Sovereign wealth funds continue to play a role in the bailout of Western banks. Yet, the $60 billion (Rs2.93 trillion) these state-backed entities collectively ploughed into the likes of Citigroup Inc., Merrill Lynch and Co. Inc., Morgan Stanley and UBS AG in the past year has roughly halved in value. So with such large and public losses, why are sovereign funds still coming to the rescue?
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Asset prices are attractive. If governments in the US and Europe have acted sufficiently to avert the failure of large financial institutions, then buying now is as good a time as any. That’s particularly true for sovereign wealth funds, some of which can invest with up to a 50-year time frame.
What’s more, topping up investments is also a way of reducing existing paper losses.
For example, the Qatar Investment Authority bought into Credit Suisse Group AG’s recent 12% share placement at a price equivalent to about 47% lower than the level at which the Swiss bank’s shares were trading earlier in the year when Qatar bought shares in the open market. China is reportedly interested in increasing its stake in Blackstone Group for the same reason.
Cheaper asset: Blackstone Group’s headquarters in New York. China is reportedly interested in increasing its stake in the company. Daniel Acker / Bloomberg
Leveraged sovereign fund investors also often rely on Western banks to help conduct their operations. That’s particularly true of the Gulf where regional and local banks lack experience and scale. Large foreign banks are needed there to coordinate financing above the $500 million mark.
When Qatar was mulling a £12 billion (Rs1.02 trillion today) bid for UK supermarket chain J Sainsbury Plc. last year, it turned to Credit Suisse to lead the financing. Similarly, DP World Ltd’s acquisition of P&O Ports ANZ was advised by Deutsche Bank AG, in which the Dubai International Financial Centre just happens to own a 2.2% stake.
As long as Asian and Gulf economies continue to grow, these investments are unlikely to come to a halt.