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FINANCIALS: This Way to the Egress

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.

Concerns Raised at Potential BlackRock Takeover of CalPERS’ Private Equity

The California Public Employees’ Retirement System (CalPERS) has been analyzing options on what to do with its massive US$ 26 billion private equity program. The pension system has embraced the mantra of reducing cost, reducing complexity and reducing risk, the hallmark of its program called “INVO 2020”. CalPERS also wants less, but more strategic relationships with external money managers. At one point, CalPERS was contemplating increasing its direct investment staff to model Canadian pension funds such as Canada Pension Plan Investment Board (CPPIB), OMERS and the Ontario Teachers’ Pension plan. The pendulum has begun to swing the other way as reported earlier by SWFI research staff.

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CDP Signs €1.7 Billion Infrastructure Loan Agreement with Atlantia Group

Cassa depositi e prestiti S.p.A. (CDP) and Atlantia Group’s Autostrade per l’Italia (ASPI) have signed a €1.7 billion loan contract dedicated to upgrading motorways in Italy under concession to ASPI. €1.1 billion will come in the form of a term loan with a 10-year tenure, with the remaining €600 million wrapped up in a five-year revolving loan.

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Sovereign Funds Commit to Integrating Climate-Related Risks at One Planet Summit

Representatives from a number of sovereign wealth funds who collectively govern over US$ 2 trillion in assets came together at the One Planet Summit at the Élysée Palace in Paris in order to discuss what public asset owners can do to incorporate climate change-related risks and opportunities into investment considerations.

The newly formed committee – called the One Planet Sovereign Wealth Fund Working Group – includes as its founding members the Abu Dhabi Investment Authority (ADIA), Kuwait Investment Authority (KIA), Qatar Investment Authority (QIA), Norges Bank Investment Management (manager of Norway’s Government Pension Fund Global), Saudi Arabia’s Public Investment Fund (PIF), and the New Zealand Superannuation Fund.

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