Annual Report 2013 - Funds

April 11, 2014

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Singapore’s GIC and Temasek Holdings were the most active sovereign wealth funds in 2013. They made 40 and 38 direct investments, respectively, accounting for a combined $14.3 billion — 34 percent of sovereign funds’ total investment for the year.

GIC and Temasek are both bullish on China’s economic prospects. They’re betting that the Chinese government will succeed in rebalancing the world’s second-largest economy from an export-led model to one driven by consumption, and that rising affluence across Asia will keep lifting demand from the new middle classes.

Although GIC’s investments in China and the rest of Asia tend to be relatively small — usually less than $50 million apiece — Temasek has been less conservative. In 2013, Singapore’s smaller sovereign fund spent an estimated HK$6 billion ($800 million) upping its stake in Industrial and Commercial Bank of China to more than 8 percent from 6.7 percent and about HK$3.3 billion on a 5 percent stake in China Pacific Insurance (Group) Co. The insurance company’s 2012 attracted investments by initial public offering the Abu Dhabi Investment Authority, GIC and Norges Bank Investment Management.

Both Singaporean funds have backed Chinese technology companies, including Beijing Xiaomi Technology Co., which became the top-selling smartphone manufacturer in China in 2013. Temasek has supported Xiaomi from its inception in 2010, and last year GIC participated in the company’s Series C fundraising. China’s largest independent Internet data center services provider, 21Vianet Group, received $100 million in funding from Temasek. The Singaporean fund also embraced e-commerce in 2013: It allocated $3.4 million to, China’s biggest online marketplace, and $1.6 million to Beijing-based travel experience sharing service BreadTrip; in developed markets it invested $85 million in Jacksonville, Florida–based sports apparel online retailer Fanatics

Asia-Pacific Sovereign Wealth Funds’ Foreign Direct Investment, 2013

Source: Sovereign Wealth Center.
In 2013, China Investment Corp. (CIC) and the Qatar Investment Authority (QIA) substantially reduced their direct-investment activity, even compared with their peers.

CIC traditionally has been an active direct investor: From the fund’s inception in 2007 through the end of 2012, we have tracked $310 billion in total investments. For 2013 our data captures only $1.9 billion, most of which was CIC’s December purchase of Chiswick Park, a 33-acre office complex in West London, for £780 million ($1.2 billion) from New York–based alternative-asset management giant Blackstone Group.

CIC’s dramatic curtailing of direct investment is partly a result of the Chinese sovereign wealth fund’s shifting its investment strategy toward an endowment-style model focused on finding beta returns through passive investments in bonds and equities and chasing alpha with the help of hedge funds.

CIC is becoming cash-constrained: The State Administration of Foreign Exchange (SAFE), the unit of the People’s Bank of China that manages the central bank’s $3.8 trillion in foreign exchange reserves, has grown reluctant to bankroll the fund because SAFE itself is now investing heavily in international equity and real estate markets. In 2013 we recorded over $800 million in property transactions alone for SAFE.

QIA started the year in its usual style, making more than $4.3 billion worth of large, high-profile direct investments in the first six months. Many of these allocations were to companies that serve the growing emerging-markets financial elite, such as New York–based jeweler Tiffany & Co., in which QIA boosted its stake by almost 4 percentage points, to 12.7 percent, in two tranches. Tiffany’s major growth areas have been in emerging markets: In 2013 comparable store sales were up 11 percent in the Asia-Pacific region and 14 percent in the United Arab Emirates on a constant exchange rate basis, compared with 3 percent in the Americas and 4 percent in Europe.

Following a similar strategy, QIA also bought several luxury hotels that cater to business travelers, who increasingly come from emerging markets. These purchases included a portfolio of properties from Greenwich, Connecticut–based private equity firm Starwood Capital Group for €800 million ($1.1 billion) and the leasehold and freehold of the InterContinental London Park Lane hotel for a total of £401.5 million.

However, following last June’s abdication of Qatari emir Hamad bin-Khalifa al-Thani in favor of his son Tamim bin-Hamad bin-Khalifa al-Thani, QIA shifted its strategy. The new emir soon promoted Ahmad Mohamed al-Sayed from his role as CEO of Qatar Holding, the fund’s direct-investment arm, to be QIA’s new chief executive, and the pair started putting a stronger focus on domestic economic development.

Two large investments at home illustrated this change. In October, QIA bought global stock exchange operator NYSE Euronext out of the Qatar Exchange. In December it set up a new joint venture, 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. The partners intended that Nebras Power would invest in power generation, water desalination and treatment, heating and cooling systems, and fuel provision abroad and transfer knowledge back to Qatar.

Middle Eastern Sovereign Wealth Funds’ Foreign Direct Investment, 2013

Source: Sovereign Wealth Center.

Although QIA reined in direct investment during the second half of 2013, when we recorded it closing only seven deals with a total value of less than $1 billion, it didn’t entirely lose its risk appetite. With an equity-heavy portfolio and no need for liquidity, the fund sought to diversify into credit opportunities that would net strong returns.

QIA appears to have already put this strategy in place: In June 2013 it provided Blackstone with £200 million in mezzanine debt, which the asset manager used to refinance its 2011 purchase of Chiswick Park. In November, QIA took a riskier bet, buying 10 percent of $1 billion in unsecured subordinated convertible debentures issued by struggling Canadian smartphone maker BlackBerry on a private placement basis. The other buyers were two insurers, Canada’s Fairfax Financial Holdings and Virginia-based Markel Corp., and three investment managers: Toronto–based Brookfield Asset Management and Mackenzie Financial Corp. and Canso Investment Counsel.

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