ActiveAllocator.com has tailored solutions for different types of SWFs. These are a heterogenous group as are their challenges.
These, as a cohort are lagging other institutional investors such as pension funds. Some exclusion criteria is used; and in a few cases some environment related investments have been made. They can do a lot more.
As long-term investors: They can reap long-term returns of environmental, social risk adjusted portfolios and ESG engagement. They can provide a source of stability in the capital markets.
As passive investors: Not always a good thing as this could dilute shareholders power and create a governance gap
As active investors: Engagement with the companies in which they hold some stakes. Make clear that the influence is purely economic based for any other type of influence could be a risk for other investors and the companies in which they hold stakes.
#ActiveAllocator Research Case Study – We successfully demonstrated to the world’s perhaps most sophisticated Government Investment Fund that our proposed changes to their strategic portfolio could increase annual returns by over 60 bps, while holding risk constant. That’s a non-trivial returns enhancement when you are speaking about hundreds of billions of dollars. Never underestimate the power of Strategic Asset Allocation done correctly. We further demonstrated concrete steps to enhance their portfolio by approximately 40 bps as described here. Here is a snapshot of one such portfolio sleeve by way of illustration (NDA prohibits us from disclosing specifics).
Bloomberg May 23 article “China’s $941 Billion Sovereign Fund Seeks More Resilient Assets”
We expect much greater scrutiny for foreign M&A deals as well as delays especially for direct investments made by Sovereign Wealth Funds, particularly China Investment Corp. We describe the ‘typical’ approval process timeline and outline key considerations in the highly opaque and secretive CFIUS review process.
What is the host country for investor?
- UK, Europe, Canada, Japan, Korea, raise few security or political issues
- 7 countries investing the most in the United States, all of which are United States allies (the United Kingdom, Japan, Germany, France, Canada, Switzerland, and the Netherlands) accounted for 72.1 percent of the value added by foreign-owned affiliates in the United States and more than 80 percent of research and development expenditures by such entities
- China raises unique issues
Does the acquirer have a good record of compliance?
- Focus on US, foreign laws and previous CFIUS commitments
- Focus also on acquirer’s record with respect to its own products or services or competition practices
Does the acquirer have state ownership?
- Have the acquirer’s leaders been implicated in any law enforcement or regulatory actions?
- Has the acquirer effectively complied with previous CFIUS commitments?
- Will investment raise political issues in Congress?
- How important are target’s assets to national security of the United States?
- Are there government contracts? With which agencies? Classified?
- Is target a direct supplier to U.S. government or subcontractor?
- Does the target have export-controlled technologies?
- Are the target’s assets considered “critical infrastructure”?
- Does target have outstanding litigation or competitive issues that could lead competitor to politicize CFIUS process?
- Who are the target’s non-government customers?
- Has the target effectively complied with previous CFIUS commitments?
- Does target have dominant position in market for key technologies or services?
WSJ article May 18, “Saudi Fund Snaps Up Some U.S. Stock Bargains”. Saudi Arabia’s $300 billion SWF, The Public Investment Fund, in Q1 2020 bought around $500mm equity each in Facebook, Walt Disney, Marriott, Cisco, Citigroup, Bank of America, Boeing, Carnival, Live Nation Entertainment inter-alia.
The U.S. has long been very open to receiving foreign capital in U.S. firms. Now we see a rise in protectionism, trade barriers and inward-looking sentiment seeping into policy and regulation. The number of transactions reviewed by the Committee on Foreign Investment in the United States (CFIUS) has been growing and the fear of foreign state governments buying distressed assets increases. Opposition is no longer just vocal; a lot of activity is taking place behind the scenes in Washington. Constituency interests, too are crowding out traditional policy interests. Any involvement, other than through voting of shares, in substantive decision making of key U.S. companies is likely to be scrutinized. For mergers and acquisitions post CFIUS review, the standard process could now be longer than the typical 45-60 days if the transaction is believed to be a “threat to impair” national security.
This will be especially true for direct investments, more than for portfolio investments. How different SWFs are treated depends in large measure on how transparent they are, national security concerns as well as reciprocity.