PrafulAnchaliya Sabina Islam Sahil Jain Vijay Krishna Sovereign Wealth Funds: A new (old) force in the capital markets
Sources of Funds
Are all SWF’s same??? No Use of earnings from export commodities and revenue receipts. Use of foreign exchange reserve.
Comparison of SWF with others
Existence of SWF’s SWF has been existent in the markets since decades KUWAIT INVESTMENT BOARD -1950 Abu Dhabi Investment authority – 1976 Saudi Arabia monetary authority – 1952 Tamasek holdings – 1974 Government of Singapore investment corporation – 1981 China investment corporation – 2007
Trends in SWF Traditionally, long-term, passive approach to investing Therefore, no-widespread public attention Recently, more active investment approach by co-investing in M & A deals E.g.: Barclays Taemasek-China Development Bank Commitment of money to private equity for diversification E.g.: CIC purchased 10% stake in US private equity firm for $3 billion in 2007
Market Size Based on market estimates, assets under management by SWFs may currently amount to over USD 3.1 tr In terms of size, therefore, SWFs are a more significant industry than hedge funds, but – for the moment – are far smaller than most other types of institutional investors Relative weight in global capital markets: however, may well change in the years to come given the growth dynamics behind state funds, especially in emerging economies, as the volume of funds disposable for SWF investments may increase substantially in future International reserves has been steadily increasing over past five years This has particularly been the case in many emerging economies which benefited from oil revenues, such as oil-exporting countries in the Middle East or Latin America, or rising competitiveness and improving balances of payments vis-à-vis established industrialised economies, especially China, South Korea or Taiwan
Changing Flows and Market Opportunities Most SWFs enjoy considerable freedom in their investment decisions and are expected to maximise performance In their asset management, SWFs are likely to behave similarly to investment, pension, hedge or private equity funds, seeking to diversify across a wide range of asset classes in different countries Over coming five years: In quantitative terms, future SWF asset allocation could lead to a gross capital inflow of over USD 1 tr into global equity markets and USD 1.5 tr into global debt markets
Geo Economic Implications of SWF. To protect domestic currencies and banks from crisis Broad range of investments opportunities Implication to government and business Lower taxes, better public works, strong state run business Capital inflows are positive
ISSUE OF TRANSPERENCY Lack of transparency!! Objectives not stated clearly Lack of guidelines on ethical standards & investment policies. No information about returns & people behind the investment.
Principles drafted for SWF SWF investment decisions should be based on commercial grounds and should not hold geopolitical goals of the controlling government. Greater information disclosure by SWF’s about fund size, investment objective , institutional arrangements & financial information-asset allocation,benchmarks and returns. Strong governance structure , internal controls Respect host country rules.
The Deal for Merrill Lynch 15th JAN 2008-$6.6 billion dollars-KIA+Korean investment Corporation & Mizuho Corporate Bank. $ 5 billion dollars – TEMASEK $1.2 billion dollars Davis Selected Advisers.
Deal Insight Security issued- Non Voting mandatory convertible , preferred stock Dividend-9% Reference stock price-$52.40 Conversion premium-17% Maturity – 2.75 years Liquidation preference – $100,000 per share Stock price movement Jan 2006 – April 2008 High-97.5$ Low-39.9$ Average- 74.2$ On announcement – 53.9$ After announcement High -21.8 Low – 4.15 Current – 21.05 Was the above deal terms appealing? Was the deal in favor of ML? Average ML dividend Yield 1.4% , but promising a 9% dividend yield isn't that too much? Were these funds the right kind of investors?
Recent investments Singapore’s GIC: £4.8 billion stake in UBS Saudi group: £800+ million in UBS ADIA: £3.75 billion in Citigroup Singapore’s Temasek: £2.5 billion in Merrill Lynch China Investment Corp: £2.5 billion in Morgan Stanley China’s Citic Fund: £500 million in Bear Stearns
Conclusion Global reach for companies. Reduction in financial market uncertainty Build trust in recipient countries. Stabilization of markets Transparency in financial and investment objectives, asset allocation and rate of returns. Diversified investment for companies.