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  • 2016

    Sovereign wealth funds

    SovereignWealthFunds16:Maquetación 1 13/2/17 11:50 Página 1

  • Co-Editors:

    Javier Santiso, PhD

    Associate Professor, IE Business School

    President, Sovereign Wealth Lab, IE Business School

    Javier Capapé

    Director, Sovereign Wealth Lab, IE Business School

    SovereignWealthFunds16:Maquetación 1 13/2/17 11:50 Página 2

  • Index

    Sovereign wealth funds 2016 Index

    3

    Preface 5

    Executive Summary 7

    “Keep calm and…Carry on”: Sovereign direct investments in 2015-16 11

    When the rainy day comes: Sovereign wealth funds in an era of low oil prices 21

    I Geographic Analysis 31

    European sovereign funds: Co-investment platforms for the real economy 33

    Unleashing the potential of sovereign wealth and pension funds in Africa 41

    II Sector Analysis 53

    Sovereign wealth funds check-in: Investment strategies in the hotel sector 55

    Luxury and trophy assets: Losing its shine for the sovereign wealth funds 69

    Sovereign venture funds 2.0 79

    Annex 1. IE - Sovereign Wealth Lab Ranking 2016 91

    Annex 2. Sovereign wealth funds strategies in Spain, 2011-2015 97

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  • SovereignWealthFunds16:Maquetación 1 13/2/17 11:50 Página 4

  • Preface

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  • 1. Preface

    Sovereign wealth funds 2016 Preface 6

    The world economic environment in 2016 has seen greater stability

    than in 2015, as evidenced by the general reduction in volatility and

    risk premiums. It has also been driven by modest growth, which is

    subject to higher uncertainty, largely as a result of the continued

    geopolitical tensions and the doubts generated by the capacity of

    emerging economies to correct their macroeconomic imbalances in

    an orderly way.

    In general terms, a slowdown can be observed in the growth of

    developed economies and a stabilization in emerging ones.

    Economic growth in the United States has slowed significantly

    compared to 2015, primarily due to a drop in investment, which

    was offset by consumer behavior, the good performance of

    employment figures and moderate inflation rates. In the European

    Union the situation has been marked by a moderate economic

    recovery driven by the continuation of the expansive policies

    enacted by the European Central Bank, which provides access to

    funding for households and companies. The current situation in

    Europe has been shaped by the victory of the Brexit camp in the

    European Union referendum in the United Kingdom, whose

    consequences have yet to be clearly seen.

    Although emerging economies began their slowdown in 2015, 2016

    has seen a gradual stabilization of their economic activities, backed

    by a lower risk perception. China has entered a new normality,

    characterized by more modest growth rates of around 6%-7% and

    the start of the awaited transition in its growth model. However it is

    not exempt from risks, including the overaccumulation of debt.

    Economic activity continues to decline in Latin America, still

    weighed down by Brazil, which continued slowing by more than 2%

    of its GDP, in a year that was supposed to mark the return to

    positive growth rates starting in 2017. The main Middle Eastern

    countries like United Arab Emirates, Qatar and Saudi Arabia saw a

    slowdown in their economic activity and greater pressure on their

    fiscal and current-account deficits.

    In this international scenario, the investment activity of sovereign

    funds has increased worldwide. In 2015 these funds saw over 180

    transactions, up 30% since the previous year, and they maintained

    their dynamism in the first half of 2016 with almost 100

    transactions. This positive behavior, in line with the performance of

    the global cross-border mergers and acquisitions market —which in

    2015 achieved its highest value since 2007—, is evidence that the

    current economic situation poses significant challenges, but also

    offers major opportunities for international investors.

    To offer an in-depth look at its trends, strategies and transactions, we

    present the fifth edition of the sovereign funds report, a joint project

    by ICEX-Invest in Spain, IE Business School and KPMG. The new

    edition of this report is produced in a period that is characterized by

    cheaper crude than in previous years, and it analyzes the impact of

    this phenomenon on hydrocarbon-dependent economies and on

    their respective sovereign funds, whose investment and funding

    strategies have been adapted to this new reality.

    Another issue in the spotlight is the increased sovereign fund

    investment in non-traditional sectors such as technology, with the

    so-called “sovereign venture funds”, the hotel sector and the luxury

    trade. We also look at the performance of sovereign funds

    originating in regions that are traditionally less inclined to this type

    of vehicle, such as Europe —with the exception of Norway— and

    sub-Saharan Africa. The report includes a summary of the

    investments made by sovereign funds in Spain since 2011, a series

    of transactions that have already been discussed in depth in

    previous editions.

    Finally, this set of editions contains a detailed analysis of sovereign

    funds by geographic area in the Middle East, Asia, –especially China

    and Singapore–, and in Latin America and Africa; and by sector,

    including real estate, the energy and financial sectors,

    infrastructure, agriculture, new technologies and sport.

    Francisco Garzón Morales

    Chief Executive Officer (CEO), ICEX

    Javier Santiso

    President, Sovereign Wealth Lab, IE Business School

    Fernando García Ferrer

    Partner Private Equity, Europe - Middle East - Africa, KPMG

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  • Executive Summary

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  • 2. Executive Summary

    Sovereign wealth funds 2016 Executive Summary 8

    “Keep Calm and…Carry On”: Sovereign Direct Investments in 2015-16

    In line with general market performance, SWFs generated limited,

    flat or negative returns in some cases in 2015. Direct investments by

    funds increased by 30% to 180 deals. However, total direct

    investment fell by 48% to US$47 billion. As the report emphasizes,

    these are direct deals that are recorded in public sources. One of the

    reasons for this decrease is the growing involvement in deals

    through consortiums with expert local partners. This is particularly

    the case in the real estate sector. Real estate accounted for nearly

    37% of capital invested by the funds. At the other extreme,

    investment in commodities fell to lows of less than 5%, while the

    financial sector was down to 12% from 17%. Geographically, the US,

    India, China, the UK and Singapore were the favorite destinations,

    attracting 69% of investments by funds. The doubling of deals in

    China and the tripling of deals in India were particularly noteworthy.

    The chapter concludes by mentioning the impact of the UK's vote to

    end its membership of the European Union. The Brexit vote has not

    yet had any direct, observable effect on SWF deals, with real estate

    deals in London remaining popular through to the middle of 2016.

    When the rainy day comes: sovereign wealth funds in an era of low oil prices

    Lower-for-longer oil prices don’t represent an apocalypse for

    sovereign wealth funds, regardless of the headlines. Kazakhstan or

    Russia are among the most heavily affected by the crisis. SWFs in

    these two countries have witnessed a repurposing in order to fill

    fiscal gaps. In addition, quasi-SWFs such as SAMA in Saudi Arabia or

    SAFE in China, have brought some confusion to the discussion. They

    are both different in nature to SWFs, they have flexible saving and

    spending rules and they were established to play the role of the

    central bank in managing foreign exchange reserves. Thus, these

    redemptions, $70bn in the case of SAMA, should be seen under this

    specific lenses.

    In other words, the largest SWFs are not being severely influenced,

    in the short run. For example, ADIA in Abu Dhabi or NBIM in

    Norway, are both being tapped by their governments, yet in volume

    levels in line with the rules established for the SWFs. They both

    generate enough investment returns to meet the demands of their

    governments. But the persistent low-oil-price environment will

    nevertheless have profound effects in the mid- and long-run,

    compelling sovereign funds to shift their allocation strategies in

    three directions: towards private markets (in 2015 they invested

    more than $25bn in real estate), in-source more of their

    operations and demand more of their partners.

    Unleashing the Potential of Sovereign Wealth and Pension Funds in Africa

    There are 12 SWFs in operation in Africa. These funds manage

    US$15