With private equity firms testing the limits of limited partners’ ability and willingness to fill their new-fund coffers, sovereign wealth funds (SWFs) are emerging as a potential source of capital to help bridge the fund-raising gap. As we point out in Bain’s Global Private Equity Report 2012, SWFs are eager to partner with a wide range of PE firms—provided general partners (GPs) understand how to work with them.

Managers of investible assets of some of the world’s richest nations, SWFs command enormous resources, which have quadrupled over the past decade to some $4.7 trillion in 2011. Increasingly, SWFs are looking to deploy assets in alternative investments, of which PE is a prime candidate.

As SWFs ramp up their private equity programs, their capital injections into the industry could rival PE commitments from conventional public and private sources. Bain analysis conservatively estimates that, taken together, the 10 largest SWFs investing in PE could channel an additional $30 billion to $60 billion into PE over the next several years.

SWFs enjoy enormous flexibility as private equity investors. Unlike conventional limited partners (LPs), which try to match the duration of assets and liabilities to meet their need for liquidity, SWFs can patiently commit capital over long time horizons. They are also able to participate in PE in a variety of ways—as traditional LPs or, as is the case for more mature programs, as co-investors or as direct investors that can maintain a position in a investment even after the PE fund exits.

GPs that aspire to win capital commitments from SWFs need to be prepared for intense scrutiny. Like many other investors who invested proportionately more capital as fund sizes grew, some SWFs are now overexposed to the mega funds of the 2006 to 2008 vintages, which are underperforming return expectations for this asset class. That experience has redoubled their determination to work only with great managers who have proven track records and are likely to achieve superlative results going forward.

SWFs are eager to learn more about GPs that clear the initial performance hurdle. Newer SWFs and those that are scaling up their private equity allocations are looking to make targeted investments that round out their portfolios. They are open to establishing ties with funds from across a broad spectrum of investment styles, including funds that offer geographic and sector diversification opportunities. They are also willing to consider investing in smaller funds that many GPs might assume to be below the threshold size a large SWF would look at.

Far from requiring endless cultivation, SWF managers are quick to make investment decisions once they have completed their due diligence. What they want to determine above all is that the GPs with whom they work can demonstrate that they will add value by bringing to bear a depth of expertise, strong network relationships and solid performance-improvement skills. Because of their size and sophistication, SWFs with more mature programs do not need help from PE firms to offer diversification they can easily provide for themselves. They are cautious, however, about working with funds that could end up being direct competitors. But for GPs that develop a good relationship with a big SWF, having a mutual interest in a target company can work to the benefit of both parties as the ultimate winner of the deal brings the other in as a co-investor.

GPs that make a SWF’s short-list need to be prepared for a tough negotiation to seal the deal. Like any large investor in PE, SWFs are devoting increased attention to terms and conditions and can drive a hard bargain. Nevertheless, as they begin to get acquainted with sovereign wealth funds, PE firms may be surprised to discover that they can be the best allies to have in today’s tough fund-raising environment.

This post was written by Graham Elton, Bill Halloran, Hugh MacArthur and Suvir Varma, leaders of Bain & Company’s Private Equity Group.