Sovereign wealth funds – investment vehicles created by
governments in primarily emerging economies and backed by huge
accumulations of foreign exchange reserves – are drawing growing
attention, and some political unease, as they become more involved
in major international M&As, writes John Evans
Go deeper with GlobalData
Barclays, attempting to win
ABN AMRO against a competing offer by a Royal Bank of Scotland-led
consortium, raised its bid to €67.5 billion ($93.5 billion) at the
end of July after lining up investments from China and Singapore
worth $18.5 billion. China Development Bank and Singapore’s Temasek
both bought strategic stakes in the UK bank, allowing it to
increase its offer for the Dutch lender.
Last year, Temasek became the largest shareholder in
UK-headquartered Standard Chartered, a bank that has most of its
assets in Asia. In May, the Chinese government invested $3 billion
in Blackstone Group ahead of the US private-equity giant’s initial
public stock offering.
Temasek, the Singapore government’s strategic fund, is one of the
oldest of the sovereign wealth funds and has become a model for
many other governments seeking to create their own investment
vehicles. On 2 August, the group published its 2006 annual figures:
Temasek’s net portfolio value grew to S$164 billion ($108 billion),
up from S$129 billion in fiscal year 2005. Shareholder funds grew
to S$114 billion, up 26 percent.
The Singapore agency, in particular, has been a serial acquirer
of banking stakes, now holding 38 percent of its portfolio in
financial services. Its stakes include interests in two Indonesian
banks (Bank Danamon and Bank Internasional), ICICI Bank of India,
Bank of China, China Construction Bank, E Sun Financial of Taiwan
and Hana Financial of Korea – in addition to Standard
Chartered.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataTemasek was established in 1974 with an initial portfolio value of
about S$350 million. Total shareholder return since inception
remains strong at more than 18 percent by market value and over 17
percent by shareholder funds. The annual dividend yield to
Temasek’s shareholder has averaged more than 7 percent.
Since 2002, Temasek has been reshaping its portfolio significantly
through greater focus on direct investment opportunities in some of
Asia’s fastest-growing economies. Temasek’s underlying asset
exposure to Singapore increased 8 percent to S$62 billion in fiscal
year 2006, but it now forms a smaller percentage of the larger
overall portfolio, accounting for 38 percent compared with 44
percent in 2005. Exposure to Asia (ex-Singapore and Japan) rose to
40 percent compared to 34 percent last year and just 19 percent in
fiscal year 2004. The rest of the portfolio comprises investments
mostly in OECD economies.
Worry in the West
Although sovereign wealth funds have existed for
several decades, it is the establishment of a new crop of funds and
their growing influence and clout that is worrying Western
governments. Led by Germany, the EU is showing concern at their
role in Europe, particularly as the funds originate in countries
such as China that do not reciprocate in allowing unfettered access
to their domestic financial services sectors.
The UK is maintaining its traditional opposition to trade or
investment restrictions, believing that there should be no special
restriction on state-owned funds acquiring strategic foreign
assets. Nevertheless, John Gieve, the Bank of England’s deputy
governor, has warned that the switch by reserve-rich countries from
being lenders to owners of financial or real assets “is likely to
lead to political tensions and pressures for protectionism”.
The problem is that
emerging countries are looking for a better return on their
swelling foreign exchange reserves after becoming disillusioned
with low yields on US Treasury securities and the long depreciation
of the US dollar, say analysts.
Global foreign exchange reserves now total about $5.6 trillion.
Adding an additional $1.5 trillion to $2.5 trillion held by
sovereign wealth funds brings total assets controlled by
governments to roughly $7.6 trillion, or 15 percent of global gross
domestic product, according to the US Treasury.
Stephen Jen, global head of currency research at Morgan Stanley,
estimates sovereign funds could grow to $12 trillion by 2015 –
nearly the current size of the US economy. China, for instance, the
country with the world’s largest foreign exchange reserves, is
rapidly establishing a fund that will invest $200 billion of the
country’s $1.2 trillion in reserves in assets around the globe.
Japan, too, with its near $1 trillion of reserves, could join the
trend towards strategic investment vehicles.
As a result, a backlash against the billions that could potentially
be ploughed into acquisitions in strategically sensitive Western
companies, such as major banks, seems sure to grow, analysts
say.
The US has already acted to block some strategic acquisitions. Last
year, an offer by Dubai Ports World to buy a UK ports operator that
owned several US ports ran into political opposition, as did a 2005
attempt by Chinese oil company CNOOC to acquire US oil producer
Unocal. Dubai Ports World ultimately agreed to sell off the US
holdings and CNOOC pulled out of the Unocal bidding.
In Germany, Chancellor Angela Merkel has warned that
state-controlled investors might use stakes in European companies
to pursue political, rather than financial, goals. The EU should
think about ways to protect its firms from politically motivated
buyers, Merkel added, citing the US’s interagency Committee on
Foreign Investment as a possible model.
The EU is concerned about investment funds originating in China,
Russia and the potentially volatile Middle East oil-producing
countries. The Abu Dhabi Investment Authority, ranking as one of
the largest sovereign vehicles, could now have funds of as much as
$500 billion.
Russia, which last year took a stake in European Aeronautic Defence
and Space (EADS), owner of aircraft manufacturer Airbus, plans to
use part of its $117 billion of stabilisation assets to finance
what it describes as a “National Wellbeing Fund”.
German officials have even gone so far as to start investigating
whether these foreign funds pose a national security risk. Among
the risks being assessed is an indirect take-over of one of
Germany’s largest banks by a foreign government.
In the US, senior officials have warned that investment funds run
by countries with large trade surpluses could pose a risk to
financial market stability.
Securities regulators are also grappling with the implications of
the rise of these funds in global capital markets. Securities and
Exchange Commission chairman Christopher Cox has told Congress that
the funds’ influence over capital market flows and their lack of
transparency presents “challenges to a regulatory system premised
on free markets”.
Clay Lowery, the US Treasury’s acting Undersecretary for
International Affairs, has called for the development of a best
practices guide for the sovereign wealth funds.
Hawks in Congress even warn
that China, in diversifying its reserves through use of sovereign
funds, could receive beneficial treatment from the US government by
threatening to sell Treasury bonds, thus driving up US interest
rates. The decision-making of a Western government could be
influenced by such threats, they contend.
Lowery, in his remarks, did not go as far, saying that the
International Monetary Fund and the World Bank could be logical
candidates to start such a monitoring process of these sovereign
funds.
Dominique Strauss-Kahn, Europe’s candidate to take over the
presidency of the IMF, said that sovereign wealth funds should
follow normal market rules. These vehicles need, as any fund, to
behave “with corporate governance”, he said.
Balanced approach
Supporters of a balanced approach to international investment
guidelines mention Norway’s global pension fund, which has $324
billion of oil wealth invested across a range of assets, as a
possible transparent role model. The Norwegian government reveals
the fund’s holdings every year and follows a strategy that limits
its acquisitions to small stakes in individual companies.
