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DISMANTLE: Sovereign Wealth Funds Could Buy Parts of GE

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GE_eating2Getting early dibs, private equity giant Blackstone Group and San Francisco-based Wells Fargo signed agreements to acquire the majority of assets of GE Capital Real Estate, a unit of General Electric (GE), in a transaction value worth approximately US$ 23 billion. More financial assets are available for sale, as GE yearns to return to its industrial beginnings, focusing on wind turbines, jet engines and medical devices. In addition, GE is eager to get away from being lumped in with banks which are facing new regulatory laws. Under Dodd-Frank, the industrial conglomerate has been labeled a systematically important financial institution (SIFI). To assist in this complex and massive sales process, GE hired JPMorgan Chase & Co to be the lead on the financial asset disposition plan. Other bankers such as Goldman Sachs and Credit Suisse are assisting possible piecemeal sales of financial assets. Once the massive corporate restructure is final, GE capital should make up less than 10% of the company’s operating earnings – down from 42% in 2014.

GE Talks to Everyone, Even Sovereign Wealth Funds

Sovereign wealth funds could play a major role in acquiring some financial assets of GE, either directly or indirectly as a limited partner through a private equity fund. Sovereign investors were the white knights that bailed out banks such as UBS and Merrill Lynch during the subprime meltdown. According to GE Chief Financial Officer Jeff Bornstein, in a Bloomberg interview, the company had discussions with “a broad geographic spectrum” of suitors, including sovereign wealth funds, hedge funds and banks. GE has more than US$ 160 billion financial assets to sell. The financial advisors of GE have assisted in trying to find buyers for GE assets as well. As an investor group, sovereign wealth funds have over US$ 7 trillion in assets, eclipsing the Canadian pensions in assets. The large sovereign wealth funds, such as the Abu Dhabi Investment Authority, GIC Private Limited and Norway’s SWF have large balance sheets. Just this week, Norway’s sovereign wealth fund partnered with Prologis, through their joint venture, and bought a mega portfolio of U.S. industrial and logistical real estate for US$ 5.9 billion.

On the April 17th, 2015 GE First Quarter Earnings Call, Scott Davis, managing director and head of global industrials equity research at Barclays Capital, commented, “I was intrigued by a couple of comments that you made but Jeff Bornstein, the comment you made on incoming interest into the asset sales. Give us a sense of — I think the question really is, give us a sense of your availability to sell those assets quicker than you laid out in your timetable, meaning are the books out, do you have — if the sovereign showed up tomorrow could you hand them the keys and a few months later it is you can get the deal done? Or is there some gating factors that could limit the timing?”

US$ 74 Billion – U.S. Commercial Lending and Leasing Unit

First up for sale is GE’s US$ 74 billion U.S. commercial lending and leasing unit. The unit provides financing and leasing for companies such as supermarket outlets, vehicle dealerships and the like. Some interested buyers are, Mitsubishi UFJ Financial Group Inc., Apollo Global Management, Wells Fargo & Co. and, yes, Blackstone Group.

Apollo and Blackstone could give Wells Fargo a run for their money, as private equity firms are pressured to use committed capital for investments – good amount is backed by pensions and sovereign wealth funds through LP commitments. In addition, GE could sell the portfolio piecemeal to gain a higher valuation.

Apple’s Ginormous Corporate Cash Pile Plans to Come Home

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The positive economic effects of U.S. President Donald Trump’s tax reform have already altered the financial behaviors of major U.S. companies such as Wal-Mart Stores, Apple Inc. and AT&T.

In response to the tax law reform, many American businesses, large-to-small in annual revenues, have issued bonuses, granted awards and signaled plans to increase capital expenditures in the United States. For example, Apple announced plans to give its employees US$ 2,500 each in stock awards. A key section of the new U.S. tax reform law includes a provision for firms to take advantage of a one-time payment of 15.5% on repatriated funds down from the 35% rate.

Initial Plans

With the Dow Jones Industrial Average (DJIA) reaching new highs and the tax reform deal signed into law, Apple revealed they would invest US$ 350 billion into the United States economy over a period of five years, as they repatriate massive piles of money from overseas. The iPhone maker estimates they will payout roughly US$ 38 billion in tax payments from the overseas repatriation – thus shifting back some US$ 245 billion out of the US$ 252.3 billion it has held offshore. Apple also plans to spend an estimated US$ 30 billion in capital expenditures over the next five years, with roughly US$ 10 billion in U.S. data centers, according to the company. Apple has plans for 20,000 more jobs to create. The company that was once led by Steve Jobs had faced substantial criticism in the press over outsourcing its manufacturing to China to avoid paying U.S. taxes and lower manufacturing costs. Many of those facilities in China had labor issues such as environmental concerns, slave-like wages and extremely long work hours.

“We believe deeply in the power of American ingenuity, and we are focusing our investments in areas where we can have a direct impact on job creation and job preparedness,” said Apple CEO Tim Cook in a statement on January 17, 2017. He added, “We have a deep sense of responsibility to give back to our country and the people who help make our success possible.”

Liquid Financials and Fixed Income Changes

The sales growth of the iPhone has been a major factor in the growth in Apple’s cash pile. In 2006, Apple moved to act, forming a subsidiary in Nevada to manage investments, initially starting with around US$ 13 billion to manage. Nevada has no corporate income tax and no capital gains tax. Apple manages its investments through an outfit in Reno, Nevada called Braeburn Capital Inc. (Braeburn is a type of Apple), a subsidiary of Apple. Apple also employs some 40 to 50 external fund managers to handle the massive portfolio, according to sources. Braeburn has tried to reduce money management costs by using more separate accounts, while reducing dependence on money market funds.

As of September 30, 2017, Apple has a large investment portfolio worth an excess of US$ 300 billion, with US$ 194.714 billion in long-term marketable securities. Some US$ 128.645 billion are in current assets, with US$ 20.289 billion in cash and cash equivalents.

Focusing on the investment portfolio, some US$ 152.724 billion is held in corporate securities, with US$ 55.245 billion in U.S. Treasuries. Most of the portfolio is held in fixed income investments, including mortgage-backed securities – generally mandating investments be investment-grade and the avoidance of losing principal. Since 2012, Apple has been hoarding more corporate debt, rivaling some bond funds. Only about US$ 799 million are held in mutual funds (non-money market). Apple is also a major buyer of commercial paper across the globe. For example, the company participated in a US$ 500 million issue of 3-year floating notes from Hyundai Capital Services. The tech giant even uses derivatives to hedge against currency and interest rate movements.

The Old Scheme Ends

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CPPIB Partners with Lendlease on £1.5 Billion U.K. Build-to-Rent Venture

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The Canada Pension Plan Investment Board (CPPIB) has announced the launch of a £1.5 billion venture with Australian listed construction giant Lendlease Group centered around the development of build-to-rent private housing in the United Kingdom. The new infusion of capital will bolster the £800 million already committed to various projects in the Britain’s housing sector by Lendlease, which will develop, construct, and manage homes built through the partnership.

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Mubadala-Owned Falcon Bank to Begin Accepting Blockchain

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Zurich-based Falcon Private Bank Limited, which is owned by Abu Dhabi-based Mubadala Investment Company, has announced that it will now be accepting wealth originating from new and existing clients’ blockchain assets, reaffirming its position in the private banking industry as a first-mover in adopting distributed ledger technology. Assets will be accepted provided that they pass required due diligence to ensure full compliance with anti-money laundering (AML) and know-your-client (KYC) regulations and laws. The Swiss bank’s auditor PricewaterhouseCoopers (PwC) has reviewed the process, according to a press release.

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