GLOBAL - Investment giant Merrill Lynch is the latest firm to have turned to sovereign wealth funds (SWFs) for financial support and has signed a deal with seven financial institutions in total to sell convertible preference shares worth $6.6bn (€5bn).
The Korean Investment Corporation, Kuwait Investment Authority - both considered SWFs) - and Mizhuo Corporate Bank, along with TPG-Axon Capital, the New Jersey Division of Investment - acting on behalf of the New Jersey pension fund - The Olayan Group and T.Rowe Price have all ploughed money into the asset manager's balance sheet in return for 2 3/4-year convertible preference shares generating 9% dividend per annum.
Under the terms of the deal, all of these investors will be considered as passive investors only and will not have any rights of control or role in the governance of ML.
However, this latest deal is just the latest move by SWFs to diversify their assets beyond home borders and talk in the asset management industry is growing about the motivation behind SWF investments in some cases.
While investments by sovereign wealth funds are not a new concept, there has been an increasing move by some developing nation funds to invest in the global financial arena, and this has prompted both asset managers and financial organisations to consider why they might be investing.
The OECD noted in November public concerns seem to relate to risks that SWFs' investment flows may destabilise financial markets, and that investments by foreign government-controlled investors - SWFs or state-owned enterprises - may be motivated by political objectives and pose potential security threats. As a result, OECD countries and non-OECD partners are looking for ways to address these concerns while avoiding unnecessary restrictions on international investments, and a major study is under way to analyse the position of SWFs.
In December, Robert Baur, managing director and global head of trading at Principal Global Investors, told IPE, he does not believe there are any ulterior motives to the investments by SWFs but instead suggested they would help to prevent recession and rebalance global wealth. (See earlier IPE story: Rebalancing nations will prevent global recession)
His comments followed moves by the Singapore Investment Corporation and an unnamed Middle Eastern fund to invest $11bn (€14bn) in UBS, as well as a $5bn cash injection into Morgan Stanley by the Chinese Investment Corporation - a firm recently created to allow Chinese assets to be invested outside of its own borders.
Now Phil True, head of UK institutional equities at Credit Suisse Asset Management, has added he believes SWFs are motivated to invest for reasons "other than diversification" but their doing so should perhaps been seen positively.
"Many SWFs are fairly new entrants to the ex-bond investment world and the fact that the China Investment Corporation's (CIC's) first investment play was to put $3bn into Blackstone's IPO may that suggest that China wants the expertise to hone its own investment skills," said True.
"When the China Development Bank invested £1.5bn in Barclays Shares at 720p in July 2007, during the bid for ABN, the rationale centred not just on the potential investment return, but also on ‘training and talent management', on collaboration in commodities products, and on Barclays input into risk management, corporate governance and IT strategy and procurement. This is a model that is likely to become more commonplace," he added.
He notes Chinese investors are perhaps looking for financial services and intellectual property exposure while ‘petro-dollar' investors are likely to be simply more interested in diversifying beyond the commodities sphere.
The Norwegian pension fund - global has been investing in overseas listed corporates for some years now but, interestingly, is not considered in the same light as SWFs, despite being a sovereign fund, according to the OECD, because the pension fund has been set up for a very specific purpose and is completely transparent in both its investment strategy and motives - a situation similar to the New Jersey fund which has just invested in Merrill Lynch.
Elsewhere, Citigroup has announced a fourth quarter loss of $9.83bn as a result of its exposure to sub-prime -related investment in the fixed income market as well as higher current and estimated losses on US consumer loans.
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