'There have been no examples of any SWF abuse'



While the rest of the world is still split on whether they love or hate sovereign wealth funds, or SWFs, Lehman Brothers last month became the first investment bank to announce a fully fledged division to handle and grow its business from such funds.

Even the International Monetary Fund (IMF) has waxed hot and cold on the role that sovereign funds play or have the capability of playing in the world's financial markets. On the one hand, it has called sovereign wealth funds a stabilising force; on the other, it has demanded more transparency about their business because they have the potential to carry out transactions based on non-commercial motives. The IMF has estimated that deployable assets by these funds will grow to as much as $10 trillion (Dh36.73trn) in the next five years.

This is the universe in which Makram Azar, Lehman's freshly minted Global Head of Sovereign Wealth Funds, will operate. Azar dismisses the hype surrounding sovereign funds saying the headline-grabbing deals of the past six months in Western financial institutions such as Citibank and Merrill Lynch make up a minuscule percentage of SWF activity. The bulk of investments are not in the mergers and acquisitions arena, and therefore not on a newspaper's radar.

How would you classify a sovereign wealth fund? How does it differ from a state-owned investment company?

It does not, necessarily. Different countries have different ways of deploying their wealth. We want to capture the whole universe. So, I'm not focused so much on the name, I'm focused on the client base. Wherever the money comes from the sovereign, I'm there. Lehman was the first mover in this – and I cover Norway to Alaska, not just the Gulf. Some of these institutions do much more than just mergers and acquisitions – but it is the big deals such as Citigroup or Morgan Stanley that grab the headlines. Most of the investments are below the surface, people don't actually see them.

What's your view on the guidelines that the IMF wants sovereign funds to create and follow? How do you respond to fears that investments by these funds may have political undertones?

Up to now, most of these fears have not been well founded. There have not been any examples of an abuse or a deal made by a sovereign fund for the wrong reasons. If you own five per cent of a big bank, what does it really mean? Where is the concealed agenda? I don't see it. I think this has been used a lot for domestic political reasons. The DP World investment in United States' ports [as part of the Dubai-based company's acquisition of Peninsular & Oriental Steamship Company] is a perfect example of this. There was no security threat. DP World is not a sovereign wealth fund but it is a state-controlled company. That said, there are some sensitive sectors and industries that the US in particular may want to protect – more from the Chinese, I think, than from the Gulf. So let's see where it leads in terms of the guidelines.

What do you see happening in future that can ease such fears?

Well, for one thing, the US presidential campaign will soon be over. That's one aspect. And over time, when they see that there has been no abuse or misuse of the funds for any political agenda, the fears will ease off. You build trust in a relationship over time.

What kinds of guidelines do you see coming in?

I think a lot of the guidelines will have to do with transparency and some sort of limits on the amount of control that can be exerted on companies in the West.

Will that make your job easier or harder?

Frankly, I'm neutral on this. It might define more clearly what the sovereign wealth funds can or cannot do, rather than stumbling on an obstacle after the fact, similar to what happened with DP World.

Where do you see the biggest deals happening for you in this arena?

Again, you have the deals that grab the headlines – these are only a small fraction of the pie, which today may be $3.5 trillion. Of this the investments made in the Western institutions were $60-$80 billion – which is nothing. Abu Dhabi Investment Authority, for example, has hundreds of billions of dollars but their headlining deal was Citibank for $7.5bn. The rest of their investments are below the radar, so to speak, for the newspapers. They invest their money every day in the markets – and that's what we're going after, not just the M&A deals. For instance, if they have $100bn to invest they may put 50 per cent in fixed income, 40 per cent in equity, and 10 per cent in more aggressive asset classes spanning hedge funds and private equity etc. We offer all of that. We are not here to just work on the M&A deals.

What is the average internal rate of return that you would have to look at when you get a fund-management mandate from a sovereign wealth fund?

The IRR is not ours, it is theirs. In the monetary markets, it is small return and low risk; 10 to 15 per cent would be in more aggressive investments where the IRR is greater and more than 20 per cent in private equity deals.

Where does it average out?

Well, when you put your money in the bank you get two or 2.5 per cent. You go buy a piece of real estate, you can expect a higher return. That's how they do it. In the more aggressive markets, they can expect an IRR of 10 to 15 per cent. In the less aggressive, it can be single-digit or low double-digits.

Does the competition to get SWF fund-management mandates push investment banks like Lehman to structure specific products with higher average returns?

We work with our existing products. We can create products, but at the end of the day our products channel investments into the areas in which the SWF wants to invest. For example, they may say they want to be present in the Asian markets. We tell them what to invest in and do it for them. An IRR is not something we can guarantee. We show them the returns we have generated over the past five years – we show them our track record.

What slice of the global sovereign fund market are you targeting?

The biggest possible! Lehman is the only investment bank that has created a global division that spans all the products across asset classes. I'm surprised that we are the first to do this as a global co-ordinated effort.

How much of Lehman's business do you see coming from this segment?

An increasing amount. What we are targeting is not a percentage of Lehman's business but a percentage of the SWFs' market – as large a market share as possible.

Sovereign funds are a growing financial force – is it a force for good? Or is it a force that the world should be wary of?

I don't see anything to be wary of. 

Do you see them as saviours?

In the past six months they may have looked like saviours. But that's not their objective – which is to make money and get good returns on their investment. They will continue to invest wherever they see the potential to make money. They did not invest in Western financials to be saviours. They invested because they thought the sector had hit bottom and was going to bounce back.

They were wrong.

Yes. Everyone lost money on that call but so did all other investors in the equity markets during that period, including Western ones. But in five to 10 years you will see them making money on that investment.

Does that make sovereign funds more stable investors?

Yes, they do take a long-term view.

Sovereign funds today generate a lot of heated argument. One either loves them or hates them. What's the reality check here?

The world is focusing on $60-$80bn of sovereign investments that have taken place in the past six or seven months in M&A deals. If you look at the total pool of sovereign investible funds – $2-$3trn – that is a minuscule percentage. Something like 90 to 95 per cent of their investing is being done in mundane, everyday things. You can't mystify them based on the small percentage that is in the headlines. Look at Norway. It has half a trillion dollars, but nobody is saying anything bad about them. So, yes, it's a group of different countries, different people, different agendas. We cannot put them all under one blanket. Sovereign wealth funds have more money than hedge funds and private equity combined. They are different from each other. Is China, for example, the same as Saudi Arabia? I don't think so. At the same time, however, if you look at the banking crisis, all of them rushed to invest in Western financials. So there are commonalities as well – in investment philosophies, for instance.

What quantum of sovereign funds does Lehman have the mandate to manage today and how do you see that growing?

Sovereign wealth funds themselves are expected to quadruple in size over the next five years. This will come from oil revenues, commodity prices, trade surpluses – multiple things – anything that comes into the sovereign coffers. We will grow at a similar rate, or higher, as we gain market share.

Do you think the whole move towards transparency and international best practices will hurt the image of sovereign funds in the huge percentage of business they do in the non-M&A segments?

Definitely not. The liquidity and depth they bring to financial markets worldwide is seen as a boon to those markets. Because the sovereign funds have an increasing amount of money, they have to put it to work. That's very healthy for the markets; it's a lifeline for the markets.

What are the critical success factors of your division?

One is relationship-building, building trust. Others do this as part of their day job, so to speak, not in a fully dedicated manner. I wake up every day thinking about how I can take our relationships further. Secondly, it is the quality of investment products and ideas in our portfolio. You can't have one without the other.

Why are you basing this effort in Dubai? Why are you moving in from London? Is that because the IMF says half of all sovereign funds will be in the GCC in five years?

I have a map of the world in my office. If you look at it – from Norway right up there to South Korea and Alaska, Dubai is perfectly located. And of course I can focus on the Gulf more easily as well. This week I'm flying to China. Dubai is like the centre of the universe – at least the universe that I will be looking at. New sovereign funds are expected to come up – India, for example, is one. Saudi Arabia, Japan… It's fascinating!


Makram Azar, Global Head of Sovereign Wealth Funds, Lehman Brothers

Makram Azar joined Lehman Brothers in 1990. Before his new posting as global head of SWFs, he led the media, consumer and retail investment banking businesses in Europe and the Middle East. Under his leadership, Lehman Brothers was named Media M&A Bank of the Year 2007 by MediaFinance magazine for having advised on most of the significant 2007 transactions in the media sector. These included the takeover of ProSiebenSat1 by KKR and Permira, merger of Canal+ and TPS, and the sale of Endemol.

A Lebanese by birth, Azar has developed strong relationships in the region, including advising Saudi Prince Alwaleed bin Talal on an investment in Berlusconi's media company, a deal that could be seen as a precursor to regional sovereign fund investments in the West, which started more recently.

His new cross-divisional role based in Dubai, says Azar, is all about "building relationships and then doing deals together".


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