SWFs look East as West struggles to give good returns

Sovereign wealth funds are turning to emerging markets as a safe haven away from heightened political scrutiny and lacklustre returns in Western markets, according to a top official at Dubai International Capital (DIC).

The Middle East, North Africa and Asia have opened up as regions ripe for investment for SWFs looking to avoid potential political turbulence in the West, said Anand Krishnan, chief operating officer at DIC.

"We need to keep politics away from business. These sovereign wealth funds are in there for the right returns, if they don't get this they wouldn't be there. They are also invested for the long term as well. As soon as there is a spotlight on them and politicians make it difficult they will retreat, which is exactly what has happened.

"I don't think any more of these sovereign wealth funds are interested in looking at the United States as an economy, everyone is moving towards the emerging markets at the moment," he said at the GCC Institutional Investment Summit in Dubai.

Krishnan, who is also CEO for Emerging Markets at DIC, a $13 billion (Dh47.1bn) Dubai-owned investment agency, insisted although he had not been hindered when investing in the US, there were growing opportunities in markets in Asia.

"We are absolutely comfortable with the US regulations. We've had three instances in the past two years where we've had approvals from the United States to invest in US companies.

"It's about a risk-reward. There are much better returns [in Asia] given where the markets are today. It's not just Asia, as we've just launched a Japan-Dubai platform and a Saudi-Dubai platform each about $1bn looking at opportunities in the Mena because returns here are much better. Asia provides much better returns as well. As an investor, why would we want to put up money where we get less returns. It's not to see where we can get into a political tangle it's to get the best returns," Krishnan added.

Gulf funds, which control about $1.7 trillion, are currently at the centre of a debate about what function sovereign wealth funds play in the world economy.

Some credit their recent injections into Western banks as propping up ailing financial institutions in the midst of a economic downturn, while others worry investments could be misused to pursue political goals.

Treasury Secretary Henry Paulson visited the Middle East earlier this month in a bid to bolster relations between sovereign funds and the US.

He urged that US economy remained open for business to Middle East investors and insisted the proposed best-practice rules for government-run investment funds should not be viewed as discriminatory.

It is estimated that 71 per cent of total bank capital raised between November 2007 and April 2008 came from sovereign funds, according to the International Monetary Fund (IMF).

Despite this, Khalid Al Rumaihi, Managing Director and Head of the Institutional Placement Team at Bahrain-based Investcorp, said the strength in emerging markets was still catching the eye of Middle East investors.

"There is a focus on emerging markets. Ask any investor today and emerging markets will be a vital part of their asset allocation. Geographically there is a focus on emerging markets but sovereign wealth funds still continue to be active in the United States.

And in private equity, SWFs are not just looking for passive investments they are looking to have an active investment role, which is unusual," he added.

The IMF maintains that sovereign fund investments have been a calming influence on unsteady financial systems in recent months.

"A number of sovereign wealth funds have participated in capital injection in systemically important banks. That tells you that sovereign wealth funds can help as a stabilising influence, to the extent that they were helpful in allieviating systemic risks in the banking system," said Krishna Srinivasan, advisor and chief of Multilateral Surveillance Unit at the IMF.

"Sovereign funds accept short-term volatility in return for long-term gains," he said on the sidelines of the summit. But Srinivasan admitted there were major discrepancies between how transparent the activities of funds such as the Abu Dhabi Investment Authority and the Government of Norway Pension Fund, which attended the conference in Dubai.

The Norway fund provides an annual listing of all its investments, a performance, risk and a detailed costs report made available to the public and a quarterly press conference of its activities after meeting with Norway's Ministry of Finance.

Hani Kablawi, managing director and head of Middle East and Africa at Bank of New York Mellon, said sovereign wealth funds would love to be treated in the same way as pension funds, which receive less political hostility than state-backed vehicles.

Despite closer scrutiny from Western officials, Gulf-based companies had invested four times as much since the collapse of the DP World takeover of P&O in 2006 than the two years before the bid attempt, Kablawi added.

The European Union (EU) is calling on sovereign funds to commit to good governance practice, adequate accountability and sufficient levels of transparency.

In particular, funds are being asked to display a clear division of rights and responsibilities between managers and the governments.

Andreas Papadopoulos, Head of Unit at the General Directorate for Economy and Finance for the European Commission, said: "The European Union and its members consider there are legitimate and objective concerns over the practice of government-linked investors. And these concerns have to be addressed.

"There have been fears expressed on a number of occasions that sovereign wealth funds in certain sectors could be for not strictly commercial ends."

He added: "Sovereign wealth funds have become a large and observant player in capital markets. Last month they have played a positive role in stabilising financial markets, which has had a very positive effect on the ongoing debate."

Krishnan said there was no difference between a sovereign fund, asset manager or hedge fund. "Why don't we have the same norms for disclosure for hedge funds today? You can't distinguish a rule for sovereign wealth funds and not talk about other investors.

"There should be some levels of disclosure but beyond that it should be kept away from politics.

"DIC is both a private equity and public equity investor. We take a look at private equity investments in the mature markets in the West and emerging markets. As far as the Western markets are concerned we take between 80 per cent and 90 per cent stake in a company and are not in the business of getting into the day-to-day running of the business, but we do govern a company by a seat on a board.

"In public equity DIC takes a stake of less than five per cent or three per cent globally, and do not take a seat on the board and are not activists," said Krishnan.

The IMF said a number of countries are considering setting up sovereign wealth funds to "siphon off" excess foreign exchange reserves as a way to generate additional profits. It estimates that 50 per cent of all new SWFs will be used for this purpose.

Mongolia, a country rich in minerals, is said to contemplating creating its own fund. The Mongolian People's Revolutionary Party has promised to give each citizen a cash dividend of $1,300 once mining production starts. It will also set up a "Gift of the Motherland" fund similar to the Alaska Permanent Fund, which pays dividends to the state's residents from oil revenues, the International Herald Tribune reported.

Since the end of 2007, Gulf funds, buoyed by record oil prices, have looked to buy up stakes in a bid to diversify their economies.

The strength of SWFs in financial markets is now beginning to rival their oil benefit, Dr Nasser Al Saidi, chief economist at the Dubai International Financial Centre Authority, said this week.

He said: "Higher oil prices have meant that SWFs have accumulated enormous volumes and revenues. In the GCC, energy revenues over the past five or six years have been well in excess of $500bn. This has meant that they've grown their net financial assets in a very substantial fashion.

Qatar was the latest high-profile Gulf investor in Western financial assets, announcing plans to buy a minority holding in the UK's third biggest bank Barclays for £1.8bn (Dh13.1bn).

Barclays said that the Qatar Investment Authority would spend $3.4bn on a maximum 7.7 per cent stake as part of the bank's $8.9bn capital raising exercise. As part of the same open offer, Challenger, an offshore vehicle set up by Qatar's Prime Minister to invest family wealth, will spend just over $1bn on a 2.3 per cent stake in Barclays. QIA, established in 2000, is estimated to be worth $60bn.

Suggestions that the sovereign wealth funds of Abu Dhabi are worth more than $800bn has been dismissed as exaggeration.

The numbers

$1.7trn: The estimated value of Gulf funds. The SWFs are under debate about what function they can perform in the world economy

£1.8bn: The amount spent by Qatar Investment Authority to buy a minority stake in the United Kingdom's third largest bank Barclays

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