UK - The Organisation for Economic Cooperation and Development (OECD) has questioned whether sovereign wealth funds are likely to be as willing to continue investing in the finance and real estate market over the coming years following the recent surge of credit crunch-related deals, as officials argue better opportunities may now be surfacing elsewhere.
An OECD report issued earlier this week - entitled Financial market highlights: May 2008 - notes of the 15 largest mergers and acquisitions deals conducted between 1986 and today involving SWFs, 11 targeted the financial and real sectors and were completed in 2007 or earlier this year.
This is aside from the huge number of controversial equity deals over recent months which has seen SWFs buying into banks in return for cash to shore up their capital requirements - the latest being the reported investment of a Middle Eastern SWF in Lehman Bros.
The report looks at all aspects of activity in the financial markets but pays particular attention on SWFs arguing: "It remains to be seen how much longer and further these investors are willing to share with the (mainly US and European) financial sector the burden of adjustment to this current crisis. As other, more profitable options to invest - in other sectors or countries - are opening up their interest in the financial sector may tail off."
More importantly, OECD officials have also questioned how much of their assets pension funds will be willing to invest in hedge funds in the future, as the report notes "macro strategies seem to have fared relatively well during the downturn, but more recently, some traditional (eg equity) investments' returns have picked up more strongly".
The OECD added: "It remains to be seen how large a share these [traditional pension fund] investors will allocate to these alternative investments in their portfolios in the future."
Officials also predict there could be growth in the use of covered mortgage bonds, such as those seen in Europe, in light of the recently-realised risks associated with asset-backed structured products such as mortgage securitisation, where investors are looking for secure fixed income paper because the actual risk to these products stays with the original issuer rather than being lost in the ‘wrapping' of structured offerings.
However, concerns have been expressed about whether the use of current mark-to-market valuation processes are appropriate in relation to the management of capital adequacy, given the volatility of credit and liquidity pricing over the last year.
"While a moratorium on marking to market could be counterproductive if it results in a loss of confidence in basic accounting rules, the issue must be addressed over the longer term," said the OECD report.
"As this crisis has shown, there are many instances where the market has not been coping well with this accounting rule, which does not factor in what has become a significant liquidity premium or the role of a fear factor…mark-to-market techniques regarding the timing of when losses occur can thus have widespread effects," noted the OECD.