Going direct: GIC gives private equity firms run for their money

Singapore’s GIC is taking the unusual step of investing directly in unlisted firms, a move bankers say will be mimicked by other sovereign wealth funds as low yields spur fund managers to adopt a more hands-on attitude in their search for higher returns.

In the first half of this year, GIC agreed to pay up to US$310 million ($388 million) for minority stakes in two unlisted Philippine companies: food producer Century Canning Corp and hospital group Metro Pacific Investment Corp.

While the investments in the Southeast Asian archipelago nation formed just a tiny sliver of GIC’s estimated US$30 billion ($37.5 billion) private equity portfolio, they marked a departure from GIC's approach of putting money in a private equity fund that would then invest on its behalf, or co-investing with a buyout firm. “These were sourced completely on their own - there were no investment banks involved in the deal,” said Jacqueline Chan, a partner at law firm Milbank, Tweed, Hadley & McCloy, advisor of GIC on the two Philippine investments.

In May, GIC acquired a stake in Brazilian online sports goods retailer Netshoes after opening an office in the Latin American country. Two months later, GIC invested an undisclosed sum in India's biggest e-commerce firm Flipkart.

The deals represent a shift in strategy as the world’s eighth-biggest state fund, chaired by Singapore'’s prime minister, transforms itself into an active private equity player. Bankers say the approach will likely be followed by other sovereign wealth funds, which are increasing their investments in alternative asset classes such as private equity as they struggle to eke out returns in more traditional stocks, bonds and real estate.

Last year, Norway said it was considering letting its sovereign wealth fund, the world’s biggest sovereign investor, make foreign private equity investments. China Investment Corp is also putting more money into private equity funds.

Private equity investments by sovereign funds like GIC would naturally intrude into the domain of buyoutfirms. Bankers say sovereign funds are still keen to co-invest with buyout firms where it suits them, but in those cases, they are becoming increasingly reluctant to be a passive “limited partner”. “They are no longer interested in just being the LP in fund No.4,” said Patrick Thomson, the London-based head of sovereign clients at JPMorgan.