Geopolitical fragmentation is redirecting private capital flows
01 Apr 2026
Tahlia Kraefft explores how geopolitical risk has evolved from a background consideration to a fundamental factor shaping private market capital allocation and investment strategy
Image: bullrun/stock.adobe.com
The new geopolitical investment landscape
The globalisation of capital is in the midst of a profound transition, from a deeply integrated, neoliberal model of the past 30 years, to a fragmented, multipolar structure, characterised by geopolitical manoeuvering and regionalisation. This shift, coined geoeconomic fragmentation, is rearranging global trade and capital flows to align with geopolitical alliances, rather than purely economic, cost-motivated lines. As private capital allocation experiences this shift, political alignment, security, and resilience are having a greater role in directing private capital, often over solely returns and diversification strategies.
Additionally, investment geography is being reshaped by escalating geopolitical tensions, industrial policy, sanctions regime, and supply-chain realignment. Private markets — including private equity, infrastructure, and private credit — are especially vulnerable to geopolitical fragmentation due to the interchange of long run, illiquid investments with heightened, non-linear risks. Asset services are being forced to adjust to a more complex, multi-jurisdictional landscape against the backdrop of these changes.
From globalisation to strategic capital allocation
Global capital allocation is facing a structural change from efficiency driven to security-driven investments, to a large extent pushed by strategic competition between great powers, notably the US and China.
Key geopolitical factors driving the change from globalised capital allocation to increasingly strategic, and politically considered investment choices include: increased supply-chain reconfiguration, energy transition demands, escalating sanctions, contributing to a greater fragmented global financial system.
Geopolitical risk is not yet having a material effect on the complete amount of private investment being guided towards certain economies and sectors, but instead is impacting the way in which that investment is channeled, according to Dr Panagiotis Koutroumpis, assistant professor in finance, at the University of Reading. He says in reaction to growing political risks, investors are more often diversifying their global supply chains, while concentrating on more stable markets, avoiding politically exposed sectors, and funnelling more resources into sectors that are aligned with economic security and the transformational growth agenda.
Strategic competition between major powers
The US and EU are employing aggressive industrial policies such as the CHIPs Act and the Inflation Reduction Act, to boost domestic tech and green energy abilities, and intended to decrease reliance on China. On the other hand, China is valuing technological self-reliance, securitising data, and technology technology, which has motivated Chinese tech capital to find new markets.
Koutroumpis remarks: “The US CHIPS and Science Act, and the EU’s drive for greater strategic autonomy have for example driven large investment of both public and private capital into global semiconductor manufacturing base, as well as into advanced technology research and development, and into clean energy infrastructure.”
“Meanwhile, private market investors are adjusting their regional allocations to better manage geopolitical risks. In practice, this translates into a higher exposure to North America and a selection of European markets, as some regions present higher sanctions risk, political risk or regulatory risk, and therefore may not be as favorable for long term investments.”
Koutroumpis explains the rising US-China trade tensions along with the Russia-Ukraine War conflict in the Middle East is causing the world economy to become more fragmented, which is negatively impacting the level of private capital flows.
An International Monetary Fund 2023 highlighted a trend from diversified and global approach to private investment to a more regionalised and sector-specific one, Koutroumpis notes.
Increased supply-chain realignment
As companies shift manufacturing and logistics systems to geopolitically linked markets, it produces additional investment opportunities in emerging industrial centres.
Koutroumpis says the trend of ‘friend-snoring’, where foreign direct investment flows are being re-routed to more convergent or geopolitically aligned economies, highlights the greater influence of geopolitical risk on where private capital is deployed globally.
The impact of geopolitical risks on the decisions of investors is becoming more important, including for asset allocation he argues. Across the sector, stability in politics, in legislation, or economic alignment with major economic blocs are becoming more integral components to investing, Koutroumpis explains. He says this sector-wide trend described reflects this broader systemic shift, with the tensions already being felt in trade and investment flows.
Global direct investment in geopolitically affiliated countries has risen by approximately 20 per cent compared to 2019, a 2023 International Monetary Fund (IMF) report found.
Koutroumpis highlights this indicates capital is being used for political not purely economic reasons within affiliated countries. He says geopolitical alignment and supply chain resilience are progressively moulding investment choices, but information indicates they are changing rather than replacing traditional diversification strategies. Institutional investors now list geopolitics as their most consequential risk.
A 2024 Boston Consulting Group survey showed 51 per cent of investors ranked geopolitical risk in their top three concerns, a 15 per cent increase from their previous survey. A PGIM Global Risk report on 400 institutional investors found 56 per cent label geopolitical risk as the primary threat to portfolio performance.
This shift is influencing how portfolios are geographically structured, Koutroumpis remarks.
The rise in friend-snoring and bloc-based capital allocation is reflected in the IMF’s 2023 figure which shows global foreign direct investment between geopolitical countries has risen by 20 per cent since 2019.
Corresponding trends are apparent in supply chains, Koutroumpis says, as firms prioritise resilience and redundancy over cost efficiency. Companies and investors are opting for diversified and regionally resilient production networks as a result of supply chain disruptions spanning for a month or longer happening every three point seven years on average, McKinsey 2020 research shows.
The growing influence of geopolitical tensions on trade, supply-chain structure, and cross-border investment patterns, driving capital to cluster within political or economic alliances is evident.
Diversification continues to be core to portfolio construction, Koutroumpis explains: “Rather than abandoning global diversification, investors appear to be reframing it around geopolitical blocs, resilient supply chains and strategic sectors. In practice, institutional portfolios are evolving toward a hybrid approach: maintaining global diversification while tilting allocations toward politically aligned jurisdictions and assets that hedge geopolitical volatility. The result is not the end of diversification, but the emergence of “geopolitically aware diversification”.
Koutroumpis says investors must be aware of the macroeconomic consequences of trade and supply chain disruption resulting from geopolitical tensions.
Deepening geoeconomic fragmentation is as one the four core risks to the world economy the IMF identified in its annual risk report. Deeper fragmentation has the potential to cut world GDP by as much as seven per cent as a consequence of lower trade, more duplication of global supply chains, and lower capital mobility.
Energy security and resource geopolitics
The Iran conflict, combined with the long-running Russia-Ukraine war has markedly heightened geopolitical risks, leading investors to increase risk premiums, prioritise geographic diversification, and decrease exposure to risky regions.
The closure of the Strait of Hormuz – where 20 per cent of global oil and LNG shipments flow through – from the escalation of the Iran-Israel US conflict, has significantly disrupted energy security.
Energy and commodity markets’ role in creating a channel through which geopolitical events affect the economy is increasingly apparent, Koutroumpis explains. He says the acceleration of hostilities between Russia and Ukraine has contributed to sharp rises in oil, gas and food prices — the main driver of high inflation rates in 2022–23.
“With inflation remaining elevated, and with monetary authorities looking to keep it contained by raising interest rates, investors are reassessing their investment options. High cost of capital, a more risk averse market, and a greater recognition of the role of investment risk, are leading to a greater inclination towards less volatile and more inflation linked assets and investments.”
The influence of global macroeconomic volatility, politics, and concerns about the security of supply chains on private capital flows is growing, Koutroumpis explains.
“The private investment sector is not turning its back on globalisation but is increasingly spreading its investments more selectively and choosing to invest in stable countries, in strategic sectors and in assets which will be least affected by political and geopolitical risks. In addition to a sectoral overview and strategic framework, energy security and transition technologies are expected to be a significant area for the involvement of private capital.
After Russia launched its invasion of Ukraine, investment in renewable energy, LNG, and energy storage rose strongly. Energy transition investment attained its highest record of US$1.77 trillion in 2023, a 17 percent increase from 2022, according to a Bloomberg NEF 2024 report.
More often governments are employing industry policy such as the US Inflation Reduction Act and the European Green Industrial Plan to encourage private investment in core sectors of the energy transition, Koutroumpis notes.
Lorne Switzer, professor of finance at Concordia University in Montreal, Canada says geopolitical risk is to a large extent influencing where private capital is deployed globally. He says private capital funds are typically constrained for moving assets around quickly. If a portfolio adjustment is necessary, due to a fundamental surprise in the market, the funds cannot change positions instantaneously, or even over a weekly or month interval. These funds are typically quite illiquid, with strong lock-ins.
“Unless you’re willing to take a big hit, and you have a cash reserve that can allow you to absorb the loss, you might just have to ride out the storm. If you had a well devised long term strategy, patience in the face of volatility can be rewarded
He says typically, in this environment we would see investors exit from emerging markets as opposed to developed markets as opposed to developed markets. Emerging markets would also take a longer time to recover.
“So infrastructure developments in places like Vietnam or India, will be hard hit in the short run given the current energy crisis. However, markets are resilient, and large projects that are affected (e.g the high speed rail line in Vietnam, and expressways, power transmission grids, and ports in India (such as the Sagarmala project).
“If we look at the current quotes on the oil futures markets, the prices are up quite a bit right now relative to the start of the Iran conflict. For the nearby delivery contract the price is about US$90 from between US$67–71 dollars per barrel before the war. But if you are looking a few months down the road, the curve has a downward slope, prices go down markedly for later deliveries.
“In other words, the market is saying that oil blockade going on in Staits of Hormuz will end. It may take a few months but by the end of the year, oil prices should be down to the US$72–78 range, which is livable. Some short term inflationary spike can be expected of course, but this will not persist, as alternative delivery mechanisms come online. Any short-term recessionary hit will likely be felt by small caps first, and large-caps may be spared.
“Geopolitical risk is not confined to the current War in the Middle East. The geopolitical risk of the ongoing tariff war still looms. While the US Supreme Court ruled that the sweeping tariffs imposed by the US are not legal, the current US administration is still looking at alternatives. On the other hand, the retaliatory tariffs of the US trading partners are not helpful. Attempts to devise other trading arrangements that are meant to bypass the US so far, for example substituting US markets for Chinese markets, do not make much economic or political sense for that matter.”
War and military conflicts
Conflicts such as the Russia-Ukraine war and the ongoing Iran war, are disturbing energy markets, trade routes, and regional stability, causing investors to reevaluate political risk.
The Russia-Ukraine war, and escalating tensions involving Iran are redirecting private capital markets by growing geopolitical risk premia, reshaping investment flows, and increasing capital allocation toward strategic sectors and political aligned jurisdiction, Koutroumpis states.
He says the uncertainty in the market created by a country being at war often leads investors to be risk averse, with investors seeking more secure places to move their money following large geopolitical shocks.
After the Russian invasion of Ukraine, a large amount of money was taken out of US primary market funds, approximately US$22 billion and relocated into government-backed funds that were seen as safer.
Koutroumpis explains this trend was also apparent during tension in the Middle East when investors shifted to putting more money into conventional safe-haven assets such as gold, government bonds, and the US dollar.
Global conflicts are leading to geopolitical alignment in capital allocations, where investors favour countries that are more aligned with their interests and seen as more stable.
The imposition of sanctions, freezing of assets, enforced regulatory restrictions following Russia’s invasion of Ukraine increased the difficulty of Western investors accessing Russian markets and assets.
Geopolitical alignment is becoming increasingly important, as investors become selective about where they invest, significantly influencing the geography of private capital investment.
War is accelerating investment in resilient sectors that are also key for security, according to Koutroumpis. He says when Russia’s energy exports to Europe were overturned, it resulted in a large rise in investments in liquefied natural gas, renewable energy, and alternative means of getting energy.
Geopolitical tensions have caused money to flow into sectors including defence technology, cybersecurity, critical minerals, and infrastructure for supply chains, governments prioritise economic security. He says this further supports the process of capital being invested along geopolitical lines.
Conflicts are contributing to longer-term fragmentation of global capital markets, Koutroumpis notes. Private capital markets are more shaped by geopolitical considerations than previous decades, he adds.
Private equity and infrastructure investment decisions are increasingly incorporating political risk, sanctions exposure, and supply chain vulnerabilities into their investment decisions.
Geopolitical conflicts are rearranging investment geography, sector priorities, and risk management frameworks, inserting geopolitical risk more firmly into private market strategies, rather than reducing private capital activity.
Switzer argues that markets are typically resilient to conflicts such as the ongoing Iran war due to there being a price to political risk. He says: “To a certain extent, it should be expected to continue. As you can see, the fault risk rises and the private capital component of the debt market is often in areas where you can get a higher return to reflect the risk, but when you have higher risk, you say the returns are going to be adversely affected.”
Escalating sanctions and financial fragmentation
Extended sanctions regimes initiated by institutions such as the European Union and the United States Department of the Treasury are confining cross-border capital flows and driving funds to overhaul investment structures. Sanctions and regulatory divergence are influencing private fund managers’ approaches to structuring cross-border investments, due to the jurisdictional planning, and compliance arrangements they introduce, according to Koutroumpis.
He says they do not decrease global investment activity outright but compliance has become a material consideration when investing in private markets. Sanction compliance can require funds to undertake due diligence on limited partners, vendors, and investee companies to guarantee they are not published on sanctions lists from the US Office of Foreign Assets Control, the EU, or the United Kingdom.
Sanctions have majorly increased in scope since 2022 according to the US Department of the Treasury, in reaction to sanctions placed on Russia along with other factors.
The way fund managers structure vehicles and transactions is also being impacted by regulatory divergence, along with how they select target countries.
Diverse foreign investment screening regimes such as the US’s Committee on Foreign Investment in the United States (CFIUS) and the EU’s Foreign Direct Investment Screening Regulation may create sector-specific barriers for cross-border investments. In this geopolitical context, quality fund domiciles are highly valued for private fund investments and especially for global private funds such as alternative funds and other types of private funds.
Global private funds seek investment opportunities globally and look to raise capital from a large number of foreign institutional investors, Koutroumpis explains. Luxembourg and Ireland are examples of well-established fund domiciles.
Rather than blocking cross-border capital flows, sanctions and fragmentation in regulation are instead reshaping their form. Fund managers are responding by strengthening compliance capabilities, considering alternative fund structures, and selecting jurisdictions with regulatory stability and aligned with key financial markets.
Switzer explains: “Sanction regimes, regulatory divergence, are affecting the way private funds structured cross border investments. Now the environment is changing again. It’s all driven by volatility.
“To ease the impact of the energy crisis, the US has decided to lift sanctions on Russian oil, and perhaps even on Iranian oil. This will certainly help most of the economies of Europe. France is less affected, given its reliance on nuclear power. Will this make investments in Russian infrastructure more interesting? Now, I surmise from a European perspective, there may be an aversion to doing these sorts of investments, especially given the ongoing Ukraine war.
“The recent decision by the US Federal Reserve Board and other US regulators to ease capital requirements for banks offers more interesting opportunities for regulatory arbitrage. Now US banks will be in a position to help the economy grow, allowing borrowers to take on more risky projects. There must be a sense of optimism for American policy makers.
“During the Financial Crisis of 2008, capital requirements were raised, in order to reduce risk. The arbitrage will kick-in if non-US banks stand on the sideline, as they have so far in their reluctance to join the fray to free up the waterways of the Persian Gulf to world commerce.”
Operational implications for asset servicers
The fragmentation of private capital flows is steering custodian and fund administrators’ role from one of passive oversight to more active, technology-guided data management.
In an environment marked by slower capital deployment, and localising capital, the intricacy of cross-border operations, and reporting for alternatives such as private equity, private credit, and infrastructure increases.
Koutroumpis argues the political environment has expanded the workload for asset servicers and financial infrastructure providers, due to factors such as the significant increase of sanctions regimes, and the world becoming more fragmented.
Poor data quality is a core barrier for banks in providing clients with a more comprehensive view of operational risk, an International Energy Agency (IEA) Critical Mineral Market report found.
Koutroumpis draws on findings from the Global Sanction Index by Castellum.AI explaining:
“The sanctions explosion, combined with regulatory requirements and an increase in transaction volumes — such as more than 16,000 sanctions imposed on Russian individuals, entities and vessels by more than 30 countries following Russia’s invasion of Ukraine, making Russia the most sanctioned country in the world — are just a few of the challenges that asset servicers are facing in relation to their custody, settlement and payments activities.
“Asset servicers will need to be able to undertake real-time screening, including beneficial ownership checks, and transaction monitoring in order to comply with the regulatory requirements.”
Additionally the fragmentation of the world is another core aspect increasing the burden on asset services according to Koutroumpis: “The various measures taken to restrict cross-border capital movements, ban certain investments and set up regional economic unions are leading to more diverse and complex market infrastructure that has to be dealt with by asset servicing companies on a global scale.
“Extreme forms of geoeconomic fragmentation may cause losses in global output of up to seven per cent, the IMF 2023 report found, which provides an idea of the potential scale of the financial and trading system fragmentation.
“In this context, the asset servicer’s network of custodial relationships must be highly adaptable and its business processes localisation-sensitive.”
Furthermore, clients are requiring more information on possible geopolitical risks and their exposures, Koutroumpis says.
“There is a rise in focus on ESG risks in general and now also on more detailed information related to geopolitical risks in the investments, counterparties or sectors they are exposed to, for example information about restrictions in sanctioned countries or sensitive political sectors.”
A PGIM Global Risk Report, found 56 per cent of institutional investors anticipate geopolitical risk to be the largest threat to their future portfolio performance.
As a consequence, it is imperative to have good data analytics and risk monitoring, Koutroumpis states.
“Recent geopolitical events have finally brought home the importance of operational resilience and contingency planning to governments around the world.
“Asset servicers should be particularly alert to potential risks including the forced closure of markets, disruption to settlements and asset freezes.
“As global tensions and major events increase, geopolitical risk is no longer a risk that investors face, but also an operational and infrastructure risk to the asset servicing industry.
Rather than a temporary disruption, geopolitics is a core structural force redirecting global capital markets. Private capital is anticipated to carry on growing but within the constraints of a more complicated geopolitical environment.
In an era where capital progressively flows along geopolitical lines, asset servicers will serve a greater role assisting firms navigate an increasingly fragmented financial world.
The globalisation of capital is in the midst of a profound transition, from a deeply integrated, neoliberal model of the past 30 years, to a fragmented, multipolar structure, characterised by geopolitical manoeuvering and regionalisation. This shift, coined geoeconomic fragmentation, is rearranging global trade and capital flows to align with geopolitical alliances, rather than purely economic, cost-motivated lines. As private capital allocation experiences this shift, political alignment, security, and resilience are having a greater role in directing private capital, often over solely returns and diversification strategies.
Additionally, investment geography is being reshaped by escalating geopolitical tensions, industrial policy, sanctions regime, and supply-chain realignment. Private markets — including private equity, infrastructure, and private credit — are especially vulnerable to geopolitical fragmentation due to the interchange of long run, illiquid investments with heightened, non-linear risks. Asset services are being forced to adjust to a more complex, multi-jurisdictional landscape against the backdrop of these changes.
From globalisation to strategic capital allocation
Global capital allocation is facing a structural change from efficiency driven to security-driven investments, to a large extent pushed by strategic competition between great powers, notably the US and China.
Key geopolitical factors driving the change from globalised capital allocation to increasingly strategic, and politically considered investment choices include: increased supply-chain reconfiguration, energy transition demands, escalating sanctions, contributing to a greater fragmented global financial system.
Geopolitical risk is not yet having a material effect on the complete amount of private investment being guided towards certain economies and sectors, but instead is impacting the way in which that investment is channeled, according to Dr Panagiotis Koutroumpis, assistant professor in finance, at the University of Reading. He says in reaction to growing political risks, investors are more often diversifying their global supply chains, while concentrating on more stable markets, avoiding politically exposed sectors, and funnelling more resources into sectors that are aligned with economic security and the transformational growth agenda.
Strategic competition between major powers
The US and EU are employing aggressive industrial policies such as the CHIPs Act and the Inflation Reduction Act, to boost domestic tech and green energy abilities, and intended to decrease reliance on China. On the other hand, China is valuing technological self-reliance, securitising data, and technology technology, which has motivated Chinese tech capital to find new markets.
Koutroumpis remarks: “The US CHIPS and Science Act, and the EU’s drive for greater strategic autonomy have for example driven large investment of both public and private capital into global semiconductor manufacturing base, as well as into advanced technology research and development, and into clean energy infrastructure.”
“Meanwhile, private market investors are adjusting their regional allocations to better manage geopolitical risks. In practice, this translates into a higher exposure to North America and a selection of European markets, as some regions present higher sanctions risk, political risk or regulatory risk, and therefore may not be as favorable for long term investments.”
Koutroumpis explains the rising US-China trade tensions along with the Russia-Ukraine War conflict in the Middle East is causing the world economy to become more fragmented, which is negatively impacting the level of private capital flows.
An International Monetary Fund 2023 highlighted a trend from diversified and global approach to private investment to a more regionalised and sector-specific one, Koutroumpis notes.
Increased supply-chain realignment
As companies shift manufacturing and logistics systems to geopolitically linked markets, it produces additional investment opportunities in emerging industrial centres.
Koutroumpis says the trend of ‘friend-snoring’, where foreign direct investment flows are being re-routed to more convergent or geopolitically aligned economies, highlights the greater influence of geopolitical risk on where private capital is deployed globally.
The impact of geopolitical risks on the decisions of investors is becoming more important, including for asset allocation he argues. Across the sector, stability in politics, in legislation, or economic alignment with major economic blocs are becoming more integral components to investing, Koutroumpis explains. He says this sector-wide trend described reflects this broader systemic shift, with the tensions already being felt in trade and investment flows.
Global direct investment in geopolitically affiliated countries has risen by approximately 20 per cent compared to 2019, a 2023 International Monetary Fund (IMF) report found.
Koutroumpis highlights this indicates capital is being used for political not purely economic reasons within affiliated countries. He says geopolitical alignment and supply chain resilience are progressively moulding investment choices, but information indicates they are changing rather than replacing traditional diversification strategies. Institutional investors now list geopolitics as their most consequential risk.
A 2024 Boston Consulting Group survey showed 51 per cent of investors ranked geopolitical risk in their top three concerns, a 15 per cent increase from their previous survey. A PGIM Global Risk report on 400 institutional investors found 56 per cent label geopolitical risk as the primary threat to portfolio performance.
This shift is influencing how portfolios are geographically structured, Koutroumpis remarks.
The rise in friend-snoring and bloc-based capital allocation is reflected in the IMF’s 2023 figure which shows global foreign direct investment between geopolitical countries has risen by 20 per cent since 2019.
Corresponding trends are apparent in supply chains, Koutroumpis says, as firms prioritise resilience and redundancy over cost efficiency. Companies and investors are opting for diversified and regionally resilient production networks as a result of supply chain disruptions spanning for a month or longer happening every three point seven years on average, McKinsey 2020 research shows.
The growing influence of geopolitical tensions on trade, supply-chain structure, and cross-border investment patterns, driving capital to cluster within political or economic alliances is evident.
Diversification continues to be core to portfolio construction, Koutroumpis explains: “Rather than abandoning global diversification, investors appear to be reframing it around geopolitical blocs, resilient supply chains and strategic sectors. In practice, institutional portfolios are evolving toward a hybrid approach: maintaining global diversification while tilting allocations toward politically aligned jurisdictions and assets that hedge geopolitical volatility. The result is not the end of diversification, but the emergence of “geopolitically aware diversification”.
Koutroumpis says investors must be aware of the macroeconomic consequences of trade and supply chain disruption resulting from geopolitical tensions.
Deepening geoeconomic fragmentation is as one the four core risks to the world economy the IMF identified in its annual risk report. Deeper fragmentation has the potential to cut world GDP by as much as seven per cent as a consequence of lower trade, more duplication of global supply chains, and lower capital mobility.
Energy security and resource geopolitics
The Iran conflict, combined with the long-running Russia-Ukraine war has markedly heightened geopolitical risks, leading investors to increase risk premiums, prioritise geographic diversification, and decrease exposure to risky regions.
The closure of the Strait of Hormuz – where 20 per cent of global oil and LNG shipments flow through – from the escalation of the Iran-Israel US conflict, has significantly disrupted energy security.
Energy and commodity markets’ role in creating a channel through which geopolitical events affect the economy is increasingly apparent, Koutroumpis explains. He says the acceleration of hostilities between Russia and Ukraine has contributed to sharp rises in oil, gas and food prices — the main driver of high inflation rates in 2022–23.
“With inflation remaining elevated, and with monetary authorities looking to keep it contained by raising interest rates, investors are reassessing their investment options. High cost of capital, a more risk averse market, and a greater recognition of the role of investment risk, are leading to a greater inclination towards less volatile and more inflation linked assets and investments.”
The influence of global macroeconomic volatility, politics, and concerns about the security of supply chains on private capital flows is growing, Koutroumpis explains.
“The private investment sector is not turning its back on globalisation but is increasingly spreading its investments more selectively and choosing to invest in stable countries, in strategic sectors and in assets which will be least affected by political and geopolitical risks. In addition to a sectoral overview and strategic framework, energy security and transition technologies are expected to be a significant area for the involvement of private capital.
After Russia launched its invasion of Ukraine, investment in renewable energy, LNG, and energy storage rose strongly. Energy transition investment attained its highest record of US$1.77 trillion in 2023, a 17 percent increase from 2022, according to a Bloomberg NEF 2024 report.
More often governments are employing industry policy such as the US Inflation Reduction Act and the European Green Industrial Plan to encourage private investment in core sectors of the energy transition, Koutroumpis notes.
Lorne Switzer, professor of finance at Concordia University in Montreal, Canada says geopolitical risk is to a large extent influencing where private capital is deployed globally. He says private capital funds are typically constrained for moving assets around quickly. If a portfolio adjustment is necessary, due to a fundamental surprise in the market, the funds cannot change positions instantaneously, or even over a weekly or month interval. These funds are typically quite illiquid, with strong lock-ins.
“Unless you’re willing to take a big hit, and you have a cash reserve that can allow you to absorb the loss, you might just have to ride out the storm. If you had a well devised long term strategy, patience in the face of volatility can be rewarded
He says typically, in this environment we would see investors exit from emerging markets as opposed to developed markets as opposed to developed markets. Emerging markets would also take a longer time to recover.
“So infrastructure developments in places like Vietnam or India, will be hard hit in the short run given the current energy crisis. However, markets are resilient, and large projects that are affected (e.g the high speed rail line in Vietnam, and expressways, power transmission grids, and ports in India (such as the Sagarmala project).
“If we look at the current quotes on the oil futures markets, the prices are up quite a bit right now relative to the start of the Iran conflict. For the nearby delivery contract the price is about US$90 from between US$67–71 dollars per barrel before the war. But if you are looking a few months down the road, the curve has a downward slope, prices go down markedly for later deliveries.
“In other words, the market is saying that oil blockade going on in Staits of Hormuz will end. It may take a few months but by the end of the year, oil prices should be down to the US$72–78 range, which is livable. Some short term inflationary spike can be expected of course, but this will not persist, as alternative delivery mechanisms come online. Any short-term recessionary hit will likely be felt by small caps first, and large-caps may be spared.
“Geopolitical risk is not confined to the current War in the Middle East. The geopolitical risk of the ongoing tariff war still looms. While the US Supreme Court ruled that the sweeping tariffs imposed by the US are not legal, the current US administration is still looking at alternatives. On the other hand, the retaliatory tariffs of the US trading partners are not helpful. Attempts to devise other trading arrangements that are meant to bypass the US so far, for example substituting US markets for Chinese markets, do not make much economic or political sense for that matter.”
War and military conflicts
Conflicts such as the Russia-Ukraine war and the ongoing Iran war, are disturbing energy markets, trade routes, and regional stability, causing investors to reevaluate political risk.
The Russia-Ukraine war, and escalating tensions involving Iran are redirecting private capital markets by growing geopolitical risk premia, reshaping investment flows, and increasing capital allocation toward strategic sectors and political aligned jurisdiction, Koutroumpis states.
He says the uncertainty in the market created by a country being at war often leads investors to be risk averse, with investors seeking more secure places to move their money following large geopolitical shocks.
After the Russian invasion of Ukraine, a large amount of money was taken out of US primary market funds, approximately US$22 billion and relocated into government-backed funds that were seen as safer.
Koutroumpis explains this trend was also apparent during tension in the Middle East when investors shifted to putting more money into conventional safe-haven assets such as gold, government bonds, and the US dollar.
Global conflicts are leading to geopolitical alignment in capital allocations, where investors favour countries that are more aligned with their interests and seen as more stable.
The imposition of sanctions, freezing of assets, enforced regulatory restrictions following Russia’s invasion of Ukraine increased the difficulty of Western investors accessing Russian markets and assets.
Geopolitical alignment is becoming increasingly important, as investors become selective about where they invest, significantly influencing the geography of private capital investment.
War is accelerating investment in resilient sectors that are also key for security, according to Koutroumpis. He says when Russia’s energy exports to Europe were overturned, it resulted in a large rise in investments in liquefied natural gas, renewable energy, and alternative means of getting energy.
Geopolitical tensions have caused money to flow into sectors including defence technology, cybersecurity, critical minerals, and infrastructure for supply chains, governments prioritise economic security. He says this further supports the process of capital being invested along geopolitical lines.
Conflicts are contributing to longer-term fragmentation of global capital markets, Koutroumpis notes. Private capital markets are more shaped by geopolitical considerations than previous decades, he adds.
Private equity and infrastructure investment decisions are increasingly incorporating political risk, sanctions exposure, and supply chain vulnerabilities into their investment decisions.
Geopolitical conflicts are rearranging investment geography, sector priorities, and risk management frameworks, inserting geopolitical risk more firmly into private market strategies, rather than reducing private capital activity.
Switzer argues that markets are typically resilient to conflicts such as the ongoing Iran war due to there being a price to political risk. He says: “To a certain extent, it should be expected to continue. As you can see, the fault risk rises and the private capital component of the debt market is often in areas where you can get a higher return to reflect the risk, but when you have higher risk, you say the returns are going to be adversely affected.”
Escalating sanctions and financial fragmentation
Extended sanctions regimes initiated by institutions such as the European Union and the United States Department of the Treasury are confining cross-border capital flows and driving funds to overhaul investment structures. Sanctions and regulatory divergence are influencing private fund managers’ approaches to structuring cross-border investments, due to the jurisdictional planning, and compliance arrangements they introduce, according to Koutroumpis.
He says they do not decrease global investment activity outright but compliance has become a material consideration when investing in private markets. Sanction compliance can require funds to undertake due diligence on limited partners, vendors, and investee companies to guarantee they are not published on sanctions lists from the US Office of Foreign Assets Control, the EU, or the United Kingdom.
Sanctions have majorly increased in scope since 2022 according to the US Department of the Treasury, in reaction to sanctions placed on Russia along with other factors.
The way fund managers structure vehicles and transactions is also being impacted by regulatory divergence, along with how they select target countries.
Diverse foreign investment screening regimes such as the US’s Committee on Foreign Investment in the United States (CFIUS) and the EU’s Foreign Direct Investment Screening Regulation may create sector-specific barriers for cross-border investments. In this geopolitical context, quality fund domiciles are highly valued for private fund investments and especially for global private funds such as alternative funds and other types of private funds.
Global private funds seek investment opportunities globally and look to raise capital from a large number of foreign institutional investors, Koutroumpis explains. Luxembourg and Ireland are examples of well-established fund domiciles.
Rather than blocking cross-border capital flows, sanctions and fragmentation in regulation are instead reshaping their form. Fund managers are responding by strengthening compliance capabilities, considering alternative fund structures, and selecting jurisdictions with regulatory stability and aligned with key financial markets.
Switzer explains: “Sanction regimes, regulatory divergence, are affecting the way private funds structured cross border investments. Now the environment is changing again. It’s all driven by volatility.
“To ease the impact of the energy crisis, the US has decided to lift sanctions on Russian oil, and perhaps even on Iranian oil. This will certainly help most of the economies of Europe. France is less affected, given its reliance on nuclear power. Will this make investments in Russian infrastructure more interesting? Now, I surmise from a European perspective, there may be an aversion to doing these sorts of investments, especially given the ongoing Ukraine war.
“The recent decision by the US Federal Reserve Board and other US regulators to ease capital requirements for banks offers more interesting opportunities for regulatory arbitrage. Now US banks will be in a position to help the economy grow, allowing borrowers to take on more risky projects. There must be a sense of optimism for American policy makers.
“During the Financial Crisis of 2008, capital requirements were raised, in order to reduce risk. The arbitrage will kick-in if non-US banks stand on the sideline, as they have so far in their reluctance to join the fray to free up the waterways of the Persian Gulf to world commerce.”
Operational implications for asset servicers
The fragmentation of private capital flows is steering custodian and fund administrators’ role from one of passive oversight to more active, technology-guided data management.
In an environment marked by slower capital deployment, and localising capital, the intricacy of cross-border operations, and reporting for alternatives such as private equity, private credit, and infrastructure increases.
Koutroumpis argues the political environment has expanded the workload for asset servicers and financial infrastructure providers, due to factors such as the significant increase of sanctions regimes, and the world becoming more fragmented.
Poor data quality is a core barrier for banks in providing clients with a more comprehensive view of operational risk, an International Energy Agency (IEA) Critical Mineral Market report found.
Koutroumpis draws on findings from the Global Sanction Index by Castellum.AI explaining:
“The sanctions explosion, combined with regulatory requirements and an increase in transaction volumes — such as more than 16,000 sanctions imposed on Russian individuals, entities and vessels by more than 30 countries following Russia’s invasion of Ukraine, making Russia the most sanctioned country in the world — are just a few of the challenges that asset servicers are facing in relation to their custody, settlement and payments activities.
“Asset servicers will need to be able to undertake real-time screening, including beneficial ownership checks, and transaction monitoring in order to comply with the regulatory requirements.”
Additionally the fragmentation of the world is another core aspect increasing the burden on asset services according to Koutroumpis: “The various measures taken to restrict cross-border capital movements, ban certain investments and set up regional economic unions are leading to more diverse and complex market infrastructure that has to be dealt with by asset servicing companies on a global scale.
“Extreme forms of geoeconomic fragmentation may cause losses in global output of up to seven per cent, the IMF 2023 report found, which provides an idea of the potential scale of the financial and trading system fragmentation.
“In this context, the asset servicer’s network of custodial relationships must be highly adaptable and its business processes localisation-sensitive.”
Furthermore, clients are requiring more information on possible geopolitical risks and their exposures, Koutroumpis says.
“There is a rise in focus on ESG risks in general and now also on more detailed information related to geopolitical risks in the investments, counterparties or sectors they are exposed to, for example information about restrictions in sanctioned countries or sensitive political sectors.”
A PGIM Global Risk Report, found 56 per cent of institutional investors anticipate geopolitical risk to be the largest threat to their future portfolio performance.
As a consequence, it is imperative to have good data analytics and risk monitoring, Koutroumpis states.
“Recent geopolitical events have finally brought home the importance of operational resilience and contingency planning to governments around the world.
“Asset servicers should be particularly alert to potential risks including the forced closure of markets, disruption to settlements and asset freezes.
“As global tensions and major events increase, geopolitical risk is no longer a risk that investors face, but also an operational and infrastructure risk to the asset servicing industry.
Rather than a temporary disruption, geopolitics is a core structural force redirecting global capital markets. Private capital is anticipated to carry on growing but within the constraints of a more complicated geopolitical environment.
In an era where capital progressively flows along geopolitical lines, asset servicers will serve a greater role assisting firms navigate an increasingly fragmented financial world.
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