To Avoid Risk and Diversify, Sovereign Funds Move on From Banks
Middle Eastern sovereign wealth funds are making investments, just not in the American financial industry.
By HEATHER TIMMONS and KEITH BRADSHER
Published: September 18, 2008
NEW DELHI — As the American investment banking industry seems to teeter, many investors are asking why the sovereign wealth funds from the Middle East have not stepped up.
Less than a year ago, the funds spent billions of dollars for minority stakes in Wall Street banks. As oil prices peaked near $145 a barrel this year, the Middle East sovereign wealth funds amassed even more cash. Still, even as the values of banks like Goldman Sachs and Morgan Stanley are swooning, Middle East funds are not biting.
The explanation is simple, bankers in the region say. Plenty of other, more attractive assets are out there right now.
With markets having been hit by the global downturn, compelling, value-priced deals are numerous — from sports teams in Britain and publicly traded companies in Russia to deals closer to home, like Middle East infrastructure buys, Youssef Nasr, chief executive of HSBC Bank Middle East, said.
Middle East funds certainly took their wallets out in September — just not for Wall Street banks. A unit of Kuwait Investment Authority is taking stakes in the country’s national telecommunications company, and Abu Dhabi’s investment fund bought the Manchester City soccer team. A Dubai fund is in talks with the British property developer Minerva, and Saudi funds are weighing agricultural tie-ups in Pakistan.
But bankers say that because the funds have already invested billions in American financial institutions, they are less likely to put more cash into that sector right now. Middle East sovereign wealth funds “put more money in a few months ago then they would have ideally done,” because financials were cheap then, Mr. Nasr said. That has “unbalanced” the portfolios of sovereign wealth investors, he said. “Now they need to go in the other direction” to diversify, buying up assets that are not financial institutions.
Sovereign wealth funds “haven’t disappeared, they’ve remained on the sidelines or gone elsewhere,” said Jan Randolph, head of sovereign risk at Global Insight, an economic forecasting firm with offices in London and Boston.
Middle East firms that were eager investors in financial companies a few quarters ago are staying away because the “magnitude of the crisis is much bigger than anyone thought,” Mr. Randolph said. “No one needs to take on unnecessary risks right now,” he said, and it seems like an unnecessary risk to try to chart the course of the tight credit market by doing a deal for a bank or investment bank.
The funds are also likely to be turned off by regulatory hurdles, political scrutiny and management issues. Large foreign investments in American financial institutions receive progressively more scrutiny, with the highest level reserved for foreign bids involving majority control.
Foreign purchases of American banks have attracted particular attention since 1991 when the Bank of Credit and Commerce International, a Luxembourg bank, was seized by regulators. The bank had purchased stakes in American financial institutions without fully disclosing its involvement to regulators.
Political concerns are another issue. None of the big sovereign wealth funds want to engage in type of bruising battle in the Congress that the energy company Cnooc of China faced when it lost the fight for Unocal.
Finally, the sovereign wealth funds generally have small staffs, with few operations employees who could be sent to protect the funds’ interests in the event they took control of a major investment bank.
“There might be some minority stakes purchased, but I don’t think you’ll see majority stakes,” said Dariusz Kowalczyk, the chief investment strategist at CFC Seymour, a Hong Kong securities firm.
Some sovereign wealth funds in Asia are still interested in American financial assets. For example, South Korea’s state-run fund, the Korea Asset Management Corporation, or Kamco, is hoping to buy nearly a billion dollars in nonperforming loans in the United States.
Temasek Holdings, Merrill Lynch’s biggest shareholder, may even have turned a tidy short-term profit on its banking investment. Temasek, the Singapore government’s sovereign wealth fund, spent $5.9 billion to buy stakes in Merrill Lynch that totaled 14 percent. Bank of America said Monday it would buy Merrill Lynch for $50 billion. The deal may earn Temasek a $1.5 billion profit, Bloomberg estimates. |
