Annual Report 2013 - Mergers and Acquisitions

April 11, 2014

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Source: Sovereign Wealth Center.

Since the financial crisis sovereign wealth funds have enjoyed the advantage of being intergenerational investors. Without explicit liabilities, many of them have exploited their ability to withstand market turbulence. In 2009 and 2010 they were able to pick up distressed assets cheaply; more recently, they could weather volatility in emerging markets to take advantage of strong growth relative to the developed world.

But in early 2013 optimism started returning to global markets. With interest rates remaining at record lows, investors hunted for yield and began pouring money into equities, particularly developing-world and dividend-paying stocks.

This influx of capital eroded sovereign wealth funds’ competitive advantage, and they found themselves outmuscled by market players prepared to pay higher prices for assets. As a result, some of them became more opportunistic, hoarding cash so they could buy quickly when attractive direct-investment opportunities emerged.

More competition in the M&A markets resulted in a lukewarm opening to sovereign wealth funds’ deal-making year. Between January 1 and the end of March 2013, their foreign direct investment, excluding real estate and infrastructure, amounted to just $3.9 billion, the lowest first-quarter total since 2007.

Sovereign Wealth Fund Direct Investments, Target Industries, 2013

Source: Sovereign Wealth Center

Acquisitions in the commodities sector dominated sovereign funds’ buying patterns in the first three months of the year: four purchases worth a combined $2.7 billion — almost two thirds of total non-property investment value for the quarter. Historically, sovereign funds’ interest in commodity producers largely has been limited to oil and gas companies, but in 2013, as hydrocarbon prices softened, they turned to a wider range of commodities, particularly chemicals.

Singapore’s Temasek Holdings hedged its bets. In March 2013 it capitalized on falling oil prices by purchasing 5 percent of Madrid-based oil and gas multinational Repsol for €1 billion ($1.3 billion), which allowed the Spanish company to bolster its finances and protect its credit rating. A week later Temasek bought 4.6 percent of German chemicals manufacturer Evonik Industries for €600 million in advance of the company’s initial public offering.

In the second quarter the most prominent non-real-estate deal was a 102.5 billion-ruble ($3.3 billion) new share offering by part-state-owned, St. Petersburg–based VTB Bank to boost its tier-1 capital ratio. The Qatar Investment Authority’s direct-investment arm, Qatar Holding; the State Oil Fund of Azerbaijan; and Norges Bank Investment Management (NBIM), which oversees Norway’s Government Pension Fund Global, bought shares totaling almost $1.7 billion. Temasek also was active in financial services in the second quarter, buying an additional 1 percent of Industrial and Commercial Bank of China for some HK$4.5 billion (almost $600 million) and 10 percent of global financial information and services company Markit Group for an estimated $500 million.

Uncertainty about whether the U.S. Federal Reserve Board would continue its bond-buying program, known as quantitative easing, dominated the investment environment in the second half of 2013. The Fed’s decision to prolong the program calmed investors’ nerves, but in September the specter of a U.S. government shutdown left them cautious. In Europe the German federal election and the right-wing Front National’s assault on French President François Hollande’s government provoked further anxiety, while China’s slowing economic growth also dampened investor optimism.

The upshot for sovereign wealth funds: In the third quarter of 2013, they closed just 16 deals outside the real estate and infrastructure sectors, with a total value of $1.3 billion — the lowest quarterly total we’ve recorded for direct nonproperty investments since 2005, when there were 12 fewer sovereign funds and the community was more conservative.

Sovereign Wealth Fund Direct Investments, Target Regions, 2013

Source: Sovereign Wealth Center.

The largest sovereign fund deal in the third quarter of 2013 suggested that its architect, Temasek, remained bullish on Chinese economic growth. The Singaporean fund exploited the fact that it can absorb short-term volatility by braving the skittish Hong Kong Stock Exchange to pick up a little more than 5 percent of China Pacific Insurance (Group) Co. (CPIC). The investment meant that Temasek joined its peers the Abu Dhabi Investment Authority, Singapore’s GIC and NBIM, which had purchased stakes in CPIC at its 2012 IPO, as a substantial investor in the company. Temasek’s open-market purchases of CPIC stock in the second half of June and early July cost the fund roughly HK$3.3 billion, Sovereign Wealth Center estimates.

Sovereign fund deal flow remained slow during October’s U.S. government shutdown, an event that created uncertainty about the world’s largest economy. But the deal-making situation improved starting with the privatization of the Royal Mail, the U.K.’s state postal service, on October 25. At the company’s flotation on the London Stock Exchange, GIC and the Kuwait Investment Authority bought substantial stakes: 4.1 percent and 2.5 percent, respectively. Although sovereign funds only closed $465 million worth of non-real-estate deals in October, the next two months each saw about $1 billion in transactions, with the largest total value in financial services.
GIC made the biggest nonproperty deal of the final quarter, acquiring 28.5 percent of London-based insurer Rothesay Life from Goldman Sachs Group for some £255 million ($420 million) along with New York–based alternative-asset management giant Blackstone Group and Springfield, Massachusetts–based Massachusetts Mutual Life Insurance Co.

Domestic Investments

In 2013, Sovereign Wealth Center recorded 26 sovereign wealth fund domestic investments, totaling $5.4 billion. Temasek made the most significant of them when it sold its 2012 investments in U.S. liquefied natural gas (LNG) and chose to establish an LNG hub in Singapore to tap Asia’s growing demand for clean energy. The fund set up two wholly owned companies: 1 billion–Singapore dollar ($806 million) Pavilion Energy to invest in various parts of the LNG value chain and S$1.25 billion Pavilion Gas to procure, market and sell LNG in Asia.

Sovereign Wealth Fund Domestic Investments, Target Industries, 2013

Source: Sovereign Wealth Center.

Australia’s Future Fund made another major domestic investment, buying the Australian Infrastructure Fund (AIX), which is mostly made up of airport assets, from Melbourne-based Hastings Funds Management for A$2 billion ($2.1 billion). Local pension fund AustralianSuper challenged the purchase — the Future Fund’s largest domestic infrastructure deal — alleging that the Future Fund had acted duplicitously and prevented it from exercising its preemptive shareholder rights over AIX’s stake in Perth Airport.

Otherwise sovereign wealth funds’ domestic investments focused on developing their countries’ economies, especially financial services. The Oman Investment Fund bought more than 41 percent of Muscat-based Oman National Investment Corp. Holding from Dubai Insurance Group, owned by Dubai Group, part of Sheikh Mohammed bin-Rashid al-Maktoum’s Dubai Holding conglomerate. QIA snapped up an entire new share issue by Doha-based Qatar Insurance Co., leaving the fund with a 32 percent stake. The Qatari fund also bought global stock exchange operator NYSE Euronext out of the Qatar Exchange, which runs the Doha stock market.

In a similar vein, Malaysian sovereign wealth fund Khazanah Nasional partnered with Toronto-based Sun Life Financial to acquire 98 percent of CIMB Aviva Assurance and CIMB Aviva Takaful, two insurance joint ventures between U.K. insurer Aviva and CIMB Group Holdings, one of Malaysia’s largest financial groups. Khazanah and Sun Life each paid 900 million Malaysian ringgit ($298 million) in the transaction, which included exclusive rights to distribute shari’a-compliant takaful products and other insurance offerings through CIMB Bank’s Malaysian network.

Beyond financial services, the Kuwait Investment Authority (KIA) has established a 500 billion Kuwaiti dinar ($1.8 billion) joint venture, Tri International Consulting Group, with international management consulting firm Oliver Wyman and the emirates international aid agency the Kuwait Fund for Arab Economic Development. Tri International’s goal is to bring high-quality consulting expertise to Kuwait to improve the competitiveness of the country’s non-oil-sector enterprises. KIA owns a 60 percent interest in the consulting company and contributed $1.1 billion in start-up capital toward its launch.

QIA also set up a joint venture to transfer expertise to its domestic economy. The fund established the $1 billion Nebras Power Co. with state-owned Qatar Electricity & Water Co. and Qatar Petroleum International, the foreign investment arm of the country’s national oil company, taking a 20 percent share. Nebras Power will make international investments in power generation, water desalination and treatment, heating and cooling systems, and fuel provision to transfer knowledge back to Qatar to help develop the emirate’s infrastructure. In the same sector Saudi Arabia’s Sanabil Investments allocated to Riyadh-based ACWA Power International, which develops, owns and operates independent water and power projects in Saudi Arabia and Morocco.

Alaska Permanent Fund Corp. (APFC) made the most unusual domestic investment of 2013. In December, departing from its usual relatively conservative strategy, APFC became a cornerstone investor in a Seattle-based biotechnology start-up: Juno Therapeutics. The fund allocated $50 million to Juno, which is developing gene therapies that activate a patient’s own immune system cells to attack cancerous tumors. APFC invested alongside Chicago-based venture capital firm ARCH Venture Partners; their total initial allocation of $120 million was one of the year’s largest first-round financings of life sciences companies.

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