The recent moves by several sovereign funds to acquire NASDAQ’s 31 percent stake in the London Stock Exchange and the Nordic Bourse operator OMX, and other highly publicized moves by such sovereign funds, have illustrated the dramatic purchasing power of these sovereign investment vehicles. The Middle East is home to some of these, the most famous being the Qatar Investment Authority, Abu Dhabi’s Mubadala Fund, and Dubai’s Istithmar, Dubai Holding, Dubai International Capital and Borse Dubai, who have joined the likes of Singapore’s Temasek Sovereign Fund in the global buying game. The power of such sovereign funds should not be underestimated, especially in times of weaker involvement by more traditional financial institutions. Collectively, sovereign funds have become the single biggest buyers of corporate names, prime properties and rated debt securities in the world.
As China and India amass substantial foreign exchange reserves, these countries too will be on the lookout for more exotic acquisitions, and begin to move away from simple purchases of US Treasury securities. However, the fall in the value of the dollar and lower yields on US treasury securities has caused some strategic rethink by traditional investors such as the Chinese and others with dollar surpluses.
China in particular, with nearly $1,300 billion in reserves by year-end 2007, stands to make massive portfolio losses on its US holdings should the yuan appreciate against the dollar. Thus it makes economic sense to diversify through sovereign funds.
And so, the Chinese joined the others in the Gulf and Singapore and established a separate fund to invest in overseas markets and China has built up a significant stake in the US private equity house Blackstone.
Why the concern then over the activities of such sovereign funds? Are they not performing a valuable role in smoothing erratic market movements by buying when markets are weak and institutional buyers have cut and run and nowhere to be found? And yet, there seems a growing unease, mostly in the US and some
European countries, about the power of the sovereign wealth funds. No one seemed to cry foul when foreigners seemed to buy smaller companies with little public profile or name recognition, but the tables were turned when such funds seemed to zero in on strategic or nationally important companies.
The list is endless and varied — port operator P&O, Carlyle Group, Ferrari, Four Seasons, Sainsbury’s, UK football clubs, to leisure centers such as Alton Towers and Legoland.
Latent nationalism rears its head, and out of the window flies talk about globalization and level playing fields. Countries that had preached open-door policies for foreign investment suddenly feel threatened. Deals that were entered into with good faith, such as Dubai’s purchase of P&O, are suddenly embroiled in politically-driven issues and the transaction later sold.
Some of this fear stems from two basic factors, causing some policy makers to argue that sovereign funds should not be treated like other investors. The first is based on reciprocity: why allow some sovereign funds in, when the same privileges are not granted in their home countries in major, let alone, strategic sectors? This might seem a valid point on the surface, but most of these new sovereign funds belong to countries that have only recently acquired sizeable foreign reserves based on a narrow national revenue base, and for the Gulf, predominantly hydrocarbon. The national economic structures are not as developed, and the few institutions which can be targets of foreign takeover are in sensitive sectors such as banking and telecommunications.
Despite this, some Gulf countries have opened up these vital sectors to foreigners, with foreign banks operating in the Kingdom, and the telecom sector now more competitive with new foreign players, while Dubai has a liberal real estate policy.
At the same time, there is intense rivalry between some of the regional sovereign funds, with both Dubai and Qatar vying to become the region’s premier financial centers through their purchases and links to leading international stock exchanges.
The second factor used against sovereign funds seems to be more valid, and is based on a lack of transparency in the activities of sovereign funds. In an era of privatization and denationalization of many state enterprises, the acquisition of many prime enterprises by sovereign funds also smacks of renationalization by foreign entities that are not transparent in their accounting or policy objectives. This raises suspicion and fear on a larger scale even compared with the much-maligned private equity funds.
But then again, not all sovereign funds are shrouded in secrecy, and the Singaporean Temasek is a model of international transparency and cooperation, and has proved a welcome partner in such institutions as Standard Chartered and Barclays Bank. Today, it has assets of around $164 billion, which makes other Middle East sovereign funds acquisitions pale into insignificance.
And so the message is clear — be more transparent, and the threshold fear factor is reduced so that you are welcome as a sovereign fund, unless of course you happen to be Chinese, Arab or Russian, then no amount of transparency is sufficient.
Dr. Mohamed Ramady is visiting associate professor, finance and economics at King Fahd University of Petroleum and Minerals.