| SINGAPORE, Sept 4
SINGAPORE, Sept 4 Singapore's GIC is taking the
unusual step of investing directly in unlisted firms, a move
bankers say will be mimicked by other sovereign wealth funds as
low yields spur fund managers to adopt a more hands-on attitude
in their search for higher returns.
In the first half of this year, GIC agreed to pay up to $310
million for minority stakes in two unlisted Philippine
companies: food producer Century Canning Corp and hospital group
Metro Pacific Investment Corp.
While the investments in the Southeast Asian archipelago
nation formed just a tiny sliver of GIC's estimated $30 billion
private equity portfolio, they marked a departure from GIC's
approach of putting money in a private equity fund that would
then invest on its behalf, or co-investing with a buyout firm.
"These were sourced completely on their own - there were no
investment banks involved in the deal," said Jacqueline Chan, a
partner at law firm Milbank, Tweed, Hadley & McCloy, advisor of
GIC on the two Philippine investments.
In May, GIC acquired a stake in Brazilian online sports
goods retailer Netshoes after opening an office in the Latin
American country. Two months later, GIC invested an undisclosed
sum in India's biggest e-commerce firm Flipkart.
The deals represent a shift in strategy as the world's
eighth-biggest state fund, chaired by Singapore's prime
minister, transforms itself into an active private equity
player. Bankers say the approach will likely be followed by
other sovereign wealth funds, which are increasing their
investments in alternative asset classes such as private equity
as they struggle to eke out returns in more traditional stocks,
bonds and real estate.
Last year, Norway said it was considering letting its
sovereign wealth fund, the world's biggest sovereign investor,
make foreign private equity investments. China Investment Corp
is also putting more money into private equity funds.
Private equity investments by sovereign funds like GIC would
naturally intrude into the domain of buyout firms. Bankers say
sovereign funds are still keen to co-invest with buyout firms
where it suits them, but in those cases, they are becoming
increasingly reluctant to be a passive "limited partner".
"They are no longer interested in just being the LP in fund
No.4," said Patrick Thomson, the London-based head of sovereign
clients at JPMorgan.
Last month, GIC was back at it again, ploughing $100 million
into Taiwanese music streaming service KKBOX, billed as Asia's
answer to Spotify.
Chris Lin, KKBOX's co-founder, said he first met with GIC's
investment team over a year ago. The team won his attention with
their ability to open doors for his firm.
GIC can help us "to connect with Southeast Asian carriers,
business financial institutions, any possible business alliance
- they can make a referral," Lin told Reuters on Tuesday.
He was also impressed by the team's depth of knowledge.
"The GIC executive responsible for our deal had more insight
into the Internet industry than most investors I've
encountered," Lin said. "We didn't really have to explain our
model or strategy too much."
The approach is part of a broader, long-term strategy as GIC
forms partnerships with small companies in anticipation of
higher returns down the road, bankers say. Sovereign wealth
funds have deep pockets, so they would be ready to weather any
near-term volatility, they add.
"They encourage us to have long-term thinking," Lin said,
reflecting on KKBOX's talks with GIC.
The new investment approach is overseen by veteran GIC
executive Lim Kee Chong, who heads the new "integrated
strategies" unit, people familiar with the matter said. The unit
analyses opportunities in both public and private companies.
Lim runs his team out of New York, leveraging on the
expertise of a growing band of investment teams on the ground in
the likes of Sao Paulo, Seoul, Mumbai, Beijing, London and San
GIC said in early August that around 9 percent of its
portfolio was in private equity as of March 2014. Sovereign
Wealth Fund Institute estimates that GIC manages a total of $320
billion in assets.
Private equity has established a track record of
outperforming other asset classes. The U.S. private equity index
compiled by advisory firm Cambridge Associates LLC shows an net
internal rate of return of 13.7 percent in the 10 years through
Sept. 30, 2012, versus an 8 percent return by the S&P 500 Index.
Making direct investments means GIC saves on having to pay
fees to private equity firms.
PricewaterhouseCoopers, in a study in June, said that for
co-investments with private equity firms, sovereign wealth funds
typically pay half of the usual fees.
They would usually pay a management fee equivalent of 1
percent of the committed capital to a fund set up by the private
equity firm, and then up to 10 percent in performance fees,
depending on the rate of return.
Direct investments also give GIC more control over how a
deal is structured and greater influence over a company's
GIC says it can also get the first pick of certain
investment opportunities, ahead of other interested investors,
if it goes direct, given its reputation for "patient" capital
and ability to invest in multiple asset classes.
"To be able to do that requires us having established teams
which have the research capabilities, ability to structure
transactions," Lim Chow Kiat, GIC's chief investment officer,
told Reuters in July.
"It's something that we would indeed want to continue to do,
step up when there are opportunities."
One risk that sovereign funds face to a greater extent than
other private equity investors is headline risk - political
ramifications for a poor investment, bankers say.
China Investment Corp faced criticism at home for its $3
billion investment in U.S. private equity firm Blackstone, after
the 2008 financial crisis caused the value of its investment to
GIC and Singapore's other sovereign investor Temasek
Holdings have had their own share of pain after losing money on
GIC's 20-year annualised real rate of return was 4.1 percent
as of March 2014. In comparison, the Norwegian sovereign fund
has returned an average of 3.75 percent a year since it was set
up in its current form in 1998.
(Additional reporting by Michael Gold in TAIPEI and Stephen
Aldred in HONG KONG; Editing by Ryan Woo)