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25 February 2024

Sovereign funds rule over the new financial landscape

By Darren Stubing

GLOBAL ASSETS Sovereign funds have increased their presence in key areas (GETTY/AFP)

GCC sovereign funds have long been significant global investors. However, the huge wealth generated over the past five years on the back of the oil price boom has seen Gulf sovereign funds increase substantially their investment presence, particularly on the international front as they seek to diversify their holdings and exposure.

It is estimated that the rising oil price is generating an extra $1 billion a day of surplus cash. Activity over the past two years for all global sovereign wealth funds has been particularly strong. It is estimated the total value of sovereign wealth fund investments in the past two years has been $140bn. This includes around 130 individual deals with 37 of them worth $1bn or more.

Morgan Stanley estimates sovereign wealth funds control $2,500bn, half the official currency reserves in the world, rising to about $17,500bn over the next 10 years. Over the same period, when global financial assets are expected to double from $100,000bn, sovereign funds’ share of global wealth could almost quadruple from 2.5 per cent to 9.0 per cent.

Although aiming to maintain a low profile, their foray into well-known investments – often considered important strategically and commercially to countries – has begun to cause concern in some western markets. Their need to look in large western financial markets to place their growing funds has, in part, seen the funds become a victim of their own success.

Concerns are not only levelled at Gulf sovereign funds but also other important global investors such as those connected to Singapore, China and Russia. Authorities in many countries are now looking carefully at investment groups controlled by foreign sovereigns. The transparency of most of these funds is poor and this fact is often behind the criticism levelled at sovereign funds. Leading international markets including the US, Canada, United Kingdom, Germany and France are now actively looking at ways to control and monitor the investments made in these countries by these funds. The European Commission for one is examining the funds’ effect on Europe’s capital markets. The US is even more active. The US has asked the International Monetary Fund and World Bank to draw up guidelines for investments by government-run funds. 

Gulf sovereign funds vary significantly in size and asset diversification. The largest by far is the UAE’s Abu Dhabi Investment Authority (ADIA) with estimated assets of $850bn. The huge size of the fund means it has to actively invest, and increasingly so, in large assets in international financial markets.

This year it acquired a 10 per cent stake in Apollo, the US private-equity group. It also bought Canada’s PrimeWest Energy Trust for $5bn. The Kuwait Investment Authority has a long track record and is well regarded although again disclosure of asset positions is poor. A recent large investment was its 7.2 per cent stake in Daimler for $8.1bn.

Saudi Arabia’s sovereign funds are currently some way behind those of the UAE in terms of assets but are increasing rapidly due to the oil wealth in the Kingdom. Moreover, ruling family wealth investments are also important global investors.

High-profile corporate investments over the past year have catapulted Gulf sovereign funds into the spotlight. The London Stock Exchange was at the centre of a battle for dominance by two Gulf state investors, including Qatar. Flagship corporate J Sainsbury was targeted by Qatari investors. In April 2007, the QIA snapped up Chelsea Barracks in London for £900m, some £300m more than was expected. Backed by the world’s third largest natural gas reserve, Qatar sovereign investments have become more active over the past few years.

However, no western government has yet had the courage to admit that dealing with sovereign wealth funds may require departures from orthodoxy on investment flows. Some sovereign wealth funds have responded to the criticism by being more open in investment strategy. These include Singapore’s Temasek Holdings.

The financial sector has long been a populat investment focus for sovereign wealth funds. Temasek acquired recently a large stake in Barclays and also owns a substantial stake in Standard Chartered. More recently, Abu Dhabi invested $7.5bn in Citigroup, the most visible of a growing trend among sovereign wealth funds, which have been buying stakes in banks, money management firms and brokers. Since April 2007, sovereign funds have invested $37.3bn in global financial assets, according to Morgan Stanley.

Despite the criticism, sovereign wealth fund investment flows have been advantageous over the past six months. Many believe the size of the sovereign wealth funds has acted as a powerful shock absorber and aided the US economy to avert a recession. The Citi deal suggests US financial institutions can offset their large write-offs from losses in mortgage-backed securities with backing from these funds.

ADIA’s cash injection into Citigroup has been highly praised because it comes just as the US’s biggest bank faces a possible capital crunch due to its massive mortgage-related asset writedowns.