Sovereign Wealth Funds Pump Up Free Enterprise

Location: New York
Author: Ken Silverstein, EnergyBiz Insider, Editor-in-Chief
Date: Thursday, February 14, 2008
 

Advocates say that it is a function of free commerce, facilitating the flow of capital across national boundaries as well as the technical know-how needed in many burgeoning industries. To impede that would send chills down the spines of investors and thereby deflate the entire global economy.

Skeptics, however, take a more sobering view, noting that sovereign wealth funds originated in the Middle East and are now prominent in China and Russia . Critical questions therefore arise and most notably whether key American businesses want to become obligated to foreign nationals that can't be properly monitored.

The matter has come to light in recent months as sovereign wealth funds in Abu Dhabi , China and Singapore bought significant stakes in investment banking giants. Specifically, the state-run China Investment Corp. purchased a 9.9 percent piece in Morgan Stanley while Singapore 's investment arm pumped $11 billion into UBS. Last October, another Chinese government-controlled investment group invested $1 billion Bear Stearns while the Abu Dhabi government placed $7.5 billion in Citigroup.

Simply, sovereign wealth funds are government-run investment bureaus that allocate the riches of an entire nation into industries around the globe. Many such nations are now awash in oil revenues have chosen to produce now, using the subsequent profits to diversify their wealth. While such funds do seek to earn respectable returns, they also relish the opportunity to establish ties with prominent western businesses -- entities that can then re-invest their earnings and share their technological prowess.

In the United States , sovereign wealth funds are already prevented from owning more than 10 percent of vital industries that include defense. Regulations also place limits in other industries such as transportation, banking and utilities. While such funds are passive investors, they are participating in banking institutions that are vested throughout the utility sphere. From the perspective of investment banks, they are unlikely to roil other shareholders and boards of directors, although skeptics say that they could pool their shared interest in an effort extract important concessions.

Sovereign wealth funds are estimated to hold $2.9 trillion in assets, with analysts predicting that this amount could rise to $12 trillion by 2015 -- still a small percentage of globally traded securities. That compares to institutional investors that hold $14 trillion in assets and U.S. mutual funds that control $10 trillion. Hedge funds hold $2 trillion.

"There is a lot of worry about sovereign wealth funds, but all of them are assumptions, they are not about real cases," says Bader al-Saad, who heads the Kuwait Investment Authority, at the World Economic Forum in Davos, Switzerland as reported by the Associated Press.

But more scrutiny is coming. To that end, the Senate Banking Committee has asked the Government Accountability Office to determine exactly where those sovereign wealth funds are making their investments and just how much information they are actually disclosing -- all to get a handle on what may become a trend. After all, the roughly $30 billion invested into the international banking giants in recent months is just a beginning. Most analysts expect billions more to flow into the beleaguered banking sector.

At this point, the sovereign wealth funds want to stay quiet, limiting their ownership to less than 10 percent of corporate enterprises. But even such passive roles upset critics who say that those funds are opaque and that they are not easily monitored. They are also concerned that the funds may have political goals rather than economic ones, noting that they should receive the same level of inquiry as the China National Offshore Oil Corp. did when it tried to buy outright California-based Unocal.

If sovereign wealth funds are to succeed in the United States , then it is imperative that they be watched closely and required to disclose more information. At the economic forum in Davos, Western government officials emphasized the need to attract foreign capital but also expressed concerns over receiving murky investments from oil-rich nations whose values may not be in synch with their own.

The best of both worlds may be possible. Take Norway 's government pension fund, which after a decade now holds $380 billion in assets: The nation's oil revenues are being steered into Central Asia, Latin America and Africa , establishing the benchmark by which others may follow. Transparency and accountability are its hallmarks, having earned returns of 7.9 percent in 2006. It recently has decided to increase its exposure to global equity markets from 40 percent to 60 percent, noting that its portfolio will extend beyond major companies and to smaller enterprises, real estate and hedge funds.

"We make no strategic investments," says Martin Skancke, director-general of the fund at Norway 's Ministry of Finance, in an interview with the Financial Times. "We invest in individual companies and sectors. We are invested in between 3,000 and 4,000 companies in 40 countries and average ownership of a company is below 1 percent. We do not feel that this distorts markets."

As the prominence of sovereign wealth funds grows here, they will be required to abide by ever-stricter requirements. But that scrutiny should not transform into hostility and temper free trade and commerce. Those cash-rich investors are pumping capital into the American economy -- money that will invariably makes it way into utility-type enterprises. While real national security concerns exist, foreign direct investment is ushering in new business opportunities and linking global economic interests.

Republished with permission from CyberTech, Inc.  EnergyBiz Insider is published three days a week by Energy Central. For more information about Energy Central, or to subscribe to EnergyBiz Insider, other e-newsletters and EnergyBiz magazine, please go to http://www.energycentral.com/.