Credit crisis puts focus on sovereign wealth funds

Business News - Thursday December 20, 2007

MARKET Movers

Credit crisis puts focus on sovereign wealth funds

BRIAN HOEGEE

Sovereign wealth funds (SWF) have become a hot topic over the recent months as the global financial system has been put under severe pressure in the midst of a full-blown credit crisis.

Sovereign wealth funds are beginning to provide much needed capital to even the most stable of financial institutions such as Citigroup and UBS who have recently found themselves in need of pricey capital due to larger than expected multi-billion dollar write-downs.

A sovereign wealth fund is a fund owned by country, government or state and is composed of financial assets such as stocks, bonds, property, gold, currencies and other investment vehicles. In essence, these are the bank accounts of countries for purposes of investment. The majority of these funds originate in the form of accumulated foreign reserves generated from budgetary surpluses and positive financing structures and blossom into investing powerhouses able to move markets and take stakes in highly prized businesses around the world.

Street estimates at the end of 2006 indicate that SWF assets were well in excess of $2 trillion excluding foreign exchange reserves which are estimated at $4.5 trillion. The "super seven" all have well over $100 billion in assets each and they include: Abu Dhabi Investment Authority, Government Pension Fund of Norway, Government of Singapore Investment Corporation, Kuwait Investment Authority, China Investment Corporation, Stabilisation Fund of Russia and Temasek Holdings (Singapore).

Most analysts expect SWF assets to quadruple to $10 trillion by 2012. Ten trillion dollars may seem like a lot of money, but it is actually only one-fifth of the value of all US listed securities. Just as a reference point, all the world's hedge funds' assets combined total up to $1.5 trillion.

Considering free-trade agreements, cross-border trade and ease of travel, it's not surprising to see how intertwined the financial system is. Why then is there so much controversy and attention surrounding SWFs?

First and foremost, the pool of assets managed by SWFs is enormous and can impact financial markets both positively and negatively not only in our home market, but abroad. Critics argue that SWFs seek to circumvent foreign investment laws and shun national security laws. Many say that if foreigners are allowed to control strategically important industries such as energy, resources, telecom or financial services, this could compromise the domestic sovereignty of a nation. The true reason is that nations are intrinsically fearful of foreign governments imposing their political or financial will on another nation.

One fact is certain: there is too much money chasing too few ideas and with additional barriers to entry (foreign ownership restrictions, etc), it is not surprising to see examples of creative strategies used directly and/or indirectly.

The Chinese are the best example of this. To seek indirect access to a multitude of investments (primarily in the United States) the Chinese took a stake in the US private equity giant Blackstone Group. Blackstone, unfortunately, will be under severe scrutiny when transacting in sensitive industries.

Closer to home, the most notable case of SWFs accessing a domestic market was the Temasek Holdings takeover of Shinawatra Group. We all know the outcome of this - the most blatant of anti-foreign sentiment hidden behind the shroud of foreign ownership restrictions.

Another high-profile attempted takeover of sensitive state interests was the Dubai Ports World attempted purchase of Ports Authority USA - an entity that controls and operates several ports around the coastal United States. This was rejected by US regulators as a matter of national interest.

The fact that DP World had already sought and obtained the necessary US regulatory approval did nothing to control the controversy of a foreign government controlling US shores. It just so happens that several other US ports are owned and/or operated by foreign companies, many of which are Asian. Some estimate that foreign entities now own over 30% of America's ports and in some cities like Los Angeles, over 80% of port terminals are run by foreign companies.

Whether sovereign wealth funds are attempting to extract technology, exert their influence to their own benefit or simply make money, it would be fair to say that these funds are actually no different than any other shareholders or investors, so isn't it quite puzzling what the hubbub is all about?

Brian Hoegee is Managing Director, Asia, of Global Trader, a leading London-based derivatives provider registered with the Thai SEC. Contact him in Bangkok at 02 654 1212 or visit http://www.gt247.com

Bangkok Post