Published March 20, 2008

SWFs on overdrive, with more left in the tank

Industry watchers expect investment pace to continue despite recent market turmoil


(SINGAPORE) The liquidity crisis that plagued several major financial institutions, particularly in the US, has prompted SWFs to step in with capital injections in return for minority stakes.

Data released by research house Dealogic is telling. In the first two months of this year alone, SWFs have invested US$24.4 billion - almost half the record volume level achieved last year.

The investments have also grown bigger, with the average deal size in January and February standing at US$1.7 billion and exceeding last year's average by 40 per cent.

Last year, SWF investments hit US$48.5 billion, surging 165 per cent from 2006 and jumping close to six-fold from 2005.

Singapore's sovereign wealth funds have been the most active, with Temasek Holdings and the Government of Singapore Investment Corp (GIC) having clinched a combined US$41.7 billion worth of deals from Jan 2007 to Feb 2008, accounting for 56 per cent of the total investments made globally by SWFs during the period.

The 10 top acquirers among SWFs all come from Asian and oil-rich Middle Eastern countries.

United Arab Emirates' SWF was the second most active after Singapore's with US$10.7 billion worth of investments, followed by China's with US$8 billion.

The past two years have seen a brisker pace of cross-border acquisitions by SWFs. Of the 166 deals worth US$106 billion made between 1998 and Feb 2008, some $99.3 billion worth of investments took place from 2005 onwards.

The finance sector has been the top target for SWFs, with US$60.7 billion being ploughed into it since 2007. Real estate, with US$4.7 billion worth of investments and the retail sector with US$2.3 billion are next in line.

With the sub-prime fallout uncovering buying opportunities in some major investment banks, it is no surprise that the United States attracted the biggest SWF investments of US$43.1 billion since Jan 2007. This is followed by Switzerland with US$12.1 billion, due largely to the US$11.5 billion investment in UBS by GIC and Saudi Arabian Monetary Agency.

'Several sources estimate that there is currently US$3 trillion in sovereign wealth funds globally,' Dealogic said in its report. 'According to Merrill Lynch and Morgan Stanley, by 2015 these funds could surpass US$10 trillion.'

These SWF transactions measured by Dealogic take into account cross-border investments, domestic investments and investments made by SWFs' private equity arms. Pension plans are not included as they typically operate differently from SWFs.

Despite the jittery market sentiment rippling from Bear Stearns' near-collapse and the Federal Reserve's emergency rescue, market watchers expect SWFs to keep investing, given the huge pool of reserves surpluses that are still untapped.

But recent investments made by SWFs in financial institutions are not doing well for now - such as China Investment Corp's near-10 per cent stake in Blackstone and Temasek's 2.1 per cent stake buy in Barclays. Temasek's recent stake buy in Merrill Lynch and GIC's investment in Citi and UBS have also resulted in some paper losses.

'With the market volatility, certain bargains may appear from time to time,' said Fundsupermart general manager Wong Sui Jau. 'The banks that are going to survive this financial turmoil are probably the strong ones and are likely to become leaner. If you dare to go in at some point in time, you are getting them at a bargain.'

While there is always the risk of getting in too early before the bottom is reached, market watchers noted that SWFs generally have a long-term horizon and are not pressured to make short-term gains.

'SWFs represent patient money. They have deeper pockets and holding power,' said Chua Hak Bin, director of Asia-Pacific economic and market analysis at Citi. 'From that point of view, they are not subject to the whims and pressures of (short-term volatility).'

But he believes Singapore SWFs' appetite for investments in financial institutions has 'reached its limit', given that it is already about 42 per cent of Temasek's portfolio.