Qatar Investment Authority building a global portfolio

09 October 2008
Qatar’s sovereign wealth fund is making high-profile acquisitions across the world to diversify its asset base and raise the state’s international profile.

Qatar Investment Authority (QIA) has an insatiable appetite for investments in the West, most recently snapping up a 20 per cent stake in UK property group Chelsfield Partners at the end of September.

Over the summer, the sovereign wealth fund’s drive to build a broad portfolio of international assets gathered pace with the acquisition of an 8 per cent slice of banking giant Barclays, plus agreements to buy French power engineering group Cegelec and UK healthcare company Senad, and to take a stake in US electric car manufacturer Fisker Automotive.

These recent purchases add weight to an investment portfolio that already includes holdings in Credit Suisse and Industrial & Commercial Bank of China, the European Auronautic Defence & Space Company (Eads), via its 5 per cent stake in French media group Lagardere, and a range of real estate projects.

It has also established regional funds in Vietnam, Indonesia and South Africa.

Diverse strategies

QIA has stakes of 20 per cent in the London Stock Exchange and, until February this year, held a 9.98 per cent stake in Nordic exchanges group OMX before opting not to make a full takeover offer for the company.

Its 27 per cent shareholding in the UK’s J Sainsbury supermarket group continues to provoke heated speculation about an eventual takeover, despite QIA abandoning a bullish takeover bid in November 2007.

The authority pulled back from a move that had been viewed with scepticism by minority shareholders in the Sainsbury family, but in recent weeks there has been renewed speculation that it will soon make a fresh bid for a brand that is seen as the crown jewels of the UK food retail sector.

The list of recent QIA acquisitions is diverse. QIA talks of core asset classes, but its definition of ‘core’ is broad, including property, retail, a range of specialist industries, infrastructure and, of course, finance. But with assets of $65bn, it can afford to build up a diverse portfolio.

The authority was set up by Doha in 2003 to invest Qatar’s surplus hydrocarbons income. It has been cautious about following other sovereign wealth funds, which have major direct stakes in the troubled US banking sector.

Yet having become the largest single shareholder in Barclays, it will now be significantly exposed through the UK group’s decision to buy the main investment banking business of the now defunct Lehman Brothers for $1.75bn.

As the Qataris range across the world in search of attractive new opportunities, observers are asking, “Where next?”

Kenneth Shen, head of strategic and private equity at QIA, outlined QIA’s intention to develop its holdings in Asia and other emerging markets in September 2007, while maintaining a strong focus on Western economies.

QIA’s decision to appoint an Asian head of strategic investment is notable in itself - Shen travels to China regularly as the authority builds up its assets in the East. Like many Gulf sovereign wealth funds, the authority is a key contributor to a national strategy of economic diversification, to reduce its reliance on oil and gas.

But in Qatar’s case, it can also been seen as part of a wider government drive to enhance the country’s profile and reinforce its security, by developing Doha as a centre for international business.

Prominent role

The strategy is markedly different in business terms from the conservative course pursued by Abu Dhabi Invest Authority (Adia) and Kuwait Investment Authority (KIA).

In some respects, QIA’s approach has more in common with the activism of Abu Dhabi’s Mubadala Development Company investment vehicle, which becomes directly involved in the ownership or development of individual enterprises.

But more than any of these, QIA appears determined to establish a prominent public image, selecting projects not only for their financial logic, but also for the role they can play in promoting international recognition of the Qatar brand.

Nowhere is this more evident than in the UK property market. QIA has a £1.6bn ($2.8bn) stake in the ‘Shard of Glass’ project to build a slender 310 metre-high tower, set to be one of Europe’s tallest buildings, and thus the ultimate high-profile development, at London Bridge.

For £600m, it bought Chelsea Barracks in April 2007, one of the capital’s most prestigious locations and, through a 15 per cent holding in Songbird Estates, it is also significantly invested in Canary Wharf.

The substantial stake in Chelsfield gives the Qataris a share in, among other sites, Camden Market, at the heart of one of London’s most popular tourist destinations, a distinct contrast to the grandeur of Chelsea Barracks.

Quite apart from their commercial value, this diverse portfolio of real estate assets helps to implant the QIA as a significant force in the UK business establishment, and a trust-worthy supporter of projects that have strategic value for London and require careful handling.

This is particularly noticeable in the case of Chelsea Barracks, a large site at the heart of one of the city’s most upmarket areas.

The development is a partnership between the UK-based Candy Brothers and the Qatari Diar Real Estate Investment Company, a property subsidiary of the QIA.

The masterplan envisages construction of 638 flats on the site, which neighbours the residential Chelsea Hospital for military pensioners.

The plans have already run into severe criticism from a panel of leading architects appointed by Kensington and Chelsea council for its impact on the historic building.

But backers of the scheme claim that London’s mayor, Boris Johnson, is in favour of a project that would open up extensive gardens to the general public and provide community facilities.

Political wrangles

The Qataris will want to avoid being drawn into domestic UK political wrangles, and would clearly like to be seen as reliable friends.

In January this year, the Qataris’ involve-ment was a crucial help in moving forward plans to build Renzo Piano’s spectacular design for the Shard of Glass, a project that was strongly favoured by Johnson’s predecessor, Ken Livingstone.

The UK property sector offers QIA the opportunity to work in partnership with prominent established names who have a long track record of bringing major developments to fruition, such as Chelsea Barracks architect Richard Rogers.

QIA’s big expansion into UK real estate can be viewed as a move away from the adventurous deal-making that characterised many earlier operations, on which the authority worked closely with financier Paul Taylor and Three Delta, the investment company he heads.

The QIA had invested in four healthcare companies, operating care homes and schools for pupils with special needs.

The total value of the deals was widely touted at £3bn, but they were highly leveraged and Qatar’s equity investment was only a small percentage of this.

Parts of this business portfolio, however, have run into serious difficulties.

QIA and Taylor have parted company since the failed Sainsbury’s bid, which left QIA smarting.

QIA is currently trying to resolve the future of its investment in the UK health sector, after appointing consultant Ernst & Young to look at the portfolio.

There have been talks with the Royal Bank of Scotland, a major lender to Four Seasons care homes, of which QIA owns 100 per cent.

The authority’s $100m equity stake in Four Seasons may now be worthless because of the scale of the group’s debt.

Long-term prospects

The position of two other UK companies, care services provider Care Principles and real estate investment group NHP, remains unclear. However, the Qataris have decided that they will stick with Senad, bought by Three Delta in 2006 for £120m.

Senad operates four adult care homes and seven schools for children with special educational needs, and is now being taken into definitive QIA ownership.

The authority has reached agreement with Japanese financial services group Nomura on a partial repayment, partial write-off of some Senad debt.

The experience of QIA highlights the challenges a Gulf-based sovereign wealth fund faces when it becomes a direct investor in a highly specialised industry in a foreign country.

The deals made in recent months show QIA has become more selective about the businesses in which it gets involved, but has no intention of completely abandoning the practice of sector-specific direct investment.

The decision to acquire Cegelec is particularly significant. In marked contrast to most of its fellow sovereign funds, QIA has been prepared to get directly involved in Western hi-tech industries.

It has put substantial money into a specialist sector - advanced engineering - in which France is a long-established global leader.

For the authority’s own portfolio, this offers a useful route to diversification, balancing its stakes in sectors such as real estate and finance, which are more typical of Gulf sovereign investors.

But as with the support for prestige UK property projects, such deals are also linked to political friendships.

Qatar and France have longstanding and close ties in defence, in both military training and the supply of equipment, and defence is a key sales area for Lagardere and Eads, in both of which the QIA has taken stakes.

The stake in Eads was taken indirectly through its French conglomerate Lagardere, which has interests in the French aerospace industry.

In this respect, the Qatari authority’s approach parallels that of Mubadala, which has played a central role in the development of engineering and defence industry partnerships between France and Abu Dhabi.

The extent to which the QIA’s investments reach into the political sphere - in contrast to KIA and Adia, which pursue agendas shaped essentially by investment imperatives - is a reflection of the degree to which the Qatari authority is closely tied to central government and subject to political leadership.

Qatar’s Prime Minister Sheikh Hamad bin Jassim bin Jabr al-Thani is chief executive officer of the QIA.

Despite difficulties with UK investments made through Delta, QIA is still pursuing portfolio diversification.

The authority has also been developing a series of investment funds and other ventures in the emerging markets that Shen regards as important long-term prospects.

It has set up $1bn funds in Vietnam and Indonesia, together with PME Infrastructure Management, a $400m vehicle for investment in African transport, communications and energy.

In China, the QIA and Singapore’s Keppel Corporation plan to develop a 30 square kilometre eco-city in Tianjin, which could act as a model for other sustainable urban developments in the People’s Republic.

The authority has also agreed a potential partnership with the Libyan Investment Authority, although target projects have not been publicly identified.

Such diversification clearly makes sense at a time when world economic conditions are what Shen, with diplomatic understatement, described as “choppy” at the recent Hong Kong private equity conference. But as Shen has made clear, that does not mean the QIA has given up on Western Europe or the US.

And there are certainly institutions that will favour the QIA as a reliably supportive minority investor.

In their search for extra capital, investment banks Morgan Stanley and Goldman Sachs are thought to have held talks with the authority, which, with holdings of 7 per cent in Credit Suisse and 8 per cent in Barclays, has already demonstrated its readiness to buy into those Western banks it believes have the clout to survive the credit crunch.

Key fact

The QIA paid £600m for Chelsea Barracks, one of London’s most prestigious developments

CAPTION: High-profile: How the Shard of Glass will look

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