Sovereign wealth’s new investment tactics

Author: Danielle Myles | Published: 10 Sep 2014
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The Singaporean fund has the led the way new acquisition strategies
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.

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 Lewin-Smith.


  • 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 investments;
  • 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 Lewin-Smith.

"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 decisions.

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 & Plimpton.

They see them as deep pockets that are now prepared to be a bit more adventurous

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 investments.

Money talks

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 returns.

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 ownership restrictions.

"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.

See also

Private equity and venture capital report 2014

What threatens Europe’s M&A revival

FDI: a brave new world