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Great things now come in smaller packages: sovereign funds set for deals

Great things now come in smaller packages: sovereign funds set for deals

No headline grabbers here, as the world's sovereign wealth funds look for smaller, fast-growing investments, with Middle East funds looking at domestic opportunities.

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July 26, 2011 1:28 by



Global sovereign wealth funds are set to hasten investing the billions of dollars of cash holdings they have built up in a rebound from the 2008 financial crisis that has lifted their combined assets to a record.

But unlike three years ago, when they rode to the rescue of Wall Street titans such as Merrill Lynch and Citigroup, the investments this time around are seen mostly of a smaller nature and into the faster-growing sectors such as resources and infrastructure.

“They may not be the headline-grabbing investments that we are used to seeing from the funds,” said Rachel Zeimba, London-based senior research analyst at Roubini Global Economics.

FAST RECOVERY
The funds have learnt bitter lessons from their plunge into the financial sector in the crisis, which wiped out billions from their portfolios in 2009. But they have recovered since as markets have steadied and their assets are now at an all-time high of $4.5 trillion, up from $3 trillion in 2007.

“SWFs have recovered fast from the financial crisis,” said Steffen Kern, a Frankfurt-based economist at Deutsche Bank who has researched sovereign wealth funds.

“At around $4.5 trillion, their assets are higher than ever, and continued current account surpluses in their home economies promise sustained growth in the near future.”

The investors, ranging from Abu Dhabi’s Mubadala and the Qatar Investment Authority to Singapore’s Temasek are expected to become active towards the end of the year when a clearer picture emerges of the European debt crisis and global economic growth.

ASIA, MIDDLE EAST HAVE THE BIGGEST SLICES
Asian and Middle Eastern state funds now hold about two-thirds of the global sovereign wealth fund assets, helped by higher oil prices in the Middle East and current account surpluses in Asia.

Sovereign funds overall have been cutting exposure to developed markets, as highlighted by the Government of Singapore Investment Corp’s latest report which showed it plans to invest more money in emerging markets amid long-term challenges facing the US and Europe.

Khuram Maqsood, a former investment director at a Dubai-based sovereign wealth fund, said the funds are likely to resist selling U.S. debt, as a deadlock over raising the country’s debt limit raises the spectre of a default.
“It doesn’t serve anyone’s interest for a mass sell-off in U.S. debt. The implied increase in cost of capital with that action will not have a positive impact for the funds too,” Maqsood said.

ALTERNATIVE, DOMESTIC INVESTMENTS
The funds are also becoming more interested in alternative investments such as hedge funds, private equity and real estate, said Jai Arya, head of BNY Mellon’s sovereign institutions group. Despite the emphasis on diversification, though, the funds still have a third of their assets in the financial sector.

The latest sovereign investor to illustrate the cash hoard was Temasek, which added $7 billion to its cash pile in its last financial year, 70 percent more from a year ago. Standard & Poor’s estimated that Temasek had cash and bank balances of S$39.73 billion ($33 billion) as of March 31, 2010.

In the Middle East, a higher proportion of state money may go to funds that are seen making investments which help boost the domestic economy, industry experts said. In the aftermath of the Arab political turmoil, many state governments doled out massive handouts to citizens and set out plans to boost employment and improve infrastructure.
Abu Dhabi-owned fund Mubadala plans to spend $16.3 billion in 2011, a substantial portion of which is expected to be for its solar energy project Masdar, some real estate developments in Abu Dhabi and several public-private partnership (PPP) projects in the Gulf emirate, according to its bond prospectus.

“There may be disproportionate revenues funneled to those funds which strive to boost domestic economy, such as Mubadala in Abu Dhabi,” said Ashby Monk, co-director of Oxford University’s Sovereign Wealth Fund Project.

Mubadala has stakes in private equity firm Carlyle and General Electric. Investment patterns of the Gulf-based funds are also starkly different from each other based in their maturity and portfolio size.

Abu Dhabi Investment Authority (ADIA), widely considered as the world’s largest sovereign fund, with estimated assets of $500-$700 billion, has kept a relatively low profile with regard to direct investments. It is positioning itself more as a large portfolio investor with significant passive investments such as index funds. On the other hand, the relatively new Qatar fund has been grabbing trophy assets across the globe and its appetite for direct stake buys remains high.

Prime Minister Sheikh Hamad bin Jassim bin Jabr al-Thani said in February Qatar is open to buying stakes in part state-owned British lenders RBS and Lloyds Banking Group.

“We pitch a number of ideas to Qataris in Europe, North America and lately in Asia. They have an immense appetite for deals and are very savvy opportunistic investors,” said one Dubai-based western investment banker, who did not want to be named because of the sensitivity of the matter.

But pressure remains high on investment professionals in these funds to boost performance and hence the due diligence and analysis made on investments is much higher than before.

“There is a mentality among some SWF professionals that it is better not to lose than it is to win,” said Monk of Oxford University. ($1 = 1.207 Singapore Dollars) (By Saeed Azhar and Dinesh Nair; Additional reporting by Samuel Shen in Shanghai; Editing by Muralikumar Anantharaman, Reuters)



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