In this 'Investment Environment Report' Mike Frith, Manager, Economics, explains the global investment environment and its implications for the NZ Super Fund.

Watch a short video of Mike Frith discussing the investment environment.

Economic and market backdrop

Economic fundamentals remain sound, underpinned by strong momentum, favourable market sentiment, supportive financial conditions, and expansionary fiscal policy in the United States. Together, these support corporate earnings and equity markets. However, it is not all one-way traffic. The strong performance of equity markets through 2016 and 2017 has not been sustained into 2018 thus far.   Central Bank liquidity is being slowly withdrawn and inflation expectations and interest rates have increased. These are all normal late-cycle market developments, although give cause for market participants to reassess expectations for corporate earnings growth. In addition, market volatility has increased due to global trade tensions and European political outcomes, which increase market uncertainty around the global outlook.

The story of Abraaj, the largest private equity house in the Middle East, is perhaps the story of Dubai. How, after excessive hubris, the private equity firm was brought down to size. This seems to be happening to Dubai itself. Just read the article: "Dubai is melting like a glacier in the desert". https://www.luciadore.com/blog/dubai-is-melting-like-a-glacier-in-the-desert

This article in Bloomberg's Business Week explains what happened. https://www.bloomberg.com/news/articles/2018-06

With the potential collapse of Arif Naqvi’s Abraaj Group comes trouble for the United Arab Emirates’ nascent financial industry. ByTracy Alloway, Dinesh Nair, and Matthew MartinJune 14, 2018Pakistani financier Arif Naqvi shared a stage with Bill Gates at the World Economic Forum in Davos, Switzerland, in January for a panel on global health. Even alongside the billionaire philanthropist and two medical professionals, Naqvi stood out for his enthusiasm: “Like Bill, I’m an optimist,” he said. “So I believe the glass is half full, very firmly. I don’t believe it’s half empty.”Unbeknownst to the audience, four investors in Naqvi’s Dubai-based $1 billion health-care fund, including the Bill & Melinda Gates Foundation, had recruited forensic accountants to investigate where their money had gone. The existence of the inquiry was first reported less than a week later by the Wall Street Journal. A subsequent review by Deloitte LLP, made at the request of Abraaj Group, Naqvi’s holding company, found it had dipped into money reserved for the health-care fund as well as a private equity fund, according to a draft summary sent to creditors and seen by Bloomberg News. Abraaj’s senior managers shared “collective responsibility” for “lapses in governance and control,” Deloitte said.In March, Naqvi halted fresh investments and released investors from commitments to a new fund, what would have been Abraaj’s largest to date. Later that month, the company began slashing jobs and downsizing its business to better prepare it for “sustainable growth,” according to a statement.

Abraaj was still pushing creditors to agree to a standstill on debt payments as of mid-June. Now it’s considering filing for provisional liquidation ahead of a June 29 court hearing on a petition from Kuwait’s Public Institution for Social Security seeking to dissolve its holdings, according to people with knowledge of goings-on inside the company.

“We should have reacted to the kind of questions that investors were asking, arguably, in a different way,” Naqvi says. “The fact that we didn’t, the fact that we took a particular perspective and stuck to that is in hindsight not the smartest thing we could have done.”

“Private equity is still a nascent industry in the region, so it’s a shame to see the biggest name falling apart”

So I see that Abraaj Group, previously the largest private equity firm in the Middle East, is struggling to keep afloat, amid allegations that some of the funds have been mismanaged.

This is a turnaround, especially from the times when it was sponsoring Art Dubai. Indeed it was sponsor of the main art prize, to support contemporary artists of the Middle East, North Africa and South Asia.  

Now, it appears not to have the prestige that it once did.

 I was working on Khaleej Times, from where the article below came, and then on mergermarket, part of the Financial Times Group, and was covering a great deal on private equity. And here’s an article from Arabian Business that explains the background.

 Filed on July 5, 2018 | Last updated on July 5, 2018 at 04.09 pm (Khaleej Times)

Real estate is a favoured asset by many private equity firms, companies more generally and individuals. Gaw Capital is no exception. This is its latest release on a deal it's just done buying 17 shopping centres.

Gaw Capital Partners completed the deal to acquire a retail portfolio comprising 17 shopping centres in Hong Kong from Link REIT

 Gaw Capital Partners today announced that the firm, through a fund under its management, and consortium partners, including Goldman Sachs, have completed the deal to acquire a retail portfolio comprising 17 shopping centres in Hong Kong from Link Real Estate Investment Trust at HK$ 23 billion according to the agreement signed on 28th November 2017.

 Following the deal completion, Gaw Capital Partners’ asset management team will be responsible for overseeing the operation of the 17 shopping malls and car parks from today. The firm will ensure a smooth handover to maintain the service quality.

 Goodwin Gaw, Chairman and Managing Principal of Gaw Capital Partners, said, “We are delighted to complete the deal today. We will utilise our experience and adopt a visionary and creative approach to operate the malls, delivering quality service and refreshing them into modern community hubs for local residents.”

Today’s announcement that the New Zealand Reserve Bank has appointed a new governor came as a surprise not because it was unexpected but because of whom it is. It is the CEO of New Zealand Superannuation Fund, Adrian Orr, who, by all accounts, has done a great job. I suppose I never imagined him moving.

 It seems that I’ve had associations with the last two governors of the Reserve Bank, and of that I’m surprised. I’ve interviewed Adrian Orr, as CEO of the Super Fund, when I’ve been working with the Private Equity International, then the outgoing Governor, Graeme Wheeler, was my former boss at Treasury.

Here’s an article about Adrian Orr’s appointment.

NZ Super Fund CEO Adrian Orr has resigned to take up the position of Governor of the Reserve Bank of New Zealand.

Catherine Savage, Chair of the Guardians of New Zealand Superannuation, the Crown entity that manages the NZ Super Fund, thanked Mr Orr for his service.

Sexual harassment is becoming increasingly real. Just look at #metoo to see how many woman have been affected.

A few years ago I was working in the City of London and I went to see a lawyer. Why? Because i was being paid less than a man for exctly the same work.

I was told by the lawyer that although i has a definite case if I proceeded, I would never get a job in the City again.

This article is the first in a two-part series that explores some of the issues surrounding sexual harassment.

The year was 1980.  It was my first job in private industry and I was working in a division of a company that would later become part of what is now Verizon.  To make a long story short, I was asked to develop a communications program in response to an issue of sexual harassment of a female employee in our southern Georgia division location.  The president of the division said he never wanted what happened to her to happen again.

News of the private equity firm, Gaw Capital Partners, keeps coming. But I guess that's what happens in the fast growing Chinese market.  And real estate is often the asset of choice.

November 28, 2017, Hong Kong – Real estate private equity firm Gaw Capital Partners today announced that the firm, through a fund under its management, and consortium partners, including Goldman Sachs, have won a bid to acquire a retail portfolio comprising 17 shopping centers in Hong Kong from Link Asset Management Limited at HK$ 23 billion and an average price of around HK$7,922 per sq. ft. excluding parking.

The portfolio is comprised of a number of strategically-located properties across Kowloon and the New Territories that sit in the heart of densely-populated communities and in close proximity to MTR stations. The GFA of the portfolio totals 2.2 million sq. ft. of prime retail space and comes with over 8,000 parking spaces that are connected to highly-convenient transport links. Their excellent accessibility and holistic shopping environments have made them attractive destinations for retailers and hubs of community life for residents.

The shopping centers included in the portfolio are: Cheung Hang Shopping Centre, Kai Yip Commercial Centre, Kam Tai Shopping Centre, Lei Cheng Uk Shopping Centre, On Ting Commercial Complex, Shek Lei Shopping Centre I & II, Tai Wo Hau Commercial Centre, Tsz Ching Shopping Centre, Yau Oi Commercial Centre and Yung Shing Shopping Centre, Kwai Fong Plaza, Kwai Shing East Shopping Centre, Lai Kok Shopping Centre, Lee On Shopping Centre, Retail and Car Park within Shun Tin Estate, Tsing Yi Commercial Complex and Lions Rise Mall.

Goodwin Gaw, Chairman and Managing Principal of Gaw Capital Partners, said, “We and our partners strongly believe in Hong Kong’s future, and believe these malls, which Link REIT has done an excellent job in upgrading and maintaining, will continue to serve important functions in the community. We hope to utilize our experience to evolve these malls into refreshed and renewed centers of local life. To be successful, we will need the support of the community, and we look forward to working with them to understand the gaps that could be filled and how we can support them to make their neighborhoods better homes.

Florentia Mall, China

November 21, 2017, Hong Kong - Real estate private equity firm Gaw Capital Partners acted as co-capital sponsor in the successful first close of US$550 million for the ERES APAC II – China Outlet Mall Fund.

This fund is backed by Allianz, Gaw Capital Partners, and TIAA General Account, a Frankfurt-based German asset management company, among others.  Allianz is the largest investor with a 30% stake in the platform, TH Real Estate is the fund manager, RDM is the asset manager while Gaw Capital acted as co-capital sponsor and advisor, as well as a substantial investor (through its Gateway Real Estate Fund V), to the fund.

 ERES APAC II is seeded by two leading designer malls, Florentia Village Jingjin in the city of Wuqing (located near Beijing and Tianjin) and Florentia Village Shanghai.  The developer and seller of the two seed assets is a joint venture between Gaw Capital’s Gateway Real Estate Fund III, RDM, Waitex Group, and another institutional investor. RDM is part of Fingen Group of Italy and has built up a strong track record in operating premium outlet malls in Europe. In 2012, Gaw Capital invested in this venture which developed the six Florentia Village outlets in Jingjin, Shanghai, Guangzhou, Wuhan, Chengdu, and Hong Kong.

Maori Iwi have come together to form a NZD 100 million fund, so that they can each make more and better investments. Here is the press release.

Indicative commitments of up to $100 million have been made by iwi, pan-tribal organisations, Māori land trusts and Māori incorporations to a proposed Iwi/Māori Direct Investment Fund.

The Fund, which will help the Māori groups further diversify their portfolios and access larger scale direct investment opportunities than they can achieve on an individual basis, will see the groups pooling capital for collective investments. Iwi and Māori groups have an increasing economic base, with potential to grow land, capability and capital. 

Over 35 Māori groups have made indicative commitments to the Fund and are now working together to finalise legal documentation and internal governance approvals.  Organisations that have made indicative commitments to the Fund include various Tūwharetoa organisations aggregating together as a single investor, Te Tumu Paeroa, and various Taranaki iwi entities.

"The Paradise Papers" and Appleby, the law firm at the centre of the scandal, have hit the headlines recently. This press release explains have the NZ Superannuation Fund has fared.

The Guardians of New Zealand Superannuation, the manager of the NZ Super Fund, confirmed today that it had previously used Appleby, the law firm at the centre of the 'Paradise Papers' document release.

The Guardians has used Appleby to assist it with local Bermudan law advice in respect of re-insurance contracts and establishment of separate accounts to hold re-insurance products as part of the Fund's natural catastrophe reinsurance mandates with external investment managers Elementum Advisers (2009/11) and Leadenhall (2013).

At this point Appleby is unable to confirm whether or not there has been a security breach of the Guardians' documents. However, given the nature of the work Appleby undertook, the Guardians is confident there will be no negative commercial implications for the Fund from the potential breach.

Based on information from the IRD, the Guardians also understands that a wholly owned Fund subsidiary, "NZSF Private Equity Investments (No. 1) Limited", is mentioned in the papers as a Limited Partner of Coller International Partners V (CIP V). Appleby was advising Coller in respect of this transaction, not the Guardians.

For anyone interested in mergers and acquisitions (M&A), here is a good round up of what's going on. I followed the ups and downs of the M&A market for years, when I was head of a newswire service, Mergermarket, looking at M&A in the middle East. Ernst & Young produce a good round up every year. 

The digital transformation race and rising economic confidence to drive more M&A

- Near-record number of companies (56%) plan to acquire in the next 12 months

- 51% of executives expecting increased M&A competition see PE as biggest competitive threat  

The New Zealand Superannuation Fund is performing remarkably well, at 14.6 per cent, in a low interest environment, globally. As outlined in its annual report the fund has invested heavily in New Zealand, which is not a large market. This report, and foreword by Adrian Orr, CEO, explains the basis of the fund's performance.

Kia ora,

I'm delighted to present the 2017 Annual Report of the Guardians of New Zealand Superannuation and the New Zealand Superannuation Fund.

This year's Annual Report has the theme "Invested in New Zealand and the world – Kaingākau ana ki Aotearoa me te ao".

The Fund is a significant investor in New Zealand with nearly $5 billion invested locally. We also invest around the world in order to diversify the Fund and get the best long-term investment returns for New Zealanders.

I've covered a lot of private equity over the years, especially in the Middle East where I was based for 8.5 years. In New Zealand, the private equity market is dominated by a few companies and the country's sovereign wealth fund, NZ Super, has a key place in particular. It has performed well. Here are the latest results.

The NZ Super Fund has enjoyed one of its best annual performances yet, turning in a 20.7% (after costs, before NZ tax) return for the 12 months to 30 June 2017. It finished the year at $35 billion, up $5 billion on the year before.

Chair Catherine Savage said: "The Fund is generating world class returns and creating significant wealth for New Zealanders on a sustained basis. It should not, however, be measured on its short-term returns. We are here to create long-term value for New Zealand taxpayers.  The Fund has now returned 10.2% p.a., more than double the cost to the Government of contributing to it,*  over a period of nearly 14 years."

The 20.7% annual result reflects a sustained rally in global equity markets, and resulted in the Fund paying a record high $1.2 billion in New Zealand income tax for the financial year.

Ms Savage said the Fund's active investment strategies had performed strongly during the year, adding value of 4.4% ($1.3 billion) over the Fund's passive benchmark. "Over the long term we expect to beat the passive benchmark by 1% p.a., so this has been an excellent year."

This press release came across my desk today. It shows that the NZ Super Fund is reducing its investment in firms emitting greenhouse gases. Perhaps other funds around the world will follow.

NZ Super Fund shifts passive equities to low-carbon

I’ve spent a lot of time following, and writing, about private equity. It was especially important to do this when I was focused on mergers and acquisitions in the Middle East. Now that I’m back in New Zealand I follow what is going on here, although the market is necessarily much smaller. Below is an update on New Zealand’s Super Fund, NZ’s sovereign wealth fund, and how it has performed on the world stage.

Australia’s Fairfax, which controls many of the newspapers across New Zealand, may have had its proposed merger with New Zealand Media and Entertainment (NZME) rejected but it appears to have other options. One of them is to be taken over either by New York-based private equity firm Hellman & Friedman (H&F) or by a consortium led by TPG.

Merger and acquisition newswire service, Mergermarket (which was then owned by the Financial Times Group) was sold in 2013 to private equity firm, BC Parners, for GBP 382 million. (Since then another sale is being sought, according to reports).

Private equity in New Zealand is lead by the country's sovereign wealth fund. The annual SWF conference was held in Auckland last November. Here is a link. IFSWF Conference: where should sovereign wealth funds invest?

The New Zealand Superannuation Fund has achieved a AAA rating in its listing of top international asset managers in the most recent Global Climate Index report, and ranks at 15, in its list of top international} asset managers.

Gaw Capital Partners Successfully Closes on US$ 1.3 Billion for Gateway Real Estate Fund V

Hong Kong fund Gaw Capital has raised yet more money for its latest fund. Here's what the company says.

From time to time I receive press releases from private equity firms since I worked in this sector for so long, in Asia/Pacific and in the Middle East. Here is the latest release from Gaw Capital Partners, a Chinese private equity firm that specialises in real estate.

I've been asked a lot recently whether I've covered private equity. The answer is a definitive "yes". For the six months ending February 2016 I was Asia/Pacific correspondent for Private Equity International, a London-based publication. Here's the link with a couple of articles as well. There's a paywall so it might be difficult to access all the material.