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Purchasing power |
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Written by Arabian Business
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Sovereign wealth funds will play an increasing role in markets, and an increasing role on the boards of companies where they will decide to have a say.
If high profile companies were designer accessories and the world's financial markets a catwalk, GCC-based investment vehicles would be among the best-dressed models on show. Amassing significant stakes in businesses across the globe the power of these, and similar funds in Asia and Russia, is on the rise; as are fears that a lack of transparency clouds their real motives.
While pressure mounts from those fearful of these financial giants, however, others welcome their open wallets and increasingly confident global investment strategies. But will shifting balances of power in international markets have far-reaching impacts that go beyond a realignment of the financial situation, reflecting political motivations at a higher level? And will these organisations heed calls for increasingly boisterous demands for disclosure on ambitious investment strategies and current holdings?
Tristan Cooper, an expert in regional sovereign funds and senior analyst at ratings agency Moodys, is sceptical. "For governments in the region there is a reason for these funds to be opaque," he explains, one of which is an attempt to limit the expectations of domestic populations. Calls for transparency may grow, "whether they'll heed those calls is different."
Speaking in Abu Dhabi recently, US Treasury official, David McCormick crystalised the sentiments of those uneasy about the power of these funds. "We are hopeful that the sovereign wealth funds will come together in a dialogue and maybe through the IMF and perhaps in other ways that could be the basis for shared understanding," he said. "A little more clarity on the funds will be useful for all parties, for those who are trying in invest sovereign wealth and those who are receiving it."
The snapping up of trophy assets by Gulf state-controlled investment bodies has thrust these previously little-known organisations into the public gaze. In June the US Treasury warned that the opacity of sovereign wealth funds across the world could stimulate renewed financial protectionism. With the value of sovereign wealth funds set to reach US$10 trillion within a decade, concerns that these funds may be wielded as financial weapons are bound-up with fears of political power games.
But judging a country's political motives from an outsider's point of view is a subjective exercise. Dr Eckart Woertz, economics programme manager at the Gulf Research Centre in Dubai, believes that when it comes to investment in strategic assets in Europe, governments feel more threatened by Russian manoeuvres than Gulf interest. "A European country won't be so afraid of Abu Dhabi owning power stations in Europe than of Gazprom owning power stations in Europe," he comments. In November 2006, Northern Ireland's electricity provider Viridian was bought by ElectricInvest, part of Bahrain-based investment house Arcapita, in an uncontroversial takeover bid backed by Viridian's shareholders.
Woertz believes that "GCC funds are rather performance orientated," a view shared by Mohammed Ali Al Hashimi, executive chairman of Dubai-based Zabeel Investments. "I don't care what the kind of deal is at the end of the day if that deal is a good business deal for me," he tells Arabian Business. "It's not about putting something on my wall and saying, ‘I own this' and letting it bleed money. That's not what I'm about. That's not what any of us are about here."
An October report by McKinsey Global Institute concludes the influence of traditional money managers will be eclipsed by that of opaque groups including petrodollar investors, Asian central banks, hedge funds and private equity groups. Petrodollar-fuelled sovereign wealth funds were also recently identified as major powerbrokers in global financial markets by the chairman of banking giant, Credit Suisse Group. The IMF estimates that the world's sovereign wealth funds, including state investment bodies established by countries such as China, Norway and Russia, already control more than US$2 trillion.
Estimates of the value of assets held by secretive Gulf sovereign funds like the Abu Dhabi Investment Authority (ADIA), Kuwait Investment Authority (KIA) vary. The Washington-based Peterson Institute for International Economics estimates ADIA controlled at least US$500bn in assets in August. By most estimates it ranks as the world's largest sovereign fund. Official figures available in March indicate KIA is worth around US$213bn, while data recently released by the Saudi Arabian Monetary Agency valued foreign assets at US$248bn in August.
Woetz sees sovereign wealth funds taking an increasingly authoritative position, not only in the market, but also on the boards of the companies they invest in. "They will play an increasing role in markets and they will play an increasing role on the boards of companies where they will decide to have a say." Ultimately, says Woertz, the activities of these bodies "will affect the asset allocation of global markets in the sense that equities are more sought-after. That means price/earnings ratios will trend higher while the attractiveness of bonds will go down. When bond prices go down interest rates go up."
This dynamic is driven by changes in the investment strategies of countries like China. "China especially has rather followed a policy of export promotion, keeping the local currency low, buying US dollars. And the performance of these assets was not that predominant in the past," says Woertz. "But it seems to have changed slightly as they are now moving money away from fixed income investments into equity investments." China recently purchased nearly 10% of US private equity firm, Blackstone.
Despite the potential impact in the global markets predicted by Woetz, however, Tristan Cooper sees a more positive picture at a local level. "It depends how you think of these sovereign wealth funds," he tells Arabian Business. He sees them acting as cooling devices for economies pumped full of petrodollars.
In Cooper's scenario, the treasuries of GCC oil producing states cannot absorb the revenues and this causes inflation. "The fact that they have already increased government expenditure to the extent they have is already creating inflationary pressures, so they need some way of sterilising those inflows," explains Cooper. "Sovereign wealth funds act as a very useful sterilisation mechanism for these economies."
"Without sovereign wealth funds foreign assets would be accruing on the balance sheet of the central bank and entering the domestic economy. And that would be building up even greater inflationary pressures than those that exist. So they have a very useful role if you think of them as recyclers of wealth and redistributors of the wealth within the economy."
But it is not just the Gulf's sovereign wealth funds that are attracting attention. "Over the last few years, particularly in Dubai, a lot more institutions have started investing abroad," says Al Hashimi. "We're looking at expanding and diversifying our portfolios, and looking at other investment opportunities outside [the region]." He reels off a list of Gulf institutions that may bid for business in different countries simultaneously: Zabeel, Istithmar, DIC, Dubai Investment Group, Dubai World, it goes on.
"All of us are going into different ventures in different areas in different sectors, so when people see that, where maybe it would have been one institution before, that's probably why people are looking at us differently," says Al Hashimi.
The region's private equity houses have never been more active. Delta Two, an investment fund controlled by the Qatari prime minister, is currently in the critical stages of its contentious takeover bid for iconic British supermarket chain, J Sainsbury. Acquisitions made by other Gulf investment houses earlier in the year include stakes in European defence and aerospace company EADS, bought by both Zabeel and Dubai International Capital (DIC); Kuwait-based Investment Dar's takeover of luxury UK carmaker Aston Martin; DIFC Investments acquisition of and 2.2% stake in Deutsche Bank; and DIC's purchase of a ‘substantial' stake in HSBC.
Odd though it may seem however, PE houses, frequently criticised for their lack of disclosure, may be leading the way towards reducing the opacity of largely anonymous investment bodies. "When it comes to transparency on how your investment decisions are made, what are the fees you are charging, what are the types of criteria you look at when making decisions, what are the key factors you use to influence investment decision-making - whether it through your board, or through political connections - all of that, I think, is increasingly transparent," says Abrar Mir, managing partner at NBD Sana Capital.
So with Gulf sovereign funds and other investment institutions splashing the cash, will their activities upset market stability? In reality, according to Woertz, sovereign funds and other investors help maintain stability. "They keep up the balance by financing the US deficit in the first place, if there was no purchase of US securities by oil exporters and by Asian manufacturers the whole global economy as we now know it would fall apart. Full stop." But he does admit, "of course within this there are power gains going on, that's what we're seeing at the moment."
Tristan Cooper also detects a degree of equilibrium in the financial markets despite the power of these investment bodies. "Often wealth is flowing from oil importing countries back to oil importing countries through investments in their stock markets or their bond markets or through foreign direct investment. So often the wealth is actually returning via the sovereign wealth funds to the very countries from which the wealth originated through imports." As a result Cooper concludes, "there is no reason why sovereign wealth funds on their own should create global imbalances by themselves."
But even if increased transparency alleviates some fears, Woertz asks, "would it mitigate the basic underlying problem?" The answer: No. "We have simply this run away deficit in the US on one hand and huge surpluses on the other hand. And that is not going to pass by soon. At some time these deficits have to be addressed."
Until then, Gulf investors will continue to buy assets overseas and fears of political motivations will remain. "It's an immensely strategic question whether you allow large foreign holdings of strategic companies in your countries," says Woertz. "It raises some suspicions."
by Christina Corbett on Friday, 02 November 2007
http://www.arabianbusiness.com/503193?start=0
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