Major Sovereign Wealth Funds Deals through January 2008

According to Thompson Financial via Gulf News:

 

News Roundup (30 January 2008): Citigroup chief says Chinese, Russian sovereign funds are top worry; Qatar buys stake in Credit Suisse; Indian SWF?

Concerns over China, Russia SWFs

At a recent finance conference in Brussels, Citigroup chairman Win Bischoff had a very interesting exchange with a German EU parliamentarian (Martketwatch):

“It is the China and Russia syndrome of sovereign wealth funds that is most concerning,” Bischoff told a finance conference in Brussels.

 

China and Russia are the main concern in the debate over whether to regulate state-backed investments, German member of the European parliament Wolf Klinz said. He said German companies are worried that China will steal its intellectual property and fear that Russian President Vladimir Putin wants to use investments “as a political instrument.”

 

“Yes, that’s a very good point,” Bischoff said, nodding at Klinz’s remarks.

Bischoff’s comments are particularly interesting because his firm has recently had several SWF investments approved by the Committee on Foreign Investment in the United States (CFIUS). I would imagine that he is familiar with what the US government’s main concerns have been with SWF investments.

Qatar likely to buy 5% stake in Credit Suisse worth $3 billion

The deal hasn’t been finalized and the stake could be slightly higher or lower. The interesting part of this deal is that Credit Suisse is not publicly recognized as having large subprime related losses, like all the other banks that recently received SWF capital infusions (Marketwatch):

Other than a $1.9 billion writedown related to the sub-prime crisis announced in November, the bank has so far emerged comparatively unscathed from the credit crunch. Sovereign wealth funds from Abu Dhabi, China, Dubai, Singapore and Kuwait have snapped up large stakes in banks such as Citigroup, Merrill Lynch, Morgan Stanley and UBS as they wilted under the weight of huge losses related to the implosion of the U.S. sub-prime mortgage industry.

See more on what the Qatar Invesmtent Authority has planned for the future in this interview chief executive Hamid Al-Thani gave to CNBC at the World Economic Forum last week (Dealbook).

India looking into creating a SWF

Indian government officials have SWF envy (The Economic Times):

While Sovereign Wealth Funds (SWF) owned by big Asian economies invest in assets the world over, Indian policymakers too are looking at whether the country needs to float such a fund. The finance ministry is planning to set up a committee to examine the pros and cons of an Indian sovereign wealth fund.

I’m not sure how much fiscal sense a SWF makes for India. The country is far less developed (infrastructure, education, basic health care, etc) than China and other export-oriented countries with SWFs, doesn’t have an abundance of natural resources, and is a democracy which means the government would likely be held accountable for the fund’s performance. How would the Indian government react to the public backlash from an investment gone bad a la the China Investment Corp/Blackstone deal?

More than a third of India’s population lives in poverty, while in China the percentage of the population living below the poverty line has fallen into the single digits; in absolute terms this is a difference of several hundred million people. How would the Indian government react to hundreds of millions taking to the streets and protesting a government that, from their point of view, is neglecting their dire condition to bailout a foreign investment bank? I just can’t see how there wouldn’t be an immediate change of policy if this type of situation arose in any democratic country, let alone poverty stricken India.

GCC dollar peg, inflation update

Qatar is considering following in Kuwait’s footsteps and dropping the dollar peg (Financial Times):

Qatar is reviewing its currency policy and could revalue or drop the dollar peg as the booming Gulf state struggles to tame inflation while the US reduces interest rates to head off a recession. Qatari officials on Wednesday said the gas-rich emir­ate was considering revaluing its currency or linking it to a trade-weighted basket of currencies as well as other policy proposals aimed at cooling rampant inflation of up to 15 per cent.

Inflation reeking havok on GCC businesses (Arabian Business):

More than half of Gulf businesses have been badly hit by rising inflation, with costs increasing faster than they can be passed on to customers, an ArabianBusiness.com survey has revealed. With inflation rising across the GCC, and predicted to hit a 20-year high of 12% in the UAE this year, 62.5% of respondents to the poll said the price of goods was rising too fast to be passed on.

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.

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.

Most Notable Sovereign Wealth Fund Deals of 2007

2007 was the year sovereign wealth funds put themselves on the map. In order to understand the evolution of SWFs, it’s obligatory to take a critical look at some of the landmark events of that important year. Expect to see more 2007 reviews, commentaries, and analytical pieces in the comings weeks. To kick things off, a review of the most newsworthy SWF deals of 2007:

• Dec. 24, 2007: Merrill Lynch says it will sell a stake in itself of at least $4.4 billion, and up to $5 billion, to Singapore’s state-run Temasek Holdings. Temasek will hold less than 10 percent of Merrill and have no voting control. Merrill also agreed to sell a $1.2 billion stake to domestic investors

• Dec. 10, 2007: UBS AG announces that the Government of Singapore Investment Corp., a sovereign-wealth fund, is investing $9.75 billion for a 9 percent stake in the Swiss banking giant, while an undisclosed strategic investor in the Middle East is contributing $1.77 billion in UBS AG.

• Nov. 26, 2007: Abu Dhabi Investment Authority, the sovereign investment fund of the Gulf Arab state, acquires a 4.9 percent stake in Citigroup Inc., the largest U.S. bank, for $7.5 billion.

• Nov. 7, 2007: Central Huijin Investment Co., China’s largest state-owned investment arm, acquires 71 percent of China’s joint-stock China Everbright Bank for $2.7 billion.

• Oct. 29, 2007: Dubai International Capital, owned by Dubai-ruler Sheikh Mohammed bin Rashid Al Maktoum, acquires 9.9 percent outstanding equity stake in Och-Ziff Capital Management Group, a U.S.-based hedge fund, for more than $1.1 billion. Och-Ziff goes public in November on the New York Stock Exchange.

• Oct. 22, 2007: China’s government-controlled Citic Securities Co. and U.S. investment bank Bear Stearns Cos. agree to invest $1 billion in each other for minority stakes that could be expanded. They will also operate a 50-50 joint venture in Hong Kong to offer capital markets services across Asia.

• Sept. 20, 2007: The Qatar Investment Authority, Qatar’s sovereign investment fund, acquires a 20 percent stake in the London Stock Exchange and nearly 10 percent of Nordic bourse operator OMX AB.

• Sept. 20, 2007: Abu Dhabi-based Mubadala Development Co., an investment arm of the Abu Dhabi government, buys a 7.5 percent stake of the management operations of one of the world’s largest private-equity firms, Carlyle Group, for $1.35 billion

• July 23, 2007: China Development Bank, a Chinese state agency, agrees to pay $3 billion for a 3.1 percent stake in British bank Barclays PLC, and Temasek Holdings, a sovereign wealth fund in Singapore, agrees to pay $2 billion for a 1.77 percent stake in Barclays.

• July 13, 2007: Dubai International Capital purchases a 2.87 percent stake in one of India’s largest banks, ICICI Bank Ltd., for $750 million.

• May 20, 2007: China’s state investment company agrees to pay $3 billion for a 10 percent stake in U.S. private equity firm Blackstone Group LP. The Chinese investment company agreed to buy nonvoting shares in Blackstone concurrent with Blackstone’s initial public offering.

• May 2, 2007: Dubai International Capital buys a undisclosed stake in British bank HSBC Holdings PLC.

Weekend Links (6 January 2008)

Some recent stories of interest:

• Gulf investments to jump as economies grow: (Bloomberg)
• China Investment Corporation’s strategy is becoming clearer:(IHT)
• How much of a discount did Temasek get for the Merrill stake?: (DealBreaker)
• Eastern investors getting bargains on Western financial companies: (Seeking Alpha)
• Kuwait fund focusing on long-term opportunities: (MSNBC)
• Qatar’s real estate king: (Portfolio)
• Are oil prices heading down?: (CNBC)
• Interesting maps of the world adjusted for size of oil reserves and exports: (Middle East Strategy at Harvard)
• Gulf states, not wanting to jeopardize economic boom, no longer want to isolate Iran: (Christian Science Monitor)