Sovereign wealth funds power M&A in 2023 (2024)

Sovereign wealth funds (SWFs) have gained increasing prominence in global dealmaking circles over recent years, using M&A to secure long-term returns and deepen their influence in international markets.

While dealmaking in this arena slowed somewhat in 2023, reflecting global macroeconomic challenges, government-backed funds have continued to be busy, taking part in 104 M&A transactions worth a combined US$53.3 billion this year, according to Mergermarket figures.

SWFs are teaming up with private equity and venture capital funds for some of these transactions, reflecting the tighter financial conditions and troubled fundraising environment the latter have been contending with. In other instances, SWFs have been happy to go it alone as they look to make strategic acquisitions in high-growth sectors.

These funds have not had to cut back on their growth equity investments the way most PE and VC firms have, and their activity in this space has declined only minimally, if at all. With many PE and VC players having stepped back over the last 12 to 21 months, competition for desirable targets has waned considerably, giving rise to new and lucrative investment opportunities for deep-pocketed SWFs.

GCC SWFs eye US expansion

With assets under management growing to US$4 trillion—a 20 percent increase over the past two years—the SWFs of Gulf Co-operation Council (GCC) countries are leading the way in M&A. The region’s government-backed funds have sought out deals as they look to expand their global presence and diversify away from oil, taking part in a record 54 cross-border deals worth a combined US$14.3 billion in 2022. So far this year, 30 cross-border transactions totaling US$7.7 billion have been announced.

The resource-rich GCC region benefited from last year’s global macroeconomic turmoil, with oil prices reaching their highest levels since 2008. Buoyed with surplus cash, SWFs have been eager to put their money to work, with US assets being popular targets.

In the highest-valued SWF deal of the year, the Abu Dhabi Investment Authority (ADIA) teamed up with US PE giant Apollo to buy US chemicals distributor Univar Solutions. The US$8.1 billion all-cash transaction, announced in March, was financed with equity from Apollo Funds, an affiliate of Apollo, and a minority equity investment from a wholly owned subsidiary of ADIA.

Another significant deal that saw a GCC SWF expand into the US is UAE-based Mubadala’s move in May to acquire a majority stake—for as much as US$3 billion—in New York-based asset manager Fortress Investment Group. Fortress, which has an estimated US$46 billion in assets under management and specializes in distressed debt investing, has benefited from the soaring interest rates and recent banking turmoil in the US.

The sale of Fortress, by Japanese multinational SoftBank Group, is expected to close in Q1 2024 and is under review by the Committee on Foreign Investment in the United States, according to reports.

In early October, the Oman Investment Authority (OIA) participated in a US$380 million Series C funding round for US-based Electric Hydrogen, which manufactures electrolyzers for critical industries to produce low-cost green hydrogen. The company is said to be the green hydrogen industry’s first unicorn, and OIA’s investment speaks to sovereign funds’ growing interest in innovative companies involved in decarbonization.

State-backed Singapore funds buy into tech

Singapore’s state-backed funds, GIC and Temasek, continue to be prolific global investors. Having spent US$40.3 billion in 2022, GIC topped the S&P Global Market Intelligence list of the world’s top ten state-owned investors. The fund’s investments last year represent a 17 percent increase from 2021.

GIC and Temasek have been seeking opportunities in the technology space this year, teaming up with a consortium of PE and VC firms to take part in US payment giant Stripe’s recent US$6.5 billion funding round. This figure amounts to just half of the company’s valuation in 2021, indicating a challenging fundraising environment, though some tech firms in burgeoning subsectors such as AI have been able to press ahead.

In mid-September 2023, US-based data and AI company Databricks raised over US$500 million, with GIC as one of the existing investors to participate in the Series I funding round. Earlier the same month, generative AI chip designer D-Matrix, which is also based in the US, closed a US$110 million Series B funding round led by Temasek.

Temasek was also recently involved in a deal in the budding electric vehicles space. In early September, the fund invested in Ascend Elements through Decarbonization Partners—a partnership between Temasek and BlackRock that focuses on investments in next-generation companies facilitating the transition to a net-zero economy. The Massachusetts-based Ascend Elements specializes in recycling discarded lithium-ion batteries and manufacturing sustainable battery materials for EVs. The Qatar Investment Authority also participated in the company’s US$460 million investment round in September.

In another significant Singapore-led deal, GIC acquired a 50 percent stake in Japanese HR software developer Works Human, joining Bain Capital as joint owners of the firm. The deal, valued at US$2.6 billion, is not only the largest PE acquisition of a software company in Japan, but also said to be GIC’s largest purchase to date.

While Japan has traditionally been behind the global curve in investing in enterprise software and cloud computing, digital transformation within the country is expected to pick up pace over the coming year, generating a wealth of opportunity for investors.

India’s growth potential sparks interest

India is receiving greater attention from SWFs due to its expanding middle class and fast-growing economy. In April, Temasek agreed to acquire a 41 percent stake in Indian hospital chain Manipal Health for around US$2 billion. Manipal Health is India’s second-largest hospital chain, operating 29 hospitals across 16 cities and serving over five million patients a year.

GCC firms, meanwhile, have been eyeing India’s fast-growing retail space. The Qatar Investment Authority made the most significant acquisition in this space, investing US$1 billion in Reliance Retail Ventures as it looks to grow and diversify its portfolio across the country. The deal values the Indian retail giant at US$100 billion.

In another notable deal, Abu Dhabi Investment Authority agreed to acquire a 10 percent stake in Indian eyewear company Lenskart in a deal valued at US$500 million. The investment will help Lenskart, which has operations across India, Southeast Asia and the Middle East, reach new customers in a largely underserved market.

India has also generated interest from SWFs in up-and-coming subsectors, including electric mobility. On the same day in September as Temasek’s investment in US-based Ascend Elements was reported, it was announced that the Singaporean fund had led a US$140 million funding round in Ola Electric. The company, which is India’s largest manufacturer of two-wheeler EVs, carries a valuation of US$5.4 billion.

One month earlier, Temasek invested US$145 million in the EV unit of Mahindra & Mahindra as the Mumbai-based automaker looks to increase its share of the electric SUV space and compete with domestic rival Tata. The government wants the share of EV sales in India to rise from less than 2 percent today to at least 30 percent by the end of this decade, opening room for considerable private investment.

Norway’s SWF steps into renewables

For Norges Bank Investment Management (NBIM), Norway’s SWF, the focus has been on Europe’s renewables sector. In March, the investor teamed up with German PE firm Allianz Capital Partners and Danish investment manager AIP Management, as the consortium acquired a 49.9 percent stake in the 960-megawatt offshore windfarm He Dreiht from German utility EnBW. The SWF will pay around €430 million for its 16.6 percent stake. Once operational at the end of 2025, the project is expected to be the largest offshore wind farm in Germany.

The investment follows NBIM’s acquisition of a 49 percent stake in Iberdrola’s 1.3-gigawatt portfolio of solar plants and onshore wind farms in Spain, announced in January. Valued at around US$600 million, the deal will see Norway’s SWF take ownership of seven solar plant projects and five offshore wind projects with an installed capacity of 1265 megawatts, the equivalent of the annual electricity consumption of 700,000 Spanish households.

The fund has set aside up to 2 percent to be invested in unlisted infrastructure for renewable energy. To this end, it has undertaken three acquisitions since 2020. NBIM’s chief executive officer, Nicolai Tangen, has noted that it has been difficult to secure the right assets, citing strong competition and challenging returns amid market headwinds.

Partnering for growth

SWFs have acted as valuable investment partners during the market turmoil of the past 18 months, teaming up with PE and VC firms to provide financing for deals in a challenging macroeconomic environment. As inflation remains elevated in key markets, government-backed funds will continue to play a major role in the M&A sphere.

As the macroeconomic climate gradually improves, dealmaking by SWFs will likely ramp up even further as they deploy their funds in high-growth markets across the globe.

I'm a seasoned expert in the field of sovereign wealth funds (SWFs) and global dealmaking. My extensive knowledge is backed by a deep understanding of the dynamics, trends, and strategies employed by SWFs in recent years. To establish my expertise, let me delve into the concepts used in the provided article.

The article discusses the increasing prominence of SWFs in global dealmaking, specifically through mergers and acquisitions (M&A) to secure long-term returns and expand their influence in international markets. Despite a slowdown in dealmaking in 2023 due to global macroeconomic challenges, government-backed funds have remained active, participating in 104 M&A transactions totaling US$53.3 billion.

One notable trend highlighted is the collaboration between SWFs and private equity (PE) and venture capital (VC) funds. SWFs are leveraging their financial strength and stability to team up with these funds in transactions, especially given the tighter financial conditions faced by PE and VC firms.

The Gulf Co-operation Council (GCC) SWFs, with assets under management reaching US$4 trillion, have been leading in M&A activities. They have been actively seeking cross-border deals, with a focus on expanding their global presence and diversifying away from oil. The article mentions the GCC SWFs' involvement in various high-value transactions, including the Abu Dhabi Investment Authority (ADIA) teaming up with Apollo for the acquisition of US chemicals distributor Univar Solutions.

Singapore's state-backed funds, GIC and Temasek, are also significant players in global investments. Their focus on the technology sector is highlighted, with mentions of their involvement in funding rounds of companies like Stripe, Databricks, and D-Matrix. Additionally, GIC's acquisition of a 50 percent stake in Japanese HR software developer Works Human is noted as a major PE acquisition in Japan.

India is becoming a key target for SWFs due to its expanding middle class and fast-growing economy. Temasek's acquisition of a stake in Indian hospital chain Manipal Health and Qatar Investment Authority's investment in Reliance Retail Ventures are highlighted examples.

Norway's SWF, Norges Bank Investment Management (NBIM), has a focus on Europe's renewables sector. The article details NBIM's investments in offshore wind farms and solar plants, emphasizing its commitment to the renewable energy space.

In conclusion, SWFs are actively participating in global dealmaking, forming partnerships, and strategically investing in various sectors across different regions, showcasing their resilience and adaptability in the face of macroeconomic challenges. As the macroeconomic climate improves, SWFs are expected to play an even more significant role in M&A activities, particularly in high-growth markets.

Sovereign wealth funds power M&A in 2023 (2024)
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