NEW YORK (Dow Jones) – After seeing billions of dollars of value wiped off their investments, sovereign wealth funds have reason to feel disillusioned.
Managers of these funds, especially those from the Middle East and China, are under pressure to rein in indiscriminate overseas investments to avoid further erosion of national wealth. They are also feeling the pressing need to devote resources at home.
This shift in investment philosophy will have a significant impact on global capital flow, says Ian Bremmer, president of political risk research firm Eurasia Group and co-author of a new book, “The Fat Tail: The Power of Political Knowledge for Strategic Investing.” Sovereign wealth funds control a vast amount of capital, some $3 trillion, and account for one-eighth of global investments.
Now, Bremmer told Dow Jones Newswires in a recent interview, many of these state-owned funds have become more inclined to invest domestically rather than simply investing in Western blue chips.
On Tuesday, China Life Insurance Co. and Singapore’s Temasek Holdings Pte. Ltd. led a $7.3 billion purchase of a one-third interest in Bank of America Corp.’s (BAC) 16.7% stake in China Construction Bank Corp. (0939.HK).
In the Middle East, Abu Dhabi Investment Authority recently bailed out neighbour Dubai with a $10 billion investment but is being selective where it invests overseas.
It has good reason to do so. In late 2007 it infused $7.5 billion of cash into Citigroup Inc. (C) in exchange for a 4.9% equity stake, which is now valued at $1 billion.
Similarly, China’s sovereign wealth funds, once a calling ground for capital-starved Western financial institutions, has been busy pumping equity into Chinese commercial banks.
There’s little doubt that for the global financial systems to again become robust, capital needs to freely flow. That includes the billions at these SWFs.
It’s a bit too simplistic to believe that the SWFs can reinvest all their resources internally. Their capital has to find ways across boundaries to generate long-term returns.
The countries behind the SWFs will surely look at industries that provide them technical know-how. We’ve seen a sample of knowledge-driven investment in the stock exchange space, where Qatari Investment Authority and Dubai have invested in the London Stock Exchange (LSE.LN) and Nasdaq (NDAQ) and is using them to develop financial markets in the Middle East.
Two things need to happen before we see more deals like these. First, the SWFs have to be even more transparent. This is a work in progress; Mubadala, an Abu Dhabi investment vehicle, in April published its first annual report. Second, the U.S. and Europe need to ease their protectionist attitudes even further. However, both are linked together.
China, for instance, is particularly eager to make commodity plays, such as buying into mining or oil companies. Lou Jiwei, chairman of China Investment Corp., has expressed interest in investing in Europe.
The question now is would these sovereign wealth funds be allowed to step up from being a source of rescue finance to becoming an active investor.
We are seeing a hint of this: Abu Dhabi-based International Petroleum Investment Co. last month agreed to buy Nova Chemicals Corp. (NCX), a Canadian firm struggling to make debt payments. Including debt, IPIC paid $2.3 billion for the chemical maker, staving off a looming bankruptcy.
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Sovereign Wealth Funds Shift Focus
Lisa Lee
13 May 2009
NEW YORK (Dow Jones) – After seeing billions of dollars of value wiped off their investments, sovereign wealth funds have reason to feel disillusioned.
Managers of these funds, especially those from the Middle East and China, are under pressure to rein in indiscriminate overseas investments to avoid further erosion of national wealth. They are also feeling the pressing need to devote resources at home.
This shift in investment philosophy will have a significant impact on global capital flow, says Ian Bremmer, president of political risk research firm Eurasia Group and co-author of a new book, “The Fat Tail: The Power of Political Knowledge for Strategic Investing.” Sovereign wealth funds control a vast amount of capital, some $3 trillion, and account for one-eighth of global investments.
Now, Bremmer told Dow Jones Newswires in a recent interview, many of these state-owned funds have become more inclined to invest domestically rather than simply investing in Western blue chips.
On Tuesday, China Life Insurance Co. and Singapore’s Temasek Holdings Pte. Ltd. led a $7.3 billion purchase of a one-third interest in Bank of America Corp.’s (BAC) 16.7% stake in China Construction Bank Corp. (0939.HK).
In the Middle East, Abu Dhabi Investment Authority recently bailed out neighbour Dubai with a $10 billion investment but is being selective where it invests overseas.
It has good reason to do so. In late 2007 it infused $7.5 billion of cash into Citigroup Inc. (C) in exchange for a 4.9% equity stake, which is now valued at $1 billion.
Similarly, China’s sovereign wealth funds, once a calling ground for capital-starved Western financial institutions, has been busy pumping equity into Chinese commercial banks.
There’s little doubt that for the global financial systems to again become robust, capital needs to freely flow. That includes the billions at these SWFs.
It’s a bit too simplistic to believe that the SWFs can reinvest all their resources internally. Their capital has to find ways across boundaries to generate long-term returns.
The countries behind the SWFs will surely look at industries that provide them technical know-how. We’ve seen a sample of knowledge-driven investment in the stock exchange space, where Qatari Investment Authority and Dubai have invested in the London Stock Exchange (LSE.LN) and Nasdaq (NDAQ) and is using them to develop financial markets in the Middle East.
Two things need to happen before we see more deals like these. First, the SWFs have to be even more transparent. This is a work in progress; Mubadala, an Abu Dhabi investment vehicle, in April published its first annual report. Second, the U.S. and Europe need to ease their protectionist attitudes even further. However, both are linked together.
China, for instance, is particularly eager to make commodity plays, such as buying into mining or oil companies. Lou Jiwei, chairman of China Investment Corp., has expressed interest in investing in Europe.
The question now is would these sovereign wealth funds be allowed to step up from being a source of rescue finance to becoming an active investor.
We are seeing a hint of this: Abu Dhabi-based International Petroleum Investment Co. last month agreed to buy Nova Chemicals Corp. (NCX), a Canadian firm struggling to make debt payments. Including debt, IPIC paid $2.3 billion for the chemical maker, staving off a looming bankruptcy.
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