Government Fund Weekly News Roundup — Abu Dhabi Engineers a SWF Merger and London Loses Some of its Lustre

July 01, 2016 by SWC Editors

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Streets Abu Dhabi

The Streets of Abu Dhabi at Night. Photo: Colin Capelle.

In the news this week: Abu Dhabi prepares to merge two of its SWFs into one $135 billion giant. Canadian pension funds keep calm and look to bag bargains in discounted British markets. And Norway’s SWF overseers flex their muscles in a fresh display of shareholder activism.

Abu Dhabi’s SWF Merger: Oil and Water?

The emirate’s government is in negotiations to merge two of its SWFs: the International Petroleum Investment Co. (IPIC), which has $68 billion in assets under management, and the similarly-sized Mubadala Development Co. The combined entity would oversee total assets of approximately $135 billion — placing it among the largest funds in the region by assets under management — and have debt of roughly $42 billion. 

Although both IPIC and Mubadala focus on the development of Abu Dhabi’s economy, IPIC supports the domestic oil industry by buying energy—related assets worldwide, while Mubadala seeks to promote economic development by investing in research-intensive industries to diversify the economy away from the oil sector. A merger between them would therefore be highly complementary; neither fund is currently expected to make any significant changes to its investment strategy. According to IPIC’s Chairman, Sheikh Mansour bin Zayed Al Nahyan, the focus will instead be on generating "greater benefits and enhanced economic value to the government of Abu Dhabi," while also offering economies of scale and streamlining any overlapping remits.

Moreover, given Mubadala’s strong reputation for accountability and transparency, a merger could be seen as a bold move in clarifying the corporate culture of the less-open IPIC. This development would be an important step for IPIC in the wake of the ongoing legal quagmire it faces over two missing $1.75 billion bond payments ostensibly made by scandal-hit Malaysian development fund 1Malaysia Development (1MDB).

The merger could be completed as early as 2017. Sheik Mansour believes the process will offer a number of opportunities for Abu Dhabi to realize synergies and growth across multiple sectors, including aerospace, energy, industry, healthcare, real estate and technology.

Life After Leave: Keep Calm and Bag Bargains

In the wake of Britain’s so-called Brexit vote, sovereign wealth fund executives have hastened to reassure their stakeholders that their recent acquisitions in the U.K. — largely office buildings and infrastructure projects — are still holding their value. Kuwait’s SWF, the Kuwait Investment Authority (KIA), expressed confidence in its portfolio of British assets despite the market upheaval sparked by the results of the referendum. Minister of Finance Anas al—Saleh promised Kuwait’s cabinet that KIA’s U.K. investments — which are largely made up of real estate, infrastructure and government debt — are "high quality and long—term."

Japan’s $1.2 trillion pension-management behemoth, the Government Pension Investment Fund (GPIF), also announced it was relatively unruffled by the aftershocks of Brexit. GPIF’s CEO Norihiro Takahashi has pledged that the political upheaval in the U.K. won’t affect the fund’s new equity-focused investment strategy because he believes that prices will soon settle. GPIF has historically held a conservative, bond-heavy portfolio; however, Japan’s aging population has required the fund to increase allocations to riskier asset classes, including stocks, to achieve higher returns.

Two Canadian pension plans — organizations that have historically been significant investors in U.K. infrastructure and real estate — seized on the vote as an opportunity to search for discounted deals. Canada Pension Plan Investment Board (CPPIB) and Ontario Teachers’ Pension Plan (OTPP) geared up for a spot of shopping as the value of sterling plunged to low against the dollar not seen since 1985. CPPIB and OTPP, which have exceptionally long—term investment horizons, are well-equipped to look beyond short-term volatility for investments that will deliver positive returns in the decades ahead. 

Brexit’s Unintended Consequences

While Canadian pension plans were browsing Britain for cut-price deals, the electorate’s decision to leave the European Union created some unexpected fallout in Ireland. Finance Minister Michael Noonan announced that he will have to step back and reconsider whether plans to create a €2.5 billion ($2.7 billion) rainy-day savings fund for Ireland would still be viable in a post-Brexit world. The aim of the fund was to stabilize the Irish economy in the event of future shocks, but — with models predicting Brexit could shave a cumulative 1.6 percent off Ireland's GDP over the next two years — the capital to fund it  may not be available.

The Qatar Investment Authority (QIA) may also have been hit by Brexit. QIA is reportedly considering canceling the sale of an office building it owns in the heart of London’s financial center, Canary Wharf. The building, 1 Cabot Square — which QIA put up for sale earlier this year — is currently leased to Zürich—based financial services giant Credit Suisse, a company in which QIA owns a sizeable stake. Mounting uncertainty regarding the U.K.’s relationship with the E.U. going forward may have given QIA jitters: Credit Suisse’s London base proves key access to the E.U.’s single market in services under so-called passporting rules that are unavailable to the financial services firm in its native Switzerland.  If the U.K. lost these rights post-Brexit, Credit Suisse’s residency at 1 Cabot Square would therefore be in question — and selling the building without a definitive long—term tenant might negatively impact its sale price.

Bulking Up: NBIM Continues to Flex Its Muscles

Norges Bank Investment Management, the arm of the central bank that manages the country’s $870 billion sovereign wealth fund, continues to flex its power as an angry shareholder. Following closely on last week’s scorching vote against all of German automaker Volkswagen’s current and former executives, as well as against its entire 27-strong supervisory board, NBIM is once again making its voice heard by divesting from two oil-and-gas exploration companies.

NBIM has dropped its 2.85 percent stake in London-headquartered Cairn Energy and its 0.8 percent holding of Dallas-based Kosmos Energy, citing a "violation of ethical norms" in relation to the two firms’ continued operations on behalf of Morocco off the coast of the disputed territory of Western Sahara. Morocco annexed the territory when it gained its independence from Spain in 1975, and Western Sahara has been fought over ever since. The Algeria-based Polisario Front has long waged a guerrilla war against Moroccan rule, demanding autonomy for Western Sahara, but  — despite a U.N.—brokered ceasefire deal in 1991 that paved the way for a referendum on independence — no such vote has yet been held.

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