Sovereign wealth funds evolving with the tide

Sovereign wealth funds exploit overseas investments to contribute to development at home

Gulf News

Dubai: Sovereign wealth funds (SWF) are exploiting their overseas investments to contribute to economic development back home.

"In conversation with several Middle East SWFs, they see themselves almost as sovereign development funds," said Nuno Fernandes, professor of finance at Swiss business school IMD.

This may take the form of inviting investee companies to market their products in the home market, influencing decisions about where to site offshored production facilities, building joint ventures with the companies in the home market, or acquiring intellectual capital to develop a new domestic industry.

Joint venture

Mubadala, one of several funds in Abu Dhabi, parlayed an initial 8.1 per cent holding in American computer chip maker AMD into a 20 per cent stake and a spin-off of its manufacturing operations in a joint venture with the Advanced Technology Investment Company of Abu Dhabi (ATIC), generating a substantial return for itself.

In its annual report, Mubadala congratulated itself on the outcome: "As well as having a solid commercial return, the AMD partnership also demonstrates Mubadala's mandate of delivering social value to Abu Dhabi."

Also in Abu Dhabi, the International Petroleum Investment Company bought 70 per cent of MAN Ferrostaal, to give the emirate access to the company's expertise in petrochemicals, solar power and project construction and management, according to a report from the Monitor Group and Fondazione Eni Enrico Mattei.

This kind of strategic investment has been happening outside the Middle East too.

The China Investment Corporation, for example, has been actively seeking to invest in resource companies such as Indonesia's biggest coal company, Bumi.

Once feared as the bogeymen of international investment, then loved as the white knights who, it was hoped, would bail out western financial institutions during the financial crisis, SWFs have developed the new function partly in response to criticism at home after losing money during the crisis.

Their approach, however, is shaped by experience of political hostility in target nations.

SWFs have in general avoided getting formally involved in corporate governance, but this does not mean they are passive investors. "If you look at the external metrics of engagement, such as board positions, it's true they're under-represented," said Professor Fernandes, "but there are many pieces of evidence that they are engaged in more... activity."

These activities are less likely to attract unfavourable political comment in the target country, while benefiting the economic development at home.

"As their domestic markets were hit by the effects of the global recession, SWFs inevitably became more active at home in providing financial support," said Vanessa Rossi of Chatham House in an article for the Monitor/FEEM report.