Sovereign funds buddy up for top returns

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Sovereign wealth funds are working in concert to make joint strategic investments in order to reduce risks and maximise returns, creating a potentially stabilising force in global markets.

In the current economic turmoil, sovereign wealth funds (SWFs) are learning there is safety in numbers.

State-owned players from China, Singapore, Malaysia, South Korea, Abu Dhabi and Kuwait are among those which have recently signed agreements to form investment partnerships with each other.

These partnerships will enable state-owned funds to optimise local knowledge, leverage capital, spread investment risks and maximise returns.

They could also create a bigger, more diverse and transparent entity, whose long-term investments might help stablise global markets.

Furthermore, by highlighting their commercial motives, partnerships might also help quell concerns among regulators and politicians who suspect SWFs investments are politically driven.

“They realise that their level of expertise is not universal and find that obtaining additional expertise via cooperation is a viable option for them. They are sharing risk and enabling access to welcome co-financing,” said Alexander Mirtchev, independent director of Kazakhstan’s SWF Samruk-Kazyna.

“In the crisis and post-crisis environment, such cooperation allows them to achieve a new level of legitimacy in markets where they have not operated before. SWFs have the potential to stabilise companies they invest in since these funds do not live by quarterly returns.”

Samruk-Kazyna’s investment arm Kazyna Capital Management is also planning to set up a fund with Tajikistan and Kyrgyzstan to co-invest in the region.

Sovereign wealth funds form a $3 trillion industry which invests windfall revenues from oil or other exports for future generations. In the Gulf, they are primarily used as a means to diversify revenue streams away from oil-related income.

Since the start of the credit crisis, SWFs have replaced hedge funds and private equity as major drivers of corporate takeover. And even before the crisis their flashy yet secretive style of investments raised the eyebrows of regulators and politicians, some of whom suspected that they were buying up assets to achieve political, rather than commercial, objectives.

However, partnerships could encourage these funds to open their books more, which would increase transparency in this often opaque industry.

“At least several parties to the transaction have to open books to each other, negotiate agreements that all parties are comfortable with, and overall increase the level of transparency about the application of the sovereign wealth,” Mirtchev said. “Recent examples of SWFs working together are much more commercially-oriented rather than having any political imperative.”

Most of the partnerships so far have stemmed from taking advantage of local expertise.

Abu Dhabi’s Mubadala signed a partnership deal with 1Malaysia Development Berhad (1MDB), the country’s new wealth fund, to make a $1bn investment in Malaysia in the energy, real estate and hospitality sectors.

France’s FSI (Fonds Strategique d’Investissement) is looking at investing jointly with Mubadala in the French biotechnology sector, spending just over €10m ($14.28m) per company.

Local knowledge is a powerful driver in enhancing returns on investment. An academic research paper in the United States has shown that local investments, defined as holdings within 100km of the fund headquarters, can increase returns by more than one percent, due to the local edge.

“Most of the ventures seem to be about tapping into local knowledge and driven by commercial interest. There are a lot of synergies to be leveraged,” Cynthia Sweeney Barnes, head of sovereigns and supranationals at HSBC Global Asset Management.

India and Oman have established a joint investment fund with an initial investment of $100m over the next few years and the amount could reach $1.5bn. Korea Investment Corp signed cooperation agreements in June with Malaysia’s Khazanah Nasional Berhad and Australia’s institutional investor QIC.

SWFs from China, Singapore and Kuwait joined forces to support Blackrock’s acquisition of Barclays Global Investors in June.

And experts predict more funds will join forces. In an Oxford University survey in July, 60 percent of 146 asset managers who have routine contact with SWFs expected collaboration or clubbing among SWFs from different countries, as these funds consider how best to achieve investment objectives.

“If you are looking to make major strategic investments, you can get some comfort if another major government institution wants to do the same,” said Guy Henriques, head of official institutions at Schroders.

“They want partners, people with whom you can share risks. Having a partner is a powerful thing.”

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