| LONDON, March 1
LONDON, March 1 Sovereign wealth funds are
shying away from making large mergers and acquisitions, at least
in public, with announced activity volumes tumbling to less than
a tenth of last year, Thomson Reuters data shows.
Worldwide announced M&A volumes involving these funds, a
giant $4-5 trillion industry which manages windfall revenues for
future generations, fell to $787 million in January to Feb 28,
compared with $8.6 billion in the same period last year.
They have declared 15 deals so far, compared with 18 in the
same period last year.
Certainly the size of announced deals has not been large. In
January, China Investment Corp bought a minority stake in London
water supplier Thames Water in a deal whose value was estimated
at between 600-700 million pounds ($960 million-$1.1 billion).
Experts say sovereign wealth funds are preferring to make
more direct investments - which may not necessarily become
public - and do fewer but bigger deals in sectors that give them
stable cash flows.
"The trend is more interest in infrastructure and real
estate. You are seeing interest in doing either direct deals or
joint ventures or managed accounts rather than doing everything
through a fund," said Dale Gabbert, head of investment funds,
Europe and the Middle East, at law firm ReedSmith.
"The consequence is that you see people doing ... fewer,
larger deals that are really worthwhile. They are more
thoughtful about how to use their internal human resources...
Now people are looking at anything from $500 million to $1
Gabbert is in ReedSmith's sovereign wealth fund team which
acts for CIC and the UAE's Emirates Investment Authority.
He said infrastructure investment is becoming popular
because of stable cash flows and the relatively low level of
"You may not make a tonne of money but you can see your cash
flows stretching out into the horizon," he said.
Gabbert said sovereign funds are less keen on close-ended
private equity funds involving limited partnerships, which give
them limited rights and flexibility.
"Certainly one big trend is they don't like pooled vehicles
very much. Funds and collective investment schemes are less
popular particularly in relation to illiquid assets," he said.
"Typically the problem of PE-style partnerships is that as a
limited partner you are not allowed to have any meaningful
In PE-style limited partnerships, investors are typically
not allowed to take part in management or selecting what to buy
because they are investing in the manager, not the asset.
"Even if you are unhappy with what the managers are doing,
you can't really do anything as a legal matter. So it has a
couple of serious flaws from the perspective of investment that
impede you from doing anything active," Gabbert said.
"A lot of them prefer to select the asset and then appoint
Assets managed by sovereign wealth funds are likely to grow
8 percent this year to $5.2 trillion after a 9 percent increase
in 2011 to a record $4.8 trillion, according to financial
services representative body TheCityUK.