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Petrobras Draws Interest for NE Pipeline Network

Petróleo Brasileiro S.A. (Petrobras) received a number of bids for its natural gas pipeline network in the country’s northeast. The asking price is up to US$ 6 billion. Banco Santander SA is advising Petrobras on the deal.

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How Asset Owners Can Achieve Greatness

Sacha Ghai

Sacha Ghai

Global asset owners, such as the CPPIBs and ADIAs of the world, have increasingly built up their internal resources, while allocating more capital toward illiquid assets. Sovereign funds and other massive pensions often use their balance sheet as tools to generate outsized returns by harvesting the illiquidity premium. However, questions loom: How can asset owners be prepared from a period of post-global financial crisis to the next economic period? To answer that question McKinsey released a report titled, “From big to great: The world’s leading institutional investors forge ahead,” which details trends, opportunities and suggestions on how asset owners can becoming high-performing organizations.

Portfolio Construction

McKinsey surveyed 27 large, geographically diverse pensions and sovereign wealth funds at the executive level, which in total amounted to US$ 7.4 trillion in assets. McKinsey’s survey and interviews came to the conclusion that more public institutional investors will take on a different approach to asset allocation. The old model of solely relying on backward-looking data is no longer cutting it. As Sacha Ghai, a Senior Partner at McKinsey puts it, “portfolio construction is the priority,” when it comes to returns. Ghai leads the consulting firm’s global institutional investor practice.

Ghai also talked about how asset owners are starting to place more emphasis on asset allocation by building up their internal resources. From a portfolio construction point of view, for example in infrastructure, Ghai noted that asset owners, “are looking at trends in regulations, while factoring in economic growth and exogenous factors that can shock the system.” Thus, more large pensions are developing their own house views on where markets are heading versus purely relying on advisor or consultant forecasts.

Alpha is much harder to find for wealth funds and pensions, and the collapse of the risk premia has forced asset owners to take on incremental risk. More owners are allocating toward illiquid strategies, and according to McKinsey’s survey, 75% of the respondents are likely and very likely to go into investment areas that are currently not in their portfolio or strategy, such as direct lending and reinsurance, in the next five years.

How Can Mid-Tier Asset Owners Generate Big Returns?

77% of the investors surveyed either likely or very likely plan to build direct or lead investing capabilities in the next five years. Often, the smaller wealth funds and pensions, averaging US$ 50 billion in assets, are in constant competition with larger asset owners for access to talent, top-tier funds, co-investments and direct investments. Ghai believes that mid-sized pensions and wealth funds can have teams as great as the larger asset owners. Ghai stated, “There is no reason a US$ 200 billion fund should be able to attract better talent than a US$ 75 billion fund. It comes down to ambition.”

Ghai says that asset owners who want greater access to deals, to be viewed as reliable partners and generate more opportunities must build internal talent and create a high-performance culture similar to what leading firms in other sectors do, for example Apple in high-tech and GE in industrials. Asset owners could enhance reputation by opening foreign offices, showing capital commitments to markets, building networks by attending conferences and partnering with local players. Wealth funds and pensions that recruit excellent people have the ability to tap into a massive deal network, which makes a significant difference. The McKinsey survey reinforces what the SWFI has been reporting for the past few quarters: More wealth funds and pensions will follow the direct investing trend, rethink asset allocation to make it more forward-looking, while needing to adjust internal resources for it.

Here is a link to the McKinsey report.

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Strategic Development: Angola Sovereign Wealth Fund Building Hospitality School

José Filomeno de Sousa dos Santos, Chairman of FSDEA

José Filomeno de Sousa dos Santos, Chairman of FSDEA

Fundo Soberano de Angola (FSDEA) has begun construction on Academia de Gestão da Hospitalidade Angolana, a new hospitality school. The school will be located in the Angola province of Benguela which borders the Atlantic coast. The FSDEA is a strategic development sovereign wealth fund (SDSWF), that is embarking on local investment projects to boost returns, while stimulating job creation. FSDEA is attempting to boost tourism, by creating a hospitality sector within Angola and the greater region.

See Angolan Sovereign Wealth Fund Profile

Switzerland is known for its world-renowned hospitality schools, attracting international students. The FSDEA is collaborating on the school development with Lausanne Hospitality Consulting (LHC), the Swiss knowledge development and management advisory company and the consulting and executive education division of Ecole hôtelière de Lausanne (EHL). By partnering with Lausanne Hospitality Consulting, the FSDEA wants to ensure the school is EHL accredited.

In a press release, José Filomeno dos Santos, Chairman of the Board of Directors, FSDEA, said, “As we continue to witness exponential economic growth there is a growing demand for trained professionals in the hotel industry. The main objective of the Academy is to provide leading training in this sector across our continent. EHL is one of the best known hospitality schools globally, and we are therefore very pleased that youth from Angola and around the continent will be able to benefit from their renowned expertise and know-how.”

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Big News Week for Sovereign Wealth Funds – The Good, the Interesting, the Ugly

vincebThis article is written by Vince Berretta – The Liaison Report and his opinions are his own and not of the Sovereign Wealth Fund Institute.

Where have sovereign wealth funds been my whole life?  Apparently moving markets.  Every time they make an investment or decide to abandon a manager, they make headlines.  And as their AUM continues to grow past US$ 5.5 trillion they’re only going to find themselves more and more the focus of fund managers’ marketing efforts.

Wait!  I’m not just saying it this time.  I actually have real verifiable, secondary-source information to base my claims. Granted, I let the news writers take care of most of the heavy lifting, but news aggregation is no easy task.  Trust me, a lot of furious clicking is going on behind this seemingly whimsical newsletter.

But enough about all the personal sacrifice I make for your benefit.  Let’s get into it.

The Ugly

SPECIAL NOTE: What you are about to read includes gruesome outflows; if you are in the presence of small children or wear a pacemaker, you are advised to proceed with discretion.

Legg Mason’s assets slide 3.1% in quarter from market losses, outflows – Rick Baert (PIonline.com)

Janus AUM drops 1.9% in quarter – Randy Diamond (PIonline.com)

T. Rowe reports $8 billion in net outflows in Q2 vs. $3.3 billion net inflows in Q1 – Rick Baert (PIonline.com)

The Money Quote: “William Katz, analyst at Citigroup Global Markets, said in a client note that T. Rowe management told him about 90% of the outflows came from ‘a handful of sovereign wealth fund clients…”’

Well isn’t that interesting?  But, like my Gramps always said, “one funds manager’s outflow is another’s inflow.”  Oh Gramps, your bucolic maxims really are so trite!

The Interesting

African tower group IHS raises $522 mln to fund growth – Reporting by Chijioke Ohuocha; Editing by Joe Brock (Reuters)

The Money Quote: “IHS raised $280 million in debt from the World Bank’s private sector arm, International Finance Corp, and $242 million in equity from new and existing shareholders, including an Asian Sovereign wealth fund, the company said in a statement.”

I wonder if the NSIA is going to be in on that?

China Investment Corporation Posts 10.6 Percent Return, Moves Up Ranking – (swfinstitute.org)

The Money Quote: “The China Investment Corporation (CIC) posted a 10.6% return for the year of 2012, compared to -4.3% in 2011. Assets for the China Investment Corporation grew to US$ 575.2 billion at the end of 2012 compared to US$ 482 billion. 36.2% of assets are internally managed, while 63.8% is managed externally.”

Let’s see.  Some quick math here.  %63.8 x 575.2 = 367 billion in sweet, sweet mandates.

The Good

For me at least.

We’ll go back to P&I because that had a very (tacitly) informative article this past week on marketing to SWFs (they also quoted the Sovereign Wealth Fund Institute, but I’ll refrain from boasting).  Many of my longtime readers will have seen some of this information before.  But this article has quotes.  I should think about doing that.

Manager growth linked to SWFs – Enormous asset pool offers ‘massive prospects’ for firms, report says – Rick Baert (PIonline.com)

Money Quote 1: “Continued asset gains will present what the report called ‘massive growth prospects’ for money managers. The PwC report said the increase in sovereign wealth funds was one of five macro trends in money management…”

Australia’s superannuation funds will be next.  But let’s just focus on SWFs for now.

Money Quote 2: “But getting this business for money managers isn’t easy. Rather than waiting for RFPs, SWFs require a more direct, individual approach ‘If you’re a sovereign wealth fund, everybody and their brother are calling you,’ said John Siciliano, PwC managing director, global asset management consulting practice, based in New York. ‘If you’re not calling, you won’t get the business.’”

You know what also works really well John?  Networking events.  Just sayin’.

Money Quote 3: Mr. (Firas) Mallah listed three things managers need to know when marketing to SWFs:

• Sovereign wealth funds aren’t very transparent. “They disclose only indicative information,” he said. “The disclosures aren’t as detailed as with pension funds.”

• “Sovereign wealth funds don’t talk unless they’re solicited, so you need to know their structure and organization, plus have good direct contacts with them,” he said.

• Internal contacts “are just one piece of the puzzle. Investors like them have seen it all. Ninety percent of the top 100 money managers have shown them their products. Ultimately what you need is something with a proven track record.”

The article then goes on to stress the fact that boutique managers shouldn’t feel as though SWFs are only giving mandates to the bigger firms.  SWFs like individualized and prompt service.  If they feel that they can get that with a smaller manager, then there’s no reason they won’t go with that manager.  Of course an asset manager with 500 million AUM probably isn’t going to get a billion dollar mandate.  But there are examples of smaller managers catching a whale by the tail.

So there you have it.  SWFs are simultaneously responsible for massive inflows and outflows, and if you’re looking for the next major source of capital, I know just the place to start.

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