In April, General Electric’s finance arm,
GE Capital, agreed to sell real estate assets for $26.5 billion
to Blackstone, Wells Fargo and others. With most of the rest of
GE Capital on the block, will sovereign wealth funds join the
Co. CEO Jeffrey Immelt has an offer for sovereign wealth
funds — some $260 billion in assets at the
Capital finance arm. The prospective sale is part of a
long-term plan by the parent company to sharply pare back GE
Capital by unloading assets, including loans and lending
businesses and refocusing on its industrial base —
which these days includes jet engines, power and water systems,
energy and medical imaging equipment.
While GE’s retreat from leasing and lending has
been ongoing, the Fairfield, Connecticut-based conglomerate
unveiled a deal April 10 to sell some $26.5 billion in real
estate assets to New York-based Blackstone
Group, Wells Fargo & Co., the San Francisco
bank, and others. It also set out a timetable to sell most of
its GE Capital assets by the end of 2017. Among the
institutions expressing interest: Sovereign wealth funds,
according to a GE comment letter to the Federal Reserve dated
There’s reason for GE to act fast. Because GE
Capital is a quasi-banking operation, it has been named a
so-called "Systemically Important Financial Institution", or
SIFI, by the U.S. Treasury Department’s Financial Stability Oversight Council,
established under the Dodd-Frank Wall Street Reform and Consumer
Protection Act. The label brings capital requirements like
reserves that raise costs and reduce returns.
There’s also extra regulation.
The comment letter explains the changes, which should allow a
reversal of the SIFI designation. It cited 450 inquiries from
possible buyers of GE Capital assets, including sovereign
wealth funds, banks, insurers and private equity firms. Chief
Financial Officer Jeff Bornstein told Bloomberg News after the
property sales that the company had held talks about assets
sales with "a broad geographic spectrum" of sovereign wealth
funds as well as others. "We have multiple, multiple pages of
names," he said. GE spokesman Seth Martin declined to
For sovereign wealth funds, the rummage sale spells opportunity
— and risk. During the financial crisis, state-owned
investors wagered billions on big Western banks, brokerages and
other financial institutions, only to suffer sometimes humbling
losses amidst the global collapse.
According to Sovereign Wealth Center data,
Singapore’s GIC poured $6.9 billion into Citigroup in
January 2008 and $10.3 billion in a deal with UBS that May. The
Abu Dhabi Investment Authority (ADIA)
invested $7.5 billion in Citigroup in November 2007. Korea Investment Corp. (KIC) and the Kuwait Investment Authority (KIA) each put
$2 billion into Merrill Lynch in January 2008, following Temasek Holdings’ $4.4
billion investment in the brokerage the previous month. Temasek
took an additional $3.4 billion slug in July 2008, just months
before Merrill’s purchase by Bank of America
Corp., completed on January 1, 2009. The Qatar Investment Authority (QIA) invested
a total of $7.7 billion in two 2008 investments in Barclays.
The fund also sank a total of $4.4 billion into two deals with
Credit Suisse Group. The losses were often formidable.
"I don’t think any of the sovereign wealth funds
have gotten over investing in large banks," says Patrick
Schena, adjunct assistant professor and co-head of the Fletcher
Network for Sovereign Wealth and Global Capital at the Fletcher
School of Tufts University outside Boston. "But they are
investing in small banks, especially in emerging markets where
there are positive demographics."
While GE Capital is no run-of-the-mill bank, it qualifies as
big: With $7 billion in net income last year, it operated in
40-plus countries with over 35,000 employees. Year end assets
totalled $499 billion, with billions of dollars in commercial
paper and securitizations outstanding. Its financing businesses
range from bankruptcy reorganizations to restaurant franchises
and from leveraged buyouts to vehicle fleets. For consumers, GE
Capital offers installment loans and savings accounts. Indeed,
the scale of its business helped earn it the SIFI designation
that Immelt so wants the subsidiary to shed.
Still, wariness born of the 2008-’09 financial
crisis will inform sovereign wealth funds’
interest in GE Capital assets — as well their
traditional reticence in overseeing operating businesses. "Few
true sovereign wealth funds want to actually manage and control
investments", says professor Bruce Bean of Michigan State
University College of Law. "They want to hook up with
someone with a solid track record of doing so."
A consortium or so-called "club deal" for large parts of GE
Capital makes some sense. "That’s something
that’s more feasible," says Sven Behrendt, founder
of GeoEconomica, a Geneva-based consulting
firm. "Here’s a bit of Arab money,
here’s a bit of Chinese money, here’s
some Singaporean money. Maybe you have another investor."
Indeed, when GE Capital’s consumer lending
business in Australia and New Zealand was put on the block last
year, financial services firm FlexiGroup, based in St. Leonards, New
South Wales, reportedly tried to line up backing from GIC,
Temasek and ADIA. The GE business was later bought by a group
led by KKR &
Co. and Deutsche Bank AG for more than $6 billion,
including debt. "There would have to be a hedge fund or other
credible leader," says Bean, referring to further big purchases
of GE Capital businesses via possible consortiums.
So the tag sale may not produce the action some predict. "I
don’t see a single sovereign wealth fund stepping
forward," says Behrendt. References to sovereign wealth funds
as potential investors, of course, are likely to stir interest.
"Perhaps it’s negotiating tactics," he says. "If I
was negotiating with someone I would drop a name. I would drop
a sovereign wealth fund in there."
For example, Bloomberg, citing people familiar with the
matter, reported that GE and its advisors talked with Middle
Eastern and Asian sovereign wealth funds as well as
Norway’s $870.3 billion Government Pension Fund Global
about their interest in the GE Capital assets. The case for a
big Norwegian purchase, to some, is a stretch, since GPFG
restricts itself to a 10 percent holding in any one company.
"The Norwegians wouldn’t be a likely acquirer,"
It also seems unlikely the Norwegian state-owned vehicle
would want to oversee a large business. "I cannot believe
GPFG would jump into the management business," says Bean.
"They have plenty to do with 1.3 percent of
Europe’s equities and at least 1 percent of the
U.S. market. It would be a major stupid move for them to do
so." Marthe Klaar, a spokeswoman for Norges Bank Investment
Management, which oversees GPFG, declined to comment.
That, however, would not preclude GPFG or any other sovereign
wealth fund from picking up, say, a loan portfolio. How GE
Capital is sliced and diced as its various pieces are sold
off is on the minds of potential investors —
including private equity firms. "We know some of the
sovereign wealth funds also have relationships with private
equity firms that are co-investing", says Rachel Ziemba,
senior director of emerging markets at Roubini Global
Economics in New York. "I think it’s less likely
to be a significant stake in companies. It’s
more likely to be co-investments in assets."
Institutions are undoubtedly window-shopping and looking for
opportunities. "Of course, there will be sovereign wealth
funds looking just to see what there is and to be in a
position to move quickly when someone else turns up to manage
the assets," says Bean.
So what would sovereign wealth funds actually pay for the
remaining GE Capital assets on the block? That’s
where things get tricky: In GE accounting, the preferred way
of assessing a business is a term of art: Ending Net
Investment (ENI). A GE glossary says it can be defined as the
amount of assets of continuing operations less the amount of
non-interest bearing liabilities. "Mark to make-believe," is
how analyst Ivan Feinseth of Tigress Financial Partners in
New York describes it. In fact, ENI may or may not help in
valuing a GE Capital business.
In the case of GE Capital’s real estate, ENI
seems to have been a good stand-in for the price
it’s getting, $26.5 billion with more on the
way. On the other hand, GE Capital’s consumer
credit card business, Synchrony Financial
, whose ENI the
company pegged at $65 billion, went public last July and
recently had a market capitalization of $27.1 billion .
GE has stated that it will hold on to financing businesses
that support its industrial healthcare, energy and aviation
businesses, with $3 billion, $14 billion and $41 billion in
ENI, respectively. Sundry other assets including insurance
businesses that are winding down bring the total ENI that GE
will retain to $90 billion. It plans a $16 billion after tax
charge, and said its board has authorized a share buy back of
up to $50 billion.
With $225 billion in assets (not ENI) on the block, what
would GE Capital’s remaining international
consumer finance businesses and vast commercial lending and
leasing operations, but not including real estate, fetch on
the open market? Media reports have cited $200 billion in
dispositions while GE itself cited $35 billion in expected
"dividends" coming its way. Sovereign Wealth Center sharpened
its pencil and looked at the assets of three publicly-traded
commercial finance companies — New York-based CIT
Group, GATX Corp. of Chicago and Toronto-based Element
Financial Corp. It found the average market capitalization of
the firms amounted to just shy of a quarter of total assets.
Using that as a benchmark, GE Capital would garner about $55
billion. (A May 7 Bank of America Merrill Lynch research
report put the figure at some $50 billion.)
One possible result of the GE Capital sales: Some of the
sovereign wealth funds with the dry powder to purchase the
biggest business lines, if they choose to do so, are also the
least transparent, like QIA, which is opening a New York
office and has an estimated $304 billion in assets. "This
would be an irony if a systemically important financial
institution is acquired by the most secretive sovereign
wealth fund in the Middle East," chuckles Behrendt.
As it turns out, some sovereign wealth funds
haven’t had to buy any GE Capital assets to
score. The day the real estate deal and accelerated sale
plans were announced, April 10, GE shares spiked 10.8
percent. Norway’s GPFG, KIC and Alaska Permanent Fund Corp.
were all big
holders of GE shares, according to recent filings.