Government Fund Weekly News Roundup — Energy and Infrastructure Opportunities Abound

September 02, 2016 by SWC Editors

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Infrastructure: Not always pretty, but often profitable.

This week, government funds jostle for position as potential buyers of two huge infrastructure assets: a natural-gas distribution network owned by Brazil’s state-run oil giant Petróleo Brasileiro (commonly known as Petrobras) and Ausgrid, an electricity distribution grid in the Australian state of New South Wales. Australia’s Future Fund has released its annual results, which reflected its newly-conservative portfolio positioning. And Norway’s sovereign wealth fund continues its push to expand its real estate holdings with the acquisition of office property in San Francisco.

Infrastructure Deals: Infra a Treat

On August 19, Australia’s State Treasurer, Scott Morrison, ruled out both of the final bidders for a 50 percent stake in Ausgrid, the Australian state of New South Wales’ electricity distributor, which runs the country’s largest electricity-distribution network. The failed bidding process had whittled down the suitors for the transmission network to Hong Kong-based infrastructure firm Cheung Kong Infrastructure Holdings and Chinese state-owned electricity provider State Grid Corp. Unconvinced of their suitability as potential owners, however, Morrison placed a moratorium on the sale due to national security concerns.

Having rebuffed the Chinese firms, the government of New South Wales has reportedly turned to other deep-pocketed investors — namely, Canadian pension fund managers — in an effort to restart the sale. The government is attempting to attract at least six such organizations to create a new consortium: the Alberta Investment Management Co. (AIMCo); Borealis Infrastructure (the infrastructure-investment arm of the Ontario Municipal Employees Retirement System); British Columbia Investment Management Corp.; Canada Pension Plan Investment Board; Ontario Teachers’ Pension Plan and the Public Sector Pension Investment Board (better known as PSP Investments). Even if the funds decide to table an offer for Ausgrid, however, they may not be willing to pay as much as China’s State Grid Corp., which assigned a value to Ausgrid of approximately A$12 billion to A$13 billion ($9.02 billion to $9.77 billion).

On the other side of the world, Brazil’s state-run oil giant Petróleo Brasileiro (commonly known as Petrobras) is said to be on the verge of selling its Nova Transportadora do Sudeste SA gas pipelines and storage unit to a consortium that includes two sovereign wealth funds: China Investment Corp. (CIC) and Singapore’s GIC. The consortium is being led by by Toronto-based asset manager Brookfield Asset Management and may close the deal to buy the network from Petrobras as early as the end of September. Petrobras would likely welcome the deal, which holds the potential to net the embattled oil giant between $5.5 and $6 billion. Petrobras has made a string of disposals in recent months as it struggles with stubbornly low oil prices and its position at the center of a Brazilian bribery and corruption scandal.

Australia’s Future Fund Announces Annual Results

Australia’s sovereign wealth fund, the Future Fund, has delivered its annual results for the 2015–’16 fiscal year, which ended on June 30. Assets under management now toal A$122.79 billion ($92.53 billion), an increase from A$117.22 billion since the end of the 2014–’15 fiscal year. These results mark the tenth year since the inception of the Future Fund, which has more than doubled in value since it was founded in 2006 with an A$60.5 billion contribution from the Australian government.

The Future Fund missed its target return of 5.5 percent for the year (derived from from an inflation hurdle based on Australia’s consumer-price index plus 4.5 percentage points), but the fund still achieved a healthy return of 4.8 percent despite its investment team adopting a lower-risk strategy. The Future Fund attributes its 4.8 percent return to its team’s success in seeking out pockets of opportunity — with a particular focus on allocations to private markets and alternatives. Alternative assets accounted for 13.7 percent of the Future Fund’s portfolio as of June 30 and are worth A$16.85 billion, up from A$14.9 billion the previous year.

Commenting at the press conference convened to release the results, the chair of the Future Fund’s Board of Guardians, Peter Costello, acknowledged that weak global growth and limited opportunities for stimulus through monetary policy meant that the Board of Guardians found it "prudent to hold the level of risk in the [Future Fund’s] portfolio at a lower level than would normally be the case." One element of this approach has resulted in the team increasing the fund’s cash holdings, from A$22.89 billion as of June 30, 2015 to A$26.7 billion in 2016. Another aspect of this risk-reduction strategy has seen the Future Fund’s investment team trim the fund’s exposure to equities over the same period; equities have fallen from 33.8 percent of the portfolio in 2015 to 33.8 percent at the end of June.

Sun Seeker: Norway’s Colossal SWF Buys Up San Francisco Offices

Norges Bank Investment Management (NBIM), the arm of the Norwegian central bank that oversees Government Pension Fund Global (GPFG), the country’s $855 billion sovereign wealth fund, has paid $453 million for stakes in two office blocks in San Francisco. The buildings, 100 First Street and 303 Second Street, are located in San Francisco’s South of Market Street district and are owned by two separate companies — both of which are subsidiaries of Los Angeles-based real estate investment trust Kilroy Realty Corp. NBIM’s real estate subsidiary, Norges Bank Real Estate Management, bought a 44 percent stake in each of the respective realty companies; Kilroy, however, remains the majority stakeholder in both properties.

NBIM has sought to increase GPFG’s real estate holdings for some time, petitioning the Norwegian government to raise the investment cap on the percentage of GPFG’s real estate assets from 5 percent to 7 percent. Despite the Norwegian government agreeing to the increase in April 2016, the investment team has struggled to reach its allocation ever since GPFG added real estate as a new asset class in 2010, and still has just 3.1 percent of the fund’s assets under management invested in real estate as of June 30, 2016.

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