A developing trend for specialised sovereign wealth funds to seek global credit ratings could provide them with new sources of financing while testing their skills under an unaccustomed spotlight.
State-owned funds from Bahrain and Abu Dhabi are joining others in a move to get a credit rating, which enable them to tap capital markets for long-term debt for their private equity type projects, which usually take 3-5 years to yield returns.
Getting a credit rating has several implications. It allows SWFs to become more transparent, given the level of disclosure they must offer to receive a rating from international rating agencies.
It can also highlight business independence from their owners, following heavy criticism from many Western countries that suspect political, not commercial, investment priorities.
“We like debt,” Matthew Hurn, executive director of group treasury at Abu Dhabi-owned fund Mubadala, told Reuters.
“When you take debt, not only do we like the financial returns that come with leverage, it also imposes a financial discipline. When you raise third party capital, it’s almost like third party validation of the project you are doing.”
Sovereign wealth funds (SWFs), which have been set up to invest national windfall revenues for future generations, are increasingly a key player in the global markets, holding 10 percent of the world’s stock market capitalisation.
While most SWFs traditionally receive a portion of national windfall revenues to invest in multi-asset portfolio, those that run private equity vehicles typically borrow, leverage and invest in long-term projects.
So far, Singapore’s Temasek, Abu Dhabi’s Mubadala, the UAE emirate of Ras al-Khaimah’s investment arm RAKIA and Malaysia’s Khazanah Nasional have ratings.
State-owned Abu Dhabi Invest AD told Reuters last week it would be talking to major ratings agencies Moody’s, Standard & Poor’s and Fitch about getting a credit rating prior to its plan to float at least a quarter of the firm in 3-5 years.
Invest AD has one private equity fund managing $120 million and focusing on infrastructure and plans to launch another.
Bahrain’s sovereign wealth fund (SWF) Mumtalakat is also in the process of choosing a rating agency before the end of the year in a move that would pave the way for it to access capital markets.
“These entities, just as any other SWFs, operate almost at arm’s length from the government on a commercial basis. They don’t have governments raising money for them, so they have to raise it themselves,” said Andrew Rozanov, head of sovereign advisory at State Street Global Markets in London.
LEVERAGE AND RISKS
While sovereign private equity arms, just as any other SWFs, are keen to emphasise their political independence from the governments, they are most likely to get the same or similar level of credit ratings as their owners — governments.
And higher ratings open up the gate for access to cheap financing, potentially luring them to take up more leverage.
However, some sovereign funds lack the experience of using leverage or debt, given that they were originally set up with central bank money to invest in various portfolios.
“If you choose to manage third party money, it’s very important to be structured in a way that can deal with private equity investments,” said Mustafa Abdel-Wadood, managing director of Abraaj Capital, which is the Middle East’s biggest private equity.
Khuram Moqsood, managing director at Emirates Capital, said it was important to have a sustainable level of leverage, as some Dubai-owned investment firms have run into problems for taking too much leverage during the boom.
“If they borrow prudently, borrow appropriately structured money, and use that to buy cheap assets in the current environment, that’s good investing. There’s no mismatch issue, they are taking advantage of low valuations and they can get higher returns,” he said.
Moqsood is former director of the Dubai government’s investment arm Istithmar and a founding team member of state-owned Dubai International Capital where he was responsible for building private equity funds portfolio.
“If the objective of state investment companies is to generate returns for stakeholders, which are ultimately the people of the country the government is representing, I don’t see any harm in taking advantage of strong credit to make smart decisions,” he said.