Sovereign Nation - Tips for Luring Investments from Foreign Governments
Author: Ed Silverstein, Editor-at-Large
American financial services companies are increasingly turning to state-run sovereign wealth funds as a way to combat the losses caused by the crippling mortgage crisis.
According to recent media reports, the Government Investment Corp. of Singapore may commit about $2.5 billion to a new $6 billion fund being formed by an American private-equity firm. China Investment Corp. plans to commit between $3 billion and $4 billion to a similar fund.
These come on top of the much publicized deal where Citigroup -- hurting from losses caused by shortfalls in mortgages and other investments -- needed billions quickly. The global financial services company found $7.5 billion in ready cash from Abu DhabiÂ’s state investment fund in November.
Simply put, sovereign wealth funds are investment funds from foreign governments.
On one level, sovereign wealth funds may appear to be the stuff of intrigue and mystery. They should not be. They are seen by most companies now as welcome sources of investment in an economy that needs money in order to ward off the ill effects of a likely recession.
They are growing, too. Sovereign wealth funds now total nearly $3 trillion and may rise to $12 trillion by 2015, according to a recent analysis by Morgan Stanley. Just five years ago, they totaled about $500 billion, according to Edwin Truman, a senior fellow at the Peterson Institute for International Economics.
Truman explains that governments, which are investing in sovereign wealth funds, find they have increasing amounts of money in their portfolios and need to look more broadly for places to put it. Examples are the oil rich governments in the Middle East. China, Russia and other states are also active players in sovereign wealth funds.
“Sovereign wealth funds are just an evolution of how other countries play in capital markets,” explains Richard Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics. “They’ve been in the market for a long time.”
Previously, governments may have gone to a third party to help find investments. Foreign governments also often invested in United States Treasuries. More recently, however, they have been looking at stocks and real estate.
“Now, they have their own name on the door,” Whalen says. “They raised their profile.”
There are many benefits from getting investments from sovereign wealth funds. They tend not to get involved in corporate governance, often shying away from serving on boards of directors. They also tend to avoid political controversies. In many cases, money invested by foreign governments is already invested in the United States but is being moved into other investments by the sovereign wealth funds.
But they have generated some controversy, too. Most prominent in the United States related to DP World. At issue was the sale of port management businesses in six major United States seaports to a government-owned company based in the United Arab Emirates. A noisy debate arose whether the sale would jeopardize port security. Yielding to pressure, DP World eventually withdrew its plans for the American ports.
In Europe, press reports note how French President Nicolas Sarkozy and German Chancellor Angela Merkel have expressed concern over sovereign wealth funds.
Critics say these funds are secretive and may have political goals—not just the goal of getting good returns on investment. Truman says that critics of these funds believe that they will manipulate their investments to gain political or economic advantages.
In response, there is the potential for tougher scrutiny of sovereign wealth funds in the United States. For instance, the Committee for Foreign Investment in the United States (CFIUS) may see a strengthened regulatory role after the Investment and National Security Act of 2007 was signed into law. Democratic candidates for president have mentioned that greater attention needs to be paid to sovereign wealth funds.
Most of the concerns have focused on the need for more transparency, and some funds, such as Norway’s Government Pension Fund–Global and Singapore’s Temasek Holdings are already providing more information to the public. Others may follow suit.
“A small but growing number of sovereign wealth funds … now provide … information on the objectives, investment strategies, and results of their management of these entities,” Truman says.
