Risk & Economy » Regulation » SOS sovereign wealth funds

THEY COULD save us all. With an estimated $5tn (£3tn) in their coffers, the world’s sovereign wealth funds could bail out the UK and the eurozone, and have change to run a G20 economy.

Able to wield billions from manufacturing and commodity surpluses, their money is seductive and their investments, usually large, make eye- catching headlines on the business pages. But with so much cash at hand, level- headed finance directors could be forgiven for thinking that one of these sovereign wealth funds (SWFs) could be the answer to their investment worries.

But before you leap on a plane to Asia or the Middle East, it’s worth bearing in mind that – despite the reported deals – the picture is murky and complex. Experts and observers note that SWFs play by their own rules and agendas. Their trust may be hard to win and intermediaries may be needed. However, the question remains. If you are a finance director in a mid-market company, what are the chances of tapping a friendly sovereign fund?

Deal makers
Using wallets stuffed with vast sums of overseas public money, sovereign fund deals have become the subject of newspaper articles and even TV documentaries. The spotlight fell on the funds during the banking crisis when they helped bail out several major institutions, including Citigroup, which was boosted by the acquisition of a 4.9% stake by the Abu Dhabi Investment Authority for $7.5bn, a deal that later turned sour.

Elsewhere, the China Development Bank aided, while Deutsche Bank received support from the Dubai International Financial Centre. Recent stories have included the acquisition of Tiffany & Co and Harrods by the Qatar Investment Authority. But the story this year that really prompted attention was the acqusition by the China Investment Corporation (CIC) of an 8.6% equity stake in the holding company that owns Thames Water.

More importantly, this followed a trip to China by the chancellor George Osborne as well as his March 2012 Budget speech in which he spoke of both sovereign cash and pension funds – some government pension funds function as sovereign funds – as potentially providing a much-needed prop for a faltering UK economy.

“We must never allow protectionist rhetoric to creep into our political system. Instead we’re actively seeking investment from overseas pension and sovereign wealth funds,” said the chancellor.

Big or small?
For all the reports in the papers, and the controversy surrounding them, there is little data in the public arena to tell us exactly where sovereign funds invest, what their policies are, and what are the value and returns on their investments. Valeria Miceli, a lecturer at the Catholic University of Milan and co-author of the book Sovereign Wealth Funds: A Complete Guide, says: “What we know is from leaks in the media, on the internet and the international databases. It’s not a complete view of this story.”

There are exceptions. A few western funds, such as Norway’s Government Pension Fund – Global, disclose everything. But when it comes to the funds that attract all the attention, those from the Middle East or even the giant China Investment Corporation, there is little information in the public domain. Figures have to be estimated, agendas inferred, information passed along – all second-hand.

But a few trends have been divined from what has appeared in the press. This is important because it gives an idea of which companies and sectors sovereign funds favour. Miceli says her observations reveal that two things are happening.

Asian funds, such as CIC and the Singapore Investment Cooperation, take a nuanced strategic approach. China is interested in investments that will have a “strategic impact” on its economy, bringing expertise into the country. Singapore has favoured logistics and the maritime sector as part of an effort to diversify the economy. The Middle East funds have in the past behaved with a “portfolio orientation” or, to put it another way, an interest in the returns on the investment. “Their idea is that we have this wealth, but we have to increase this wealth for future generations,” says Miceli.

There is broad agreement on this, but there has been a change of tack in Middle East funds since the start of the Arab Spring. Funds have focused more on local economic development, reducing the sums that they are willing to take overseas. “More sovereign money has gone national, rather than international,” says Nick Tolchard, head of investment Middle East with asset managers Invesco.

That said, funds are still spending and China, especially, has grabbed the headlines. Scrutiny of the press, and of the limited data sets available, quickly reveals much of the strategic spending has been focused on infrastructure and energy – the Thames Water deal is an example of this. But there are others. In August last year, it emerged that CIC had paid €2.3bn (£1.8bn) for a 30% stake in the oil and gas exploration business of GDF, one of the world’s biggest utility companies.

Such activity appears to suggest that SWFs are naturally interested in very large investments in reasonably safe sectors. Many of these deals are also direct, without any intermediaries.

But that is not the whole story. Smaller companies have seen investment from funds, and recent news that CIC has invested in Luxembourg private equity house A Capital implies that China, too, is willing to see money placed in mid-sized companies. However, there will be conditions.

A Capital’s latest fund of up to €500m is aimed at investing in European companies with turnovers above €100m. CIC is a limited partner in the fund. Investments are made with Chinese co-investors and on the condition that any recipient company will expand its business into China.
It is not unusual for a sovereign fund to invest with an intermediary, but the A Capital deal could signal an adjustment in strategy to embrace smaller concerns.

One of the beneficiaries of the fund is Club Med, the holiday business. A Capital’s chairman Andre Loese-Krug Pietri, speaking from his base in Beijing, says of his Chinese backers: “[They] are interested in our strategy, which is combining European quality of governance, accounting and technology with the Chinese growth perspective. The best of both worlds.”

Access to the funds is difficult to achieve, however. No expert would rule out success from a direct approach, but others point to the difficulty of establishing relationships with sovereign funds. Recommendations tend to come via intermediaries who might themselves rely on referrals from advisors such as banks and accountancy firms.

According to Pars Purewal, leader of UK asset management at Big Four firm PwC, “it comes down to who your finance director knows and the strength of your contacts and your relationships”.

Relationships with Middle-Eastern funds might take years to secure and even then these funds will rely heavily on personal chemistry and familiarity with local business culture, explains Invesco’s Tolchard.

However, with UK companies struggling to find the debt they require, Richard Parsons of Deloitte speculates sovereign money could find its way into debt funds to back alternative lenders, an area currently expected to grow markedly after news in April that insurance company Aviva would lend storage business Big Yellow £100m.

Miceli believes this could be an area for sovereign funds sensitive to “national security” objections when they invest in key strategic assets. Lending is less threatening than buying.

But no investment will work if the funds will not take the bait. According to Miceli, investment is accessible for the right company. “They are very selective in investing. They follow their strategies, especially the Asian funds, and you don’t convince them based upon your needs. You convince them if the investment you have to offer is interesting for them. You should be able to match their interest with your needs,” she concludes.