Sovereign wealth funds started 2014 quietly. Research by the
Sovereign Wealth Center shows that between January and March
they closed just $6.7 billion worth of international
investments, much less than the $10.5 billion tally for the
first quarter of 2013.
The funds’ low levels of cross-border
acquisitions at the beginning of 2014 can partly be explained
by their need to identify new strategies that maximize what
they consider to be their competitive advantages: long-term
investment horizons and enormous scale. At the same time, they
continued facing the M&A challenges that we observed in
2013 [link to annual report].
At the start of 2014, sovereign wealth funds continued to
have difficulty competing for targets with industry buyers.
Global strategic M&A surged in the first quarter. Many
companies have been sitting on growing cash reserves as
they’ve struggled to find attractive
opportunities, but they are under pressure from shareholders to
spend through acquisitions, organic growth, share buybacks or
This glut of industry buyers crowded out financial investors
including sovereign funds, and not just by sheer volume.
Strategic purchasers can bring the kind of synergies that allow
them to pay more for target companies. Industry players can
also take advantage of cheap financing and buoyant corporate
bond markets, to help them edge out financial buyers.
Consequently, sovereign wealth funds and their partners have
become less willing to compete at auctions, preferring to
negotiate directly in the hope of better terms. This means
deals take longer to complete. After a slow first quarter in
which sovereign wealth funds sealed only ten private equity
deals valued at a combined $1.6 billion, activity picked up in
the second, when they concluded 19 worth a total of $7
In the first quarter of 2014, sovereign wealth funds were
cautious about overpaying. With global interest rates remaining
near historic lows, the so-called great rotation from bonds
into equities continued, inflating valuations. The Dow Jones
Industrial Average and the S&P 500 index nudged record
highs during the first half of the year; in February,
London’s FTSE 100 Index reached levels not seen
since the dot-com bubble of 1999.
Share demand was fueled by plentiful and high-profile new
issues on both sides of the Atlantic, but sovereign wealth
funds held back, largely steering clear of well-hyped initial
public offerings and participating only when they perceived
exceptional deals. Some of them are now investing specifically
to help companies avoid the rush to go public[link to
Innovation Alliance story].
In the second quarter sovereign wealth fund acquisition
volume rebounded strongly, to $16.7 billion, as funds developed
strategies to navigate high valuations. One clear trend was a
move into overlooked sectors and distressed companies. For
example, Singapore’s GIC and the Qatar Investment
Authority (QIA) bought stock in European listed real estate
companies. Both funds helped raise capital for Inmobiliaria
Colonial, a Barcelona-based company that owns and operates
rental properties across Spain. GIC bought bonds; QIA, equity.
The Qatari fund also purchased a 13.6 percent stake in
Paris-based commercial property owner Société
Foncière Lyonnaise alongside DIC Holding, an investment
vehicle owned by Qatar’s royal family, which
acquired an 8.6 percent share.
While sovereign wealth funds often strive to avoid following
market trends, they have been pursuing life sciences and
technology investments, where global deal volumes have been
high. In the first half of 2014, sovereign wealth funds
invested more than $1.5 billion in health care, nearly all of
it in drug and medical technology companies — more
than double their acquisitions in the sector during the
previous six months. Although Asia’s funds
accounted for the lion’s share, Middle Eastern
sovereign wealth funds also participated. For example, the
Kuwait Investment Authority made a rare direct investment by
allocating $100 million to NantHealth, a healthcare information
technology company based in Culver City, California.
Sovereign Wealth Fund Investments by Sector:
Source: Sovereign Wealth Center
Hunting for New Technologies
Asia’s sovereign wealth funds, particularly
Singapore’s GIC and Temasek Holdings, were the
biggest state-backed investors in e-commerce, technology and
telecommunications companies in the first six months of 2014.
Although this trend really gathered momentum from midyear, May
saw a rush of deals from the Singaporean funds. Both funds
invested in a $170 million fundraising by São
Paulo–based online sports apparel retailer Netshoes.
Temasek invested $17 million at the initial public offering of
Beijing-based JD.com, an e-commerce website that competes
head-to-head with Hangzhou, China–based Alibaba Group
Holding and contributed to a $100 million funding round for
Indian online retailer Snapdeal.com.
GIC backed a wider range of technologies, buying bonds
issued by two Chinese technology companies and the stock of
fuel cell manufacturers and software developers. In
telecommunications both Singaporean funds bought into the New
York listing of Cheetah Mobile, a Beijing-based mobile Internet
provider. Temasek led a new, $86 million fundraising round for
Virgin Mobile Latin America, an affiliate of London-based
Virgin Group, which provides mobile phone services in Chile and
Colombia, and will use the capital to finance new operations in
Brazil and Mexico.
As these examples suggest, sovereign wealth funds looked to
emerging markets in the first half of 2014. Continuing slow
growth in continental Europe prompted sovereign fund
acquisitions in the European Union to drop from some 60 percent
($10.9 billion) of their total foreign direct investment in the
previous six-month period to just 16 percent ($3.8 billion).
More than half of this investment was in the U.K. as funds
bought London properties.
Go for Growth
Sovereign funds instead sought opportunities to harness
Asian economic growth. The largest deal between January and
June 2014 was Temasek’s HK$44 billion ($5.7
billion) investment in A.S. Watson Group, the
drugstore-to-supermarket retail arm of Hong Kong–based
Hutchison Whampoa, the conglomerate controlled by Hong Kong
billionaire, Li Ka-shing. Temasek acquired 24.95 percent of
Watson, which owns British pharmacy chain Superdrug Stores, and
pushed back plans for a listing on the London Stock Exchange.
But this deal was no one-off. Besides their e-commerce
purchases, the two Singapore-based sovereign funds invested in
several food companies in emerging markets, including
São Paulo–based BRF, Brazil’s
second-largest food company.
The mantra for sovereign wealth funds so far in 2014 seems
to be a simple one: Go easy, but go for growth.