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By William Patalon III
Money Morning/The Money Map Report
The government of Qatar – operating through its state-run investment fund – is accumulating shares in Swiss banking giant Credit Suisse Group (CS) and says it intends to invest as much as $15 billion in U.S. and European bank stocks over the next year.
The announcement, made over the weekend by the prime minister of the Persian Gulf state is part of a major mobilization of capital that has what Money Morning has labeled as the "Middle East Cash Barons" bringing billions of dollars to bear on the U.S. and world banking sectors.
In the past year alone, these highly controversial state-run "sovereign wealth funds" have invested an estimated $70 billion in the world's ailing banking system – most of them in the West. In the United States alone, the funds have provided bailout capital to the likes of Citigroup Inc. (C), Merrill Lynch & Co. Inc. (MER) and Morgan Stanley (MS) – financial-sector heavyweights whose balance sheets have been eviscerated by the subprime-spawned credit crisis. UBS AG (UBS) – also Swiss-based – has received Cash Baron bailout money, too.
During an interview late Sunday in the Qatar city of Doha, the prime minister, Sheikh Hamad bin Jasim bin Jaber al-Thani, told Bloomberg News that his country has "a relation with Credit Suisse and we bought some of the stock from the market, actually, but I cannot say what percentage because still we are in the process."
Sheikh Hamad is also the chief executive officer of the Qatar Investment Authority, the $60 billion sovereign wealth fund backed by the Qatar government. Currently, the fund has plans to double in size by 2010, with up to 40% of its investments in Asia, and the rest in Europe and the United States, according to research conducted by
London-based Standard Chartered PLC.
Sovereign Wealth Funds: The (Big) New Kids on the Block
Long the capitalist bastion, Wall Street is finally getting some competition, and is feeling the heat from these state-controlled investment pools known as sovereign wealth funds. Some – including the Kuwait Investment Authority – have been around since the 1950s.
Much of the money comes from crude-oil sales, which is why many of these government-operated venture pools are situated in the Middle East. And since oil prices have soared in recent years, these funds have turned into veritable "war chests" of capital that enable the states to mount ambitious acquisition and infrastructure-development jags.
The governments of such countries as Dubai, Saudi Arabia, China, Russia and Norway operate the big investment pools – and more are on the way. The capital was amassed chiefly through crude oil sales, although China started its fund with some of the estimated $1.3 trillion in foreign reserves racked up from the massive trade surpluses it routinely runs.
The richest sovereign funds include the Abu Dhabi Investment Authority, or AIDA ($875 billion), the Government of Singapore Investment Corp. ($330 billion), and Norway's Government Pension Fund Global, or GPFG ($322 billion), although several others may be larger. Some of the other top funds include Singapore's Temasek Holdings Pte. Ltd., Mainland China's , and Dubai's Dubai International Corp.
New funds have been announced in recent months.
Many of these Cash Barons are looking for more than just an investment return: They are seeking the deal-making know-how that over time will transform them into global financial titans. That quest induced the China-controlled State Foreign Exchange Investment Co. to invest $3 billion in the private-equity whiz The Blackstone Group LP (BX) back in April. The funds often take passive stakes, meaning they don't demand management say-so and don't seek seats on the target company's board of directors.
Sovereign wealth funds currently control an estimated $3.2 trillion in assets. That's already believed to be more than the $1.5 trillion to $2 trillion held by worldwide hedge funds [though some sources put the hedge-fund estimate as high as $5 trillion].
The International Monetary Fund (IMF) and other experts predict the state-run venture funds could control $12 trillion by 2015. State-managed funds in countries including Kuwait, Abu Dhabi and South Korea have ballooned to $3.2 trillion in assets. Fueled by record oil prices and rising currency reserves, sovereign fund assets may gain fourfold to $12 trillion by 2015, equal to the capitalization of the Standard & Poor's 500 Index, according to Morgan Stanley.
Money Morning Investment Director Keith Fitz-Gerald thinks the ultimate total will actually be much bigger: Even now, he estimates that the total capital under the control of the global Cash Barons is more likely to reach $20 trillion by the middle of the next decade.
The growth rate is certainly accelerating. The U.S. Treasury says that 20 new funds have been created since 2000 – more than half of them since 2005 – bringing the total to nearly 40 funds with total assets between $1.9 trillion and $2.9 trillion.
Needless to say, the funds have become the focus of controversy and concern in Washington. Congress is worried about the manner in which sovereign funds seem to have exploded onto the scene, the large and potentially influential stakes the funds have been taking in big U.S. investment-banking firms, and their lack of "transparency" – there's no global equivalent of the U.S. Securities and Exchange Commission to force disclosure of their holdings or of their investment intent.
That lack of transparency is apparently a particular issue with the Qatar Investment Authority, which Standard Chartered cites as being among the world's "most-secretive funds," a group that also includes those in the United Arab Emirates, Kuwait, China, Qatar, Brunei and Venezuela.
But some of its deals have been in the spotlight of late.
Among the deals the QIA pursued in order to diversify its assets and build its asset base in the European market was the purchase of a stake in the U.K.-based supermarket chain, J. Sainsbury PLC (OTC: JSAIY). Since the Qatari sovereign fund Delta Two acquired a 25% stake in the supermarket early in 2007, Delta Two had been expected to launch a bid for the entire chain for an estimated $21.7 billion. Delta Two is an affiliate of the Qatar Investment Authority.
But the full-scale takeover hit a snag, however, after the Sainsbury family and company pension-fund trustees balked at the structure of the deal, worrying that the supermarket will be burdened with a crushing level of debt.
In mid-January,that Delta Two transferred its entire 25% stake – 435.16 million shares – to state investment vehicle Qatar Holdings LLC, a wholly owned subsidiary of QIA, the primary investment vehicle.
As its interest in Credit Suisse underscores, Qatar wants to build a position in the global financial sector.
Last September, Qatar Holding purchased a 20% stake in the London Stock Exchange Group PLC. That stake was subsequently diluted to about 15% on Oct. 1 when the LSE finalized its $2.4 billion buyout of the Borsa Italiana SpA.
But on Friday, the Nasdaq said it expects its $4.5 billion deal to acquire Nordic and Baltic stock exchange OMX through a complex tie-up with Borse Dubai Ltd. – a sovereign wealth fund affiliate of the state of Dubai – will close on Feb. 27. In a statement, Nasdaq said Borse Dubai had been successful in a tender offer for OMX shares, which paves the way for it to form the Nasdaq OMX Group. Separately, Borse Dubai said that after it exercises its options, it expects to hold a 97.6% stake in the entity.
Now, after agreeing to buy Qatar's stake in OMX AB, Borse Dubai said it would consider an offer from Qatar to sell the shares it holds in the London Stock Exchange Group, in which Borse Dubai is the biggest shareholder, according to Bloomberg News.|
Back in September, when Borse Dubai cut its deal with OMX and Nasdaq, it said it would be left with a 20% stake in the Nasdaq and a 28% stake in the LSE. Qatar threatened to scuttle the deal, and bought the rivaling OMX stake and the 20% position in the London Stock Exchange. That forced Dubai to boost its own OMX offer.
According to Bloomberg, Dubai now owns 20.4% of LSE, 5% more than Qatar's holding. Both sovereign investors saw their stakes get diluted when LSE on Oct. 1 completed its takeover of Borsa Italiana S.p.A.
Other QIA investments include 100% ownership of the U.K.-based Four Seasons Healthcare, a 97.3% stake in Lebanon's BLC Bank SAL, and part of a 3.12% stake in European Aeronautic, Defence & Space Co. (EADS NV), the parent company of airliner maker and Boeing Co. (BA) rival Airbus Industries SAS, Standard Chartered said.
Switzerland's second-biggest bank, Credit Suisse said on Feb. 12 that its fourth-quarter profit plunged 72% after taking a $1.2 billion write-down on debt and leveraged loans. The stock has fallen more than 30% since early October. UBS, Switzerland's largest bank, has taken $14 billion in write-downs.
Credit Suisse already has ties to Qatar. In March 2006, it became the first European bank to get a license for the Qatar Financial Centre, a self-regulated business park designed to attract lenders to the Gulf state as part of Qatar's ongoing plan to diversify its own
And when Qatar went after J. Sainsbury last year, Credit Suisse was one of the three Europe-based banks that agreed to underwrite billions of dollars in debt to help finance the buyout.
News and Related Story Links:
- Bloomberg News:
Qatar Buys Credit Suisse Shares, Prime Minister Says.
- CNNMoney.com: .
- Money Morning Economic Forecast Report:
Outlook 2008: Three Ways to Profit From Sovereign Wealth Funds – the "Next Wall Street."
- Middle East Online:
Qatar's emir appoints new PM Sheikh Hamad appointed as Qatar's PM, will continue to hold foreign affairs portfolio in new cabinet.
Qatar Investment Authority fund expected to double in size by 2010.
- Money Morning News Analysis:
Tough Talk About Sovereign Funds Spawns Fear of Economic Retaliation Against the United States.
- Forbes.com: .
- Bloomberg News:
Borse Dubai Would Consider Qatari Offer for LSE.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.