Global investment patterns are changing as the world’s centre of economic gravity has shifted east in recent years. And with a new global investment landscape comes non-traditional investment sources. Perhaps the most high-profile example of these to emerge recently is sovereign wealth funds (SWFs), joining private equity and hedge funds alongside more traditional investors, in search of appealing global investment targets.
Although SWFs have existed for more than 50 years, they have become particularly visible for the cash injections they have provided into troubled Western financial markets post-credit crunch.
On the one hand, the sizeable investments that bailed out many established financial institutions have been welcomed, but on the other, they seem to have simultaneously stirred up suspicions among those who believe SWFs to be more than purely commercially motivated investment vehicles.
If the column inches dedicated to SWFs are anything to go by, one would assume the state-backed investors were dramatically shaking up the global investment landscape. But AT Kearney’s 2007 FDI Confidence Index strongly suggests multinational firms do not see SWFs as competitors.
AT Kearney chairman Paul Laudicina says the survey’s respondents viewed private equity as far more serious competition, with 62% considering it their main concern. “It is not easy to break down the FDI data into specific greenfield investments, but the anecdotal impression is that SWFs tend to make strategic investments (well short of ownership) in very large-cap companies, in infrastructure such as ports or in financial institutions,” says Mr Laudicina.
“SWFs are less likely to make the kind of market-oriented investment in products and distribution that most commercial investors in overseas markets tend to target,” he adds. There was also confidence among respondents that international or national codes of conduct for SWFs would mitigate many concerns, according to Mr Laudicina.
And it is precisely those international calls for greater transparency surrounding SWF investments that have highlighted what many say is a real threat to global investment flows; protectionist sentiment from Western governments. Warnings that SWF investments in nationally strategic assets could be leveraged for political means have prompted public statements of concern from business leaders and heads of state, including Germany’s chancellor Angela Merkel and France’s president Nicolas Sarkozy.
But whether the fears have any foundation or not, the perception still remains that SWF investments are not always entirely commercially led and that the big state-owned funds of the Gulf, China and Russia are using these sovereign entities as Trojan horses into Western lines of power.
Business as usual
Jacques Philippe Marson, BNP Paribas Securities Services chief executive officer, says that from a financial intermediaries point of view, SWFs are business as usual. “It is the recent financial crisis that brings SWFs into the limelight because without their financial input, Western markets would be in even more turmoil. The assets managed have become more visible although they are relatively small,” he says.
SWFs are not changing the investment landscape and the discussions are highly over-rated, according to Mr Marson. “At present, SWF investments only represent 2% of global equity and bond markets so we ought to keep things in perspective,” says Mr Marson.
European trade commissioner Peter Mandelson wants foreign state-backed funds to sign up to a voluntary code of conduct, while the International Monetary Fund (IMF) and OECD are also working together to come up with a set of international voluntary SWF codes of conduct. “We have to reassure people about the experience and practices of these funds to date and get the funds themselves to demonstrate that their future will be guided by their practices in the past,” says Mr Mandelson.
Reassurance is the way to overcome protectionist pressures in Europe and the US, according to Mr Mandelson: “Because in this political climate, Russian, Chinese and Gulf-based funds have been subject to suspicion, which I think this is almost certainly unfounded and unjustified, and people are wrong to over-react.”
||Although the European Commission and the IMF have both insisted proposed codes of conduct for SWFs are voluntary and nothing more than exercises in reassurance, managing director of the Kuwait Investment Authority (KIA) Mr Bader Al Sa’ad has said publicly that he views codes of conduct as regulation under a different name. SWFs such as the KIA have been around for almost 55 years with an excellent track record of being responsible and disciplined investors, says Mr Al Sa’ad. “What has changed so that recipient countries suddenly want to regulate us?”|
Mr Al Sa’ad has said the regulation should instead be applied to those entities who are responsible for the market crisis, while echoing fears that imposing regulation on SWFs would create a global business environment which would hurt crossborder investment in general. Mr Al Sa’ad says the KIA has a vested interest in maintaining mutually beneficial co-operation with recipient countries. “The more the KIA invests in Europe, the greater our vested interest to ensure Europe’s continued economic growth and stability, otherwise our investments would be adversely impacted,” he says. It is a view shared by many of the SWFs.
Head of Dubai World (DW), Sultan Bin Sulayem, has also publicly warned that European attempts to force greater transparency on SWFs will make the continent an unattractive investment destination. He even went as far as to say that Europe is now exerting even more pressure on SWFs than the US, a significant charge when bearing in mind that it was the US which created controversy over Dubai Ports World’s (DPW) acquisition of UK port operator P&O, which ran a number of major US ports, leading DPW to eventually sell its American P&O operations. Mr Sulayem argues that his investment fund is run on a commercial basis and should not be seen as having any political motive.
But different funds have taken different approaches and while DW and KIA have levelled criticism at European regulators, the Abu Dhabi Investment Fund – by far the largest SWF – has showed good faith by working with the US Treasury on a set of principles for investment – although no other Middle East fund has followed its example.
However, according to Gerard Lyons, chief economist and group head of global research at Standard Chartered Bank, the greater transparency demanded by the West will not necessarily assuage doubts about SWFs’ intentions. “The China Investment Corporation has already disclosed information about many of its investments and still the West is worried about China; transparency is not the real issue and will simply lead to an increase in the number of questions being asked,” says Mr Lyons.
The real issue, according to Mr Lyons, is not that the investment is foreign but that it is government investment that may end up distorting markets. “Eight years ago, the Senate agreed that the US government could not invest in the US private sector so why should it be different for foreign governments?” he says.
Whether the investment originates from a government investment vehicle or not, data on funding sources is essential, says Deutsche Bank director for financial markets and regulation Steffen Kern, who sees transparency simply as a means to ensure market stability. “The generally accepted principles and practices the IMF is currently working on have nothing to do with investment policies or protectionism,” he says. “We are currently in an SWF-buying phase and at some point in the future funds may decide to divest. The more information available for financial markets about investors and their strategies, the better it is for financial stability.”
Alexei Moisseev, head of fixed income research at Russian private equity firm Reneaissance Capital, says that not all protectionism is bad. “Governments have a right to protect mineral reserves and critical infrastructure as long as they are open about it and provided they have adequate technology and expertise,” he says. State-owned energy company Gazprom was criticised for not allowing Western investment in oil and gas, despite not having the technology or the expertise to fully exploit the mineral resources it owned. There are many ways of restricting capital flows – some through formal committees such as the Committee on Foreign Investment in the US and Germany’s plans for a similar committee; Russia simply chose to tax foreign companies up to the hilt so that it became unfeasible to invest in its oil and gas sector, says Mr Moisseev.
Open for business
Although there has been much made of Western governments blocking emerging economy fund investments, the West is still officially more open for business, according to the OECD Investment Openness Index, which says most global investment barriers exist within younger economies.
While there may be political implications for SWF activities, there is little evidence of any economic impact on corporate ownership and control. Public concerns about national security are yet to be proved valid as there is no known case of an SWF or its activities having given rise to any kind of political opposition or upheaval, says Peter Jungen, president of the European Enterprise Institute.
“To stop SWFs would be to stop one of the biggest wealth-creation machines of all time,” he says. “People say we are becoming dependent on emerging economies but the more interdependence the better because crossborder investment is a peace-creation instrument and surely it is much better to have a trade war than a cold war.”
THE RISE OF SWFS
Although SWFs have existed for more than 50 years, they have become particularly visible for the cash injections they have provided into troubled western financial markets post-credit crunch.
On the one hand, the sizeable investments that bailed out many established financial institutions have been welcomed.
On the other, they seem to have simultaneously stirred up suspicions among those who believe SWF to be more than purely commercially motivated investment vehicles.
AT Kearney’s 2007 FDI Confidence Index strongly suggests multinational firms do not see SWFs as competitors.
The survey’s respondents viewed private equity as far more serious competition, with 62% considering it their main concern.