New study adds nuance to sovereign fund debate

Wayne Arnold

• Last Updated: June 06. 2008 4:19PM UAE / June 6. 2008 12:19PM GMT

The increasing importance of SWFs was highlighted when the Abu Dhabi Investment Authority purchased a 4.9 per cent stake in Citigroup last year. Lauren Lancaster / The National

A story in Friday's edition on the release of a report on sovereign wealth funds by the Monitor Group in Cambridge, Massachusetts, referred incorrectly to the date of its scheduled release. The report is scheduled to be released on Monday, June 9.


ABU DHABI // Sovereign wealth funds (SWFs) are neither the completely passive investors they claim to be, nor are they devoted to gobbling up assets in the West as many of their critics fear, according to a new study on the controversial government-controlled investment groups conducted by a US-based management consultancy.

The Monitor Group, a consulting firm based in Cambridge, Massachusetts, plans to issue a report on Monday that analyses 33 years of sovereign wealth transactions, sifting through more than 1,100 deals amounting to US$250 billion ­(Dh918bn) and in the process dispelling some of the most commonly repeated misconceptions about SWFs.

The report, an advance copy of which was released to The ­National, confirms recent observations among analysts that SWFs have been moving increasingly into emerging markets and away from investing in the US, Europe and other developed nations, taking on increasing risk in the process. Despite their assurances that they are passive investors, the study finds that SWFs’ company investments often leave them with controlling stakes. Nonetheless, the study concludes that SWFs appear to have no political motives behind their investments.

“The facts don’t demonstrate that these SWFs are behaving as anything but prudent investment vehicles for their governments,” said Emad Tinawi, the London-based vice president for Monitor in the Middle East and North Africa. “They have not targeted ‘sensitive’ sectors.”

Secretive to the point of being mysterious, SWFs have generated more than their fair share of suspicion in the past year as their swelling size has thrust them to the front lines of global deal-making, with $92bn in publicly recorded company investments last year, according to Monitor. The Abu Dhabi Investment Authority (Adia) made a $7.5bn purchase of a 4.9 per cent stake in Citigroup last year, for example, which has become a symbol on both sides of the controversy of the increasing importance of SWFs and their potential for good and ill.

And though the controversy over their role shows no sign of abating, a widening recognition that SWFs are destined to play an increasingly vital role in global finance has sparked a rush to better understand them.

Although they do not generally reveal details about their size, booming exports and soaring oil prices have swollen SWFs to what some estimate is $3 trillion in assets, larger than the entire hedge fund industry, but still smaller than either global pension funds or insurers.

Suspicion still abounds, particularly because the largest sovereign funds are in non-democratic nations. An opinion piece in Wednesday’s edition of the Los Angeles Times marvels at the growing influence of SWFs over the American economy and asks readers to ponder: “What does it mean for Americans to have decisions about our jobs, our home loans, our school loans and so on to ultimately rest with foreign governments?” In an article in its latest issue headlined “The Coming Energy Wars”, Newsweek magazine suggests that growing acquisitions by SWFs are part of a trend likely to culminate in armed conflict.

The rising tide of protectionist rhetoric in the US has sparked a campaign by the administration of President George W Bush and other proponents of free trade and investment to counter criticism of SWFs and to convince SWFs in the Gulf that their investments are still welcome in the US.

Some SWFs also appear to be trying to defuse the debate by agreeing to calls for them to adopt a set of guidelines governing their investments. The Adia is leading the most prominent effort, co-chairing a working group of 25 countries within the International Monetary Fund to develop a set of voluntary principles. Estimates of the ADIA’s size range from $450bn to $1tn, an amount that HSBC in a report this month calculates is sufficient to pay every citizen of Abu Dhabi $50,000 a year.

The ADIA also sought to dispel some of its vaunted secrecy this week by launching a new website that provides hitherto unknown details about its composition and activities, including a list of its board of directors, a history of major investments and an organisation chart. It does not, however, reveal its size or allocations.

Such secrecy masked the real influence of Gulf funds in global markets, Mr Tinawi said. The Monitor study found that only $83bn of the $250bn in publicly announced deals it was able to analyse involved funds from the Middle East and North Africa. “A lot of it is not available to the public,” said Mr Tinawi. “It’s secretive.”

The Monitor report also found that more than half of the equity transactions made by SWFs since 2000 had resulted in their acquiring a controlling stake, belying their frequent claim that they were merely passive investors. “You can be a two per cent shareholder and exert tremendous influence,” said Mr Tinawi. While it is their investments in the US and Europe that have garnered the most headlines, the Monitor report found more than half of all SWF transactions since 2000 were either purchases at home or in emerging markets. According to Mr Tinawi, two-thirds of all deals were in emerging markets, representing roughly 40 per cent of all SWF deals in value. Since 2000 alone, the report said, $19bn of the $73bn invested publicly by funds from the Middle East and North Africa had occurred within the region.

With an estimated $500bn of oil revenues pouring into the Gulf each year, SWFs in this region are only likely to gain a higher public profile, however. But the report predicted that while greater transparency would boost understanding of SWFs, it would probably not dispel the controversy over the political implications of their investments.

“There’s always this kind of built-in prejudice,” Mr Tinawi said. “That ‘Oh, the Arabs are going to come and buy us’.”

arizvi@thenational.ae