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FINANCIALS: This Way to the Egress

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Sovereign wealth funds were once referred to as white knights when it came to them bailing out a number of global investment banks such as Citigroup, Merrill Lynch and UBS during the financial calamity of 2007. Sorry West – their desires have changed.

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To this day, wealth funds continue to amass tremendous financial firepower in the trillions, despite headwinds such as the oil glut, heightened geopolitical tensions, slowdown of global consumer demand and the possible rise of new protectionism. In 2014, sovereign wealth funds directly invested US$ 33.4 billion into the financial sector, according to data from SWFI’s Sovereign Wealth Fund Transaction Database. In 2015, the sovereign fund transaction figure toward financials dramatically fell to just US$ 18.76 billion. There has been a clear shift in what sovereign wealth funds want and are willing to invest millions into. With greater inclination, wealth funds have pulled allocation away from traditional Western banks and more toward emerging financial institutions in Asia, cascading down from China into Vietnam. In late August, Singapore’s GIC bought a 7.73% stake in Vietcombank through newly-issued securities. GIC joined the ranks of institutional owners in the large Vietnamese bank, sitting alongside Mizuho Corporate Bank. Though GIC encountered trouble reworking and making changes in its Western bank portfolio holdings, the wealth fund, along with Temasek Holdings, has had success in creating banking franchises and lending operations throughout China and India.

Sovereign funds have veered toward direct deals into technology-driven consumer companies such as SnapDeal and Uber Technologies.

Undesirable Fruit

Plagued with low interest rates and a drop in investment banking profits, many Western banks have become unpalatable for wealth funds. Sovereign investors such as the Korea Investment Corporation (KIC) still feel the reeling of its holding in Bank of America, while the GIC is still exposed to its bailout of UBS. During the global financial crisis chaos, GIC’s capital infusion in UBS was far bigger than Abu Dhabi Investment Authority’s capital commitment of US$ 7.5 billion in Citigroup. In 2011, UBS announced it was embroiled in a rogue trader scandal performed by Kweku Adoboli. Soon after, Oswald Grübel, the CEO of UBS at the time, resigned. Furthermore, banks such as these; Barclays, Credit Suisse and UBS have been pelted by fines and penalties, thus affecting their valuations, while being brought under the ire of global financial regulation. In addition, banks tied to the success of commodity-driven economies have suffered – Temasek’s investment in Standard Chartered. Temasek took a financial blow recently in its investment portfolio, helplessly watching the value of Standard Chartered tumble amid bad loans in emerging markets. With all this being said, wealth funds are desperately seeking avenues to hedge their bets by betting on information technology. In fact, investing in financial technology startups, typically requires far less capital compared to major bank bailouts.

Largest Institutional Owners of UBS

Largest Shareholders Jun 30, 2016 Dec 31, 2015 Dec 31, 2014
Chase Nominees Ltd, London 9.12% 9.14% 9.05%
GIC Private Limited 6.38% 6.38% 6.61%
The Depository Trust Company (Cede & Co.), New York 6.15% 6.14% 5.76%
Nortrust Nominees Ltd, London 3.52% 3.60% 3.52%

GIC’s holding may be higher. Source: UBS 

The Asian wealth funds are not the only institutional investors making moves out of traditional banking. A number of Gulf wealth funds have bought into the reinsurance story, backing vehicles with industry players. Even Canadian pension funds are feeding billions into reinsurance fund strategies and companies. In March 2014, the Canada Pension Plan Investment Board (CPPIB), in a buy and build strategy, acquired Bermuda-based Wilton Re Holding Limited for a total cash consideration of US$ 1.8 billion.

Migrating Capital Toward Technology-Driven Consumer Services

Sovereign funds have veered toward direct deals into technology-driven consumer companies such as SnapDeal and Uber Technologies. Yes, there are some mega tech deals such as Saudi Arabia’s Public Investment Fund’s legendary US$ 3.5 billion cash infusion into taxi-app Uber. However, the clear majority of tech venture deals require very little capital from the wealth fund. GIC can even put a feather in its cap for investing in SnapChat. The Alaska Permanent Fund Corporation has exposure to SnapChat through a fund it invested into. In 2015, wealth funds directly invested US$ 7.11 billion into information technology. For the first half of 2016, wealth fund direct transactions amount to US$ 6.75 billion (this figure may be higher as some transactions are still being tabulated). Another deal to highlight is Khazanah Nasional’s investment in the Series D round of Singapore-based Garena Interactive Holding Ltd., a mobile entertainment and e-commerce company, which occurred in May 2016. Then on September 5th, Garena announced it raised more money, these investors include SeaTown Holdings International, a sovereign wealth enterprise (SWE) of Temasek. Indonesia-based Global Digital Prima, backed by Martin Hartono, and Mistletoe Inc., a fund managed by Taizo Son, also invested in the September round. SeaTown Holdings’ Archana Parekh is joining Garena’s advisory board. Garena was founded in 2009 by China native Forrest Li. Garena is putting financial resources into payments and social commerce, looking to compete with Facebook and Alibaba.

The shift in strategy is clear. Sovereign wealth funds certainly won’t be the first ones in line to bail out Western banks in a future global financial crisis.

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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