Source: Sovereign Wealth Fund Transaction Database
As of June 28, 2017, the Sovereign Wealth Fund Institute (SWFI) can report that first half direct transactions made by sovereign wealth funds for 2017 totaled US$ 50 billion, compared to the first half of 2016 at US$ 54.17 billion and 2015 at US$ 67.3 billion. However, overall, from 2015, total sovereign fund direct transactions totaled US$ 122.04 billion versus 2016 at US$ 140.27 billion. Political events have impacted larger privately-negotiated transactions and open market transaction flows. For example, there was a monumental surge in open market transactions by sovereign funds after the U.S. election. Honing in by sectors, sovereign funds have significantly multiplied direct investments into institutional real estate, totaling US$ 21.83 billion in 1H 2017 versus US$ 13.53 billion in 2016. Sovereign funds made very large real estate purchases, such as the China Investment Corporation (CIC) investing in near-controlling positions in Manhattan offices, while competitively acquiring Logicor from The Blackstone Group. In addition, the Qatar Investment Authority (QIA) has kept pace on increasing purchases in office properties in the U.S., nearly finalizing a round of deals with its real estate investment partner Douglas Emmett, Inc.
A quarterly period record US$ 28.69 billion of direct sovereign fund investment surged into the U.S. in the final quarter of 2016 – besting bailouts (calculated on a quarter basis) during the global financial crisis.
The Singaporean sovereign funds, GIC Private Limited and Temasek Holdings, continue their build out of a massive student housing portfolio either through partnering or sourcing directly from secondary owners. The more conservative real estate sovereign fund institutional investor Norges Bank Investment Management (NBIM) had sedated its powerful property purchasing machine, even putting a freeze on Japan. The Norwegian giant has witnessed a slowdown in the growth of its total annual net rental income generated from its sizable property allocation. In 2015, annual net rental income for the Norway sovereign fund was US$ 790.3 million compared to US$ 886.5 million at the end of 2016.
President Trump Steam
A quarterly period record US$ 28.69 billion of direct sovereign fund investment surged into the U.S. in the final quarter of 2016 – besting bailouts (calculated on a quarter basis) during the global financial crisis. In the first half of 2017, an investment hangover lingered for these funds, thus causing a dramatic slowdown in direct U.S. investments by sovereign funds. For example, during 1H 2017, US$ 12.4 billion was directly invested in the U.S. versus US$ 19.77 billion in 1H 2016. The SWFI research team believes if an infrastructure plan were put in place and signed by the U.S. President, it could have a dramatic increase on direct transactions into the U.S.
The Brexit Effect and Select Opportunism
Sovereign fund direct investments in the United Kingdom picked up in the first half of 2017 at around US$ 20.16 billion versus US$ 10.48 billion in 1H 2016. Some large ticket purchases in England were a major boost for the country. For the second half of 2016, many active sovereign funds had re-allocated and moved money out of the U.K. and into the U.S., thus SWFI tabulated only US$ 8.7 billion in direct investments in 2H 2016. A few sovereign wealth investors such as China’s SAFE Investment Company accelerated the process of selling down their European direct listed equity holdings. By the end of May 2017, SAFE had dumped its whole position in oil giant BP, dropping US$ 2.26 billion worth of common equity holdings.
Since 2006, in both the number of transactions and total deal size, SWFI has calculated a substantial increase in direct venture capital startup investments. This is a sharp difference compared to a decade ago, where only a few sovereign funds chose to go direct versus allocating to venture capital funds. For example, in the second quarter of 2017, Australia’s Future Fund participated in a US$ 40 million venture round in video analytics company Conviva, which is based in Foster City, California. During the same period, Singapore’s Temasek Holdings also made a notable investment in IP Holdings.
Please note that first half data for wealth fund transactions are not fully tabulated.
The Cassa Depositi e Prestiti Group (CDP) and its investee companies, which include Fincantieri, Italgas, Snam, and Terna, have reached an agreement with the Municipality of Naples and the Authority of the Central Tyrrhenian Sea Port System. The entities will cooperate to provide for the development of Naples and its surrounding area. There will be a focus on helping the institutions and the community at large through financial support, real estate, and infrastructure investment, and support for local businesses. Signatories can help to provide technical expertise and planning, loans, and oversee public projects. Further, assistance and consulting will be provided, particularly as they relate to interventions and renegotiation of contract terms for the purposes of freeing up capital. Sustainable mobility will be a priority, with natural gas and biomethane forming the core fuels of the future. The group will be developing the ports, which will include the construction of emission-reducing structures.
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The Federal Reserve made a decision to hold interest rates steady and indicated that no more hikes will be coming for 2019. Federal Reserve Chairman Jay Powell addressed the media saying that the Chinese and European economies have slowed ‘substantially’. Despite low U.S. employment, Powell explained to the media that the U.S. has the lowest labor force participation rate among developed nations.
There were four interest rate hikes in 2018.
The Federal Reserve committee intends to conclude the reduction of its aggregate securities holdings in the System Open Market Account (SOMA) at the end of September 2019. Essentially, the Federal Reserve is ending quantitative tightening in September 2019. Furthermore, the committee intends to slow the reduction of its holdings of Treasury securities by reducing the cap on monthly redemptions from the current level of US$ 30 billion to US$ 15 billion beginning in May 2019.
In a March 20, 2019 statement called “Balance Sheet Normalization Principles and Plans”, a portion of it reads, “The Committee intends to continue to allow its holdings of agency debt and agency mortgage-backed securities (MBS) to decline, consistent with the aim of holding primarily Treasury securities in the longer run.
Beginning in October 2019, principal payments received from agency debt and agency MBS will be reinvested in Treasury securities subject to a maximum amount of $20 billion per month; any principal payments in excess of that maximum will continue to be reinvested in agency MBS.
Principal payments from agency debt and agency MBS below the $20 billion maximum will initially be invested in Treasury securities across a range of maturities to roughly match the maturity composition of Treasury securities outstanding; the Committee will revisit this reinvestment plan in connection with its deliberations regarding the longer-run composition of the SOMA portfolio.
It continues to be the Committee’s view that limited sales of agency MBS might be warranted in the longer run to reduce or eliminate residual holdings. The timing and pace of any sales would be communicated to the public well in advance.”
source: Federal Reserve website
Tencent Holdings Limited is contemplating a bid to acquire Temasek Holdings’s ownership stake in A.S. Watson, an Asian beauty and health retailer. Temasek Holdings has been trying to offload its 10% stake in A.S. Watson. The price tag could be around US$ 3 billion.
Alibaba Group Holding Limited has also expressed interest in the A.S. Watson investment.
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