Government Fund Weekly News Roundup — Funds React to Oil Price Slump

January 29, 2016 by SWC Editors

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As oil prices remain at historic lows, sovereign funds respond in individual ways. British real estate attracts interest from sovereign wealth fund China Investment Corp. and Dutch government pension fund PGGM. And government funds enter a bidding war for Australian infrastructure assets.

SWF Sell-Off?

According to received wisdom in the financial press, the oil price slump is causing sovereign wealth funds to sell assets to support their sponsoring governments’ budgets. These sales are, in turn, exacerbating the wider volatility in global equities. Look behind the headlines, however, and the reality is more complex.

Take India, a country that has attracted billions in capital from state-owned investors over the past two years. According to recently-published data from ET Intelligence Group, the research arm of Mumbai-based newspaper The Economic Times, oil-funded sovereign wealth funds such as the $621 billion Abu Dhabi Investment Authority (ADIA) and the $592 billion Kuwait Investment Authority have indeed redeemed capital from asset managers that invested in India on their behalf over the past 12 months.

But look a little deeper at ETIG’s figures and you find that sovereign wealth funds’ direct investments in Indian equities actually increased by 14 percent during 2015. As of December 31, sovereign funds held 1.7 trillion rupees ($25.5 billion) in Indian stocks, up from INR 1.5 trillion a year earlier. Funds haven’t withdrawn capital from the India, in other words — they are simply investing in a different way. And the same holds true in other parts of the world.

Comments this week from Tom Arnold, ADIA’s head of property investment in the Americas, provided a further corrective to the view that the oil-price slump has caused sovereign funds to beat a mass retreat from global markets. Speaking at a conference in New York, Arnold said, "I would think [the impact of low oil prices] would have to show up at some point, but I don't think it really has yet." He reminded the audience that "ADIA was built when oil was $15 to $20 a barrel," and confirmed that U.S. real estate still looks "attractive" from the fund’s perspective.

There’s no doubt that the collapse in energy prices has hit oil-dependent nations hard. Azerbaijan, for instance, appealed to the International Monetary Fund and World Bank for support this week for its ailing economy. However, the Central Asian country looks set to issue new sovereign debt to finance its budget deficit rather than tap the $33.6 billion State Oil Fund of the Republic of Azerbaijan for cash. Like many other countries facing similar circumstances, Azerbaijan is keen to allow its sovereign wealth fund to stay the course and fulfil its long-term investment mandate, despite the current turmoil.

Whether this sort of hands-off approach would continue if oil prices remain low for much longer is, of course, another story.

British Real Estate Investments

Some things are indelibly associated with the city of London. Red buses. Black cabs. Mangy pigeons. Humongous sovereign wealth fund property deals.

Some of the British capital’s most recognizable buildings are owned by sovereign funds after a series of multibillion-dollar transactions over the past decade, including Harrods, the Shard, the Walkie Talkie and Canary Wharf. As prices rise, however, state-owned investors have begun to look beyond the capital for real estate opportunities.

This week $208 billion Dutch government pension fund PGGM announced that it is partnering with British asset manager Legal & General (L&G) to launch a £600 million ($858 million) build-to-rent fund to finance the construction of 3,000 new homes across the U.K., starting in Bristol and Salford. L&G plans to commit £300 million from its own balance sheet; PGGM will provide the remaining capital. But the fund is free to borrow up another 50 percent. L&G will manage the portfolio, whose creation indicates that attempts to make U.K. homes an institutional asset are gathering momentum.

The $747 billion China Investment Corp. (CIC), meanwhile, is reportedly teaming up with Australian property developer Goodman Group to buy three business parks in southeast England for £250 million ($356 million). CIC and Goodman have cherry-picked three parks — Hammersmith Embankment, Oxford Business Park and Uxbridge Business Park — from a portfolio of assets owned by the Arlington Business Parks Partnership (ABBP) fund, which was launched in 2003 as a joint venture between Goodman and the real estate unit of London-based financial services firm Legal & General. ADIA was an early investor in ABBP, which Goodman and L&G are now gradually winding down.

Deals Down Under

In Australia, government funds are involved in a bidding war for infrastructure assets. CIC and the $215 billion Canada Pension Plan Investment Board (CPPIB) have both joined a consortium led by Sydney-based logistics company Qube Holdings that has made a bid worth A$9 billion ($6.4 billion) for Australian railway and seaport operator Asciano.

The Asciano board had already recommended an earlier takeover bid in August 2015 from a consortium led by Canadian infrastructure group Brookfield Asset Management and Singapore’s $343 billion sovereign wealth fund GIC. Despite the board's approval, however, that proposed deal was repeatedly postponed — and the delay has enabled the Qube-led consortium, which also includes New York-based infrastructure firm Global Infrastructure Partners, to step in with a higher counteroffer.

The Qube consortium acquired 20 percent of Asciano late last year and is eager to take full control of the company; it has offered approximately 15 cents per share more than Brookfield and its partners.

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