Mergers and Acquisitions, Third Quarter 2013

November 13, 2013

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In the third quarter of 2013 sovereign wealth funds made 19 foreign direct investments with a total value of $2.5 billion. This deal flow is historically low. At the height of the global financial crisis in the second quarter of 2009, sovereign funds made just 13 such investments. But we haven’t recorded a lower total quarterly value since the second quarter of 2006, when foreign direct investment totaled $1.7 billion. At that time there were 12 fewer sovereign wealth funds, and many of them had more-conservative portfolios.

Quarterly Sovereign Wealth Fund Foreign Direct Investment, 2006–’13

Source: Institutional Investor’s Sovereign Wealth Center.

However, this lull in international direct investment doesn’t appear to be confined to sovereign wealth funds. The total value of global mergers and acquisitions fell by 16 percent year-on-year in the third quarter, according to Dealogic. Like many other investors, sovereign funds seem to have had trouble reading the market because the global economy remained complex and unpredictable.

Many uncertainties weighed on investors’ minds. At the start of the third quarter the big question was whether the U.S. Federal Reserve Board would continue its bond-buying program, known as quantitative easing. The Fed’s decision to prolong the program calmed investors’ nerves, but in September the specter of a U.S. government shutdown meant that they remained cautious. In Europe the German federal election and the right-wing Front National’s assault on French President François Hollande’s government have provoked further anxiety. More broadly, China’s slowing economic growth rate also dampened investors’ optimism, reminding them just how uncertain an investment landscape they must navigate.

Some of the market challenges are magnified by the nature of sovereign wealth funds. Targeted companies may be more wary of sovereign funds, given their governments’ potential engagement in political strife that now colors some countries in Asia and the Middle East, like Libya and Syria. Companies in which the funds might seek to invest could, as a consequence, perceive them to be purveyors of reputational risk, making them less attractive as new backers.

Many enterprises are sitting on their own reserves of excess cash because they too have struggled to find attractive investment opportunities. Consequently, sovereign wealth funds that only offer financing — particularly if they’re planning to use leverage — are less appealing investors to target companies than they were two years ago.

Despite the challenging deal-making environment, sovereign wealth funds still found some attractive opportunities in the third quarter. Looking beyond real assets, they favored financial services firms (seven deals worth a total $163 million) and technology providers (three transactions worth a combined $110 million).

Sovereign Wealth Fund Foreign Direct Investment by Industry, Q3 2013

Source: Institutional Investor’s Sovereign Wealth Center.

In financial services, sovereign wealth funds focused on Asia. Singapore’s Temasek Holdings drove this trend: The $173 billion fund accounted for half of the financial services investments that we identified in the third quarter. A longtime investor in China’s financial sector, Temasek boosted its stakes in Shanghai-based China Pacific Insurance (Group) Co. and Beijing-based investment bank Citic Securities Co. and to 5.03 percent and 9.01 percent, respectively.

Through its wholly owned subsidiary Fullerton Financial Holdings, Temasek also undertook one of the quarter’s most adventurous deals: a retail banking joint venture in Cambodia with national mail service Cambodia Post and Phnom Penh–based Canadia Investment Holding, the parent of one of the country’s largest banks, Canadia Bank. Only 4 percent of Cambodians had an account at a formal financial institution in 2011, according to the World Bank Group, so this deal has enormous growth potential.

GIC, Singapore’s other sovereign wealth fund, continued to invest in technology companies in the third quarter, as did Temasek. GIC was part of an investor group, led by Boston-based alternative investment firm Bain Capital and San Francisco–based private equity house Golden Gate Capital, that undertook a $6.9 billion buyout of Houston, Texas–based computer software and business solutions provider BMC Software. GIC contributed only a small amount — $35 million — to the deal and received 0.5 percent of BMC’s equity.

Temasek concentrated on the synergies between technology and emerging-market consumers by buying a minority stake in Shanghai-based e-book provider Cloudary Corp., China’s largest copyright owner of online literature, alongside Goldman Sachs Investments Holdings (Asia), a subsidiary of New York–based global investment bank Goldman Sachs Group.

Domestic Investments

Sovereign wealth funds’ unease about the global markets rippled down to their domestic investments in the third quarter of 2013. Our data only captured two small domestic deals, in the United Arab Emirates and the U.S. Abu Dhabi’s Mubadala Development Co. refinanced 83 million dirham ($22.5 million) of the remaining debt for its Galleria at Sowwah Square development in the emirate’s central business district. The Alaska Permanent Fund Corp. (APFC) bought shares worth $25 million in American Homes 4 Rent in a private placement in advance of the Agoura Hills, California–based residential property management company’s initial public offering. APFC first invested in American Homes in May 2012.

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