Corporate Financing Analysis - SWFs Adapting To Survive - 10 APR 2017


After a busy year for spending last year, the opening up of alternative avenues for investment in 2017 has seen sovereign wealth fund (SWF) spending come off the boil so far this year. However, with the driving force behind the funding of these state-backed investment vehicles shifting beyond the traditional strategy of investing in just either luxury brands or pure energy plays and towards assets from across a range of industry sectors that provide more reliable investment returns, we believe that there is plenty of scope for a return to an uptick in dealmaking over the coming quarters. Until the last few years, SWFs were very much the investment vehicles of oil-rich and consequently cash-rich nations looking for a place to put their reserves. However, over the last eighteen months or so, things have started to change. With the oil-rich nations of the world having seen their reserves hit hard by the prolonged slump in oil prices - which have only recently started recovering after passing their nadir late last year - the name of the game now is very much diversification, moving economies away from being entirely dependent upon one asset. Yet that is not all, we note that we have seen a second trend emerging in the SWF world over recent quarters, one that have seen countries with struggling economies launching state-backed investment funds to boost growth through investment.

A Trio Of Short-Term Headwinds

While the trends we have identified in the diversification in spending strategies and the expanding reach of countries establishing new funds will drive growth in both assets under management (AuM) and spending over the medium-to-long term, we caution that the outlook for SWF looks a little less rosy in the near term. We highlight that a combination of the recovery in oil prices beginning to flatten out, the rise in asset prices - thanks to a market recovery - making it more expensive for funds to complete deals and rising 'animal spirits' among both strategic acquirers and private equity (PE) funds is making the marketplace dealmaking more competitive for SWF acquirers. Furthermore, since the people you need to be showing evidence of value for money in investments to are voters, there is a healthy dose of political risk involved if a SWF overspends on an asset - a factor that puts SWF at a disadvantage in any potential auction for an asset. Thanks to the rise of the trio of aforementioned headwinds, SWF spending this year reached an aggregate level of USD9,055mn (across 172 announced deals) by the close of play on March 24 - according to data from Zephyr, a Bureau van Dijk product. If SWF M&A activity continues at the same rate across the remainder of 2017 it will close the year at a level far shy of the USD63,167mn haul recorded across 937 announced transactions during the 2016 full-year period - a time when funds were in spending mode while market volatility was forcing private acquirers onto the sidelines as spectators ( see ' SWFs Spending Big During Tough Times ' , June 15 2016).

Moving Away From Natural Resources
Global SWF Assets Related To Oil & Gas Sector, %
Source: SWF Institute, BMI

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