SWFs return as bargain hunters

Stock and commodity markets have rebounded dramatically from their lows 12 months ago, but there are many parts of the global economy that remain untouched by the recovery. It is in these unloved markets that investors can still find cheaply priced assets on offer.

Sir Stelios Haji-Ioannou, the Greek-Cypriot-British entrepreneur, told me about one such bargain opportunity last week. He had snapped up a six-floor office block on the fringes of the city of London for £5.2 million (Dh29.2m). Just 18 months ago, the same block went on the market for £13m. Sir Stelios, who plans to turn the building into a hotel, was able to score this great deal because the block had no tenants and the owners were receiving no rent from it – they had become desperate to sell.

As Sir Stelios has shown, there are still under-priced assets out there for investors looking for bargains. Among the bargain hunters are a few sovereign wealth funds (SWFs) returning to markets they abandoned during the downturn.

When the downturn hit, many SWFs were caught out having bought big stakes in over-leveraged banks or infrastructure companies. Seeing billions wiped off the value of your fund must make even the most long-term investor nervous and many SWFs retreated into cash and bonds.

Others, such as the Kuwait Investment Authority (KIA) and Russia's Reserve Fund, were required by their governments to divert money from foreign acquisitions into supporting their domestic economies.

As a result, SWFs were pretty anonymous last year – certainly in comparison to the noise they generated in the years prior to the downturn. However, the tide appears to have turned for the SWFs thanks to rising oil prices and a recovery in asset values.

Preqin, a consultancy firm, has estimated that the cumulative value of SWFs will increase to $3.51 trillion (Dh12.8trn) this year from $3.22trn and we have already seen some funds making the sort of high-profile acquisitions that set bankers' imaginations alight a few years ago. The Abu Dhabi Investment Authority (Adia), for example, bought a 15 per cent stake in London's Gatwick airport earlier this year. Bahrain's Mumtalakat has invested in McLaren's new sports car and at least one other Gulf SWF is understood to be ready to join that venture as well.

Very few SWFs give details of their holdings but Preqin's data gives an estimate of how the funds performed during the downturn. For the most part, the answer is surprisingly well. Despite the worst recession in North America and Europe since the 1930s, many funds actually accumulated huge amounts of wealth last year – Norway's Government Pension Fund was one of the big winners gaining $38.4bn to $456.3bn.

Preqin believes that Adia was a loser last year, shedding $150.8bn to be worth $625 billion. Adia will not reveal how much it is worth but I know from conversations with senior executives that they are pretty happy with their investment performance so perhaps this loss has been exaggerated.

According to Preqin, the KIA lost $26bn to be worth $202bn as it was forced to pump money into Kuwaiti banks and Russia's Reserve Fund decreased in value from $137bn to $60bn as the Kremlin used it to cover deficits in the federal budget.

It is likely the KIA and Russia's Reserve Fund will take longer to become active in global markets again but some other SWFs are certainly on the lookout for bargains. Indeed, a number of them are rumoured to have joined Sir Stelios in picking up cheap commercial property in London and other recession-hit cities. If SWFs do return to global markets in a big way looking for aggressively priced bargains we may see another clash with Western politicians. Before the downturn, governments were concerned that strategically important assets were falling into the hands of funds controlled by foreign states.

Politicians wanted to know why these SWFs were buying certain assets and what their motives were.

Of course, this paranoia was nonsense but the SWFs sensibly drew up a voluntary code of practice to govern their activities. It was hoped that this would bring some transparency to SWF activities and soothe political fears. If SWFs do go on a buying spree this year as oil and gas revenues flood in once again, that code may receive its first real test.

The writer is correspondent of The Times of London


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