March 1, 2012 / 12:15 PM / 6 years ago

Sovereign wealth funds off to slow M&A start in 2012

LONDON, March 1 (Reuters) - 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 billion-plus.”

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 gearing.

“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 rights.”

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 the manager.”

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.

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