Sovereign Wealth Funds A Growing Global Force Franois
Sovereign Wealth Funds: A Growing Global Force François Bujon de l’Estang Chairman, Citi France February 22, 2008
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. 1
SWFs are Big and Getting Bigger Global Financial Assets ($ T) 2
SWFs: Increasingly Relevant Assets Under Management ($ b) * 3 * ADIA.
Foreign Inflows Keep Treasury Yields Low Impact of Foreign Capital Flows on US 10 -year Treasury Yield Mc. Kinsey estimates that annual net foreign purchases lowered long rates by 130 basis points 1989 1994 1999 2004 (bps) 1984 Warnock Model (1) Warnock Model (2) 4 Source: Mc. Kinsey 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.
SWFs are in Increasingly High Profile Transactions $9. 75 b, Dec 07 $8. 83 b, Nov 05 $7. 5 b, Nov 07 $6. 88 b, Jan 08 * China Investment Corp $5. 19 b, Aug 07 5 $5. 00 b, Dec 07 China Investment Corp $4. 40 b, Dec 07 $3. 00 b, May 07 * Total Fund raising of $12. 5 b included investments from KIA, Capital Research Global Inv. , Capital World Inv. , NJ Div. of Inv.
Recapitalizing the Financial Service Industry Total Investments by SWFs ($ b) $66. 6 Investments in Other Industries Investments in Financial Services $44. 6 3. 8% of Total $1. 7 $42. 6 63. 8% of Total $20. 6 $42. 9 $24. 0 $19. 2 $1. 4 6 Source: Dow Jones Newswire. 93. 3% of Total
Where the Wealth is Coming From Where the wealth is coming from and how will it grow? Surge in commodity prices Dramatic increase in current account surpluses in Asia Global Foreign Exchange Reserves ($ b) 7 Willingness of governments to allocate more funds from Foreign Exchange Reserves to Sovereign Wealth Funds 2007 $3. 0 trillion 2012 $7. 5 - $10. 0 trillion
Commodity Producing Countries Generate Investment Assets Petrodollar Foreign Investment Assets ($ T) $8. 51 $3. 91 $3. 40 Estimated Scenarios CAGR (2006 -2012) $8. 51 Oil Price $100 17% $6. 93 Oil Price $70 13% $5. 88 Oil Price $50 10% $4. 83 Oil Price $30 6% Forecast At oil prices of $100/barrel, there is an incremental $2. 3 b petrodollar investment into the world markets per day. 8 Source: Mc. Kinsey 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.
SWFs: Not a New Concept 1950’s 9 Today KIA $250 b, 1953 (Kuwait) Brunei Inv. Authority $30 b, 1983 (Brunei) Stabilization Fund $200 b, 2004 (Russia) CIC $200 b, 2007 (China) Temasek $108 b, 1974 (Singapore) Norway Govt. Pen. Fund $328 b, 1990 (Norway) QIA $60 b, 2005 (Qatar) Saudi Arabian Funds $250 b, 2007 (Saudi Arabia) ADIA $875 b, 1976 (UAE) Khazanah Nasional BHD $18 b, 1993 (Malaysia) Future Fund $42 b, 2006 (Australia) GIC $200 b, 1981 (Singapore) KIC $20 b, 2005 (Korea) LIA $40 b, 2007 (Libya)
Where Is Sovereign Wealth Managed? Central Banks/ Monetary Authorities China Japan India Hong Kong Saudi Arabia Sovereign Stabilization Funds Sovereign Saving Funds Government Investment Corporations Affiliated Corporate Entities / SOEs Russian Oil Stabilization Fund Abu Dhabi Investment Authority Mubadala Development Company Gazprom Algerian Revenue Regulation Fund Norway Government Pension Fund Dubai International Capital Abu Dhabi National Energy Company Dubai World Chilean Economic and Social Stabilization Fund Kuwait Investment Authority China National Offshore Oil Corp. SAGIA SABIC GIC China Investment Corporation Temasek Qatar Investment Authority 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. 10 Source: Citi.
Activity Is Moving to the Aggressive End of the Spectrum Stabilization Low Examples Investment Objective Russian Stabilization Fund Norwegian Government Pension Fund Abu Dhabi Investment Authority Kuwait Investment Authority Temasek Qatar Investment Authority Wealth Accumulation 11 Source: Citi. High Risk Tolerance Cash / Gov’t Bonds Fixed Income Equity Strategic Stake Building Real Estate Hedge Funds Private Equity Leveraged Buyouts
SWF Capital Can Reshape Global Economic Landscape Scenario B: Allocation of Incremental SWF Capital Scenario A: Allocation of Incremental SWF Capital 25% 37% 75% 19% Estimated Impact on GDP Growth Growing Disparity in Western and EM Economic Growth 12 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? ”.
SWF Strategic Implications for Citi Clients SWF Benefits for Citi’s Clients Co m for petiti ass on ets Key investors in IPO or pre-IPO financing Core Shareholder with long term investment focus Source of capital for transformative transaction Strategic partnerships can smooth regulatory approval, mitigate political risks Political Implications Franchise Impact or rt f o l pp Su ationa ns n io mp a ch 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 13
Governments Are Weighing Their Response to SWFs Managing political risk has become essential in SWF-related transactions. Potential Benefits Perceived Threats ▲Long-term investment horizon ▼Transparency ▲Low leverage ▼Political ambitions / security concerns ▲Key source of foreign financing ▼Reversal of 25 years of privatization ▲May facilitate future investment in key emerging markets ▼Potential for reciprocity / restricted market access 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”. 14
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