As stock markets around the world have come crashing down, and investors have fled for the cover of safer assets and cash, sovereign wealth fund managers too have shifted gear in their investment strategies. Traditionally, SWFs operated essentially like private equity funds and sought to maximize risk-adjusted returns from the international investments.
In the wake of the downturn, however, funds have begun to emphasize on strategic investments, acquiring shareholdings in sectors that make their national economies more competitive in what their governments perceive as areas of comparative advantage. And within the past couple of weeks, sovereign investors have made tremendous strides forward to strengthen their strategic positions.
The International Petroleum Investment Company (IPIC), for example, responsible for Abu Dhabi’s foreign investments in the oil and chemicals sector, purchased a 17.6% stake for just over US$1 billion in Oil Search Ltd which operates all of the oil and gas producing fields in Papua New Guinea. It bought a 70% stake in the German Ferrostaal which designs oil and petrochemical plants. It invested $1.63 billion for a 71% stake in Aabar Investments Co, an energy investment company which in turn is reported to have bought AIG’s Swiss-based private bank for US$254 million.
Mubadala Development Co, another government-owned investment arm of Abu Dhabi, has set its eyes on Finmeccanica, Italy's aerospace company. It is also on the list of potential bidders for London’s Gatwick airport which is being sold by airports operator BAA. Add to that its joint venture activities with General Electric which is a major supplier of jet engines to the global aerospace industry, its ties to the aircraft manufacturer EADS, and, further upstream, its positions in aluminium production, and one sees how Mubadala is on the way to turn Abu Dhabi’s existing aerospace industry into a global aerospace hub.
Further up the Gulf, the Qatar Investment Authority raised its stakes in the Swiss Bank Credit Suisse to just below 10%. QIA will also own 12.7% of Barclays after a going through a rather painful capital raising process. Add to that the already existing shareholdings in the London Stock Exchange and one can see how its investments contribute to turning Qatar into a sizable financial center.
Kuwait, whose on stock market has fallen around 30% this year, is shifting its strategy too. Kuwait’s Petroleum Industry Company and Dow Chemical signed a US$17.4 billion joint venture deal to boost the emirates’ petrochemical industry. In summer, KIA had already provided funding to Dow’s acquisition of Rohm&Haas. KIA is also rumored to bid for a 20% stake in the Spanish oil company Repsol YPF which would translate roughly into a US$4 to US$5 billion investment.
Beyond the Gulf Arab countries, Libya too is becoming much more active with its foreign acquisitions. It has built a stake of over 4% in UniCredit, the Italian pan-European banking organization. It also decided to buy 10% of Eni, Italy’s oil and gas company. It is also rumored to buy the Luxembourg arm of troubled Icelandic bank Kaupthing. Although it is yet to be seen how these investments could support Libya’s economic development strategies, Libya is fast becoming a serious financial player.
This new direction stands in stark contrast to the extravagant shopping spree that SWFs had embarked on just a year ago in the financial services sector. In hindsight, these were highly speculative acquisitions that turned out to be pushing down heavily the value of some of the largest sovereign funds. Morgan Stanley, who surprised the international audience some 18 months ago with stating that SWFs would grow to US$12 trillion by 2015, has revised its figures and now argues that US$9.7 trillion looks like a more realistic target. It argues that the world’s sovereign wealth funds holdings have declined 18% to 25% for this year.
These losses put tremendous heat on fund managers who in the end have been losing citizens’ money. SWFs were under fire when they acquired substantial stakes in Citigroup, Merrill Lynch and others in the U.S. and in Europe. Now that these investments have turned out to be loss making, it might appear more in tune with the sentiments of their constituents to align their investments with overarching economic policy objectives.
What does this mean for the coming 12 to 18 months with regards to future SWF investment activity?
SWFs will probably resist the temptation to make equity acquisitions based on nothing else but an attractive market valuation. They will rather move very cautiously and assess opportunities to pick up share holdings in companies that promise to make a contribution to the competitiveness of their national economies. What does that mean for Western executives searching for investors? They will have a convincing story to tell that resonates with the strategic aspirations of Arab investors.