A Mexican tequila maker, a Vietnamese mall operator and Indian life insurers were just some of the stockmarket debuts that enticed sovereign investors to take chunky stakes in record numbers last year, and the trend shows no sign of stalling.
In data just released, the Sovereign Wealth Fund Institute data put the number of initial public offerings (IPOs) “anchored” by SWFs at a record 26 in 2017, with some $826 million committed, up from $196.7 million in 2016.
Taking an anchor or cornerstone stake means investors commit to a hefty investment in advance of the listing, de-risking the process.
The upsurge in interest from SWFs, which hold some $6 trillion in assets globally, could encourage more emerging market companies to list after a strong 2017 in which the Asia-Pacific dominated global activity by both number of deals and proceeds according to EY.
Funding database PitchBook, which also tracks the market, identified SWF participation in a record 28 IPOs in 2017, worth some $10.78 billion in total.
“There’s no reason to think this will reverse or slow down,” said Doug Trafelet, managing director at PitchBook. “But these are big chunky deals, so they have to find the right opportunities to invest - they won’t do so blindly.”
This year Saudi Aramco will list in what is expected to be the world’s biggest initial public offering (IPO). China is building a consortium with its SWF CIC and state-owned oil giants to act as a cornerstone investor.
While Saudi Aramco won’t struggle to win interest, lower-profile emerging market companies are keen to bring SWFs on board to raise their profile and provide reassurance to other investors. SWFs are also seen as unlikely to flip the stock for a quick profit.
For the fund, it’s a way of getting a sizeable stake without paying over the odds, as fierce competition in private equity markets has seen deal values balloon over the last two years.
“Nowadays it’s a little bit more difficult to deploy money, so if you can take a 5-10 percent stake in a company without driving up prices, then that’s interesting for an institutional investor,” said Markus Massi, a senior partner at The Boston Consulting Group.
Abu Dhabi Investment Authority (ADIA), Singapore’s GIC and the Kuwait Investment Authority (KIA) were among the most active in fast-growing emerging markets such as India last year, PitchBook data showed.
India enjoyed a record year for IPOs with some $11.5 billion raised, partly driven by big insurer listings. These were attractive for SWFs looking to buy into long-term growth, as insurance coverage penetration is low but affordability is improving.
“It makes sense for a long-term investor like a SWF to invest into the growing middle classes in emerging markets, which are demanding hospitals, insurance, real estate and consumer goods,” said Javier Capape, a director at the Sovereign Wealth Lab research center in Madrid. “And India is a country with a huge population.”
Insurer SBI Life attracted ADIA, GIC and KIA as anchors in India’s first billion dollar IPO in seven years. It was swiftly followed by HDFC Life, which pulled in ADIA, Singapore’s state-owned investment company Temasek and KIA among others.
Nikhil Salvi, a senior manager at Aranca, an investment research and analytics firm, said the insurer debuts were attractive because the issuance was large. “From the SWF’s point of view, one or two issues can set them up for the year – they don’t have to chase multiple small deals.”
Consumer plays in other emerging markets also proved popular, with Temasek anchoring the IPO of Mexican tequila maker Jose Cuervo through its subsidiary Aranda and participating in the IPO of Turkish jeans-maker Mavi. Meanwhile GIC anchored Vietnam’s biggest IPO, mall operator Vincom Retail.
For Norway’s $1 trillion SWF, which cannot take stakes in unlisted companies, anchoring an IPO represents the earliest opportunity to get in. It took part in well over 100 IPOs in the first nine months of 2017, including anchoring Indian cable operator GTPL Hathway.
“The fund’s long-term strategy makes us well suited to play the role of anchor investor, and it’s something we do from time to time,” a spokesperson for Norges Bank Investment Management (NBIM), which manages the portfolio, told Reuters.
With some IPOs oversubscribed, the popularity of becoming an anchor investor or even entering into a pre-IPO deal is growing. It allows investors to secure a sizeable stake at an attractive price, ahead of the rush.
BCG’s Massi said institutional investors may be offered the position of anchor shortly before the IPO at a fixed rate to stabilize prices. Some are even invited to pre-IPO deals with discounts of around 5-15 percent.
Having a marquee name give their seal of approval by taking an anchor stake boosts the company’s credibility and gives other investors comfort.
“It demonstrates that we’ve carried out extensive due diligence on the company and that we see a strong investment case,” Eugene O‘Callaghan, director of Ireland’s Strategic Investment Fund (ISIF), told Reuters.
ISIF and the Russian Direct Investment Fund (RDIF) focus on home-grown IPOs to help build out the local market. O‘Callaghan said ISIF’s backing of Greencoat Renewables, an energy company, life sciences company Malin and venture capital firm Draper Esprit had acted as a catalyst for other investors to take part.
“The market for attracting capital from international investors is intense - having ISIF on board can make it somewhat easier for companies to attract capital,” he said.