Arabian Gulf sovereign wealth funds pick new plays

Sovereign investment vehicles in the region need to generate more income from the non-oil sector amid the fall in crude prices. Some, such as those of the UAE, Qatar and Kuwait, are increasing forays into new territories.

Arabian Gulf sovereign wealth funds (SWFs) may have to increase their transaction volume to generate more returns to make up for the loss of income from lower oil prices and sales, analysts say.

The oil price scenario remains unclear and will continue to impact the investments of Gulf funds, which corner nearly 40 per cent of the world’s estimated US$7.2 trillion sovereign wealth fund assets, based on figures from the US-based Sovereign Wealth Fund Institute (SWFI).

Growth in the energy-exporting Gulf is forecast to slow to 3.4 per cent this year, while the region will post a fiscal deficit of 7.9 per cent as oil prices continue to tumble, according to the IMF. Brent is down about 50 per cent since reaching US$115 a barrel in June last year due to an oil supply glut sparked by the US shale oil boom, weaker demand in Europe and Asia and a stronger dollar.

“While a drop in oil price may in theory mean that some swfs will reduce their volume of transactions, the need to diversify away from oil revenues is now even more urgent and could translate in some swfs increasing their transactions in the medium and long term,” says Bruno Daher, the chief executive of Credit Suisse for the Middle East and Indian Subcontinent.

Gulf sovereign wealth funds have remained active this year despite the oil price slump.

Qatar Investment Authority (QIA) bought last month a 19.9 per cent stake in Hong Kong’s electric utility HK Electric Investments from the billionaire Li Ka-shing for HK$9.25 billion (Dh4.38bn). QIA plans to spend up to $20bn in Asia in the next five years, in industries including health care, infrastructure and property, its chief executive Ahmad Mohamed Al Sayed said last year.

On Monday, Singapore’s CapitaLand said its serviced residence business unit, The Ascott, entered into a joint venture with the QIA to set up a $600 million serviced residence fund with an initial focus on Asia Pacific and Europe.

“The wealth funds like the QIA who are looking outward, will diversify and expand investments into the Americas and Asia,” says Michael Maduell, the president of the SWFI.

“Liquidity, strong private property rights and market size are important factors for Gulf investors. “

The Kuwait Investment Authority, the world’s fifth-richest sovereign wealth fund with assets of $548bn based on SWFI estimates, joined this month with Spanish energy group Gas Natural to invest in its Global Power Generation (GPC) unit by subscribing to a $550 million capital increase at GPG and taking a 25 per cent stake in the subsidiary.

The Abu Dhabi Investment Authority (Adia), the world's second-richest sovereign wealth fund with assets of $773bn based on SWFI estimates, agreed in April to buy a 50 per cent stake in three leading Hong Kong hotels from a group led by New World Development, one of Hong Kong's most powerful property companies and controlled by the billionaire Cheng Yu-tung.

Investment Corporation of Dubai, the emirate’s sovereign wealth fund, in April purchased two luxury hotels: the W Hotel in Washington DC, and a majority holding in the Mandarin Oriental in New York.

It also took a minority stake in the One & Only resort in Cape Town, South Africa.

“Despite the slowdown of inflows and the pressure to use some of the assets for stabilisation purposes, there is still a substantial amount of wealth that has been accumulated over the past years,” says Sven Behrendt, the managing director of the Geneva-based consultancy GeoEconomica.

“Given public demand to maintain public spending patterns, I assume there is certainly a great interest to further diversify into equities but also illiquid asset classes with an expectation that these yield higher returns.”

Sovereign wealth funds continue to invest in property and hospitality as they seek steady returns on investments in an era of low-interest rate environment.

They are also looking at oil assets, despite the oil price drop, according to Ashish Dave, a Dubai-based partner at the consultancy KPMG.

“In the oil and gas space we have seen sovereign wealth funds targeting more upstream assets because there is an opportunity to buy these upstream assets at a lower price as the oil price has go down,” says Mr Dave.

“During times of uncertainty in the market, pricing spreads compress, which allows investors with access to financing opportunities to buy assets at reasonable prices. In addition, sovereign wealth funds have the benefit of looking at opportunities with a long term investment horizon.”

In terms of geographies there is a switch towards the United States rather than Europe for some wealth funds. Greece’s sovereign debt crisis could put extra pressure on Gulf investments in Europe if the saga spirals out of control.

“More Gulf funds are moving slightly away from Europe and more toward the United States. The US continues to innovate and attract investors,” says Mr Maduell.

Gulf sovereign wealth funds remain focused on developed markets despite their increased exposure to emerging markets.

For example, Adia invests a minimum of 35 per cent in North America and 20 per cent in Europe, while ploughing a minimum of 10 per cent into developed Asia and 15 per cent into emerging markets. It can raise those percentages if it wants to.

“Gulf sovereign wealth funds have a conservative investment approach and favour exposure to mature markets,” Mr Daher says.

“Emerging market exposure has historically been taken more selectively, though in recent years sovereign wealth funds have increased their focus here both in response to the financial crisis in North America and Europe, and in an effort to capture higher yields.

“India and China stand out as major investment opportunities in the emerging market space and both countries benefit from long term secular growth trends,” he says.

Sovereign wealth funds do face a number of challenges. They have to battle with the low-interest rate environment, which is unlikely to end anytime soon despite expectations of an interest rate hike in the US. It has driven sovereign wealth funds to search for higher yield.

But the main concern could the possibility of having to sell assets or tap cash to plug the fiscal deficit hole if they are pushed by governments to do so.

“Some sovereign wealth funds might be requested to sell assets to support the budgetary needs of their governments,” says Mr Behrendt.

“On the other hand, if assets that have been bought with a longer-term investment horizon in mind were sold to fill short-term budgetary gaps, one would have to question the wisdom to buy these in the first place.”

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