The Growing Role of SWFs in M&As

The Growing Role of SWFs in M&As  At the time, this was primarily because SWFs were welcomed for their stabilising effect on the financial markets. While some of the most prominent SWFs - such as Norway’s SWF and Singapore’s Temasek Holdings – were welcomed with no restrictions, SWFs from emerging markets were viewed with suspicion. However, the scepticism that accompanied them – arising from their lack of transparency and political agenda - hindered some of their activities within western markets. This was often attributed to associated transparency, but also national security concerns.

It was the more recent oil price crisis and market volatility, however, that led many emerging market SWFs to diversify their portfolio and identify new growth areas. There has been a marked shift, not only in their operational activities, but also in their investment strategy. While in the past SWFs used other funds to invest on their behalf, they have now become direct investors in what they consider viable opportunities. In addition, many have adopted the strategies often associated with Norway’s SWF and Temasek Holdings to improve their investment process.

According to data from Thomson Reuters, the value of acquisitions from SWFs has increased by 62% over the course of 2016, to U.S. $28.6 billion – the highest since 2008. This is impressive not only in terms of the prominence of SWFs in the international M&A field, but also when taking into consideration that 2016 has seen a 20% drop in M&A deals in comparison to 2015, which hit a record high.

SWFs have been careful to balance their M&A portfolio between high-profile global investments in the real estate and hospitality sectors, and more strategic acquisitions in sectors such as renewable energy, infrastructure, water and waste management – particularly in the emerging markets.

Of particular interest are the activities of SWFs in the Gulf, who have been identified as some of the largest investors over the past 18 months.

What is unique about Gulf-based SWFs is the speed with which they have adapted to the global environment, and how they have embraced their governments’ initiatives to push forward with diversification, as their oil-dependent economies faced substantive losses with the fall of the oil price. At the same time, they have also been addressing concerns that western investors had often highlighted in terms of their dual role as political vehicles and financial institutions.

In an unprecedented move, funds including Saudi Arabia’s Public Investment Fund (PIF), Abu Dhabi Investment Council (ADIC), Kuwait Investment Authority (KIA), Mubadala, Oman’s State General Reserve Fund (SGRF), have eagerly adopted a diversification strategy to ensure the preservation and continuous growth of their countries’ economies.

However, these fears have been addressed to a certain extent – if for nothing else, but for the longevity and success of the funds themselves. Over the past 18 months, the changes that have taken place in many of these funds reflect their keen interest to comply with international standards and increase their attractiveness towards western investors.

It is imperative to remind ourselves that the reluctance and suspicion that western investors traditionally had towards SWFs from emerging markets was driven by the lack of transparency and suspicions of an overly politicised agenda. What we now see is the drive and ability of some of these governments to separate the dual role once inherent within their funds, this has been the case with the Kuwait Investment Authority and the Qatar Investment Authority (QIA). For example, it is anticipated that the recent establishment of new management team within QIA will remove the political motivations that have previously been driving the fund.
Saudi Arabia’s Public Investment Fund (PIF) - who until recently was primarily a domestic-driven financial institution – has emerged as one of the fastest growing SWFs. The investment of U.S. $3.5 billion for a stake in Uber, a fast-growing online transportation network company based in the U.S., is the single largest international transaction PIF ever made, and the first under Saudi Arabia’s Vision 2030, an initiative to free the country from oil dependency and to build a sustainable private sector-led economy. In response to a growing economic deficit, the Saudi government issued a decree to enable PIF to set up new ventures without having to obtain approval from the cabinet. Such flexibility and autonomy provided the fund with the opportunity to successfully adopt its new investment strategy and establish a new growth model led by the private sector.
UAE sets another good example of such efforts. On the one hand, the merger of the International Petroleum Investment Company (IPIC) and Mubadala in 2016 was a strong move by the government of Abu Dhabi to consolidate their most powerful funds under one entity. The separation of strategies and objectives is also evident in how ADIC and the Abu Dhabi Fund for Development (ADFD) operate. While ADIC is increasingly developing a strong reputation as a fund that reflects and promotes the aims of Vision 2030 in order to revamp UAE’s economy, ADFD remains a SWF that is not commercially driven and remains primarily a political and diplomatic tool used by the Abu Dhabi government to serve the aims of its wider foreign policy agenda.

For the first time in the history of the evolution of SWFs, what we are beginning to witness is a clear distinction between three ‘types’ of SWF. One operates purely as a commercial entity, a financial institution that is not riddled with hidden political agendas, and therefore can be a viewed as a legitimate investor and a viable partner for western financial actors. Second are the SWFs that remain a vehicle primarily used to promote a political agenda. And third, there are funds that remain ‘dual-purpose’ -  although commercial by nature, they are leveraged to fulfil a political agenda, and retain a certain degree of political exposure.

It is when dealing with these ‘third’ funds that a greater degree of partner diligence is required. The extent and potential implications of a transaction being manipulated for a specific political or personal agenda deserves scrutiny, and should be treated as a necessary step to preserve both integrity and transparency.
 
Daphne Biliouri-Grant is Co-founder and Director of West Sands Advisory Limited. West Sands Advisory Limited is a UK-based business intelligence and advisory firm that leverages an international network of sources, and seasoned multi-lingual analysts, to help their clients create opportunities, and reduce reputational risk in emerging and frontier markets. West Sands regularly undertake projects in Africa, Emerging Europe, Eurasia, South Asia, and MENA. It also operates an analytical arm – Shadow Governance Intel (www.shadowgovintel.com) - that provides regular analysis and insight on power players and how commercial and political influence is exerted in these regions. For more information on West Sands Advisory, please visit www.westsandsadvisory.com