By Natsuko Waki
(Reuters journalists have produced a special multimedia package on frontier markets including stories, video reports, pictures, research and graphics. To see the full package click here)
* SWFs often enormous, established fish in small ponds
* Their need for discretion suits many "frontier" targets
* Declining rich-world power weakens push for transparency
LONDON, May 27 (Reuters) - Sovereign wealth funds -- national vehicles created to grow state wealth for the future -- have long experience investing in exotic and lesser-known lands. To these funds, many of which originate in what the West calls the "frontier" region, it's a local market.
This year alone, countries including China, Singapore, South Korea, Kazakhstan, Azerbaijan and Abu Dhabi have invested easily more than $1 billion in frontier markets, in such projects as mines in Mongolia and companies in Africa, the Caribbean and Latin America.
The often secretive heavyweights of the financial world, sovereign funds control around $3-4 trillion in assets and include some established players on tricky terrain. Because their investments are so influential, their presence can be manipulated to wrong-foot other investors.
So the sovereign wealth funds' tendency to be opaque adds to the challenge for investors in frontier markets. But beyond this, they are also having a broader influence, bringing a "frontier factor" to the rest of the world.
"Most SWFs are themselves a creation that should be looked at in the context of frontier markets," said Alexander Mirtchev, independent director of a sovereign wealth fund from the "frontier" region and a member of the board of trustees on the Kissinger Institute on China and the United States.
"The frontier is part of their DNA, and this 'frontier make-up' to a large extent determines their competitive advantages, as well as in some cases the problems that SWFs sometimes face."
Backed by leverage-free reserves beyond the dreams of most indebted rich-world countries, the funds' "south-south" investment is more than a sideshow: it's reinforcing their role as powerbrokers of global markets.
HISTORY LESSON
To get the picture it's worth considering that in a sense, sovereign funds have been actively investing on the frontiers for at least 400 years.
The East India Company -- an English trading company in the 17-19th centuries backed by the state -- functioned loosely like a modern sovereign wealth fund. It pursued trade in commodities including spice, cotton, tea and opium in the then-frontier markets of China and India, creating regional markets and helping develop local economies.
Other European corporations including the 17th-century Dutch East India Company, VOC, served as tools of colonial power -- an extension of states -- just as do some sovereign funds today.
The difference between the pioneers of the past and the present is that today, much of the wealth and influence come not from the modern rich world, but from resource-rich countries with very different values.
SOUTH-SOUTH TIES
Concrete figures are hard to come by, but experts estimate the allocation of sovereign wealth fund assets to frontier markets is less than 5 percent.
That would translate into $150 billion, which eclipses the total market capitalization of the benchmark MSCI Frontier Markets equity index at $120 billion.
What for the funds is small exposure makes a huge difference to recipients. Their presence brings mutual benefits.
The funds and their targets in poor countries often have shared experience on the economic margins, which fosters a cultural affinity.
Countries on the investment frontiers desperately need long-term capital, which sovereign wealth funds can provide.
Recent economic ructions in the West add to the incentive for stronger ties: the risk in developed-market investments has increased, but the prospect of commensurate rewards has not.
Sovereign funds are keen to diversify into illiquid but higher-yielding assets in frontier economies in the hope of providing returns for future generations. And unlike the quarter-to-quarter reporting required from companies in the West, these funds can wait a long time before showing returns.
"Most SWFs are seeking new and untapped sources of diversification and alpha generation," said Cynthia Sweeny Barnes, global head of sovereigns and supranationals at HSBC Global Asset Management.
"Frontier markets offer interesting risk-reward dynamics, particularly for investors with permanent capital. The low level of information in frontier markets creates often significant pricing inefficiencies, which active investors can exploit."
SHHHH
Modern sovereign funds have been thrust further into the global economic limelight since the credit crisis cut funding for the hedge funds and private equity groups that had been cocks of the walk.
Only a few years ago, Western politicians were making headlines with attacks on sovereign funds for their secretive ways: behind this were fears their motives were political, rather than commercial.
Keen to be accepted, many did make an effort to open up. But since the credit crisis, political calls for greater transparency from the funds have quietened.
"Once regarded as subversive agents of state capitalism, they are now sought-after providers of capital," Sven Behrendt, a visiting scholar at the Carnegie Middle East Center, said in a study for the centre this month.
"Their growth dynamic suggests that their investment and policy behavior will resonate across the global economy."
These funds need a degree of secrecy to function.
Already, their investment decisions are closely followed by the wider investment community, as the global importance of the industry grows. It is forecast by Deutsche Bank to more than double in less than 10 years.
In a fiercely competitive investment environment, others in the market sniff about for deals that anticipate the moves sovereign funds will make. A practise known as front-running, that risks pushing up prices before the funds invest.
"Because we are generally large institutional investors, there is the whole community of investment banks, brokers, analysts and others who want to front-run our investments in the market," David Murray, chairman of the board of guardians at Australia's Future Fund, told a news conference last October.
"In doing so they would use all sorts of techniques to find out from us exactly where we are in the market in terms of timing. It is not in the interest of the funds nor our community to be involved in that game because it would be detrimental to our investment returns."
Showing posts with label DNA. Show all posts
Showing posts with label DNA. Show all posts
Monday, October 11, 2010
Tuesday, September 28, 2010
China's possible Potash bid fans unease over SWFs
(Reuters) - China's possible bid for Potash illustrates the priority some surplus-rich countries still put on pursuing strategic national goals with their windfall cash and risks a regulatory backlash against sovereign wealth funds.
Sources say China's state-owned Sinochem could bid for the Canadian firm (POT.TO), possibly partnering with its wealth fund CIC or Singapore's Temasek, in a deal worth almost $40 billion.
A Chinese bid via CIC could become the latest example of emerging and frontier market nations deploying their sovereign wealth as an economic policy tool to secure energy and food needs or buy industries they want to develop at home.
China's designs on Potash may rile recipient countries that have long suspected SWFs -- now major players in global markets with $3 trillion of assets -- invest with national political imperatives to the fore.
The risk is it leads to a round of regulation that could impede the flow of capital from the powerful SWF community that has benefited cash-strapped advanced economies since the global financial crisis struck, and helped emerging economies recycle their windfall surpluses.
"As soon as the business environment improves and liquidity eases, noises against foreign capital are going to start becoming wider. Eventually tougher regulation could be coming," said Pervez Akhtar, a Dubai-based partner in law firm Allen & Overy specializing in corporate finance.
"SWFs are strategic investment funds designed for wider policy considerations of the state. It's a very fine line between making commercial investment and commercial-plus, that is furthering of a strategic policy. More states will do investments on the basis of commercial-plus."
Analysts say China's Potash bid, if it goes through, would serve as a litmus test for other sovereign wealth funds which have sharply reduced headline activities after the crisis.
"SWFs have been hesitant to go out in a big way. (Potash) is a big test for markets. That could then give me the touch and feel of the sentiment that may be prevailing in another sector in Canada," said Sven Behrendt, a SWF expert and managing director of political risk consultancy Geoeconomica.
ROCKY RELATIONSHIP
Sovereign funds, which have had had a rocky relationship with the West, have spent the past couple of years striving to convince that they invest for financial reasons.
It was less than three years ago that French President Nicholas Sarkozy hit out at SWFs, saying: "We've decided not to let ourselves be sold down the river by speculative funds, by unscrupulous attitudes which do not meet the transparency criteria one is entitled to expect in a civilized world."
Such concerns receded as the financial crisis highlighted the importance of long-term capital which sovereign funds can provide to developed economies desperate for liquidity.
SWFs themselves also took steps to enhance transparency, creating the Santiago Principles of best practice guidelines in 2008 to fend off the West's criticism.
However, progress in implementing these self-imposed rules advocating transparency and accountability has been slow and patchy.
And now that the West is awash with liquidity and risk appetite is improving, its stance may be hardening again.
Canada's industry minister, Tony Clement, warned earlier this month that its takeover rules would ensure state-owned enterprises would invest with market-based motives, rather than "acting as an agent for a foreign government's interests."
In Italy, shareholders and politicians upset over a sizeable stake held by Libya's wealth fund and central bank in UniCredit (CRDI.MI) forced its chief executive out earlier this month.
In 2008, that very investment by Libya was welcomed as vote of confidence in the bank. It invested again in 2009.
In Australia, a Qatar Investment Authority-owned firm's investment in farmland prompted a Senate inquiry calling for an audit of foreign ownership of land and water.
"At the present time there is no differentiation between private investment and sovereign investment," New South Wales Liberal Senator Bill Heffernan, who chairs the Senate committee on agricultural and related industries, told a local media.
"We need to put all of this on a register, we need to lower the trigger point for reporting foreign asset sales, and we need as part of our sovereignty to consider (our own) strategic investment in Australia."
Sovereign funds are growing aware of a threat of more regulation, a topic of discussion in a closed-door industry forum last week in London attended by various funds officials.
"There's enough regulation. SWFs are already subject to lots of regulation -- capital, sector, anti-monopoly, then some rules on foreign investment. Why regulate further?" said a head of an emerging market SWF during a recent trip to London.
"Our DNA says we are a sovereign fund, we cannot be purely financial. And there's nothing to apologize for that. When I make an investment, I have to think about jobs and ethics and being a good corporate citizen, otherwise we get beaten up."
(Editing by Mike Peacock)
Sources say China's state-owned Sinochem could bid for the Canadian firm (POT.TO), possibly partnering with its wealth fund CIC or Singapore's Temasek, in a deal worth almost $40 billion.
A Chinese bid via CIC could become the latest example of emerging and frontier market nations deploying their sovereign wealth as an economic policy tool to secure energy and food needs or buy industries they want to develop at home.
China's designs on Potash may rile recipient countries that have long suspected SWFs -- now major players in global markets with $3 trillion of assets -- invest with national political imperatives to the fore.
The risk is it leads to a round of regulation that could impede the flow of capital from the powerful SWF community that has benefited cash-strapped advanced economies since the global financial crisis struck, and helped emerging economies recycle their windfall surpluses.
"As soon as the business environment improves and liquidity eases, noises against foreign capital are going to start becoming wider. Eventually tougher regulation could be coming," said Pervez Akhtar, a Dubai-based partner in law firm Allen & Overy specializing in corporate finance.
"SWFs are strategic investment funds designed for wider policy considerations of the state. It's a very fine line between making commercial investment and commercial-plus, that is furthering of a strategic policy. More states will do investments on the basis of commercial-plus."
Analysts say China's Potash bid, if it goes through, would serve as a litmus test for other sovereign wealth funds which have sharply reduced headline activities after the crisis.
"SWFs have been hesitant to go out in a big way. (Potash) is a big test for markets. That could then give me the touch and feel of the sentiment that may be prevailing in another sector in Canada," said Sven Behrendt, a SWF expert and managing director of political risk consultancy Geoeconomica.
ROCKY RELATIONSHIP
Sovereign funds, which have had had a rocky relationship with the West, have spent the past couple of years striving to convince that they invest for financial reasons.
It was less than three years ago that French President Nicholas Sarkozy hit out at SWFs, saying: "We've decided not to let ourselves be sold down the river by speculative funds, by unscrupulous attitudes which do not meet the transparency criteria one is entitled to expect in a civilized world."
Such concerns receded as the financial crisis highlighted the importance of long-term capital which sovereign funds can provide to developed economies desperate for liquidity.
SWFs themselves also took steps to enhance transparency, creating the Santiago Principles of best practice guidelines in 2008 to fend off the West's criticism.
However, progress in implementing these self-imposed rules advocating transparency and accountability has been slow and patchy.
And now that the West is awash with liquidity and risk appetite is improving, its stance may be hardening again.
Canada's industry minister, Tony Clement, warned earlier this month that its takeover rules would ensure state-owned enterprises would invest with market-based motives, rather than "acting as an agent for a foreign government's interests."
In Italy, shareholders and politicians upset over a sizeable stake held by Libya's wealth fund and central bank in UniCredit (CRDI.MI) forced its chief executive out earlier this month.
In 2008, that very investment by Libya was welcomed as vote of confidence in the bank. It invested again in 2009.
In Australia, a Qatar Investment Authority-owned firm's investment in farmland prompted a Senate inquiry calling for an audit of foreign ownership of land and water.
"At the present time there is no differentiation between private investment and sovereign investment," New South Wales Liberal Senator Bill Heffernan, who chairs the Senate committee on agricultural and related industries, told a local media.
"We need to put all of this on a register, we need to lower the trigger point for reporting foreign asset sales, and we need as part of our sovereignty to consider (our own) strategic investment in Australia."
Sovereign funds are growing aware of a threat of more regulation, a topic of discussion in a closed-door industry forum last week in London attended by various funds officials.
"There's enough regulation. SWFs are already subject to lots of regulation -- capital, sector, anti-monopoly, then some rules on foreign investment. Why regulate further?" said a head of an emerging market SWF during a recent trip to London.
"Our DNA says we are a sovereign fund, we cannot be purely financial. And there's nothing to apologize for that. When I make an investment, I have to think about jobs and ethics and being a good corporate citizen, otherwise we get beaten up."
(Editing by Mike Peacock)
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