By Jason Simpkins
Concerned about the recent decline in stock prices, French President Nicolas Sarkozy, yesterday (Tuesday) called for the creation of European sovereign wealth funds. The funds would be virtual carbon copies of the state-owned investment vehicles that have sprung up from Beijing to Abu Dhabi to disperse their respective nations’ cash reserves in foreign assets.
Addressing the European Parliament, President Sarkozy implored his European contemporaries to embrace the current period of economic upheaval as an opportunity to restructure the global financial system. According to the Daily Telegraph, he also articulated the concern of many Western authorities that sovereign wealth funds, located primarily in Asia and the Middle East, could use their massive cash reserves to scoop up key foreign assets at extraordinarily low valuations.
“Stock markets are at historic lows. I do not want European citizens to wake up a few months from now and discover that European companies belong to non-European capital which has bought at the lowest point of the stock exchange," Sarkozy said. "I would ask that all of us consider how interesting it would be to set up sovereign funds in each of our countries – and maybe these national sovereign funds could now and again coordinate to give an industrial response to the crisis.”
Sovereign wealth funds, or SWFs, currently control an estimated $3 trillion. 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. But Money Morning Investment Director Keith Fitz-Gerald thinks the ultimate total will actually be much higher: 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. [To fully understand the growing power and influence of sovereign wealth funds worldwide, check out this Money Morning report: “Three Ways to Profit From Sovereign Wealth Funds: The Next Wall Street.”]
Some of the most prominent funds include China Investment Corp., which holds an estimated $200 billion, and the , which controls as much as $875 billion.
Conflicts of interests have already cropped up with respect to international takeovers, most notably in the form of Bain Capital Partners LLC and Huawei Technologies Co.’s failed takeover of Marlborough, Mass.-based 3Com Corp. (COMS).
In September 2007, China’s No. 1 network-equipment maker and Bain Capital launched a $2.2 billion takeover bid for 3Com. The deal stipulated that Huawei would receive a 16% stake in 3Com, leaving the rest to Bain. However, complications arose when the U.S. government expressed reservation about the deal and the possible breach of national security.
The fact that Shenzhen-based Huawei was founded by Ren Zhengfei, a former officer in the Chinese army, raised suspicion about the company’s intentions for 3Com, which has its own ties to the Pentagon.
3Com’s Tipping Point unit makes security software for the U.S. government, and policymakers worry that 3Com’s networking technology would allow China to eavesdrop on U.S. domestic conversations. Another concern was that the company’s encryption technology would make Chinese networks harder to tap.
Similarly, the year prior, Dubai Ports World – a United Arab Emirates-based maritime company – bowed to pressure from U.S. Congress and sold off its U.S. port operations to an American owner.
"There are a number of big French or European groups whose market value today is a third of what it was six months ago,” Sarkozy said, expressing his reservations about the growing role of SWFs. “Yet, there exists in the world sovereign funds with considerable means," he said.
Europe’s Dow Jones Stoxx 600 Index has lost nearly half of its value since peaking in June 2007.
Sarkozy deflected criticism from former European Trade Commissioner Peter Mandelson, who described attempts to exclude foreign competitors from European markets as a modern day, economic “Maginot Line,” the highly touted, very expensive, and supremely ineffective defensive barrier erected in France prior to World War II as a deterrent to German intrusion.
“It is not a question of building a Maginot Line,” said Sarkozy, “What you have to do is take into account the pragmatic situation, the markets are depressed."
Critics of Sarkozy’s request point out that Europe lacks adequate funding to create its own SWFs. The funds that sprang from Asia and the Middle East in recent years have huge pools of foreign exchange reserves and petrodollars to draw from. European nations don’t have these stockpiles of cash.
Sarkozy's proposal also “suggests that all foreign sovereign wealth funds are negative,” Kramer went on. “That's an assumption I don't share.”
News and Related Story Links:
3Com Sues Bain Capital For $66 Million Failed Takeover
Sarkozy urges protection of companies from non-European takeovers