Sovereign wealth funds (SWFs), or state-owned investment vehicles, are coming under increasing discussion and scrutiny. SWFs are estimated to hold over US$3,000 billion in assets. Merrill Lynch has projected that SWFs will reach US$7,900 billion by 2011. These funds are anticipated to become key global investors.
SWF’s have been on a buying spree in the United States.
The China Investment Corporation took a US$3 billion dollar stake in the Blackstone private equity company and a US$5.5 billion stake in financial house Morgan Stanley.
Partner
Sonnenschein Nath &
Rosenthal LLP
US financial institutions, weakened by the sub-prime mortgage crisis, have seen significant SWF investment. Singapore has poured millions into Merrill Lynch, Citigroup and UBS. Similarly, Abu Dhabi, Kuwait and the United Arab Emirates have taken a position in Citigroup.
Most of the stakes so far have remained passive and below the 10% threshold triggering a review by the Committee on Foreign Investment in the US.
Real estate players, such as Related Cos, have tapped Abu Dhabi and Kuwait SWFs for more than US$1 billion. Casino operator MGM Grand has received nearly US$3 billion from Dubai.
Thus far, India has been on the sidelines. On its face, India would seem to be a natural candidate for such a fund. India has the third largest foreign currency reserves in Asia, nearly US$300 billion, and is the second fastest growing major economy.
A weak dollar and the US credit crunch present unique opportunities. Increased merger and acquisition activity by Indian majors (such as the pending TATA-Ford deal) has clearly placed India at the forefront of the international stage.
Politics are a different matter. While the Prime Minister’s Council on Trade and Investment has supported establishing a SWF (with a particular emphasis on energy assets), other factions are not so sure. The Communist parties have stated that establishing a SWF will do nothing but expose India to international financial risks. Their view is that the Indian economy is already partially exposed to a US recession and further external financial integration would increase that risk.
The Prime Minister, at the forefront of economic policy since the beginnings of liberalization in the early 1990s, is pushing for a greater position for India on the international financial scene.
The Reserve Bank of India, however, will most likely be reluctant to part with any of its foreign currency reserves. With elections looming next year, and significant internal investment needs, particularly in the area of infrastructure, forming a SWF may be a tough political sale.
Intense scrutiny
Meanwhile, in international circles, SWFs are coming under increasing scrutiny.
The G-7 and the International Monetary Fund are in the midst of drafting a set of “best practices” for SWFs investment.
The particular concern is the use of investment in furtherance of political and strategic policy.
China has specifically rejected the need for any set of rules and bristles at the thought of “outsiders” telling the China Investment Corporation how it should act.
In Washington, the concern level has been raised, particularly given the stakes taken in weakened financial institutions.
Several Democratic senators have called for legislation to create regulations and disclosure requirements.
Public opinion is largely against stakes by SWFs, despite polling showing only 6% of the American people have seen or heard anything about SWFs.
While political response has been quiet, it is not likely to remain so. The general fear is the political influence such funds could wield inside US companies.
Political moves
It is difficult to totally remove “politics” from publicly owned funds.
The combined California Public Employees and State Teachers Retirement Funds, if classified as a SWF, would be the second largest in the world.
Politics have clearly been at the centre of decision making by these funds and a constant source of debate and criticism.
It seems clear that the “first mover advantage” is favouring the current SWFs. Both in the US and internationally the playing field is likely to get tougher in future.
It is not clear that India will reach the requisite decisions and, if favourable, become operational before changes in the marketplace take place.
What is clear is that the SWFs will have to pay more and more attention to the issues of government relations, lobbying and public opinion in the investments they make.
This will be as key to their success as the investment and risk officers selecting the target investments.
Wayne Rogers is a partner in the international law firm of Sonnenschein Nath & Rosenthal, where he specializes in international trade and cross-border transactions. He may be reached at +1-202-408-6478 or wrogers@sonnenschein.com.
Sonnenschein Nath & Rosenthal LLP
1301 K St, NW, Suite 600E
Washington, DC 20005
United States
Tel: +1 202 408 6478
Email: wrogers@sonnenschein.com
www.sonnenschein.com
