Fang-Temasek Partnership the Latest in a String of High-Profile Sovereign Wealth Deals

By Jennifer Yousfi
Managing Editor

In another example of the growing power of state-run investment funds, renowned Chinese dealmaker Fang Fenglei has joined forces with Singapore's government-controlled Temasek Holdings Pte. Ltd. to launch a new $2 billion China-focused private-equity fund, reported The Wall Street Journal.  Temasek currently manages a portfolio worth more than $100 billion, the bulk of which is invested in Asian nations. The new fund will be a sovereign wealth/private-equity hybrid, as state-owned Temasek will put up $1 billion and the other $1 billion will be raised through other investors. 

Sovereign wealth funds already hold more than $3 trillion in cash worldwide, and experts are projecting that total could growth to $12 trillion by 2015. For perspective, the estimated U.S. gross domestic product for 2006 was slightly more than $13 trillion.

Sovereign wealth funds are nothing new - in fact, Abu Dhabi Investment Authority (ADIA), the world's largest, has been around since 1976 and Temasek dates back to 1974. But what is new is the funds' willingness to invest in less-liquid and - by default - more-risky investments as they chase higher returns.

Middle Eastern sovereign funds have made headlines repeatedly this year, both for investing heavily in private equity funds and for making direct investments in high-profile public companies, as AIDA recently did with its $7.5 billion cash infusion in Citigroup Inc. (C).

China's sovereign wealth fund, the China Investment Corp. (CIC), broke away from its traditional investment strategies for the first time in May. Largely invested in U.S. Treasurys, CIC invested $3 billion in The Blackstone Group L.P. (BX). It's a risk that has yet to pay off for China, as Blackstone stock is down almost 40% in the last six months.

For the Middle East, part of the justification for riskier - and hopefully, higher yielding - investments is clear. The United Arab Emirates and others know that eventually their vast reserves of crude oil will run out, and they want to be financially well positioned when it happens. For Asian heavyweights such as Singapore and China, where growth comes from more sustainable assets, the motives are murkier - and are probably political, many fear.

But political plays cut both ways. In 2005, China's government-owned CNOOC was blocked in an attempt to buy U.S.-based oil company Unocal on the basis of national security concerns. With these government-controlled funds already representing large stakeholders in U.S. companies like Citigroup, Advanced Micro Devices Inc. (AMD), and Blackstone - plus the ready capital to invest in many, many more - investors will watch to see how the state-controlled funds exert their newfound influence, and will likely follow their lead.

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