Will Sovereign Wealth Funds Pay Up For GE Capital’s Assets?

May 26, 2015 by Loch Adamson

General Electric Co. CEO Jeffrey Immelt has an offer for sovereign wealth funds
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Jeffery Immelt,

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 rummage sale?

General Electric Co. CEO Jeffrey Immelt has an offer for sovereign wealth funds — some $260 billion in assets at the conglomerate’s GE 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 May 4.

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 elaborate.

35,000 Employees

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.

"Credible Leader"

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 (GPFG) 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," says Behrendt.

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.

Big Irony?

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. 

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