SWFs eye offshore deals after quiet Q1

Hurt by mark-to-market losses and exercising caution in the face of an unforgiving investment environment, sovereign wealth funds (SWFs) made only 26 investments, worth $6.8 billion, in the first quarter of 2009 – their lowest deployment of capital since the fourth quarter of 2005.

Despite dropping oil prices, the SWFs of Abu Dhabi were the most active among the investors in the quarter, pumping $4.9 billion into 12 of the reported transactions, primarily targeting the financial services and industrials sectors at home and offshore, according to research by the Monitor Group.

SWFs worldwide lost about $67 billion from market-to-market losses in the quarter, and some funds – notably the Qatar Investment Authority and Kuwait Investment Authority – have been tapped to bail out ailing home economies.

But many SWFs, flush with capital and armed to the teeth with skilled internal teams, are allocating once more into the global economy.

“Retreat cannot be a long-term strategy for SWFs. It would be short-sighted for them to forego opportunities when they have available cash,” Monitor Group writes.

During the quarter, the trend among SWFs to invest domestically and in emerging markets weakened as capital was once again directed at OECD economies. More than one third of the SWF investments and two thirds of the capital deployed was put to use in the OECD, compared to only 27 per cent of total deal value in the previous quarter.

Their preference for investments in financial services businesses remains, which the sector netting 46 per cent of the deals and 28 per cent of expenditure. The two biggest deals in that sector were China Investment Corporation’s reported $800 million investment in a Morgan Stanley real estate fund and stake taken in private equity firm Apax Partners by Australia’s Future Fund and the Government of Singapore Investment Corporation (GIC).

Next in line was the industrials sector, which saw three deals worth a reported $3.3 billion. Two of these were driven by Abu Dhabi’s $14 billion International Petroleum Investment Corporation (IPIC), an entity originally formed to invest in oil-related projects outside the emirate but has recently showed signs of morphing into a strategic government-backed investor, which bought stakes in German carmaker Daimler and industrial services provider, MAN Ferrostaal.

Throughout the crisis, SWFs have spurned real estate more than most sectors. The sole deal of the quarter  IPIC’s purchase of land on Abu Dhabi’s Al Reem Island for $1.3 million – stood in stark contrast to the $5.3 billion in investments made in the final quarter of 2008.

Other sectors attracting investments were the automotive, IT and consumer goods industries, in economies ranging from Colombia and Germany to Thailand. Almost two thirds of the deals, accounting for 88 percent of the capital invested, were made in foreign markets.

This signalled an increasing risk appetite among SWFs, Monitor wrote.

“These patterns point to SWFs beginning to return to a long-term approach to their investments, putting their losses behind them and resuming the business of investing abroad, albeit at a cautious pace.”

But SWFs continued to regard the North American market with some trepidation – only three publicly reported investments were made in the region. They were more bullish on the Middle East, which received nine deals worth $864 million. But Europe was the favoured market, hosting more than half of the total reported investment flow – $3.5 billion – for the quarter.

The Abu Dhabi funds that accounted for most of the SWF investments in the quarter were the $627 billion Abu Dhabi Investment Authority, Abu Dhabi Investment Council, the $14.7 billion Mubadala and the IPIC. The funds executed 12 of the 26 deals.

In contrast, the Singaporean funds, the GIC and Temasek, which are typically among the most active SWFs, were very quiet. Temasek made no publicly reported investments, and the GIC made only three with a total reported value of $35.5 million.