ADELAIDE, Australia — Asia’s sovereign wealth funds are plowing more capital into the U.S. and other big Western economies in search of better returns and portfolio diversification, despite increased government scrutiny of deals, particularly those involving Chinese entities.
Singapore’s GIC topped the list of sovereign wealth fund investments by value in the first quarter of 2017 after striking two of the biggest deals of the period, data from Thomson Reuters show. GIC was involved in nine of the 20 biggest investment deals during the quarter.
In March, the fund teamed up with private equity firm Hellman & Friedman to acquire a 75% stake in Spanish fund platform Allfunds Bank for 1.8 billion euros (then $1.9 billion). In January, GIC bought a 95% stake in 60 Wall Street, a New York tower, in a deal that valued the property at $988 million, according to Dealogic.
These deals followed a number of acquisitions overseas by Asian wealth funds and other institutional investors, many of them in big-ticket real estate and private equity assets. Declining returns at home have led many large Asian institutional investors to seek opportunities overseas, particularly in alternative assets, which include real estate, private equity, hedge funds and infrastructure.
South Korean sovereign wealth fund Korea Investment Corp., for example, increased its alternative asset allocation from 8% in 2014 to 13.7% in 2016 and is seeking to raise the total to 20% by 2020. Higher gains on its mostly overseas alternative investments are likely to encourage other South Korean institutions to sink money into offshore alternative assets. KIC’s 2016 investment gain of 4.35% was led by its alternative investments, which posted a return of 6.57% for the year.
China Investment Corp., the world’s second largest sovereign wealth fund by assets, on June 2 reached a 12.25 billion euro deal to acquire London-based warehouse property group Logicor from private equity firm Blackstone. If concluded, the deal would rank as the second-largest European real estate transaction on record, and the fourth-largest international Chinese takeover to date, according to Dealogic.
Hammered by global market volatility and foreign exchange losses caused by dollar appreciation, CIC’s overseas portfolio delivered a net annual return of minus 2.96% in 2015. This was likely to have prodded the fund to seek more stable returns, including in alternatives.
The U.S. alone accounted for more than 46% of CIC’s global public equity portfolio in 2015. Miao Hui, a senior analyst covering China at Cerulli Associates, a U.S.-based asset management research company, said conditions were ripe in the U.S. for Chinese investment. “The U.S. is seeing strong economic recovery and improving business conditions among developed markets. It’s reasonable for investors like CIC to increase their exposure there,” she said.
In March, CIC expanded into room-sharing company Airbnb, contributing about 10% to a $1 billion funding round. The move signals its growing interest in foreign technology companies, following in the footsteps of Singapore’s Temasek Holdings and GIC, and Malaysia’s Khazanah Nasional.
Temasek and GIC have backed technology companies such as Alibaba and Chinese internet service provider 21Vianet Group. Temasek is even more prolific, having invested in Airbnb, PayPal Holdings, Tencent Holdings, and Chinese transportation network company Didi Chuxing.
The share of telecommunications, media and technology in Temasek’s portfolio hit 25%, or about 14 billion Singapore dollars ($10 billion), in the financial year ended March 2016 to become the fund’s largest sector of investment, surpassing financial services.
Jess Delaney, head of data and research for the London-based Sovereign Wealth Center, which tracks government financial institutions, said Temasek had enough experience to understand the risks of the sector. It has an established Enterprise Development Group that looks at early-stage investments and disruptive business models, said Delaney.
Despite its diversified investments, Temasek’s portfolio value shrank for the first time since 2009 in the financial year to March 2016. Its net portfolio value fell 9.02% to 242 billion Singapore dollars in 2016 from the year before.
Khazanah has also been increasing its exposure to overseas and technology assets. The fund has made investments in Alibaba’s logistics arm, Hong Kong financial technology startup WeLab Holdings, and Singapore-based online gaming portal Garena. Khazanah’s overseas exposure stood at 45.1% of its assets at the end of 2016, up from 44.9% in 2015 and 40.7% in 2014.
But not all investments by Asian wealth funds have gone as planned. CIC has made several investments in Canada’s mining and oil and gas industries that have been soured by tumbling commodity prices. These included a $1.5 billion investment in mining company Teck Resources in 2009, a joint venture with Penn West Petroleum in 2010, and a purchase of $150 million worth of shares in Sunshine Oilsands in 2012. CIC eventually shuttered its Toronto office — its first outside China — in 2015 and opened a new office in New York.
CIC has a reputation for risk-taking. Its debut investment was a $3 billion stake in Blackstone 10 years ago. But in 2014, China’s National Audit Office said CIC had mismanaged some of its offshore investments between 2008 and 2013, resulting in unspecified losses. It also said some CIC employees failed to do sufficient due diligence prior to investing in 12 offshore projects during the period.
The longer-established Temasek has also had its share of missteps in investments, particularly during and after the global financial crisis of 2007 to 2008. In 2009, Temasek sold stakes in Barclays and Bank of America, which bought Merrill Lynch, in moves that were estimated to have caused it 500 million British pounds (then $814 million) and at least $2 billion in losses, respectively.
Temasek invested in Merrill Lynch without the downside protection that many other sovereign wealth funds were using at the same time, said Loch Adamson, director of the Sovereign Wealth Center. The fund has since refocused away from financial services, which accounted for only 23% of its portfolio in the financial year to March 2016, down from 40% five years ago, Adamson noted.
Apart from the risks that investors face, increased scrutiny is a growing issue, especially for Chinese companies and institutions, whose influence has raised concerns among foreign governments. Adamson said CIC’s portfolio strategy has always attracted the interest of other governments.
But recent deals scuttled by overseas governments offer a cautionary tale for Chinese investors, particularly when national security issues are raised. In August, the Australian government blocked a proposed 99-year lease of electricity provider Ausgrid to State Grid Corp. of China and Hong Kong-listed Cheung Kong Infrastructure, citing national security concerns.
In Germany, the government withdrew its approval of a 670 million euros deal to sell semiconductor equipment supplier Aixtron to a group of Chinese investors after receiving security-related information.
CIC chairman Ding Xuedong said at a Hong Kong forum that the fund was willing to accept scrutiny by U.S. regulators, while also calling for fair treatment of Chinese organizations investing in the U.S.
Hui said the increased scrutiny was unlikely to have much impact on CIC. “CIC’s investments are steady and rational. It is a well-recognized investor with more experience and expertise than other institutional investors from China, so such scrutiny shouldn’t affect its plans,” she said.