Major Sovereign Wealth Funds Deals through January 2008

According to Thompson Financial via Gulf News:

 

News Roundup (6 February 2008): Temasek/Tui deal; No SWF for India?; Japan looking to thwart China; Saudis to be modest

Slow news week and I’m swamped at work so not much news analysis this week. I’m working on a few substantive pieces that I hope to get up as soon as things calm down, possibly this weekend.

Temasek merger with Tui

Germany doesn’t seem to have the same issues that the US does with allowing foreign entities to own transportation infrastructure (Financial Times):

Temasek, the sovereign wealth fund, and Germany’s Tui are in talks to merge their shipping operations in a deal that could see the Singaporean group take a stake of more than 20% in the Hanover-based travel group.

India not in a good position to start SWF

Echoing some of my own thoughts on the possibility of an Indian SWF (LiveMint):

Unlike established SWF rivals, India’s reserves are not a result of high commodity prices or excess savings. The country runs a current account deficit of 2% of gross domestic product (GDP). It needs to keep a fair amount of cash on hand just to ensure that trade keeps flowing.

More important, India is still very poor and crying out for investments. Investment accounts for 33% of GDP in India, far below China’s 43%.

The government recognizes the problem. Its latest Five-year Plan includes $492 billion of infrastructure spending, but it expects the private sector to come up with two-thirds of the cash. It would make sense to use any extra unneeded foreign currency to increase the government’s share.

In the long term, the returns on even modestly well thought out domestic investments will surpass those earned by a sovereign wealth fund.

Saudi reconsidering plans for SWF

Much larger country than the other commodity-based SWFs, much more political unrest, couple that with the Western backlash to SWFs, the risks of having a SWF seem to outweigh the rewards for Saudi. Especially, when they can at any point ‘appropriate’ a larger portion of any excess reserves to members of the royal family (Business Week):

Don’t expect Saudi Arabia to be a big player in the Sovereign Wealth Fund space. That was the message from a senior Saudi financial official I encountered recently. He said Saudi Arabia was considering a modest fund of around $6 billion.

Japan wants global SWF ‘rule book’ for protection from China

China Development Bank is attempting to ‘dominate and control’ the Japanese steel industry. Any global rules or regulations on SWFs are likely to be voluntary so I don’t think Japan would get much protection from those. It will be interesting to see how this plays out (Times Online):

“We need governments everywhere to come together to make rules that would prevent the disorder caused by these funds,” Hajime Bada, president of the Japan Iron and Steel Federation said. “Some countries are using their state funds to dominate certain industries.”

Japanese steelmakers see the impending bidding war for Rio as a crisis in the making, with potentially devastating iron ore pricing power going to BHP Billiton or, worse, to an aggressive Chinese player with the financial backing of the State. Caught between what it sees as “two worst-case scenarios”, the Japanese steel industry is pinning its hopes on government intervention.

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.

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.

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)