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Silence
not necessarily golden for sovereign funds
Henny
Sender
Financial Times
19 Jan
08
http://ftalphaville.ft.com/blog/2008/01/18/10265/ft-analysis
-silence-not-necessarily-golden-for-sovereign-funds/
Sovereign
wealth funds are suddenly the capital provider of first and last
resort for ailing US financial institutions, investing at least
$30bn in some of Wall Street's biggest banks and brokerages.
In
many ways the SWFs are a dream investor: not only do they come
flush with money but also "they are massive, passive and
patient", as Mark Bradley, who heads Morgan Stanley's
relationships with private equity firms and other large pools of
capital, tells Sender. In other words, they lack the motivation
and the resources to demand swift and radical change.
But
their arrival also poses another question: is the presence of
these "passive" investors good for the US economy?
The
finance from the SWFs comes with few strings attached. Yet some
observers are beginning to fear that this very passivity –
which seems such a blessing to Wall Street – might have a
negative side to it. It could mean there will be little pressure
for real change at institutions that, after incurring large
losses on subprime mortgages are arguably in dire need of
reform.
Larry Fink, the founder and head of BlackRock, one
of the world's largest investors with some $1,300bn under
management, notes that in the past, when firms had losses of this
magnitude, "they would not have survived independently. But
now we may not be taking out excess capacity."
Naturally,
the SWFs see their patience and passivity as an advantage rather
than a weakness. Most notably, they view themselves as
"friendlier" stakeholders than western private equity
groups, which need to be rigorous owners to produce the high
returns demanded by their investors. Indeed, the sovereign funds
present themselves as almost antithetical to the private equity
houses and hedge funds that form that other big pool of global
capital.
Their passivity arises for several reasons, notes
Sender. For a start, as arms of foreign governments, SWFs
increasingly feel they need to minimise any political backlash or
concerns about national security. Two years after a furore over a
bid for US port facilities from Dubai Ports World and an offer by
China's CNOOC for Unocal, the US energy company, foreign wealth
funds have forsworn an active, interventionist stance.
When
the embryonic China Investment Corp announced last May that it
was taking a minority stake in Blackstone, it said it would be
passive and would not seek to sit on the board of the buy-out
group. That has become the template for subsequent deals, whether
dealing with healthy or troubled companies.
But in
addition to political imperatives, there is a more practical
constraint: few SWFs have the capacity to be active investors
even if they wished. In most cases, these organisations are still
building the human infrastructure to handle their bulging
coffers. CIC has yet to celebrate its first birthday and few have
the experience or specialised organisational structure of the
Kuwait Investment Authority or Singapore's Temasek.
Meanwhile,
private equity firms today have little interest in taking
minority stakes in troubled banks, both because they lack the
deep pockets of the sovereign funds and because they prefer full
control.
"The scale of these companies dwarfs our
ability to make a meaningful contribution," Stephen
Schwarzman, Blackstone chief executive, said of institutions such
as Citigroup on a recent conference call.
Blackstone, the
largest private equity firm in the world, has more than $100bn of
assets under management. But the Abu Dhabi Investment Authority,
which is merely one investment arm of the Gulf emirate's
government, albeit the largest, has almost $1,000bn of firepower
– more than the combined $700bn that private equity
controls.
The sovereign funds have other advantages as
shareholders. For example, because they do not depend on borrowed
money nearly as much as private equity firms do to finance their
stakes, the companies in which they invest do not become loaded
with debt.
To the sovereign funds, the meltdown in the
credit markets since mid-2007 is a once-in-a-lifetime opportunity
to acquire stakes in big US financial institutions at bargain
prices. The wealth funds "are taking the long-term view",
says one banker, who works with a group that deals with private
equity firms and sovereign funds out of London. "They
believe that the markets will come back in 18 months."
But
the $30bn question that now hangs over Wall Street is what will
happen if the markets do not recover, the banks and brokerages
have to take further big writedowns and share prices continue to
slide. Would the sovereign funds, in other words, be able to do
anything more than monitor their losses? In that eventuality, if
not before, they might need both the capability and the courage
to speak out.
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