Business | Investment
Better that you know them now
Depending on who you ask, sovereign wealth funds are either the saviours of the financial system or a massive threat to national security.
- By Peter Thal Larsen, Financial Times
- Published: 01:39 February 2, 2008
Depending on who you ask, sovereign wealth funds are either the saviours of the financial system or a massive threat to national security. But for corporations, they are an inescapable part of the landscape.
Here are a few key lessons to bear in mind when thinking about the rise of active sovereign wealth investors.
1. They cannot be ignored: Though exact figures vary, sovereign wealth funds control assets worth more than $2,000 billion. This is about the same as the amount invested in hedge funds and private equity combined. There is an element of double counting here, because the funds are heavy investors in alternative asset managers.
2. They are not all the same: This is an obvious but often overlooked point. By grouping together funds from the Middle East, China, Singapore and Norway, there is a danger of assuming they all have the same objectives.
3. They can be investors, partners - or suitors: Much of the recent discussion has been about sovereign wealth funds investing in troubled investment banks. But they have also taken substantial stakes in companies as diverse as Sony and Standard Chartered. They are joining forces with companies in M&A deals.
4. Above all, they want a return: Sovereign wealth funds have been hailed as savvy, long-term investors able to identify value in the recent market turmoil. But not all investments look so clever. China Investment Corporation's stake in Blackstone, the US private equity group, is now worth substantially less than the $3 billion it cost to buy. And the Abu Dhabi Investment Authority's $7.5 billion investment in Citigroup looks less canny in the light of the US bank's decision to raise an additional $12.5 billion from other investors.
So far, sovereign wealth funds have been at pains to stress their role as passive financial investors, and have avoided taking board seats.
5. They will be selective: In the equity markets, the prospect of a capital injection by a sovereign wealth fund has replaced private equity bids as the favourite rumour. So far, however, most of the activity has been in large, multinationals with established brand names. Investment banks have also benefited from the fact that they have deep, long-standing relationships with many of the largest funds.
6. Be prepared for the backlash from politicians, and from other investors: In spite of their claim as passive investors, the sight of foreign governments bailing out US banks has triggered protectionist rants.
Moreover, companies should also consider shareholders' interests. If existing investors feel that sovereign wealth funds are being offered a cushy deal, they are bound to squeal.
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