Brexit stalls investments by sovereign wealth funds in Britain

By Tom Arnold

LONDON (Reuters) – Britain has long been a favored playground for sovereign wealth funds from around the world to snap up glitzy skyscrapers, banking stakes and posh department stores.

However, uncertainty over Britain’s tortuous exit from the European Union has put many new investments on ice, say sources close to the funds.

Last year, there was a sharp drop in investments by wealth funds via private equity, with deals falling more than two-thirds from 2017 to $3.82 billion, according to PitchBook, a data and research firm.

“A lot of funds are simply not pursuing deals (due to Brexit), while they wait for certainty,” said Tihir Sarkar, London-based partner at Cleary Gottlieb, which counts several prominent sovereign funds as clients.

Brexit has now been postponed until Oct 31 so parliament can agree terms. While that prevents Britain from crashing out without a transition period in place, it also prolongs political and economic uncertainty.

At least Britain managed to draw a vote of confidence in February when Norway’s $1 trillion sovereign wealth fund, the world’s biggest, said it planned to keep increasing UK investments.

Most large sovereign funds contacted by Reuters did not respond or declined to provide comment, but several said their commitment to Britain remained unchanged while a couple acknowledged a pause in investments.

Abu Dhabi’s Mubadala Investment, which has its largest exposure to UK real estate and financial services and whose unit Masdar owns 20 percent of the London Array offshore wind farm, has not made any changes to its investment strategy or portfolio in anticipation of Brexit, spokesman Brian Lott said.

“Our long-term strategy is opportunistic, so we will weigh the investment climate either way,” he said.

A spokesperson for the Hong Kong Monetary Authority, which has investment portfolio assets estimated at $509.4 billion, said it was watching the Brexit situation and “keeps under constant review the need to adjust the Exchange Fund’s investment strategies accordingly.”

But sources close to two other funds, who requested anonymity, said they were freezing investments until there was greater clarity on Brexit.

British authorities may be getting concerned: two sources close to the sovereign fund industry said several funds had been asked by British officials, including ministers, for assurances they would remain committed to existing investments.

LONG FAVORED

There are some bright spots.

PitchBook data shows venture capital deal flow with sovereign fund participation in Britain rose 70 percent last year to $1.28 billion. And the pound’s drop in value against the dollar since June 2016 appeared to have boosted allocations to external fund managers based in London, Sarkar said.

“We’ve been really busy,” he added. “That’s not small amounts, so £500 million ($651 million) at a time, and those allocations have increased [since Brexit].”

Britain still ranks joint-third along with India, for investments by sovereign wealth funds in 2017 and 2018, behind the United States and China, according to a report by Spain’s IE University and ICEX. But it dropped out of the top five country destinations as a percentage of total deal volume in 2018, the report noted.

Examples abound of the kind of uncertainties Brexit has created for sovereign funds’ British holdings.

China Investment Corp’s 2017 acquisition of European warehouse firm Logicor was one such case, said Javier Capapé, director of sovereign wealth research at IE University.

“Most of the warehouses are not in the UK but in the EU, bringing potential issues in the case of a hard Brexit,” he said, noting also risks to businesses such as airports and financial services, where sovereign investors are heavily involved.

London’s Heathrow Airport is partly owned by Qatar Investment Authority (QIA) and China Investment Corp, while QIA and Singapore’s Temasek Holdings own stakes in Barclays and Standard Chartered, respectively.

Brexit has contributed to hastening a shift away from real estate, traditionally a favored choice for investment in Britain, to technology.

“I see a structural shift as with real estate you’re a little bit more exposed if you have a low-growth UK which is the expectation with Brexit scenarios,” said Elliot Hentov, head of policy and research at the official institutions group of State Street Global Advisors.

“But that won’t affect your high-value add technology and export sectors which will thrive regardless of Brexit, so you see a focus on sectors kind of independent of the uncertainty.”

QIA, one of the funds most active in Britain, particularly in real estate, is also diversifying its focus after amassing several London trophy assets, such as The Shard, Savoy and Connaught hotels and the high-end Harrods store. It agreed to buy another hotel, the Grosvenor House, Reuters reported in November.

“We’ve seen a decline (in British investment) in the past year or two. Real estate investment is definitely declining,” said a source familiar with QIA’s thinking, adding that it was looking more towards the Americas.

(Additional reporting by Alun John in Hong Kong; Editing by Andrew Cawthorne)

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