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ESTIMATE: Sovereign Wealth Funds Paid Around $14 Billion in Fees

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When it comes to the financial sector, asset management is one of the most profitable industries in the world. The Boston Consulting Group put out a 2014 figure saying there is US$ 74 trillion worth of professionally-managed assets. One of the fastest growing institutional investor classes are sovereign wealth funds which have taken the parochial asset management industry by storm over the past seven years.

37% of sovereign wealth fund assets are managed externally, according to a recent SWFI estimate.

Sovereign Wealth Funds – $2.76 Trillion Managed Externally

Typically, a sovereign wealth fund is perceived as an enigma for traditional U.S. small to mid-sized asset managers. These managers have spent their marketing dollars and time toward investment consultants, endowments and U.S. pensions. This is changing. With sovereign funds expanding assets, smaller asset managers are paying greater attention to this rising institutional investor class, hoping to not lose out against the heavy weights like PIMCO. Meanwhile, the giant investment houses like BlackRock, BNY Mellon Investment Management, State Street Global Advisors and Amundi have allocated considerable resources tending the expanding group of sovereign investors. 37% of sovereign wealth fund assets are managed externally, according to a recent SWFI estimate. Some US$ 2.755 trillion is being managed by external parties out of a total of US$ 7.367 trillion. Collectively, how much are asset managers profiting from sovereign wealth funds? For example, by using the California Public Employee’s Retirement System (CalPERS) as a proxy, in fiscal year 2014, the pension investor spent US$ 1.59 billion on external managers and performance fees. These costs come out to about 50.7 basis points. By using CalPERS’ management costs as a proxy for the sovereign fund industry, one can roughly estimate that US$ 14 billion worth of fees have been paid to external managers in 2014.

Sovereign Fund Management Trends

Given the weighted distribution of assets under management, the top 10 sovereign wealth funds significantly impact the total amount of fees being paid to external managers. Take for example, Norway’s Government Pension Fund Global (GPFG) which manages over 96% of its assets internally. Other wealth funds like Australia’s Future Fund or the Kuwait Investment Authority have tilted the wheel in the opposite direction – showing preference toward external investment managers.

Michael Maduell, President of the Sovereign Wealth Fund Institute

Michael Maduell, President of the Sovereign Wealth Fund Institute

“Superior fund performance does not guarantee you will get noticed by sovereign funds. Investment managers need to actively engage sovereign investors in a variety of channels in order to win business,” warns Michael Maduell, President of the Sovereign Wealth Fund Institute.

As wealth funds like the Future Fund and the Alaska Permanent Fund grow, they will positively impact the fee landscape for fund managers, as they rely heavily on external management. The state of the sovereign wealth fund management industry will favor a variety of asset managers. With the larger more sophisticated funds, alternative asset managers will prosper, thus there is tremendous potential for fee income. Real estate, infrastructure and private equity funds continue to raise capital from sovereign funds. For example, real estate managers like Tristan Capital have attracted wealth funds as limited partners such as the Texas Permanent School Fund for their recent fund, European Property Investors Special Opportunities IV. The voracious appetite to get into top-tier funds has allowed general partners to hold some fees steady.

However, with the advent of smart beta and large institutional investors looking at passive products, equity and fixed income managers may have to adjust to reduced fee income. Fee negotiation among seasoned wealth funds is becoming commonplace, as there are a plethora of asset managers to choose from and the lure of a significant capital commitment.

Note
There are pros and cons of using CalPERS as a proxy for fee calculation for the SWF industry. Some key reasons are that CalPERS uses a similar ratio in a variety of dimensions that include: division of internal and external managers, alternative asset allocation, and the usage of in-house management in relation to fixed income and equities. Using Norway’s SWF as a proxy would distort the fee number, as the majority of its assets are managed in-house.

Temasek Rides with Google on Go-Jek

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Singapore’s Temasek Holdings has reportedly joined forces with Google LLC and Chinese on-demand service provider Meituan-Dianping as part of a US$ 1.2 billion fundraising effort for Indonesian ride-hailing startup Go-Jek that has put regional rivals like Uber and Singapore-based Grab on notice.

Screen Shot Go-Jek, January 19, 2018

Although exact figures for individual stakes have so far been kept secret, the new infusion of capital puts Go-Jek, incorporated as PT Aplikasi Karya Anak Bangsa, at a valuation of roughly US$ 4 billion. Samsung Venture Investment Corporation also participated in funding, as well as existing private equity investors KKR & Co. LP and Warburg Pincus LLC.

Google’s direct involvement in Go-Jek’s growth – rather than through its Google Ventures unit – highlights its faith in the latent potential of ride-sharing services – and the tech-enabled consumer services sector as a whole – in Southeast Asia. Home to more than 640 million potential customers, the region was identified as the fastest growing emerging market for e-commerce globally in an industry report published jointly by Google and Temasek last December. According to data compiled by the internet-giant and the Singaporean sovereign wealth fund, ride-sharing in Southeast Asia is expected to grow into a US$ 20.1 billion industry by 2025, compared to US$ 5.1 billion in 2017.

2011 Origin Story

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Temasek Leads Series B Round for Chinese Robo Startup Rokid

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Rokid Corporation Limited, a Chinese robotics startup that specializes in smart devices assisted by artificial intelligence (AI), announced the closing of a Series B extension round through its WeChat account on January 18, 2018. The capital-raising effort was led by Singapore’s Temasek Holdings, with additional contributions from Credit Suisse Group, China Development Bank’s overseas investment arm CDIB Capital International, and existing investor IDG Capital. Although Rokid did not disclose the size or terms of the deal in its announcement, the technology company reportedly secured US$ 100 million in funding.

Founded in 2014 by chief executive Mingming Zhu and chief financial officer Eric Wong, Rokid’s core products consist of its smart speakers, the Rokid Pebble and Alien, as well as the newly debuted Rokid Glass augmented reality spectacles. The company’s most exciting offering, however, is its Full Stack Open Platform, a collaborative effort made in partnership with Alibaba that gives third-party developers backdoor access Rokid’s software suite and hardware integration and will – it hopes – help give its offerings the accessibility and recognition they need to thrive outside its home market of China.

Rokid is particularly keen on bringing its products to the U.S., where it believes it can challenge Google and Amazon’s dominance in the smart home arena. Amazon makes the Amazon Echo, while Google has Google Home.

The Series B

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SWFI First Read, January 19, 2018

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RDIF Portfolio Company PhosAgro Raises Bond Issue

PhosAgro is a portfolio company of the Russian Direct Investment Fund (RDIF). The company price out a US$ 500 million 5.25-year Eurobond issue that has a coupon of 3.949%.

Alison Swonnell Named Global Head of Institutional Marketing at Fidelity International

Alison Swonnell was hired on as Global Head of Institutional Marketing at Fidelity International. She will be based in London and report to Chuch McKenzie, the firm’s global head of institutional clients. Before Fidelity, Swonnell was Director of Fund Operations for LCM Partners, an alternative investment management firm.

NY Governor Cuomo Seeks to Treat Carried Interest as Ordinary Income for State Taxes

On January 18, 2018, New York Governor Andrew Cuomo revealed he had submitted a bill to the New York State Legislature that seeks to treat carried interest as ordinary income rather than capital gains in regard to state taxes. Governor Cuomo in his press release said that the federal carried interest tax provision costs New York roughly US$ 100 million per year.

William Bain – Bain Founder Passes Away

Dated January 18, 2018, William Bain Jr. passed away at his home in Naples, Florida at the age of 80. Bain started at the Boston Consulting Group and left in 1973 to form Boston-based Bain & Co. By 1984, Bain formed Bain Capital alongside a number of colleagues including former 2012 Republican presidential nominee Mitt Romney. In a statement to the Boston Globe, Romney said, ” It’s hard for me to imagine my life and career without Bill Bain’s mentoring.”

Prostar Capital Gets Controlling Stake in Socar Aurora Fujairah Terminal

Prostar Capital now has a 90% control stake in Socar Aurora Fujairah Terminal FZC by purchasing 100% of the shares of Socar Aurora Terminals S.A. The Prostar Capital entities investing in the asset are Prostar Asia-Pacific Energy Infrastructure Fund and a co-investment fund managed by Prostar Capital for a large U.S. state pension plan. The storage terminals acquired in the Port of Fujairah in the United Arab Emirates.

Socar Aurora Fujairah Terminal FZC is a joint venture between State Oil Company of Azerbaijan Republic (SOCAR), Swiss-based commodity trader AURORA Progress, and the Government of Fujairah.

Prostar Capital started buying the terminal back in 2013 at 18.6%. The private equity firm eventually moved its ownership up to 40% on August 14, 2015.

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