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ASIAVIEW: The sovereign route to success


Jonathan
Brasse

If you were to examine the annual reports put out this summer by some of Asia’s biggest sovereign wealth funds, among your findings you’d likely come away with two takeaways.

The first is that they are doing really quite well. Take the China Investment Corporation (CIC), for example. During the last week of July, the Beijing-based state fund revealed in its Annual Report 2010 that its assets, which had grown in value to $409.6 billion, had generated a return of 11.7 percent for the second year running. CIC’s annual average return since inception was 6.4 percent, but that kind of payback was no mean feat considering the fund was only formed in 2007, just as the world’s economy was about to fall apart.

The Government of Singapore Investment Corporation (GIC), which is longer in the tooth than CIC, fared pretty well too. In its Report on the Management of the Government’s Portfolio for the Year 2010/2011 released the same week, GIC revealed its assets, thought to be in the region of $300 billion, were producing a five-year return of 6.3 percent and 10-year and 20-year returns of more than 7 percent on average. The Singapore state fund said it had “fully recovered” the losses it sustained from the start of the global financial crisis and had even outperformed various composite portfolios it measures.

Australia’s Future Fund also reported strong results. In its latest quarterly portfolio update last month, the Melbourne-based group revealed that, despite a dip of 3.3 percent in the three months to 30 June, its return for the year was 12.4 percent – more than twice its 5.2 percent average return over the past three years.

The second takeaway you’d likely come away with is that these sovereign wealth funds are – in some cases quickly, in some cases more slowly – shifting their focus away from certain sectors traditionally befitting of state investment vehicles, like cash. These days, their focus is swinging increasingly towards alternative assets, including real estate, and emerging markets.

From reading the reports from Asia’s sovereigns, they seem to be turned on more by what is happening in emerging markets closer to home.

While reducing its cash holdings from 32 percent in 2009 to just 4 percent in 2010, CIC made a point of highlighting how it had increased its exposure to long-term assets, accepting “higher risk-return profiles” in the process. Last year, it invested a whopping $35.7 billion as it sought to “appropriately balance its portfolio as a long-term investor,” and real estate was among the alternative asset classes sitting centre in its new remit. Without giving away details, CIC also said “an increasing percentage of investments have been made in emerging markets.” It would be fair to come away with the idea that it intends to chase even more such investments in 2012.

GIC also is evolving its thesis to taking on more risk. The Singapore state fund has determined it is worth having further exposure to emerging markets amid the current uncertainty surrounding the recovery of the world’s developed markets. “The developed economies, in particular the US and Europe, are recovering from the global financial crisis,” it said in its report. “However, their longer-term outlook is still uncertain and carries considerable macro financial and economic risks.” In addition to increasing its emerging markets equities exposure, GIC also increased its alternative assets by 1 percent to 26 percent of total assets, thanks specifically to its real estate outlays. As with CIC, it’s not too great a leap to think real estate in emerging markets is becoming more important to GIC as well.

Of course, nobody expects Asia’s sovereign wealth funds to trend back to making dramatic international corporate investments reminiscent of the billions pumped into Citigroup and Merrill Lynch at the start of the global financial crisis. They almost certainly have adopted the ‘stung once, twice shy’ approach to making huge financial sector outlays, particularly in the face of a double-dip recession in the West. Today, their capital seems to want smaller and more focused deals.

So how should private equity real estate firms position themselves in light of this strategic evolution? Club investments by various sovereigns give an indication of how they might access property going forward, but there may still be a home for commitments to traditional, blind-pool commingled funds.

For example, National Pension Service of Korea (NPS) this summer signed off on $650 million in such commitments, including a $200 million cheque to Tishman Speyer for its current Brazil fund. NPS is expected to follow up that outlay with further commitments to opportunity fund managers as part of its 2011 strategy.
 
Of course, that’s not to say all sovereign wealth funds are going to plough capital into private equity real estate funds again anytime soon. The Abu Dhabi Investment Authority’s aversion to new commitments is well known, and PERE also hears that CIC is considering only token commitments to current fundraisings by The Blackstone Group and Brookfield Asset Management, in the name of maintaining relationships.

Then again, those funds have a heavy focus on distressed assets in the US. From reading the reports from Asia’s sovereigns, they seem to be turned on more by what is happening in emerging markets closer to home.