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Public Funds Prefer Balance Sheet Improvements Over Stock Buybacks

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In the September 2018 SWFI Global Asset Owner Survey, which was taken during the month of August 2018, one question asked, “What would you like to see listed companies do with their cash flow?”

The majority of respondents (including sovereign wealth funds, pensions, and the like) wanted companies to improve their balance sheets structure, a sharp contrast of the option of increasing capital spending, which won out in the last four quarters. The question did not call out specifically U.S. companies, but all companies. One can infer that institutional investors are concerned about interest rates and their potential to put financial strains on corporate balance sheets. Public funds are concerned about the leverage of some listed companies.

The least favorite option was returning cash to shareholders which include stock buybacks. Given the recent news in a surge of stock buybacks, corporate CEOs are opting for shareholder returns versus fixing corporate balance sheets, which is the preferred path for public institutional investors. Public funds like sovereign funds are typically long-term holders of corporate stock, caring less about the quarter to quarter volatility in earnings. It can be argued that demand for share buybacks can be seen as a response from investors’ not total trusting corporate management to spend excess cash wisely. Stock buybacks essentially reduce real investments.

U.S. Companies

Before U.S. President Trump’s tax plan (Tax Cuts and Jobs Act) passed, U.S. multinational enterprises kept large amounts of capital overseas. The 2017-2018 repatriation of foreign earnings impacted U.S. stock markets. The recently passed tax reform act permitted a “one-time tax (payable over eight years) on the existing stock of offshore holdings regardless of whether the funds are repatriated, thus eliminating the tax incentive to keep cash abroad,” according to the September 4, 2018 Federal Reserve note called “U.S. Corporations’ Repatriation of Offshore Profits.”

Source: BEA Balance of Payments data. Credit: Federal Reserve created the graphic.

That U.S. Federal Reserve study showed multinational corporations brought home roughly over US$ 300 billion of the US$ 1 trillion held abroad. According to the study, some US$ 55 billion was used for equity share buybacks, which is more than the US$ 23 billion in the fourth quarter of 2017. For U.S. stocks, the share buyback began to again gain traction after 2008, slowly rising to its apex in the first quarter of 2018.

GIC Supports CapitaLand Shanghai Investment on Haimen Road

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GIC Private Limited, Singapore’s sovereign wealth fund, has entered into a 50:50 joint venture with Raffles City China Investment Partners III (RCCIP III), a fund controlled by CapitaLand. The joint venture is acquiring Shanghai’s tallest twin towers for an aggregate consideration of RMB 12.8 billion (US$ 1.84 billion). The property is located in Shanghai’s core Central Business District.

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Wells Fargo Could be Slimming Down, Possible Retirement Unit Sale

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Wells Fargo (WFC) is looking to exit the retirement plan servicing market, for a potential sale price of US$ 1 billion. The unit is involved in record-keeping, custody, trust details and various other retirement plan services for corporations. It is housed under the Wealth and Investment Management unit. The retirement plan servicing market is not particularly compelling for the bank, especially in light of the U.S. Department of Labor’s newer regulations to force managers to disclose compensation arrangements and fees to plan fiduciaries. Wells Fargo has been lauded for its loyal consumer base and high revenue, and doesn’t require the business, though recent scandals have been a drag on the company’s profitability and public image. This news has pre-empted some advisors to jump ship. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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Mubadala Petroleum Signs Deal to Buy Interest in Nour North Sinai Offshore Area Concession

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Mubadala Petroleum, a division of Mubadala Investment Company, signed a deal to acquire a 20% percent participating interest in Egypt’s Nour North Sinai Offshore Area concession. The seller of the interest is a subsidiary of the Italian energy giant Eni. Eni holds an 85% stake in the partnership with Tharwa Petroleum Company, which holds a 15 percent interest. Formed in 2004, Tharwa Petroleum Company is 100% owned by the Egyptian government through a variety of state-owned entities such as the Egyptian General Petroleum Corporation (EGPC) at 20% and Egyptian National Gas Holding Company (EGAS) at 20%.

The sales transaction is subject to conditions, such as approval from government authorities in Egypt.

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