Sovereign Wealth Funds Biting into the World's Biggest Companies...Transparency and Motives in Question

By Mike Caggeso
Associate Editor

Oil is called "black gold" for a reason. Any country with enough of it not only has an endless line of customers, but pockets overflowing with cash.

In that sense, oil is just as much a currency as dollars, euros or gold itself - hence the term "petrodollar."

And right now Persian Gulf countries are putting their cash to work through newly minted sovereign wealth funds (SWFs), which operate much like state owned hedge funds or private equity groups. 

In the past six months alone, Middle Eastern SWFs have doled out serious cash for stakes in major international corporations. Just take a look:

  • Nov. 27: Abu Dhabi pours $7.5 billion into ailing Citigroup Inc. (C), which recently lost its status as largest bank by market capitalization to Bank of America Corp. (BAC).
  • Nov. 16:  Abu Dhabi invested $622 million (an 8.1% stake) in California-based microchip-maker Advanced Micro Devices Inc. (AMD).
  • Aug. 22: Dubai World, another investment arm of the state, plunked down $5.1 billion for a 9.5% stake in MGM Mirage (MGM).
  • Aug. 14: Istithmar, part of Dubai World, was cleared to buy Barneys New York Inc. for $942.3 million from Jones Apparel Group Inc. (JNY).

And it's not just coming from the Middle East. In May, China Investment Corp. purchased almost a 10% stake in Blackstone Group L.P. (BX). And just yesterday (Thursday), Chairman Lou Jiwei said the company is interested in scooping up companies rocked by the subprime mortgage defaults. 

Also recently, India announced it would launch a government-owned investment company to buy stakes in overseas coal producers to shore up future supplies. The project will marry a multitude of companies from varying sectors under a single umbrella to ensure regional prosperity.

"This is a first of its kind in India, where government companies belonging to different ministries have joined hands in this way," India's Secretary for Steel, RS Pandey, said in an interview with the Financial Times.

As SWFs emerge from the global economic undercurrent, their higher motives are revealed: Diversifying away from their economy and resources and into another country's private sector, where they're able to steer a company's direction through acquired shares. 

And of course, they make more money in the process.

Who Has the Fattest Stack of Cash?

A recent report from U.K. bank Standard Chartered listed the world's largest SWFs and said that their influence on global financial markets will only grow.

Topping the list is oil-flush Abu Dhabi (one of the seven United Arab Emirates) with $625 billion. Norway is second with $322 billion. Singapore has $215 billion. Kuwait has $213 billion. And China's government has $200 billion in spending money. More than two-thirds of countries with the largest SWFs derive their purchasing power from oil.

Perhaps most striking, six Persian Gulf states - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE - have almost $1.6 trillion in foreign reserves, the Financial Times reported in May

The United States has three serious disadvantages when it comes to the rise of SWFs.

  • One, its SWF, the Alaska Permanent Fund, is 11th on the list at $40 billion, a fraction of the largest SWFs.
  • Two, it's only 25% funded by oil via the Trans-Alaska Pipeline.
  • And three, the fund's earnings aren't spent on international investments. Rather, they are split between inflation-proofing, operating expenses, and paying a $50 dividend every year to citizens living in Alaska.

Compare that with Abu Dhabi's $7.5 billion stake in Citigroup (the second largest U.S. bank) or Saudi Arabia's $11.6 billion stake in GE (the second-largest company in the world), and the political concerns become a little more palpable.

"Western countries may need to accept the rise of SWFs as a further sign of a shift in the world economy and should seize this as an opportunity to work with emerging economies such as China and Russia, countries in the Middle East and others to find common ground rules and a code of practice," Gerald Lyons, chief economist at Standard Chartered, said in an October report.

The Political and Economic Consequences

Edwin M. Truman, a senior fellow at the Peterson Institute for International Economics, wrote that the increased SWF investing will escalate political tension because the books for state-controlled funds are much more guarded than those of public companies.

Not only that, but the money is being spent on behalf of a country whose intentions can be equally as guarded, Truman wrote in his August report, "Sovereign Wealth Funds: The Need for Greater Transparency and Accountability."

"The fact that governments own these assets raises the potential that their management will be guided by political, rather than economic and financial, considerations or that the economic and financial considerations are motivated by support for national champions (if a country accumulates excess oil reserves and invests them in foreign energy projects, this looks like exploitation of economic power not diversification)," Truman wrote.

"Consequently, host-country jurisdic­tions are under increasing pressure to limit the scope of such investments, raising the specter of political confrontation and financial protectionism."

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