Sovereign Wealth Funds: A Growing Global Force

February 22, 2008

François Bujon de l’EstangChairman, Citi France

Sovereign Wealth Funds: A Growing Global Force

Sovereign Wealth Funds (“SWFs”) are a prominent investor class with their assets rivaling Global Hedge Funds and Private Equity combined

Not all SWFs are created equal as they lie along a spectrum of risk appetite

SWFs are hiring best-in-class investment talent to serve long-term investment goals

Governments are weighing perceived threats of SWFs against potential benefits. Managing political risk in SWF-related transactions is key

Citi is playing a central role in the intermediation of these capital flows.

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$48.1

$23.6

$5.4

$3.0

$1.9

$1.3

$7.5 - $10.0

Asset Management Industry AUM

Retirement Funds AUM

Projected Sovereign Wealth Funds

Foreign Exchange Reserves

Sovereign Wealth Funds

Hedge Funds AUM

Private Equity AUM

SWFs are Big and Getting Bigger

Global Financial Assets ($ T)

2

SWFs: Increasingly Relevant

*

* ADIA.

Assets Under Management

($ b)

3

Warnock Model (1)Warnock Model (2)

Foreign Inflows Keep Treasury Yields Low

McKinsey estimates that annual net foreign purchases lowered long rates by 130 basis points

Source: McKinsey Global Institute: “The New Power Brokers: How Oil, Asia, Hedge Funds and Private Equity are Shaping Global Capital Markets,” Oct. 2007. Warnock and Warnock: “International Capital Flows and US Interest Rates,” NBER 12560, Oct 2006.

Impact of Foreign Capital Flows on US 10-year Treasury Yield(b

ps)

1984 1989 1994 1999 2004

4

SWFs are in Increasingly High Profile Transactions

$9.75 b, Dec 07 $7.5 b, Nov 07

$5.19 b, Aug 07

China InvestmentCorp

$5.00 b, Dec 07

$6.88 b, Jan 08

*

* Total Fund raising of $12.5 b included investments from KIA, Capital Research Global Inv., Capital World Inv., NJ Div. of Inv.

China InvestmentCorp

$3.00 b, May 07$4.40 b, Dec 07

$8.83 b, Nov 05

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Recapitalizing the Financial Service Industry

Source: Dow Jones Newswire.

Total Investments by SWFs ($ b)

2006 2007 Jan-08

$42.9 $24.0

$1.4

$19.2

$42.6

$44.6

$66.6

$20.6

Investments in Other Industries

Investments in Financial Services

63.8% of Total

93.3% of Total

$1.7 3.8% of Total

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Where the Wealth is Coming From

Where the wealth is coming from and how

will it grow?

Surge in commodity prices

Dramatic increase in current account surpluses in Asia

Willingness of governments to allocate more funds from Foreign Exchange Reserves to Sovereign Wealth Funds

2007 $3.0 trillion

2012 $7.5 - $10.0 trillion

0

1000

2000

3000

4000

5000

6000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Global Foreign Exchange Reserves ($ b)

Global Current Account Balance 2007Global Current Account Balance 2007Global Current Account Balance 2007

Deficits Surpluses

Western Hemisphere

Asia (ex-Japan) $480B

Asia (ex-Japan) $480BMiddle

East $227B

Middle East

$227B

Japan $195BJapan $195B

Russia / CIS

$77B

Russia / CIS

$77B

Other Advanced

US$784B

US$784B

C & E Europe$120B

C & E Europe$120B

Eurozone

$20B$20B

$21B$21B

$19B$19B

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Commodity Producing Countries Generate Investment Assets

At oil prices of $100/barrel, there is an incremental $2.3 b petrodollar investment into the world markets per day.

Source: McKinsey Global Institute: “The New Power Brokers: How Oil, Asia, Hedge Funds and Private Equity are Shaping Global Capital Markets,” Oct. 2007. Warnock and Warnock: “International Capital Flows and US Interest Rates,” NBER 12560, Oct 2006.

$3.40 $3.77$4.83

$1.05

$1.05

$1.58

$0.07

$0.07

2006 2007 2012

Petrodollar Foreign Investment Assets

$8.51

$6.93

$5.88

$4.83

Estimated Forecast

Oil Price $100

Oil Price $70

Oil Price $50

Oil Price $30

ScenariosCAGR

(2006-2012)

17%

6%

10%

13%

$3.40$3.91

$8.51

($ T)

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SWFs: Not a New Concept

1950’s Today

KIA$250 b, 1953

(Kuwait)

Temasek$108 b, 1974(Singapore)

ADIA$875 b, 1976

(UAE)

GIC$200 b, 1981(Singapore)

Brunei Inv.Authority

$30 b, 1983(Brunei)

Norway Govt.Pen. Fund

$328 b, 1990(Norway)

KhazanahNasional BHD

$18 b, 1993(Malaysia)

QIA$60 b, 2005

(Qatar)

KIC$20 b, 2005

(Korea)

Future Fund$42 b, 2006(Australia)

CIC$200 b, 2007

(China)

LIA$40 b, 2007

(Libya)

StabilizationFund

$200 b, 2004(Russia)

Saudi ArabianFunds

$250 b, 2007(Saudi Arabia)

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Central Banks/Monetary

Authorities

Sovereign SavingFunds

Sovereign Stabilization

Funds

AffiliatedCorporate Entities /

SOEs

Government Investment

Corporations

China

Japan

India

Hong Kong

Saudi Arabia

Russian Oil Stabilization Fund

Algerian Revenue Regulation Fund

Chilean Economic and Social Stabilization Fund

Abu Dhabi Investment Authority

Norway Government Pension Fund

Kuwait Investment Authority

China Investment Corporation

Temasek

Qatar Investment Authority

Gazprom

SABIC

Abu Dhabi National Energy Company

China National Offshore Oil Corp.

Mubadala Development Company

Dubai International Capital

Dubai World

SAGIA

GIC

Where Is Sovereign Wealth Managed?

Note: Some central banks and monetary authorities, such as the Saudi Arabia Monetary Authority, may not only manage official foreign-exchange reserves, but other foreign assets as well.

Source: Citi.

Temasek

Qatar Investment Authority

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Activity Is Moving to the Aggressive End of the Spectrum

Source: Citi.

StabilizationRisk Tolerance

Inve

stm

ent

Ob

jec

tive

Examples

Cash / Gov’t Bonds

Fixed Income Equity

Strategic Stake

BuildingReal

EstateHedge Funds

Private Equity

Leveraged Buyouts

Russian Stabilization Fund

Norwegian Government Pension Fund

Abu Dhabi Investment Authority

Kuwait Investment Authority

Temasek

Qatar Investment Authority

Low

Wealth Accumulation

High

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2.4%

9.8% 10.0%

2.7%

12.1%

10.7%

US India China

US: $1.69

India: $0.83

China: $0.83

ROW: $1.13

US: $3.38

ROW: $1.13

SWF Capital Can Reshape Global Economic Landscape

Scenario A:Allocation of Incremental SWF Capital

Growing Disparity in Western and EM Economic

Growth

Scenario B:Allocation of Incremental SWF Capital

Estimated Impact on GDP Growth

Note: Estimates of SWF capital inflow effects based on historical relationship between GDP growth and FDI, as estimated by Carkovic and Levine (2005), “Does Foreign Direct Investment Accelerate Economic Growth?”.

2.4% 3.0%

US

Current 5-Yr GDP Growth Forecast

Estimated 5-Yr GDP Forecast With Incremental Capital Inflow

75%

25%37%

19%19%

25%

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SWF Strategic Implications for Citi Clients

Key investors in

IPO or pre-IPO financing

Source of capital for

transformative transaction

Strategic partnerships can

smooth regulatory approval, mitigate

political risks

Core Shareholder

with long term

investment focus

Competition for assets

Support for

national

champions

Political ImplicationsFranchise

Impact

SWF Benefits for Citi’s Clients

Large, liquid funds with the ability to quickly close transactions

Supportive source of funding for potential acquisitions

Core investors with a long-term horizon bring added stability to shareholder base

Typically utilize low leverage levels in their investments

Business Opportunities for Citi

Intermediary between SWFs and global corporations

Advisory and financing

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Governments Are Weighing Their Response to SWFs

Perceived Threats

▼Transparency

▼Political ambitions / security concerns

▼Reversal of 25 years of privatization

▼Potential for reciprocity / restricted market access

Potential Benefits

▲Long-term investment horizon

▲Low leverage

▲Key source of foreign financing

▲May facilitate future investment in key emerging markets

Managing political risk has become essential in SWF-related transactions.

In light of the importance of these issues for global policymakers, one can expect continued public discussion about the need for international consensus on “best practice”.

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