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SovereignWealthFunds16:Maquetación 1 13/2/17 11:50 Página 1 Sovereign wealth funds 2016 SovereignWealthFunds16:Maquetación 1 13/2/17 11:50 Página 2 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 3 Index 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 Sovereign wealth funds 2016 Index 3 SovereignWealthFunds16:Maquetación 1 13/2/17 11:50 Página 4 SovereignWealthFunds16:Maquetación 1 13/2/17 11:50 Página 5 Preface SovereignWealthFunds16:Maquetación 1 13/2/17 11:50 Página 6 1. Preface The world economic environment in 2016 has seen greater stability In this international scenario, the investment activity of sovereign than in 2015, as evidenced by the general reduction in volatility and funds has increased worldwide. In 2015 these funds saw over 180 risk premiums. It has also been driven by modest growth, which is transactions, up 30% since the previous year, and they maintained subject to higher uncertainty, largely as a result of the continued their dynamism in the first half of 2016 with almost 100 geopolitical tensions and the doubts generated by the capacity of transactions. This positive behavior, in line with the performance of emerging economies to correct their macroeconomic imbalances in the global cross-border mergers and acquisitions market —which in an orderly way. 2015 achieved its highest value since 2007—, is evidence that the current economic situation poses significant challenges, but also In general terms, a slowdown can be observed in the growth of offers major opportunities for international investors. developed economies and a stabilization in emerging ones. Economic growth in the United States has slowed significantly To offer an in-depth look at its trends, strategies and transactions, we compared to 2015, primarily due to a drop in investment, which present the fifth edition of the sovereign funds report, a joint project was offset by consumer behavior, the good performance of by ICEX-Invest in Spain, IE Business School and KPMG. The new employment figures and moderate inflation rates. In the European edition of this report is produced in a period that is characterized by Union the situation has been marked by a moderate economic cheaper crude than in previous years, and it analyzes the impact of recovery driven by the continuation of the expansive policies this phenomenon on hydrocarbon-dependent economies and on enacted by the European Central Bank, which provides access to their respective sovereign funds, whose investment and funding funding for households and companies. The current situation in strategies have been adapted to this new reality. Europe has been shaped by the victory of the Brexit camp in the European Union referendum in the United Kingdom, whose Another issue in the spotlight is the increased sovereign fund consequences have yet to be clearly seen. investment in non-traditional sectors such as technology, with the so-called “sovereign venture funds”, the hotel sector and the luxury Although emerging economies began their slowdown in 2015, 2016 trade. We also look at the performance of sovereign funds has seen a gradual stabilization of their economic activities, backed originating in regions that are traditionally less inclined to this type by a lower risk perception. China has entered a new normality, of vehicle, such as Europe —with the exception of Norway— and characterized by more modest growth rates of around 6%-7% and sub-Saharan Africa. The report includes a summary of the the start of the awaited transition in its growth model. However it is investments made by sovereign funds in Spain since 2011, a series not exempt from risks, including the overaccumulation of debt. of transactions that have already been discussed in depth in Economic activity continues to decline in Latin America, still previous editions. 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 Finally, this set of editions contains a detailed analysis of sovereign positive growth rates starting in 2017. The main Middle Eastern funds by geographic area in the Middle East, Asia, –especially China countries like United Arab Emirates, Qatar and Saudi Arabia saw a and Singapore–, and in Latin America and Africa; and by sector, slowdown in their economic activity and greater pressure on their including real estate, the energy and financial sectors, fiscal and current-account deficits. 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 Sovereign wealth funds 2016 Preface 6 SovereignWealthFunds16:Maquetación 1 13/2/17 11:50 Página 7 Executive Summary SovereignWealthFunds16:Maquetación 1 13/2/17 11:50 Página 8 2. Executive Summary “Keep Calm and…Carry On”: Unleashing the Potential of Sovereign Wealth Sovereign Direct Investments in 2015-16 and Pension Funds in Africa In line with general market performance, SWFs generated limited, There are 12 SWFs in operation in Africa. These funds manage flat or negative returns in some cases in 2015. Direct investments by US$154 billion, yet representing a mere 2.1% of the overall total for funds increased by 30% to 180 deals. However, total direct the SWF industry. However, Africa has huge potential: 12 of the 28 investment fell by 48% to US$47 billion. As the report emphasizes, countries worldwide considering setting up new SWFs are African. these are direct deals that are recorded in public sources. One of the There are two African SWFs in the top 25 by assets under reasons for this decrease is the growing involvement in deals management (AuM): Algeria and Libya. Sub-Saharan countries are through consortiums with expert local partners. This is particularly also gaining importance, not only because of the creation of new the case in the real estate sector. Real estate accounted for nearly funds, but also because of their governance. Botswana's Pula Fund 37% of capital invested by the funds. At the other extreme, is a clear example. It is already being studied as a success story. The investment in commodities fell to lows of less than 5%, while the Nigeria Sovereign Investment Authority is another. Its corporate financial sector was down to 12% from 17%. Geographically, the US, governance and transparency are setting the bar for other countries India, China, the UK and Singapore were the favorite destinations, with enormous natural wealth and huge capital requirements. attracting 69% of investments by funds. The doubling of deals in China and the tripling of deals in India were particularly noteworthy. This chapter also looks at the little-known African pension funds. Led by a number of South African funds, assets under management The chapter concludes by mentioning the impact of the UK's vote to for the African pension-fund industry is expected to reach US$1.1 end its membership of the European Union. The Brexit vote has not trillion by 2020. Other countries, such as Nigeria, Namibia and yet had any direct, observable effect on SWF deals, with real estate Kenya, have also set up public and private pension funds. deals in London remaining popular through to the middle of 2016. European sovereign funds: When the rainy day comes: co-investment platforms for the real economy sovereign wealth funds in an era of low oil prices In Europe, SWFs are not well represented. Admittedly, Norway has Lower-for-longer oil prices don’t represent an apocalypse for the world's largest fund - the Government Pension Fund Global - sovereign wealth funds, regardless of the headlines. Kazakhstan or with US$848 billion of AuM. While the strategies and deals of this Russia are among the most heavily affected by the crisis. SWFs in fund are well known, less is known about the activities of other these two countries have witnessed a repurposing in order to fill European funds. The funds of Ireland, Italy and France manage fiscal gaps. In addition, quasi-SWFs such as SAMA in Saudi Arabia or around US$14.1 billion, but the general public are unaware of them. SAFE in China, have brought some confusion to the discussion. They The Irish fund, for example, is undergoing a "reorientation" of its are both different in nature to SWFs, they have flexible saving and mission, now pursuing the development of the domestic economy spending rules and they were established to play the role of the and support for employment rather than investment in a global central bank in managing foreign exchange reserves. Thus, these portfolio. In Italy, the renowned CDP Equity was involved in one of redemptions, $70bn in the case of SAMA, should be seen under this the main deals when it acquired a 12.5% stake in oil company specific lenses. Saipem. In this edition, we dedicate a chapter to in-depth analysis of European SWFs, focusing on their corporate structures and In other words, the largest SWFs are not being severely influenced, investment strategies.

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