Major Sovereign Wealth Funds Deals through January 2008

According to Thompson Financial via Gulf News:

 

News Roundup (23 January 2008): US SWF backlash; Gulf response to US rate cut; China being patient; Abu Dhabi clean energy initiatives

US backlash to recent investments by sovereign wealth funds

Citigroup and Merrill Lynch are viewed more negatively by the American public on the heels of investments each firm accepted from SWFs (Financial Times):

Citigroup and Merrill Lynch’s standing among US citizens has plummeted as a result of multi-billion dollar capital injections by sovereign wealth funds, according to new research that highlights simmering public opposition to investments by foreign governments.

 

Over half of the 1,000 people polled by the market research group Strategy One said they “trusted Citigroup less” after its recent decision to tap Middle Eastern and Asian sovereign funds to ease its financial constraints.

 

In Merrill’s case, 45 per cent of the respondents said their trust in the bank had fallen since hearing of investments from foreign state funds, according to the research to be published on Tuesday.

The poll draws attention to the rising protectionist sentiment among the American public, which is in part being stoked by politicians like Hillary Clinton:

The new research – carried out early this month between the two waves of foreign investments in Citigroup and Merrill – also points to an underlying current of protectionism within the US public, which could be exacerbated by the rising threat of a recession.

 

“The Citigroup figure is staggering,” said Laurence Evans, president of Strategy One, which is owned by the public relations group Edelman.

 

“There is a xenophobic element to it. The biggest concern is uncertainty: people don’t know how much influence sovereign wealth funds will have.”

Gulf response to US rate cut

Gulf central banks, whose currencies are pegged to the US dollar, have decided to follow the US Federal Reserve’s 75 basis point interest rate cut with reductions of their own (Arabian Business News):

“The Gulf will have to match the Fed cut,” said Marios Maratheftis, regional head of research at Standard Chartered Bank. “This is going to create even more liquidity in the market which means more inflationary pressures.” Inflation in four of the six Gulf Arab oil producers has overtaken official lending rates, encouraging borrowing for investment in assets such as real estate, which is the main driver of the surging cost of living across the region.

Gulf Cooperation Council (GCC) central banks say that they remain committed to the dollar peg for now, but will leave the door open for coordinated currency revaluations in the future, to tackle rising inflation.

China in no hurry to buy credit crunch bargains

China is taking a more cautious approach to making investments on the belief that the worst of the subprime crisis is still yet to come (Reuters):

Beijing’s reluctance to buy into Citigroup coincides with growing expressions of concern by Chinese officials about the seriousness of the credit crisis. “The subprime loan issue has planted a ticking timebomb in the global financial markets. It now seems the impact is much more serious than the market had previously expected. I don’t think it will be over any time soon,” Vice-Finance Minister Li Yong said at a recent forum.

Abu Dhabi announces $15 billion clean energy fund, world’s first carbon neutral city

Abu Dhabi decides to invest in the energy technologies of the future (BBC):

The government of Abu Dhabi has announced a $15bn initiative to develop clean energy technologies. The Gulf state describes the five-year initiative as “the most ambitious sustainability project ever launched by a government:”. Components will include the world’s largest hydrogen power plant. The government has also announced plans for a “sustainable city”, housing about 50,000 people, that will produce no greenhouse gases and contain no cars.

Weekend Links (20 January 2008)

Some recent stories of interest:

• Davos-Sovereign wealth funds this year’s most in-demand guests: (Reuters)
• Economic uncertainty to dominate Davos: (Financial Times)
• One year on and the mood among bankers at Davos has taken a serious turn: (Times Online)
• China Investment Corp – transparency, accountability constitutional impossibilities: (Guardian Unlimited)
• China turns risk averse as capital outflows rise: (Financial Times)
• The new (financial) world order: (RGE Monitor)
• Silence not golden for sovereign funds: (Financial Times)
• A Guide to Speed Dating With Sovereign Funds: (NY Times Deal Book)
• Who’s afraid of Middle East money?: (Business Week)
• Regulators should intervene in bankers’ pay: (Financial Times)
• The Growing Power of Petro-Islam: (Newsweek)
• Subprime Nation: (Real Clear Politics)
• Abu Dhabi fund to break silence: (Arabian Business)
• ‘Green city in the desert’ for Abu Dhabi (Arabian Business)
• Gulf oil boom spreads to poorer lands: (Financial Times)
• President Bush Questions Saudi Ability to Raise Oil Supply: (Naked Capitalism)
• The Construction Site Called Saudi Arabia: (NY Times)
• Gulf Cooperation Council-Iran Watch: (Abu Aardvark)
• US Secretary of Defense: Iran a challenge, not a threat: (Inter Press Service)
• MEMO to US Presidential Candidates RE Middle East Policy: (Time)
• Red, White, and Blue Tag Sale: (NY Times)
  

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Sovereign Wealth Fund segment on Charlie Rose

Charlie Rose, hands down the best interviewer in the business, had Landon Thomas of the NY Times and David Enrich of the WSJ on his show last night discussing SWFs. They hit on most of the major themes (SWFs bailing out the US banking industry, reverse globalization, the SWF put) in the news recently (it’s the first segment, about 15 minutes long):

Enrich made an interesting comment about emails that he receives after writing articles about SWFs investing in US corporations. He says that many people complain about the US “selling out to foreigners” and “needing to learn Chinese and Arabic in the next ten years”. Thomas followed up by saying that there’s a xenophobic element in that type of criticism and the US isn’t as global as it thinks it is, especially when compared to places like London, Hong Kong, and Singapore. Hillary Clinton’s pandering at the last Democratic debate certainly speaks to these points.

Economist cover story: ‘Invasion of the Sovereign Wealth Funds’

The Economist’s cover story this week is a feature on Sovereign Wealth Funds.

The story gives a good overview of many of the basics such as size of SWFs, how they came about, how they’ve evolved, where they’re headed, and the issues facing SWF investing. It also includes a relatively balanced discussion on the motives of SWFs, which isn’t surprising as The Economist is probably the most fair and balanced mainstream publication around.

One point that The Economist makes, that has been completely absent from the mainstream debate thus far, is that the fear of politicizing foreign investments cuts both ways. The SWFs must be cognizant of possible retaliatory actions, such as asset freezes and/or asset confiscations, that can be taken against their investments for things such as political disagreements or court rulings that hold SWFs responsible for the actions of their host country’s citizens. The Economist cites the example of Britain forcing the Kuwait Investment Authority to divest from part of its’ stake in BP in the 1980s because Margaret Thatcher, in the midst of privatizing national assets, ‘was in no mood to see so much of a national treasure owned by a foreign government’.

Politicians scrutinizing the recent flurry of SWF investments should take care to remember that these infusions are in effect rescue capital that their government’s would likely be on the hook for had SWFs been deterred from investing, and that their own future geopolitical motives should be held to the same standard they want to hold SWFs to.

The article concludes, correctly in my opinion, by saying the chief threat that SWFs pose is that of financial protectionism and that it’s in the best interests of all parties to get along:

The hope is that both host countries and sovereign-wealth funds see that their interest lies in building confidence. The hosts stand to benefit from the funds’ capital. Meanwhile the funds are ruled by the politics of the places where they invest. You are only sovereign at home; abroad, someone else wields the power.

News Roundup (16 January 2008): Citigroup, Merrill Lynch go back to the well; Subprime damage report; GCC currency revaluation

Citi, Merrill Raise $21 billion from SWFs

Citigroup announced that it will be accepting investments totaling $14.5 billion from the Government of Singapore Investment Corporation, the Kuwait Investment Authority, one of it’s largest current shareholders Prince Alwaleed bin Talal, former CEO Sandy Weill, and the New Jersey Investment Division. Merrill Lynch will raise a total of $6.6 billion from the Korean Investment Corporation, the Kuwait Investment Authority, and Mizuho Corporate Bank of Japan (Financial Times).

For Citigroup, the announcement of the capital infusion coincided with the release of a disastrous 4^th quarter earnings report and the revelation that things could get worse:

Citigroup also unnerved investors by warning of losses to come from consumer loans as it revealed a 40 per cent dividend cut, a $9.83bn fourth-quarter loss, $18bn in subprime-related credit writedowns and remaining exposure of $37bn to subprime mortgages.

Tomorrow, Merrill Lynch is expected to report a substantial loss and a possible subprime related writedown of $15 billion (Reuters):

Citigroup expects a $15 billion fourth-quarter write-down at Merrill Lynch and said CDO/subprime exposures will decline by 50 percent to 70 percent in aggregate.

Subprime Damage Report

The capital infusions that Citi and Merrill just received bring the total amount invested in banks and securities firms by outsiders (primarily SWFs) since the subprime crisis began last summer to $59.4 billion:

*In billions (USD)    Source: Bloomberg

Gulf to revalue currencies by April?

The countries of the GCC could revalue their currencies, which are currently pegged to the dollar, by April (Arabian Business News):

Gulf Arab oil producers could revalue their currencies together if the US dollar weakens further, with appreciations of 8% in the UAE dirham and Saudi riyal likely before April, Standard Chartered said on Wednesday.

 

Dollar pegs force the region to shadow US interest rates at a time when the Federal Reserve is cutting rates to contain a credt crisis and inflation is running at decade highs across the Gulf.

Sovereign Wealth Funds to Outsource 20% of Assets to External Managers?

Morgan Stanley has a new report (PDF) out that argues SWFs are likely to outsource around 20% of their assets to external managers in the near future. They estimate that SWFs may grow by $1 trillion annually over the next 5 years, meaning that about $200 billion per year may be placed with outside investors. Also, in the next 2 years recently established SWFs in Russia, Chile, and China will likely contribute $700 billion to the existing $2.88 trillion stock of SWF money, adding another $150 billion to the amount that will be farmed out.

The 20% figure is derived using assumptions, which are based on the behavior of Norway’s SWF, the Government Pension Fund (GPF) and Canada’s Caisse de depot et Placement du Québec (CDQ), a sovereign pension fund. The investment portfolios of these sovereign investors are disclosed to the public.

The arguments Morgan Stanley makes are somewhat self-serving (benefits of outsourcing alpha, management costs, supposed SWF lack of staff and sophistication), which isn’t surprising.

There are a myriad of reasons why Morgan Stanley’s analysis doesn’t tell us very much:

• The methodology of using the Norwegian and Canadian sovereign funds as proxies upon which generalizations and assumptions about SWF behavior can be made is deeply flawed. The current levels of SWF deal volume and deal dollar value are unprecedented in SWF history. I don’t think past SWF behavior predicts much at all about current or future SWF behavior.

• The sophistication of funds such as the Abu Dhabi Investment Authority, the many Dubai SWFs, and the up and coming Chinese SWF rivals that of any Wall Street firm or the largest hedge funds. In fact, the largest SWFs recruit a good portion of their talent from private asset managers.

• It’s cheaper, easier, and more profitable for SWFs to buy outright stakes in asset managers rather than investing in their actual funds.

• The use of the Canadian CDQ fund doesn’t make much sense given that it’s a pension fund and doesn’t exactly have the same investor profile (investment objectives, time horizon, risk tolerance, accountability) as a traditional sovereign wealth fund.

For some of the smaller and newer players in the SWF arena (Brazil, Libya, Chile) it may make sense to outsource most of their investments. Even if these funds outsource all of their investments, you don’t get anywhere near the over $200 billion (for the next 5 years) total annual figure that Morgan Stanley predicts will be farmed out.

Deriving the 20% figure on such flimsy data (essentially the past behavior of Norway’s GDF) makes Morgan Stanley’s “estimate” seem like a guess more than anything.

Weekend Links (13 January 2008)

Some recent stories of interest:

• Gulf States to stay on trail of foreign companies: (Financial Times)
• A Closer Look at Sovereign Wealth Funds – Secretive, Powerful, And Huge: (Knowledge @ Wharton)
• Buffet says he turned down investments in financials: (Bloomberg)
• Sovereign funds invest where Buffet won’t: (Bloomberg)
• China and the Arabian Peninsula as market stabilizers: (Stratfor)
• The price of oil and nationalism: (Economist)
• Canada is ‘anxious’ to have investment from China: (Bloomberg)
• No sovereign wealth fund for Canada: (Bloomberg)
• Bush’s “New Middle East”: (Time)
• Abu Dhabi – East Leans West: (City Journal)
• The Dubai phenomenon: (Bitterlemons-international.org)
• How Arab Countries are Coping with Globalization: (Knowledge @ Wharton)
• Can the Middle East Sustain Democracy?: (Middle East Strategy at Harvard)
• The Arabs should stop whining: (Haaretz)
• Sovereign Wealth Funds making ‘good’ investments in US banks: (Emirates Business 24/7)
• Americans sold out to foreign firms at record rate: (Bloomberg)