Sovereign and Public Investor Topics: Asset Allocation and Policy
Alternatives - Hedge Funds and Private Equity
Real Estate and Infrastructure |
Central Banks and Monetary Authorities
Under the terms of the agreement, the affiliates of the private investor group will buy all outstanding BMC common stock for US$ 46.25 per share or approximately US$ 6.9 billion.
Asian sovereign funds are progressively playing a key role as direct private investors.
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Institutional investors have several means to gain exposure to private equity through a variety of differing liquidity and cost structures. The limited partner position investing in an externally managed fund is quite common. The “2 and 20” fee structure on committed capital has been the bread and butter for the private equity industry.
Larger investors with human resource flexibility often partake in direct investing, enlarging their internal private equity capacity. Direct investment in private equity assets has a lower overall cost structure compared to fund investments. Access to eye-catching deals and execution expertise are critical for direct private equity investors to manufacture high returns.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]
The China Investment Corporation (CIC) generated a 10.65% return on overseas investments for 2012. Since inception, the CIC’s total overseas investment return is above 5%. Public equities compose 25% of their global portfolio, down from 48% at the conclusion of 2010.
The California Public Employees’ Retirement System (CalPERS) with US$ 254.5 billion in assets is juicing its augmentation to event-driven and global macro hedge funds. 5% of their hedge fund portfolio will be allocated to event-driven strategies. Global macro strategies will grow to 10% of the hedge fund portfolio, up from 2%. The big news is that CalPERS plans to decrease fund-of-fund investments, excluding those investing in small hedge funds, in this area from 14% to 5%. About US$ 5 billion in assets is allocated to hedge funds. The pension fund’s Absolute Return Strategies Program returned 4.2% in 2012 which was below the 5.2% benchmark.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]
Public investors that have restrictions participating directly into credit swaps or desire access to a diverse pool of credit investments are choosing to invest some capital in credit-linked notes (CLN). Public pensions such as CalPERS have classified credit-linked notes as an opportunistic asset class given the historical level of risk associated with structured investments. In Europe, cash-focused public pension funds have been gobbling up CLNs. Historically, credit-linked notes have been purchased by financial institutions, high net worth individuals, and opportunistic institutional investors. CLNs tend to have higher yields and customized maturity structures, a unique benefit for smaller pension funds, but not for investors keen on liquidity. The lack of counterparties makes it challenging to get out of credit-linked note trades. Banks like credit-linked notes because they can effectively sell certain credit exposures.
Are synthetic credit products making a comeback?
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The short-lived evolution of the hedge fund industry in the past twenty years has been a boon to hedge fund managers. From being a private pool of high net worth capital to becoming an asset class suitable for institutional capital, the industry and its participants have augmented greatly in assets and wealth. From an investor viewpoint, hedge funds are an expensive asset class to invest in. Despite the setback in 2008, hedge funds remain a key interest for a swath of sovereign wealth funds and public investors. Generally speaking, sovereign wealth funds like the Abu Dhabi Investment Authority (ADIA) are long-term in nature; this is a powerful attribute for an investor in hedge funds.
Hedge funds that follow a long-term strategy can benefit from having sovereign funds as investors.
2013 and Beyond
The type of sovereign wealth fund to invest in hedge funds includes one where capital preservation is not the highest priority. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]
Key stakeholders at sovereign wealth funds and public funds slowly push the mandate of domestic strategic investing to stimulate local development. This is not a new concept, and usually gains traction when unemployment is high.
There are obstacles in implementing such a domestic private equity investment program.
Two significant hurdles include proper return measurement mechanisms and the size of the state, region, or country. Socioeconomic return measurement is subjective in nature compared to measuring pure financial returns.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]
The Korea Investment Corporation (KIC) posted an 11.83% return on investment for 2012. The KIC topped the benchmark yield of 11.17%. The KIC posted a net asset value of $56.6 billion for 2012.
The negative effects of deleveraging in developed economies have lowered return expectations for sovereign funds and some public investors.
Sovereign funds have generally low expectations for fixed income and some equity markets for the next couple of years, which show the move towards alternative asset classes like real estate and private equity.
Exposure in private markets for the KIC is targeted toward 20 to 25%. In July 2009, the KIC launched their indirect private market program, which allowed investments in private equity, real estate, infrastructure, and hedge funds. Almost a year later in June 2010, the direct investment program was pushed forward, allowing the KIC to pursue direct energy and natural resource cross border deals. Some overseas deals in 2012 include purchasing landmark real estate in Europe.
In 2005, the Korea Investment Corporation was established to manage a portion of Korea’s foreign reserves and to contribute to the development of Korea’s domestic finance industry. The KIC is prohibited by law from investing in Korean assets.
ATP Alpha Fondsmæglerselskab A/S is the ATP’s hedge fund-of-funds division that will restructure. Part of the restructure includes minimizing ATP Alpha’s 35-person staff nearly in half. In 2006, ATP created ATP Alpha to be managed as an independent unit. ATP Alpha has about 10.2 billion Danish kroner invested in the alpha portfolio.
The 789 billion Danish kroner ATP is attempting to position the fund in period of low economic growth, emerging risk, tighter regulation, and lower returns. In October 2012, Denmark’s largest pension fund cut back their investments in high-yield debt.
Japan’s aging population and low birth rate are mounting pressure on the pension system to generate higher returns. A Japanese government agency showed a survey that said by 2060, the population of Japan will fall by 30%, down to 90 million people. Historically, the GPIF has been one of the largest purchasers of Japanese government debt. Japan’s US$ 1.3 trillion Government Pension Investment Fund (GPIF) has chosen four companies to conduct feasibility studies on conceivable future investments in alternative assets. These assets include private equity, real estate, and infrastructure investments. The chairman of the GPIF, Takahiro Mitani has ruled out hedge funds as a possible asset class.
The GPIF is contemplating private equity style investment programs.
The solicitation went out in August 2012. These studies will be due by the end of March 2013. The feasibility study results will be presented to the Japanese public and to the members of fund’s investment committee for review in the future.
The firms selected are the following:
- Brightrust PE Japan Co., Ltd.
- Atsumi & Sakai, Japanese legal firm
- Capital Dynamics
- T&D Asset Management
The Texas Permanent School Fund (TPSF) has dropped two more managers to save on hedge fund fees and streamline relationships. The TPSF dropped GAM Holdings AG and Mesirow Financial Inc. Holland Timmins, the chief investment officer of the TPSF, pushed for the modification as 10% of TPSF assets are invested in hedge funds, yet they derive 44% of investment expenses. Mr. Timmins distributed documents to trust board members stating that hedge fund fees cost TPSF about US$ 82.7 million since 2008. Mr Timmins has preferred to allocate in-house management of hedge fund managers over time.
From September 30, 2012 documents showed that GAM and Mesirow Financial managed US$ 666 million in assets. Money from these managers is to be allocated between Blackstone Alternative Asset Management and Grosvenor Capital Management. In July 2012, TPSF terminated K2 Advisors LLC from Stamford, CT from managing US$ 405 million.
As sovereign wealth fund investors and public plans continue to embrace alternative asset classes such as real estate, infrastructure, hedge funds and private equity, manager fees will gobble into their returns. By analyzing a sample of fiscal year 2011 public investor financial statements, one can see that alternatives make up a major portion of fees paid. Diversification has its hefty price; furthermore, not many public funds can hire full-time professionals in every field.
Running a complex-strategy for a public fund, investing in a variety of asset classes will push up manager fees. The Future Fund’s indirect cost ratio is the ratio of the fund’s total management costs to the fund’s average net assets. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]
Heliconia Capital Management, a sovereign wealth enterprise (SWE) of Singapore’s Temasek Holdings, is backing investment in a fund managed by Dymon Asia Capital by allocating S$ 100 million to it. The firm plans to raise S$ 300 million in its Dymon Asia Private Equity fund. The private equity fund plans to target both public and private small to medium businesses (SMEs).
The government of Singapore wants to develop SMEs in Singapore by providing a diverse funding base of growth capital. They are targeting to have a S$ 1.5 billion public-private co-investment fund for Singapore-based SMEs funded by both public and private capital. Heliconia Capital Management was created to manage the vehicle. Heliconia will continue to appoint private equity managers to source capital to match the government of Singapore’s investments.
Utilizing fund-of-funds can be beneficial for sovereign investors who lack large internal staff dedicated to alternatives. Many sovereign investors need the capability to have exposure to an asset class quickly.
Clearly, there is a trend of direct investing into hedge funds, but public investors also understand they might not have the research capabilities or skill to find or manage such investments. The fund-of-funds industry has been criticized for high fees and lackluster returns in recent years.
A fund-of-funds can speedily grow exposure to hedge funds when opportunities arise.
In addition, adopting the use of fund-of-funds allows public investor staff to jump onto market dislocations faster in various instances. The Australian Future Fund has taken this approach and nearly has a 20% exposure to hedge funds, including fund-of-funds.
Singapore’s GIC and the Kuwait Investment Authority among other institutional investors have taken a combined 10% stake in CVC Capital Partners Ltd. (CVC). Sovereign investors are using their purchasing power to better negotiate fees and terms with private equity firms. The investment allows CVC flexibility to finance additional investments and expand their infrastructure and credit businesses. CVC Credit Partners Limited manages and advises various types of debt funds.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]
Temasek Holdings, Bain Capital, and Piramal Group are seeking to acquire a 20% stake in Shriram Transport Finance Company Ltd. (STFC) from private equity firm TPG Newbridge. Shriram Transport Finance Company Ltd. is India’s biggest commercial vehicle financier.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]
CS Strategic Partners, the secondary private equity group of Credit Suisse, won the bidding to purchase a portfolio of private equity interests from Singapore’s GIC. CS Strategic Partners purchases secondary interests in private equity funds from investors needing liquidity. In the overall scheme of private equity, the secondary market is still a niche sector.
Singapore’s GIC manages those investments through its sovereign wealth enterprise (SWE), GIC Special Investments. The GIC has been keen on selling a number of private equity interests since the end of 2011. The carrying value of the sale was less than US$ 500 million and was made up of mostly US private equity fund interests.
GIC worked with UBS to manage the process.
Sovereign wealth funds famously known for their long-term investment horizons are bidding for private equity interests in institutional portfolios. In fact, a number of the large SWFs are honing in on alternative assets such as real estate, hedge funds, and private equity. A number of European pension funds and insurance companies are looking to sell off chunks of their private equity portfolio in order to shore up liquidity for future investments, be in compliance with regards to future EU regulations, or fund current obligations. An emerging development is that some public pension funds are seeking to limit the number of private equity limited partnerships they are engaged in.
Larger pools of private equity interests up for sale will draw the unbridled attention of sovereign funds.
Swedish banking and insurance co-operative Länsförsäkringar is in the process of selling a €1.5 billion portfolio of private equity interests. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]
Sovereign wealth funds are constructing strategic alliances with asset management companies. The China Investment Corporation (CIC) and Blackrock Inc., an asset management firm, are sponsoring a China-focused investment fund. The fund is called China Global Opportunities Fund and is pursuing to raise US$ 2 billion. The fund is reported to receive a commitment of up to US$ 500 million from the CIC. The fund may also attract other large public investors. The fund will have a strategic focus as well as a commercial return mandate.
Blackrock is keen on growing their presence in Asia Ex-Japan and partner with governmental investors. Blackrock’s private equity team will not be involved in managing the fund. Instead the fund will be managed by Liu Erfei, the former chairman of Bank of America Merrill Lynch’s China operations.
|Fiscal Year 2011 Revenues by Continent||Millions USD|