Tuesday, January 15, 2008
Wall Street Journal
Barriers to Entry
Blockbuster Investments by Government Funds Lead to Backlash
By RICK CAREW in Hong Kong, MARCUS WALKER in Berlin, CHIP CUMMINS in Dubai, UNITED ARAB EMIRATES, and KATHARINA BART in Brussels
January 15, 2008
The powerful government-run investment funds of Asia and the Middle East -- which have been gobbling up global assets recently -- are hitting new resistance.
Some obstacles are political in nature. But others center on bottom-line questions about whether investments like these are solid business moves.
The latest example: China's government has apparently squashed a multibillion-dollar investment in Citigroup Inc. by state-owned China Development Bank. The move suggests there is discord in Beijing over how best to deploy China's money pile. A few previous China investments like these have fared poorly so far financially.
In the West, the newfound assertiveness of these pools of government money -- known as sovereign-wealth funds -- is reinvigorating the debate over possible restrictions amid the realization that the West's share of the world economy is shrinking, and with it, control over the ground rules of globalization.
Germany has been looking into new laws to block takeovers by state-owned foreign companies and investment funds. And last week, French President Nicolas Sarkozy vowed to use France's state pension fund to defend French industries "in the face of a rise in the power of extremely aggressive" state-owned investment funds from abroad.
One irony is that "there haven't been any significant investments by sovereign-wealth funds in Germany or France," says Stephen Jen, an economist at Morgan Stanley in London. Nevertheless, the growing size of sovereign-wealth funds in China, Singapore and Saudi Arabia, among other places, means they are potentially in a position to buy major corporations in Europe's leading economies.
Asian and Middle Eastern investors have snapped up significant assets including stakes in Wall Street giants Citigroup and Morgan Stanley as well as the global port operator Peninsular & Oriental Steam Navigation Co. and the iconic Madame Tussaud's Group PLC, operator of wax museums.
It hasn't been without controversy. In 2006, the port deal, in which Dubai Ports World would have acquired U.S. container-port operations, among other assets, raised a political firestorm in the U.S.
The newness of government-controlled investment funds on the global financial stage is sparking worries about their intentions. In Switzerland, activist shareholders in UBS AG, the giant bank, are questioning a planned 11 billion Swiss franc ($9.98 billion) acquisition of a 9% stake by the Government of Singapore Investment Corp. That investment would rank GIC as the single largest investor in UBS.
One concern centers on whether foreign investments like these are sizable enough to "effectively block certain decisions through an informal veto right," says Dominique Biedermann, a director of Ethos, a Swiss activist investment fund. The fund fears that poor turnout at shareholder meetings could artificially inflate GIC's influence.
Current shareholders argue that the investment is structured in a way that dilutes their own holdings. GIC has said publicly that it doesn't seek to control UBS's business and views itself as strictly a financial investor. UBS spokesman Christoph Meier said UBS plans to address Ethos's questions no later than Feb. 27, when UBS shareholders are scheduled to vote on the capital infusion.
China's decision to halt a planned $2 billion investment in Citigroup comes after China's government fund, China Investment Corp., pumped $5 billion into Morgan Stanley in December. Citigroup had hoped to sell its stake to China Development Bank to improve its books in the wake of losses from the U.S. subprime lending as well as Citi's decision to fold off-balance-sheet investments into its accounts.
People familiar with the situation say China's senior leadership decided against backing the investment plan, which had been in the works for weeks.
Citigroup hopes to announce a cash infusion from government funds and other investors today when it is due to report its fourth-quarter earnings. In late November, a Middle Eastern state-controlled fund, Abu Dhabi Investment Authority, invested $7.5 billion in the New York financial-services company.
It wasn't clear why Chinese leaders scrapped the Citigroup investment. Yang Hua, director of China Development Bank's news department, says she is unaware of any plans for the bank to invest in Citigroup, or any government opposition to any such investment.
China's blockbuster investments so far in Blackstone Group LP and Barclays PLC have fared poorly. A $3 billion stake in U.S. money manager Blackstone triggered sometimes angry Chinese public criticism of China Investment Corp., the state fund set up last year to invest a $200 billion pile of China's money. The value of China Investment Corp.'s stake has fallen 31%.
China's government holds controlling stakes or full ownership in almost all its large financial institutions.
Senior Chinese leaders don't necessarily coordinate the operations of firms like these, instead retaining veto power over major moves.
Unlike some other sovereign investors, China is quite new at doing big deals. Only in the past few years has the country's trade surplus exploded, giving it foreign reserves now valued at more than $1.5 trillion.
"Four years ago they could not imagine that they would be in this position," says Arthur Kroeber, managing director of Dragonomics, an economic research firm in Beijing.
In the Mideast, there are few signs so far of unease over the large investments regional players are making abroad. But officials and fund managers say they still worry about the potential for political backlash in foreign countries, along with high regulatory hurdles and a softening economy in the West.
Dubai International Capital, a government-owned investment fund, has in recent years snapped up big stakes in British bank HSBC Group Holdings. But its last big deal was for a stake in Sony Corp.
DIC's chief executive, Sameer Al Ansari, said he is looking more at Asia than the U.S. and Europe these days. That is partly to diversify geographically, he said late last year. But it also reflects worry about U.S. economic and regulatory conditions.