Government Fund Weekly News Roundup — New Strategies Come Into Focus as Government Funds’ Financial Results Reveal the Effects of Market Volatility

July 29, 2016 by SWC Editors

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Renewable Energy1
New energy technologies are increasingly drawing the attention of funds.

In the news this week: Sovereign and government funds, including Japan’s Government Pension Investment Fund and AustralianSuper, are looking at new ways to put their capital to work. The latest financial results from Singapore’s GIC and Canada’s PSP Investments reveal the impact of tough market conditions. Meanwhile, Abu Dhabi’s Mubadala Development Co. is taking up a significant stake in alternatives manager Investcorp — and new energy and agricultural technologies attract interest.

Japanese and Australian Funds Seek to Unlock New Strategies

Falling returns from traditional investments are leading sovereign and government funds to investigate new approaches to put their capital to work. The Japanese government is considering allowing Japan's $1.3 trillion Government Pension Investment Fund (GPIF) to invest 5 percent of its assets — more than $55 billion — in private equity, infrastructure and real estate. GPIF had not previously been allowed to invest directly in these asset classes, having focused mainly on domestic government bonds since its creation in 2001. However, this conservative approach is being overhauled as Japan’s aging demographics put pressure on the fund’s assets and force it to seek higher returns. GPIF is currently not allowed to invest directly in private equity, infrastructure or real estate, so it is scouting for third-party fund managers to help it gain access to private markets. GPIF is likely to award mandates to global private equity firms in the coming months.

Meanwhile, Australian superannuation and sovereign funds plan to take up the slack as banks tighten their lending practices, with executives from AustralianSuper and the Future Fund targeting direct-lending opportunities. While government funds have traditionally been investors rather than lenders, their long-term capital could allow them to offer attractive bespoke deals for long-term borrowers and reap comparatively higher returns in a low-yield environment. Roger Knott, who joined pension fund AustralianSuper 18 months ago, told a regional conference that executives at the A$95 billion ($72 billion) fund have received strong referrals from banks. James Waldron, a manager of debt and alternatives at the Future Fund, Australia's A$117.4 billion ($88.3 billion) sovereign wealth fund, said that as regulations tightened, funds could be more flexible lenders than banks.

Tough Market Conditions Weigh on Results

Two major funds revealed falling returns in their latest financial results. Singaporean sovereign wealth fund GIC’s latest report for the financial year ending March 31, 2016 showed its 20-year annualized rate of return fell from 4.9 percent in 2015 to 4 percent in 2016. Depressed bond yields, low interest rates and stock market volatility weighed on GIC’s results in the most recent reporting period — factors the fund expects to persist and dampen returns over the coming decade. GIC has pledged to strive harder to reduce portfolio costs, but Lim Chow Kiat, the fund’s deputy group president and group CIO, warned of "modest growth" in the years to come.

Canadian pension fund manager the Public Sector Pension Investment Board (better known as PSP Investments) released annual results for the fiscal year ending March 31, 2016. Net investment income was down significantly compared to the previous year, dropping from C$13.97 billion ($10.71 billion) in 2015 to C$1.1 billion ($0.84 billion) in 2016. The decline was attributable, in part, to PSP Investments' lower returns from private equity in 2016 and a loss of C$2.5 billion in public markets. The fund did increase its net assets under management, however, which rose by 4.3 percent over the past year, from C$111.97 billion in 2015 to C$116.76 billion in 2016.

Mubadala Takes 20 Percent in Alternatives Manager Investcorp

Abu Dhabi's sovereign fund Mubadala Development Co. is buying a 20 percent stake in New York-based alternative investment manager Investcorp, according to a company announcement. The value of the deal was not disclosed. Mubadala will take a 9.99 percent ownership stake immediately and expects to acquire a further 10.01 percent following regulatory approvals. Investcorp's shareholders already include institutions from United Arab Emirates, Bahrain and Qatar, and include prominent individuals and family offices. Investcorp, which was founded in 1982, provides clients access to corporate and real estate investment opportunities among other products. It has offices in the U.S., U.K. and throughout the Middle East.

Green Energy Draws Canadian and Australian Dollars 

Green technologies have been attracting considerable investment interest from sovereign wealth funds, with energy deals seen in both Canada and Australia. Canadian pension plans Ontario Teachers’ Pension Plan (OTPP) and the Public Sector Pension Investment Board (better known as PSP Investments) have topped up their stakes in London-based renewable-energy holding company Cubico Sustainable Investments by buying out the interest of their investment partner, Spanish banking group Banco Santander. The three parties have each owned a third of Cubico since May 2015, when the pension funds bought in after Santander transferred a €2 billion portfolio of 19 renewable infrastructure assets into Cubico. Now, OTPP and PSP Investments will each own 50 percent of Cubico. 

Meanwhile, Sydney-based energy retailer AGL Energy, in partnership with the Future Fund and Brisbane-based investment manager Queensland Investment Corp. (QIC) have established an investment vehicle called Powering Australian Renewables Fund. The fund will plans to spend up to A$3 billion ($2.2 billion) to acquire two existing AGL solar-power plants, and will develop renewable energy across the country. 

Innovative agriculture also drew sovereign wealth fund interest. The Alaska Permanent Fund Corp. (APFC), the agency that manages the U.S. state's sovereign wealth fund, has led a $100 million capital-raising effort for Boston-based agriculture biotechnology start-up Indigo. The company researches and produces new seeds, coated in microbes, which result in higher crop yields and more efficient water use.

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