As Wall Street teeters, the party is moving to the SWFs of Asia and the Middle East
Don't expect sovereign funds to ride to rescue
The word is out. As the titans of Wall Street teeter and drop like fraternity boys after too much punch, the party is moving over to the sovereign wealth funds of Asia and the Middle East. Oozing petrodollars and export receipts, the funds are being looked at to keep the good times rolling. And as unlikely as it may seem, some revellers think Abu Dhabi is party central. "To whom it may concern," reads one recent entreaty to a local investment house. "I am an owner of a special piece of property that has unlimited potential." The pitch goes on to describe a private lake with a 4.5 hectare island. "A friend of mine who lives in Dubai mentioned that there are a few organisations in your neck of the woods that might find this water and dirt we have very interesting."
Which organisation? It doesn't matter. If its name includes Abu Dhabi, it must be buying. Another proposition offers to sell the emirate 104 paintings by Old Masters including Rubens, Breughels and Rembrandt - a collection it values at US$420 million (Dh1.54 billion). Another appeals to Abu Dhabi's seeming fondness for football, seeking investment in the amateur English club Bishop Auckland. "My son plays for the club and we are hoping for planning permission soon for the proposed new stadium," writes the club's self-described head of fund-raising. It wouldn't just be any stadium. It would include a cinema, a grocery, drive-through restaurants and even a bowling alley.
The list goes on. Since Abu Dhabi has been linked to investments in Citigroup, Manhattan's Chrysler Building and Manchester City football club, the emirate's funds, investment companies and pretty much any other organisation in town featuring the Abu Dhabi name have been deluged with unsolicited offers. There are office buildings in Frankfurt, hotels in Spain, Pakistani soft drinks, Turkish shopping malls and mobile phones in Indonesia.
Most of these offers - shown to me on condition I don't reveal their origin - didn't end up anywhere near where they might get serious consideration, if indeed they are worth considering seriously by anyone. The property offers were received by organisations far away from the Abu Dhabi Investment Council, the sovereign fund that bought into the Chrysler Building. The football pitch fell far from the Abu Dhabi United Group for Development and Investment, which however much it sounds like one, isn't a sovereign wealth fund at all.
It's a mystery how anyone gets it so muddled. The Abu Dhabi Investment Council is completely distinct from its forbear, the Abu Dhabi Investment Authority (Adia) and the completely unrelated private, boutique investment bank the Abu Dhabi Investment House. Please don't use the acronym "Adic" for the Council, because it's reserved for the Council's subsidiary, the Abu Dhabi Investment Company. And don't confuse the Abu Dhabi United Group for Development and Investment - which represents Sheikh Mansour bin Zayed and bought Manchester City - with the Abu Dhabi Fund for Development, because that one is headed by Sheikh Mansour and invests for Abu Dhabi in developing countries, which at least for the moment excludes the UK.
The international media have only added to the confusion by routinely mixing and matching the names of the funds in reports. The Times of London misreported this month that the Abu Dhabi Investment Company bought a stake in the Chrysler Building, when it was its parent, the Council, that did so. That purchase is also frequently credited to the Abu Dhabi Investment Authority, as is the Manchester City deal, as was suggested this month in an article by The New York Times. Some journalists defend such sloppiness by pointing out that since all the funds are owned by the royal family, they are essentially the same.
The trouble with this is that it isn't just kooks coming out of the woodwork looking for money from sovereign wealth funds. As the global credit crunch bites, an increasing number of reasonable officials and executives are expressing hope that, as things deteriorate in financial markets, sovereign wealth funds will soon step in with their more than $2.5 trillion in assets and start buying. "The sovereign wealth funds in their present context might be better termed 'saviour wealth funds'," said the EU trade commissioner Peter Mandelson at the World Economic Forum's meeting in China this week. Others predict that Gulf sovereign funds will at some point prop up regional stock and property markets, and even bail out banks if they get into trouble. A lot of media coverage lately, including that New York Times article, has been devoted to when that might happen, and why it hasn't already.
Hold on a minute. Even if we accept that sovereign wealth funds hold $3tn of assets, that's minuscule next to the roughly $60tn in investments controlled by global pension funds, mutual funds and insurers. And yes, thanks to oil revenues, Gulf funds are growing fast. But they are not running charities. The sovereign funds are all mandated to make money, or at least preserve capital, for their owners, which in Abu Dhabi's case is the Government of the emirate. That means they try to diversify their investments to minimise risk. Unfortunately, that also means they have most likely been losing money recently, along with everyone else. The need to diversify amid falling prices makes them less, not more, likely to take on new risks, whether by buying English football teams or propping up stocks here in the UAE.
Adia's investment in Citigroup late last year may have made sense at the time. And the Council's purchase of the Chrysler Building gave it its first exposure to one of the world's most resilient property markets. It doesn't mean either is likely to make a habit of such flashy investments now that times are tough, although the Council is probably in a better position to hunt for bargains in markets where, unlike Adia, it has no exposure.
Those in search of Gulf funds to make up for the foreign investment being lost amid the crisis would be better off looking for ways to mobilise the billions in private, family wealth around the region, which analysts say eclipses whatever the sovereign funds may have. The irony, of course, is that much of the hand-wringing over when the sovereign wealth funds will ride to the rescue is coming from the same quarters that earlier this year were expressing grave misgivings about the potential political implications of sovereign wealth investment.
Recently, a group of 26 sovereign funds, submitting to pressure from the US, EU and the International Monetary Fund, forged a code of investment principles that includes a promise not to use their investments for political ends. It should come as no surprise that even now they are behaving like other private investors, cutting their losses and running for cover. For sovereign wealth funds, this double standard should further illustrate the fallacy that government-run investors can be apolitical, even if politics do not guide their investments. Indeed, it seems that sovereign funds are damned if they do and damned if they don't.