SWFs in AIA Pru-ve power shift

A deal hailed as a once-in-a-lifetime event looks about to put headline numbers against international appetite for Asian growth.

The UK’s Prudential, itself only worth some $23.3 billion but already claiming to be the leading European life insurer in Asia, as it offers up to $35.5 billion for American International Group’s trophy AIA Asian network of over 320,000 agents and 23 million policies, is showing just how much Asia’s macro story is worth to corporates anxious to diversify out of their topped-out, and now struggling, Western core markets. Furthermore, Asia’s sovereign wealth funds, some already anchor investors in the Pru, are reportedly lining up to bankroll the – fully underwritten – $20 billion rights issue to support the deal. One SWF is apparently ready to take up around $5 billion of the share sale.
The rights issue doesn’t give guaranteed access to the SWFs, who will only take up the tranches that existing Pru shareholders pass on. All the same, the certainty that the SWF appetite provides clearly matters in the final resolution of the deal, and might have helped trim the fall in Pru’s stock that greeted the plan to 12%. The SWFs are reported to be eager to invest closer to their home ground after conspicuous losses in Western-directed post-crisis financial investments. Indeed, an SWF consortium was being touted as a possible rival bidder to the Pru in the runup to the deal. 
Temasek Holdings, whose $5.9 billion investment in Merrill Lynch in 2008 could have lost up to $2 billion by some calculations, and the Government of Singapore Investment Corporation (GIC), which apparently also saw very uneven performance from its $18 billion of post-crisis investments into UBS and Citigroup, are both likely beneficiaries. Meanwhile, the China Investment Corporation (CIC) is a likely participant, and its $146.5 billion sister organization the National Social Security Fund (NSSF) may move on its plan to invest up to 20% of its assets overseas.
Either way, a deal likely to kick life back into Asia’s M&A market and reward underwriters Credit Suisse, HSBC, and JPMorgan Cazenove, also demonstrates the burgeoning power of Asian SWFs, backed by the same Asian growth that the Pru seeks to tap. Temasek’s $703 million triple-A-rated bond issue underlines the SWFs’ range of funding options, and deep pockets. And CIC’s recent move into secondaries with Pantheon, Lexington and Goldman Sachs, on apparently favorable special terms, shows that the SWFs are ready to use their muscle to extract concessions from GPs.
And all this comes as the California Public Employees' Retirement System (CalPERS) faces cutting its target overall rate of return from 7.75% p.a. CalPERS itself is apparently no stranger to securing special provisions and terms from those it chooses to support. But overall, with the leading Western LPs of yesteryear in such difficulties, it’s clear that a new breed of institutions is going to dominate the private equity landscape in Asia and beyond in future. Whether these are pension funds like Canada Pension Plan Investment Board doing huge direct investment deals in Australia, or state-connected groups like CIC, these giants appear to have more cohesion, confidence and firepower than the Western investment groups of hold, and also appear ready to be more pro-active and demanding.
Private equity GPs may have to deal with these institutions as tough-minded LPs. They may have to face off with them as, at best, co-investors, or alternatively, powerful direct competitors in deals. In any case, they may simply have to live with just how far the balance of power has shifted towards these institutions post the crisis.