Its back to Sovereign Wealth Funds and what they have being up to recently.
Shining a light behind their closed doors isn’t easy. Seldom mentioned in any Political or economical discourse these Funds will be the Jihad of our times.
Although sovereign wealth funds (SWFs) have been around for decades, it was not until the subprime mortgage crisis of 2007 that they truly garnered recognition as major players in the investment market.
With vastly different political, economic, and investment philosophies States/Countries are starting using their populations’ collective wealth to do more than simply investing with hopes of compelling returns.
When they invest in the infrastructure or some other critical industry of another country, for example, people are left to wonder what the real motivation might be.
Guided by the interests of the state rather than those of international business community they are gobbling up what is left of the worlds assets/resources.
With a mind-boggling $6 trillion of assets, (Sovereign wealth funds–charged with preserving the accumulated fortunes of their home nations–are well known for their opaque, tightly guarded investment decisions) an amount on par with the collective economic output of Germany and the U.K. combined.
The 10 largest funds account for 80 percent of that wealth.
The value of global direct deals by sovereign-wealth funds hit $50.02 billion in the first half of 2014.
This was a 23.1% increase on comparable transactions in the first half of last year, and up from roughly $35 billion put to work in the first half of 2012.
The largest deal struck by a sovereign-wealth fund in the first half of 2014 was Singapore’s Temasek Holdings ‘ $5.7 billion purchase of a 25% stake in A.S. Watson Holdings, a health and beauty retailer.
The financial sector was the most attractive for sovereign-wealth funds. A total of $12.9 billion was put to work in direct deals in the sector.
The rise in direct deals by sovereign-wealth funds comes as large, sophisticated investors seek to bypass fees charged by fund managers.
In December, the former co-head of private equity at European firm Doughty Hanson joined the Canada Pension Plan Investment Board. In February, Pascal Heberling, a 12-year veteran of European private equity firm Cinven, joined the Abu Dhabi Investment Authority to find direct investment opportunities.
Russia, for example, where tensions with the U.S. and European Union have continued to escalate. Political instability, exactly what sovereign investors like and don’t like, is affording more and more investment opportunities.
These funds’ potential influence is unquestionable.
Though countries all over the globe have sovereign investment funds, East Asian and the Middle Eastern funds make up 72 percent of total sovereign assets under active management.
As of 2012, Norway’s fund owned more than $4 billion worth of stock each in Apple, HSBC, Nestle, Royal Dutch Shell. That same year, China Investment Corp., – the world’s fourth largest fund – bought a 10 percent stake in Heathrow Airport Holdings. The $773 billion Abu Dhabi Investment Fund (world rank: #2), invested $7.5 billion in Citigroup in 2007, which helped the bank to recover from mortgage losses. Temasek Holdings’ assets are worth the equivalent of 10 percent of the Singaporean economy and include majority stakes in both the national telecommunications provider and Singapore Airlines. The Qatari Investment Authority is reportedly considering using some of its $170 billion to build infrastructure in India. International reserves have grown 1,300 percent in non-Japan Asia since 2000 and by 900 percent in the Middle East and Africa.
For a majority of those countries surpluses are due to commodity exports, such as oil in the Gulf states or copper in Chile. In other countries, such as China, high domestic savings rates and low levels of consumption created the surplus.
On the other hand countries like the United States have accumulated large fiscal deficits.
Is there any particular type of investment that these funds favor?
It’s true that most countries’ funds focus on foreign investments, but an increasing number do deploy their wealth primarily at home.
Among the large funds, domestic deals are especially pronounced in three countries: the UAE, Singapore, and Malaysia, where they make up well over 50 percent of total investments. In each case, the host country has established an investment vehicle whose principal purpose is to effectively oversee the management of state assets, including privatization, and to invest in strategic sectors of the domestic economy.
Roughly 40 new sovereign wealth funds that have emerged since 2000, almost 80 percent in emerging-market countries.
A growing proportion of investments are likely to be in real estate, infrastructure and private equity.
They tend to operate like holding companies and have greater access to international capital than the state-owned companies would on their own.
Many Westerners worry that SWF investments would permit foreign executives to sit on corporate boards — and advance their state objectives that as government-operated investment funds.
Much remains to be understood about their processes and activities.
One famous example is Dubai Ports World, which in 2006 wanted to invest in ports in the United States. There was tremendous concern that they could use their investments to influence shipping routes. Dubai Ports World eventually sold the American assets it had acquired to AIG.
As to the question of how will the funds be used in the future?
They are increasingly being tapped to provide financing for domestic investments, including to help close infrastructure gaps.
A large influx of money can strain domestic resources and create opportunities for official corruption.
This opens up some potential opportunities but also a number of serious risks, including undermining hard-earned efforts to sustain macroeconomic stability and becoming a vehicle for politically driven “investments” that fail to add to national wealth.
However, the global payment imbalances that have been a driving force for sovereign wealth funds are decreasing. In China, for example, the government is encouraging a shift from an export-driven economy to a consumer-driven one, which would tend to drive down the balance-of-payments surplus. At the same time, fiscal and external deficits are declining in the U.S.
So sovereign wealth funds will continue to grow, but at a slower pace than we have seen in the past decade, however these funds will continue to grow, and so will their influence. Sovereign wealth funds are in a position to invest in large infrastructure projects that are in great demand and face sizable financing needs.
While their investment goals and strategies vary widely, countries will have to be careful to account for this increased investment within their own budgetary framework to counter these pressures. Keep in mind, too, Many of these countries do have great need for more domestic infrastructure investment. But there are limitations, such as domestic absorptive constraints. And frankly, there are sometimes governance issues that could result in the misuse of vast resources.
However, many of these countries are still developing their intellectual and legal infrastructure. When a fund chooses an overseas private equity fund to invest with, for example, they’ll obviously look at performance and risk metrics, but they’ll also look at how willing that private equity fund is to transfer its knowledge.
Before it’s too late and we all end up Privatized these funds must be regulated so they cannot own more than 20% of any Investment.
If not, in the not so distant future we will find that everything our Taxes have paid to provide will end up in the hands of Profiteers.