Since mid-year statistics revealed that sovereign wealth funds
(SWFs) are making direct investments at a rate never
seen before, attention has turned to their new profile in
the M&A landscape.
fund has the led the way new acquisition
An increasing number of state-owned funds are
shunning their reputation as long-term, passive investors by
acquiring private companies direct and even investing in exchange-traded funds.
While their push into higher-yielding assets has sparked some concern, their growing
sophistication and preparedness to look at alternative
strategies is here to stay.
"Provided they can manage the associated risks, and
they are proven to produce better returns than more
conventional forms of investment, then we would expect this
trend to continue," said Debevoise & Plimpton partner Guy
- Lawyers believe SWFs’ more active
role in M&A is here to stay;
- Instead of being limited partners in private
equity funds, a growing number are directly acquiring stakes
in companies and are looking at higher-yielding
- Some private equity firms are seeking out targets
that they know SWFs are interested in, looking to take
advantage of their cash reserves;
- SWFs are leveraging off their relationships with
sponsors to build internal expertise.
Singaporean fund GIC has set
the high watermark for new tactics, making standalone
investments in four private companies throughout the year.
Most SWFs, however, are expanding their deal roles
by leveraging off their traditional partners – private
equity firms. SWFs are expanding their limited partner status
through co-investments, separate managed accounts, and
membership in bigger consortia.
These might not be as drastic as GIC’s
tactics, but it sends a strong signal that other funds view
them as a serious source of competition.
Some of the larger and more global private equity
sponsors are actively looking to put together consortia in
sectors where they know there is appetite from SWFs, said
"They see them as deep pockets that are now
prepared to be a bit more adventurous," he added.
Sponsors are attuned to the fact that, compared to
a normal institutional investor, SWFs have large cash reserves,
can make investment decisions quickly, and are guaranteed to
deliver the funds they promise.
Clout and expertise
SWFs are hiring more investment professionals so
they don’t have to outsource their dealmaking
As noted by Macfarlanes’ investment
management head Bridget Barker: "They are writing large cheques
and so they want more control; they don’t want to
pay huge fees, especially when they can afford to hire people
to do the investing for them."
They are also using their relationships with
private equity firms to build their in-house capabilities.
"They have considerable resources to invest, and this is giving
them some leverage within sponsor groups in obtaining this
expertise while also achieving their investment objectives,"
said Anthony McWhirter, a London-based partner at Debevoise
They see them as
deep pockets that are now prepared to be a bit more
Many are requesting secondee arrangements. Others
are using co-investment structures to gain greater exposure to
dealmaking. This improves their ability to negotiate better
terms – including rights to information and discretion
over investment decisions – which, in turn, improves
their ability to make and evaluate the performance of targeted
Following the crisis, Barker said some SWFs were
concerned about the level of fees that were being paid to
primary funds and the behaviour of some general partners.
This period also accentuated the need for them to
be careful when investing through external managers. They
realised they were more likely to avoid errors if they retained
greater control over their deals.
As a result, SEFs invested more selectively in
funds, and according to Barker, prompted them to think more
closely about what the return profile is for each pocket of
money they have invested.
Like other institutional investors, this focus on
return has been exacerbated by this year’s low
interest rates. They have replaced their traditional debt
strategies with new asset classes, hoping for better
The fact they are government-backed does, however,
limit the investments they can make. SWFs require a high level
of confidentiality and prioritise reputational risk.
It means they are likely to avoid deals that carry
a high degree of completion risk, such as under the UK Takeover
Code, or involve assets that could be caught by foreign
"In my experience, these funds often
don’t want to be the centre of a publicity storm.
Many tend to be averse to taking an investment position where
the spotlight is on them," said McWhirter.
Private equity and venture capital
What threatens Europe’s
FDI: a brave new world