Sovereign investors' M&A deals fall 26% to $14.1bn in Q2

Some Gulf SWFs were said to have held back from new property buys in Britain before the EU referendum
Sovereign investors' M&A deals fall 26% to $14.1bn in Q2
By Reuters
Fri 08 Jul 2016 05:50 PM

Sovereign investors, including wealth funds, made $14.1 billion worth of acquisitions in the second quarter, down 26 percent from the first three months of the year but underpinned by a rebound in real estate deals.

Data compiled by Thomson Reuters shows sovereign investors, a category that can include everything from state pension funds to oil-backed investment vehicles, were involved in 39 deals between April and June, six fewer than in the first quarter.

The single biggest deal was the $4.5 billion funding round for Ant Financial Services Group, an affiliate of China's biggest e-commerce company, Alibaba Group Holding, which attracted China's CIC Capital, amongst others.

Some sovereign investors witnessed reduced inflows as a result of lower oil prices and increasing demands from cash-strapped governments - Russia for instance is proposing to empty one of its two sovereign funds next year.

Volatile markets have also taken a toll, with big direct investors such as Singapore's Temasek suffering a fall in the value of its portfolio of almost $18 billion over the past year.

This could be making the sector more cautious about committing new capital. However, industry experts suggested the publicly available figures might not tell the whole story, with some deals flying below the radar, such as those carried out by boutique fund managers on behalf of sovereign wealth funds (SWFs).

"There's a steady secular flow into illiquid investments which hasn't stopped, so the overall volumes should be higher," said Elliot Hentov, head of policy and research in the official institutions group at State Street Global Advisors.

"There are a lot of deals we don't see that have SWF participation."

Patrick Thomson, head of international institutional clients at JP Morgan Asset Management, said there was no requirement for private transactions to be reported, so some investments were not being captured in public data.

The overall volume was still 11 percent higher than the second quarter of 2015, helped by a handful of very large transactions.

The second largest deal was the $3.5 billion investment in ride-hailing service Uber by Saudi Arabia's Public Investment Fund, while the $2.5 billion sale of BlackRock's 43-storey office building in Singapore to the Qatar Investment Authority (QIA) was in third place.

Following Britain's vote on June 23 to leave the European Union, London property markets have been thrown into turmoil with many funds freezing investor cash to counter ballooning outflows.

However, property-related deals made up roughly a quarter of the second quarter total, as SWFs continued to diversify away from low or negative yielding developed market government bonds.

Property offers predictable, repeatable cashflows, and yields of 3-5 percent in some core retail markets, JPMorgan's Thomson said. Also, prime office blocks are expensive, allowing investors to do very large single transactions.

"SWFs have relatively limited investment staff, and need to put quite a lot of money to work, so they need an asset class that can absorb a lot of capital," Thomson said.

Real estate has also proved easier for SWFs to access than infrastructure and private equity in recent years. An Invesco survey of sovereign investors found that the average portfolio exposure to real estate had risen to 6.5 percent in 2015, from 3 percent in 2012.

"There is a greater stock of real estate and a greater number of places to source deals," said Alex Millar, head of EMEA sovereigns, Middle East and Africa institutional sales at Invesco.

Some Gulf SWFs were said to have held back from new property buys in Britain before the referendum. But Norway's $830 billion fund said in March it was undeterred, and Singapore's Gif said the turmoil may even bring buying opportunities.

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