PREVIOUSLY regarded as hostile raiders, the elite global club of sovereign wealth funds (SWFs) began to look more like saviours as the financial crisis unfolded in 2008. They poured billions into American and European financial groups teetering on the brink of collapse and remain a source of both fascination and controversy in the global investment landscape.
It is therefore unsurprising that the sale of £615 million worth of warrants in Barclays by the Qatar Investment Authority (QIA) generated a wave of interest when announced last week. The disposal by the QIA, which is headed up by the Qatari prime mi
nister Hamad bin Jassim Bin Jaber Al Thani, will only fractionally decrease the gas-rich emirate's holding in the British bank. However, it has led to mounting speculation as to what the Qataris might do next.
The immediate supposition was that the QIA was raising funds for a takeover of Sainsbury's. This, however, seems unlikely.
QIA did take a tilt at Sainsbury's two years ago, and continues to hold a 26 per cent stake in the group. Yet it allowed its shareholding to be diluted in June when it failed to take up its entitlements to a share placing and convertible bond offer by Sainsbury's.
Victoria Barbary, senior analyst with the Monitor Group in London, also questions the premise that the QIA would have to sell existing holdings to fund fresh investment. Barbary specialises in tracking the activity of SWFs for her advisory firm, and estimates that QIA has $60 billion at its disposal to bankroll new activity.
"It seems rather ridiculous to me to suggest that they would have to sell Barclays to make a move on Sainsbury's," she says.
But it's not just the financial assumptions that fail to add up. Barbary says the scenario simply doesn't feel right, given the changes taking place within the world of sovereign wealth.
SWFs are government-owned investment vehicles. Many are responsible for managing the money from selling natural resources such as oil, or are in charge of the surpluses generated by powerful exporting economies. Their aims vary, but they generally focus on diversifying a country's sources of income while also securing wealth for future generations.
Although some date back several decades, many SWFs are relatively new. The massive China Investment Corporation (CIC), which manages that country's foreign exchange reserves, is one of the world's largest, with $298bn in assets at the end of last year.
It was established in 2007, just two years after South Korea set up the Korea Investment Corporation with an initial backing of $20bn . The majority of Middle Eastern SWFs have been established since 2002, including QIA, which was set up in 2005.
By contrast, the sector's biggest wielder of assets, the Abu Dhabi Investment Authority, was set up in 1976 and has an estimated $625bn. Singapore's Temasek Holdings and Government of Singapore Investment Corporation were founded in 1975 and 1981, respectively, and together control an estimated $300bn.
With a tradition of passive investment and a lack of statutory disclosure, SWFs have been criticised for being too secretive. Though the International Working Group of SWFs drew up a voluntary code of best practice known as the Santiago Principles last year, a recent report found that few were adhering to the ideals of transparency in areas such as funding sources, investment objectives and corporate structure and governance. This lack of clarity has stoked suspicion in some quarters that SWFs could be acting as the financial component of their governments' political agendas.
But Barbary says: "Sovereign wealth funds are commercial investors. They are there to make a profit. It is not in their interests in any way to be seen as political investors or bad investors."
They have remained an oasis of cash amid the credit drought, but SWFs have not been immune to the global downturn. Exact figures are difficult to pinpoint, but experts estimate the total value of assets controlled by sovereign funds fell by anywhere between 8 and 18 per cent during 2008 and early 2009.
The Norwegian Government Pension Fund, the world's largest SWF outside the Middle East, is one of the few that does publish figures. It posted losses of more than 23 per cent for 2008, driven primarily by its massive equity portfolio, which took a hammering as global stock markets crashed.
The Norwegian fund is now recovering following the purchase of an additional $175bn of equities when markets bottomed out earlier this year. Others have been less fortunate. Temasek, for example, sold its stake in Bank of America when its shares hit rock-bottom in February, locking in billions of losses.
Many SWFs involved in the banking and finance bailouts of 2008 are nursing both losses and a lingering sense of resentment about the representations made when some of those firms put out the begging bowl. This led to a sharp reduction in deal activity at the beginning of this year. Monitor Group recorded nearly 50 publicly announced SWF investments in the second and third quarters of 2008. By the first half of this year, that figure had fallen to just 37 deals, including a mere 11 in the second quarter.
Although she doesn't yet have full figures for the third quarter, Barbary says there are signs that sovereign funds are returning to international markets. China's CIC has been putting money into financial services, including some cash into British hedge funds. However, most of the other major SWFs have been concentrating on sectors such as energy and utilities, aerospace, automobiles and natural resources.
Real estate has also been popular, and this is an area where the UK can expect to attract keen interest. Yngve Slyngstad, chief executive of the Norway's Government Pension coffer, said last month his fund would be investing significantly in UK property in the run-up to next summer.
Barbary says the financial crisis has catalysed what was already the growing importance of sovereign funds in the global investment market. She believes there will be a permanent re-balancing, but cautions against over-inflating the significance of SWFs, particularly as other parts of the financial sector return to health.
"You have to put sovereign wealth funds into perspective," she says. "They do not have massive amounts of money under their control when compared to major banks or hedge funds, or even private equity when times are normal."
