Sovereign Wealth Funds
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Transcript of Sovereign Wealth Funds
- 1. PrafulAnchaliyaSabina IslamSahil JainVijay Krishna
Sovereign Wealth Funds:
A new (old) force in the capital markets
2. 3. Sources of Funds
4. Are all SWFs same???
Use of earnings from export commodities and revenue receipts.
Use of foreign exchange reserve.
5. Comparison of SWF with others
6. Existence of SWFs
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
7. 8. Trends in SWF
Traditionally, long-term, passive approach to investing
Therefore, no-widespread public attention
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
9. 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--vis established industrialised economies, especially China, South Korea or Taiwan
10. 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
11. Geo Economic Implications of SWF.
To protectdomestic 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
12. 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.
13. 14. 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 SWFs about fund size, investment objective , institutional arrangements & financial information-asset allocation,benchmarks and returns.
Strong governance structure , internal controls
Respect host country rules.
15. The Deal for Merrill Lynch
15th JAN 2008-$6.6 billion dollars-KIA+Korean investmentCorporation & Mizuho Corporate Bank.
$ 5 billion dollars TEMASEK
$1.2 billion dollars Davis Selected Advisers.
16. Deal Insight
Security issued- Non Voting mandatory convertible , preferred stock
Reference stock price-$52.40
Maturity 2.75 years
Liquidation preference $100,000 per share
Stock price movement
Jan 2006 April 2008
On announcement 53.9$
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?
17. Recent investments
Singapores GIC: 4.8 billion stake in UBS
Saudi group: 800+ million in UBS
ADIA: 3.75 billion in Citigroup
Singapores Temasek: 2.5 billion in Merrill Lynch
China Investment Corp: 2.5 billion in Morgan Stanley
Chinas Citic Fund: 500 million in Bear Stearns
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.