Ravi Madhavan's A&D Blog

NYT - Dubai and private equity

A couple of articles (from a while ago) on Dubai's debt crisis, which came to light late last year, both from the NYT. Andrew Ross Sorkin and Heather Timmons address several interrelated issues that led up the debacle.

SWF news: Qatar investment in Porsche

In the midst of a rapidly transforming automotive industry, Porsche and Volkswagen have announced plans to merge. This NYT report says that the cash-strapped Porsche might get a cash infusion from Qatar's SWF - such an investment would allow the proposed business combination to go forward.

How SWF are impacted by the global financial crisis

Just before the global financial crisis hit last year, Sovereign Wealth Funds (SWF) were all over the headlines - one of the new power brokers (as labeled by the McKinsey Global Institute). Clearly, their clout has not shielded SWF from meltdown-induced losses; this article from Knowledge @ Wharton discusses some aspects of the impact. One of the open questions, of course, is whether SWF will continue to invest beyond their own borders once the fog lifts. The article ends with the view that they will:

"Some of the opportunities may be within their own economies, but generally they are so small relative to the world economy that it's unlikely a very large share should be devoted to domestic investments."

China SWF takes the Wall St. bypass (Reuters Deal Zone)

This Reuters.com Deal Zone article describes how the Chinese Sovereign Wealth Fund's investment strategy has changed in light of the financial crisis. Excerpt:

Our correspondent George Chen reports China’s $200 billion sovereign wealth fund, China Investment Corp, is shifting to natural resources, fixed income and real estate after taking big haircuts on the U.S. financial sector. The fund, headed by former Vice Finance Minister Lou Jiwei, “has drawn criticism at home over large paper losses on its combined $8.6 billion investments in U.S. private equity giant Blackstone Group and Wall Street bank Morgan Stanley,” Chen says, citing people familiar with the matter.

France setting up SWF

French President Sarkozy has proposed creating a Sovereign Wealth Fund in order to defend French companies from unwanted takeovers by foreign companies - as well as to help companies in other types of difficulty. Read the Wall Street Journal report here. This would appear to be a new use of SWF - while the traditional SWF model has been to invest large holdings, this is aimed directly at protecting national champion companies. 

SWF watch

Tow interesting articles on SWF from the FT.com website. The first one reports that Qatar's SWF turned down an offer to help recapitalize troubled Wall Street banks (may have been Goldman Sachs and Morgan Stanley). Excerpt:

A leading executive of Qatar’s sovereign wealth fund on Wednesday disclosed it had spurned the chance to help recapitalise troubled Wall Street banks, in remarks that offered a rare insight into its investment strategy.

Kenneth Shen, head of strategic and private equity at the Qatar Investment Authority, said that the QIA had got “an early look” at potential investments in the US banks but declined the offers.

He told a Hong Kong conference: “From where we stood it was too early [to invest] from a timing perspective. It was clear to us that we were coming down the curve.”

The second reports that the head of the Kuwait Investment Authority recently went on his domestic TV to explain the SWF business model, apparently in response to concerns about how the US market meltdown affects SWF investments. An important strand of the story was that SWF are not in the business of shoring up failed institutions, and have generally avoided getting involved in the current meltdown. However, the report ends by noting that there will be investment opportunities once the dust settles down. Excerpt:

But people who are in contact with the funds say they have not been inactive and, once the US government bail-out comes into effect, they will be combing the financial rubble for cheap assets. The KIA will be among them.

As Mr Saad put it on al-Arabiya: “Disasters in the US, some European countries or Asian countries create investment opportunities in the real estate sector, the financial industry or other sectors.”

Stephen Schwarzman on the need to play with SWF

Blackstone chief Stephen Schwarzman has written this defense of SWF in the Financial Times. Excerpt:

Gao Xiqing, the president of China Investment Corporation, China’s sovereign wealth fund, spoke last week of his frustration that CIC’s attempts at investing outside China sometimes run into political opposition. He went on to add, in words that should act as a chilling wake-up call to many politicians and bankers: “Fortunately there are more than 200 countries in the world. And fortunately there are many countries who are happy with us.”

I have known CIC since it bought a 9.4 per cent non-voting interest in Blackstone when we went public last year. The fact that its president publicly suggests that CIC may invest only where it feels welcome – a view I know many other SWFs share – has serious implications for the economic well-being of the US and other western countries where political opposition to SWF investments has mounted.

From the point of view of a rational economist, this is frightening. It is difficult to think of how much worse off we would be in the current financial crisis without SWFs. Many of our commercial and investment banks have taken large hits to their balance sheets because of bad investments. The capital infusions from SWFs have enabled them to strengthen their balance sheets. Since the fourth quarter of last year, SWFs have poured about $55bn (€35bn, £28bn) into US and European financial institutions to the great benefit of their shareholders. That is a very good thing. Using SWFs to recycle the holdings of countries with large surpluses in the west, which needs the capital, rather than keeping that money at home, is a huge benefit to us.

Source of SWF information

I came across this yesterday - the Sovereign Wealth Fund Institute, whose website appears to have a lot of information about SWFs. Looks like a useful source to keep on your radar, if you're interested in SWF.

SWF watch

Here are a few recent items about the continuing appeal of - and controversy surrounding - Sovereign Wealth Funds.

In this Reuters article, Blackstone CEO Schwarzman said that excessive U.S. scrutiny and distrust of sovereign wealth funds is "chilling" foreign investment at a time when the credit crunch needs to be eased instead.

In this Financial News comment, UK law firm partner Tom Cartwright argues that London should roll out the red carpet for SWFs. He has a very interesting take - that the Sarbanes-Oxley act has played a major role in strengthening London as a better place to do business than New York, and that the current US attitude to SWFs presents another opportunity for London to take business away from New York.

In addition to the oil producing nations, China has been a major SWF player. Now India is considering setting up a SWF.

Defense against SWF

According to this New York Times Deal Book article, California lawmakers are considering a bill that would prevent the two large California pension funds, Calpers and CalSTRS (also two of the nation’s largest), from allocating funds to private equity firms in which sovereign wealth funds hold a stake. Excerpt:

The bill is co-sponsored by the Service Employees Union International, a union that has loudly criticized many of the largest buyout firms, arguing that their leveraged buyouts are hurting the average worker. In proposing the measure, the union sought to draw attention to the questionable human-rights records of some of the countries whose government-controlled funds, known as sovereign wealth funds, have invested in American buyout firms.

But many in the private equity industry are “scratching their heads” over the legislation, as Investment Dealers’ Digest writes in its latest issue.

“It’s unclear what the goal of this legislation is,” said Bruce Ettelson, a partner in Kirkland & Ellis who heads its private funds group. He argued that the bill, if passed, would force buyout firms to choose between California pension funds and sovereign wealth funds — and he suggests that California, big as it is, would lose out.

Charlene Davidson of RSM EquiCo Capital Markets suggested the legislation is a knee-jerk reaction to the increased activity from foreign state-sponsored investment funds. “It appears to be more of a reactionary maneuver than a research-based action,” she told the Digest.