Cash-rich governments blindly plundering away their easily earned wealth. It’s an easy picture to draw of the new big boys in the investment world — the sovereign wealth funds (SWFs). That’s not only an oversimplification. It’s basically wrong. Many of these state-controlled entities are looking for good prices and strategic advantage.
Sure, there are a few tales of dud investments from SWFs. China’s $3 billion (Rs11,880 crore) investment in Blackstone Group Lp. last year was top of the market. The shares have since tanked. Qatar came close to making the same mistake with its overly generous £11 billion (Rs85,690 crore) near-bid for UK supermarket J. Sainsbury Plc. Its last-minute retreat may have looked farcical, but at least it showed good investment sense.
If anything, SWFs seem to be snapping up bargain basement buys that are likely to generate decent long-term returns. The US subprime debacle and falling property prices across the West have provided attractive opportunities. SWFs have invested more than $75 billion in Western banks. The Investment Corp. of Dubai is sniffing around the troubled Spanish developer Inmobiliaria Colonial SA.
Funds are also astutely negotiating deals which promise more than pure investment returns. The Kuwait Investment Authority’s capital injection into Merrill Lynch and Co. Inc. included an agreement for future cooperation. Chinese companies are understood to be asking foreign partners allocate a proportion of business to China.
Even when SWFs do buy trophy assets, they often carry strategic benefits. Qatar clearly expects that, in return for its stake “protecting” the London Stock Exchange from an unwanted takeover, Doha will receive assistance in promoting its stock market. Dubai’s interest in the Liverpool Football Club would act as a “marquee investment” granting the emirate large amounts of publicity for a relative pittance.
For developing countries, buying large stakes in Western corporations is an effective way of shooting up the value curve. These investments offer both the potential of financial returns and much needed expertise.
Global economic power is shifting towards the developing world. SWFs, which represent the world’s future power brokers, are readying themselves to take the reins.