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Sovereign funds increasingly do their own private equity deals

Some of the world's biggest sovereign wealth funds are increasingly striking their own private equity deals rather than relying on external fund managers, in a drive to cut costs and gain more control. With some $6.5 trillion in assets, sovereign investors already account for 19 percent of capital committed to private equity, according to data from research firm Preqin. But mega-funds such as the Abu Dhabi Investment Authority (ADIA), Saudi Arabia's Public Investment Fund (PIF) and Singapore's GIC, are hiring specialists to find or vet deals - enabling them to negotiate with private equity firms from a position of strength or to go it alone. In 2012 sovereign investors participated in just 77 direct private equity deals. By 2016, that had risen to 137, Thomson Reuters data shows. Deal value more than trebled to $45.2 billion from $14.8 billion. For target companies it could mean longer-term investors with deeper pockets. Private equity funds typically look to sell within three to five years, but sovereign funds often an take investment view stretching over decades. The trend is driven partly by a need to work assets harder as returns shrink, and partly by a conviction that only through originating or structuring deals themselves can sovereign funds get what they want. "It's a natural evolution. If you do it yourself, you not only reduce the fees, you get greater control over the pricing of the deal," said Babak Nikravesh, a San Francisco-based partner at law firm Hogan Lovells, who represents sovereign investors. This allows funds to better protect their interests when markets go south. One sovereign investor who spoke on condition of anonymity said that during the global financial crisis, some external funds behaved irrationally. "They had different liability streams than us, so they were under pressure to sell at a time when they should have been investing more," the source said. "Going more direct means you don't have to worry about whether your interests are aligned with other investors'."

Some funds still rely on private equity funds to find deals and commit capital on their behalf, but not many can take the amount of capital the sovereign investors want to commit. There is also growing disenchantment with the industry's traditional 2 percent management fee and 20 percent performance fee model. A Preqin survey found 39 percent of institutional investors polled in December 2016 cited fees as one of the key challenges facing the industry, up from 19 percent in 2015."The fees are very high and swallow a large chunk of the returns, so there is a big desire to look at how can they do this more efficiently," said Elliot Hentov, head of policy and research in the official institutions group at State Street Global Advisors. For the oil-backed funds, low oil prices mean the days of plenty are over, while lackluster returns from publicly listed assets mean more funds are missing targets. As a result, sovereign funds may be under pressure to manage their portfolios more actively.

HIRING TALENT To this end, Saudi's PIF signaled a switch to a higher- risk, more-active strategy when it purchased a $3.5 billion stake in Uber last year. It recruited Kevin O'Donnell from Kaiser Permanente as head of global private equity and is the lead investment partner in a technology fund jointly established with Japan's Softbank Group. ADIA, estimated by the SWF Institute to have some $792 billion in assets, has added people with direct transaction experience and hired regional and sector specialists in its private equity department. This now has around 40 investment professionals headed by ex-GE executive Sherwood Dodge.

The aim is to participate earlier in originating, valuing and structuring deals alongside private equity firms. Together with TDR Capital, ADIA was one of the largest investors in the acquisition of LeasePlan Corp. And GIC, which has been at the forefront of the direct investment trend, now has boots on the ground in San Francisco, New York and London. Local offices help investors source proprietary deals and avoid going through auctions, keeping costs down. GIC has landed a string of deals in the past year, partnering with private equity firm Golden Gate Capital to take U.S. telecoms group Neustar private and buying a stake in digital maps company HERE, to name two. Sovereign funds are also partnering more with their each other, rather than relying on private equity firms. The Russian Direct Investment Fund (RDIF) has joint investment vehicles with China, Kuwait, Qatar, France and Korea, among others."When we invest with sovereign wealth partners, we help the business and we can generate significant positive returns," said its chief executive, Kirill Dmitriev. He cited a co-investment in French glass manufacturer ARC International with Chinese and Middle Eastern partners, which has helped ARC grow in China, the Middle East and Russia. But for the industry as a whole, it remains difficult to tell whether going direct is more profitable than investing via third parties. "In theory, you're saving money on management fees, but it depends how good you are at choosing the investments," said Nikravesh at Hogan Lovells.

Wall Street set to open lower as oil prices fall

U.S. stocks were set to open lower on Friday as a drop in oil prices weighed and investors assessed if the "Trump rally" had gone too far too soon. Oil prices were down about 1 percent after U.S. crude inventories rose for a seventh week, showing the market is still struggling to ease oversupply. [O/R]President Donald Trump's promises of tax reforms, reduced regulations and increased infrastructure spending has helped spur equities to record highs. The S&P 500 is up more than 10 percent and at all-time highs since the election. The Dow notched a record high for a tenth straight session on Thursday, its longest such streak since 1987. But, with Trump giving scant detail on his plans – including on one on Thursday to bring millions of jobs back to the United States – those gains have come with the markets trading in a tight range. The benchmark S&P 500 index has not registered a move of at least one percent in either direction since Dec. 7.

"Investors have embraced this oversimplified fundamental story of Trump's impact on the financial market and you're starting to see that narrative unravel a bit," said Aaron Clark, portfolio manager at GW&K Investment Management."The market will come to realize that a lot of these pro-growth policies might get pushed to the end of this year or next year and you might have this buyer's remorse for the market."U.S. Treasury Secretary Steven Mnuchin said on Thursday that any policy steps would probably have only a limited impact this year. Investor will likely get more clarity on Trump's plan on Tuesday, when he addresses a joint session of Congress. Dow e-minis 1YMc1 were down 73 points, or 0.35 percent, with 28,671 contracts changing hands at 8:31 a.m. ET (1331 GMT).

S&P 500 e-minis ESc1 were down 10.5 points, or 0.44 percent, with 189,563 contracts traded. Nasdaq 100 e-minis NQc1 were down 29.25 points, or 0.55 percent, on volume of 30,953 contracts. Shares of Hewlett Packard Enterprise (HPE. N) fell 8.35 percent to $22.60 in premarket trading after the company cut its full-year profit forecast.

J. C. Penney reports comp sales drop, to shut 130-140 stores Department store operator J. C. Penney Co Inc said on Friday it would close 130-140 stores over the next few months, and reported a bigger-than-expected drop in same-store sales for the holiday quarter.

Exclusive: Trump says Republican border tax could boost U.S. jobs WASHINGTON U.S. President Donald Trump on Thursday spoke positively about a border adjustment tax being pushed by Republicans in Congress as a way to boost exports, but he did not specifically endorse the proposal.

On visit to London, Peugeot boss offers reassuring words on Vauxhall plants LONDON The head of French carmaker PSA played down the threat to British factories when he discussed the potential takeover of GM's European operations with union officials and politicians in London on Friday.