Sovereign wealth funds managed assets worth a record $7.1 trillion in 2014
Sovereign wealth funds (SWFs) have increased and consolidated their investment flows. Worldwide, there are currently 92 active SWFs (eight more than last year) and the assets under their management are worth a total of $7.1 trillion (up from $5.9 trillion last year). Meanwhile, a further 25 countries are considering the possibility of creating a SWF. The greatest investment capacity is concentrated in four areas – Norway, Southeast Asia, the Gulf Cooperation Council countries, and China – but Africa and Latin America are also emerging as important SWF regions. These are just a few of the highlights of the 4th Sovereign Wealth Fund Report, written by ESADE, KPMG Spain, and ICEX–Invest in Spain. The report analyses the behaviour and major trends of SWFs over the course of 2014 and early 2015. At the presentation of the report on ESADE’s Madrid campus, Enrique Verdeguer, Director of ESADE Madrid, commented that the study period was characterised by “increased sectoral and geographic diversification. In addition to Mr. Verdeguer, the presentation featured the participation of Fernando García Ferrer, Partner Responsible for Markets and Private Equity at KPMG Spain, and José Carlos García de Quevedo, Executive Director of ICEX–Invest in Spain. David Vegara, Lecturer at ESADE and former Spanish Secretary of State for Economic Affairs, gave a talk entitled “Notes on the Economic Situation.
According to the report, SWFs made nearly 140 investments and moved approximately $90 billion in 2014. With 40 and 23 transactions, respectively, Singapore’s Temasek and GIC were the most active funds for the second year running, followed by Norway’s GPFG, which had 14 transactions. The greater diversification and sophistication observed in SWFs comes at a time when “their behaviour is influenced by fluctuations in the price of raw materials generally, and of oil in particular, according to Mr. Verdeguer. These government-owned funds have not been able to insulate themselves from the changing macroeconomic and geopolitical environment. Under these circumstances, the bulk of SWF investment has continued to go to sectors such as real estate (which saw three of the five largest transactions) and infrastructure, and to countries such as the United States and China. However, in response to the new economic situation, strategic bets and new opportunities have emerged in places such as Brazil and the United Arab Emirates, and in a diverse range of sectors, including technology start-ups, venture capital, agriculture, Islamic finance and the halal industry, football, and art.
Joint ventures, another increasingly popular phenomenon, were involved in a large portion of the investments made during the study period. “It is noteworthy that a growing number of funds are following the strategy of learning alongside local experts, said Mr. Verdeguer, “thereby avoiding direct control, at least in principle.
Spain and Latin America, in context
Spain, the site of multiple large-scale transactions in recent years, has once again started to attract SWF investment as its economy has recovered. Since January 2014, SWFs have directly invested more than €4.6 billion in Spanish companies, building on the trend seen over the previous two years (this figure was €2.7 billion in the 2014 report). The real estate sector received a large proportion of Spain’s SWF investments, and was surpassed only by the energy sector. Noteworthy operations included Singapore’s GIC becoming a shareholder of the real estate group Gmp and the Qatari fund QIA buying a stake in Colonial and its French subsidiary SFL. Those two transactions confirmed that investors have regained confidence in the real estate sector. Also in 2014, the Kuwaiti fund KIA once again turned its attention to Spain, spending €1 billion to acquire a 40% stake in E.ON and becoming a shareholder of Global Power Generation, an international subsidiary of Gas Natural Fenosa, to the tune of €485 million. Through Impulse International, KIA also led a round of financing in the Spanish start-up Tyba. Given the volume of investment and the variety of sectors receiving funds, it is clear that Spain continues to offer excellent investment opportunities.
The last edition of the report mentioned a systematic strategy for structuring joint ventures in Spain. In late April 2015, the Spanish government, through COFIDES, closed a deal with Oman’s SGRF to create a €200 million co-investment vehicle that would encourage Spanish multinationals to expand in the Gulf state.
The same chapter of the report also analyses the performance of Latin American SWFs, which have been substantially affected by fluctuations in the global economy, and particularly – although not uniformly – by decreases in the price of raw materials. In 2014, the eight Latin American funds managed assets worth a total of $50.8 billion, or $1 billion less than the previous year. Besides Venezuela’s fund – which is embroiled in an economic and social crisis and has lost more than 60% of its asset value – the funds that suffered the greatest impact were Chile’s FEES and the Mexican and Brazilian funds. However, some funds – including those of Trinidad and Tobago, Panama, Chile and Peru – saw their assets grow in 2014. Peru’s FEF, the world’s 42nd largest SWF, saw its assets increase in value by 6%, reaching a total of $9.1 billion.
Middle East and Southeast Asia
Two other regions also stand out in this year’s report: the members of the Gulf Cooperation Council (Muslim-majority countries that account for 40% of the world’s active SWFs and $3.3 trillion in assets, or 46.4% of the SWF-managed assets worldwide) and three Asian countries whose SWFs are ranked among the 16 largest in the world (Singapore’s GIC and Temasek, South Korea’s KIC, and Hong Kong’s HKMA). These Asian SWFs are among the most active and sophisticated funds, with assets valued at approximately $987 billion.
After the financial crisis, many Middle Eastern funds have begun to funnel their investments into two emerging sectors: Islamic finance and the halal industry. This shift has produced a bandwagon effect that has mobilised other funds in non-Muslim countries.
The four Southeast Asian funds mentioned above share common characteristics in terms of investment strategy: a focus on the digital economy (particularly in the cases of Temasek and GIC) and a willingness to engage in joint ventures with other institutional investors, such as pension funds.
New opportunities and strategic bets
Across the globe, SWFs are increasing their investments in new technologies, innovation, start-ups and venture capital. This trend has given rise to sovereign venture funds, which have proliferated and become involved in “unicorns as well as large, publicly traded start-ups. The fact that some SWFs are placing strategic bets on the digital economy by taking an ownership stake in start-ups during the very early stages of financing illustrates the funds’ sophistication. This is just one example of how countries with money to invest are diversifying their strategic bets and seeking out new opportunities in today’s changing macroeconomic landscape.
Long-term profitability prospects make the agriculture sector an attractive investment because it is less volatile than the stock market. SWFs, which have the capacity to absorb high volatility in agricultural prices in the short term, could lead an influx of investment in agricultural assets. Other strategic alliances have been formed in a diverse range of industries, including football, which has enormous international visibility (nearly $300 million is spent on sponsorship in European football each year), and art, a useful instrument for positioning countries geopolitically and culturally. Alliances of this sort generate long-term relationships between SWFs and the countries that receive their investments.
