When the global markets entered the credit crunch, sovereign wealth funds (SWFs) funneled billions of dollars into a variety of struggling companies, especially financial institutions like Citigroup (NYSE: C) and Merrill Lynch (NYSE: MER).
Alas, the transactions have shown tremendous losses.
True, SWFs are focused on the long-term, which may extend into decades. But the extent of the losses were certainly jarring.
So are SWFs backing off? Perhaps not. In fact, these funds are starting to write checks again. For example, the Qatar Investment Authority structured a $8.83 billion dollar capital infusion into Credit Suisse Group (this is according to the Wall Street Journal, a paid publication).
Interestingly enough, China Investment Corp. may even pony up more money into the Blackstone Group LP (NYSE: BX), even though it has sustained losses of more than 70%. The SWF now has the right to boost its equity stake from 9.9% to 12.5%.
While it's true that SWFs tend to invest early, the recent activity is nonetheless encouraging – and another sign that major investors are getting more and more confidence.
Reuters reports that Merrill Lynch (NYSE: MER) is taking an enormous $5.7 billion write-down on losses from mortgage-backed securities (MBSs) and plans to raise $8.5 billion.
The biggest shocker was, as Reuters reports, that Merrill signed a contract with Singapore's Temasek, a sovereign wealth fund, that requires Merrill to pay $2.5 billion under terms of a previous stock sale to Temasek, along with $2.4 billion in required dividends to preferred shareholders. That's because under its previous deal, Merrill had agreed that if it sold shares at too low a price in the future, it would reimburse investors. Temasek has agreed to purchase $3.4 billion -- or 28% of the new offering. In other words, Merrill is paying an extremely high price for its capital.
The second shocker was how much of a write-down Merrill is taking on its portfolio of collateralized debt obligations (CDOs). Private equity fund Lone Star is paying 22 cents on the dollar, or $6.7 billion for CDOs with a stated book value of $30.6 billion. At that rate, the holders of $2 trillion worth of CDOs outstanding earlier this year would need to take a $1.56 trillion haircut if they sold all the CDOs. And I don't think they have nearly enough capital to be able to afford that.
So far, sovereign wealth funds have had bad luck with investments in U.S. financial institutions such as with Citigroup (NYSE: C) and Merrill Lynch (NYSE: MER).
Despite this, there still may be interest in dealmaking. Just take a look at the situation with Merrill Lynch. There was talk that the troubled firm would unload its 49.8% stake in BlackRock Inc (NYSE: BLK), and apparently there was interest from sovereign wealth funds, according to the Financial Times.
The potential suitors: Kuwait Investment Authority and Temasek (Singapore).
However, one issue was valuation. Why sell when the markets are in dire straights?
But there were some other key considerations. For example, BlackRock has been able to escape much of the turbulence from the credit crunch. More importantly, the firm has a lot of growth potential in global markets.
BlackRock must give consent for a sale -- at least for the next 14 months. So, in the end, it has a lot of power in the situation.
Traditionally, sovereign wealth funds (SWFs) have focused on highly liquid investments, such as equities and bonds. But as these funds get bigger and bigger, the focus has been changing. In fact, some SWFs are moving into alternative investments and even buying up whole companies.
Take Dubai World, which is the emirate's SWF. This week, the firm teamed up with OAO Roskommunenergo (a Russian energy player) to bid $5.34 billion for OGK-1, which is a major electricity provider in Russia.
It's a savvy move. After all, Russia is in the process of deregulating the electricity market, which should come into effect by 2011. So there should be some pricing opportunities (keep in mind that prices have been held artificially low for decades).
Even so, OGK-1 has its challenges. Essentially, the company needs some serious capital infusions. But hey, that's something Dubai World can deal with handily, right?
Lehman Brothers Holdings (NYSE: LEH) has approached a Korean sovereign wealth fund (SWF) about investing. But Lehman probably won't get the money it seeks. Reuters reports that Korean Investment Corp (KIC), an SWF that manages about $20 billion and is an investor in Merrill Lynch (NYSE: MER), is unlikely to invest in Lehman.
Meanwhile, Bloomberg reports that investors on the Einhorn side of Lehman -- those hoping its stock will drop -- are increasing their wager. It notes that options traders increased their bearish positions to a two-month high yesterday. With one analyst expecting Lehman to report a second-quarter loss of 50 cents a share during the week of June 16, put option volume rose to 283,676 contracts, or quadruple the 20-day average, and bearish bets on the company exceeded bullish ones by 1.6-to-1.
As I mentioned during my talk at Stanford in April, SWFs have been burned by their investments in the U.S. finance industry. One of them, the Citic Group, was lucky it was able to bail out of its commitment to invest $1 billion in Bear Stearns. But that close call is likely to keep other SWFs from throwing good money after bad.
Just a year ago, if you mentioned "sovereign wealth funds," you probably would have gotten a blank stare. But, of course, this is now the hot thing in finance. More importantly, it looks like sovereign wealth funds are poised for strong long-term growth. In fact, Lehman Brothers (NYSE: LEH) recently set up a division to capitalize on the mega trend.
Sovereign wealth funds are found in many countries in Asia, Africa, Europe and the Middle East. It's the inevitable consequence of some major forces: strong economic growth in emerging economies, the fall in the US dollar and spikes in commodities prices, especially oil.
Global Insight, a research firm, estimates that sovereign wealth funds have grown an average of 24% per year for the past three years. They have about $3.5 trillion in assets, which is more than private equity and hedge funds combined.
No doubt, sovereign wealth funds have become a key element in global finance. For example, they contributed to about 28% of M&A deals (in January 2008) and about 10% of private equity transactions.
Global Insight forecasts that – by 2015 – sovereign wealth funds will exceed the value of the GDP of the US economy. And, I'm sure, the funds will also own a big chunk of it as well.
Tom Taulli is the author of various books, including The Complete M&A Handbook (www.mergerbook.com) and is also a principal in Averiware, which provides an ERP system to small and midsize businesses.
Every hour, the U.S. spends about $100 million on oil. Of course, a big chunk goes to the Middle East, and ultimately, into sovereign wealth funds.
Although far from exact, it looks like sovereign wealth funds have about $3.5 trillion in assets, which is more than private equity and hedge funds. In other words, this is a huge opportunity for Wall Street.
Well, Lehman (NYSE: LEH) is taking advantage of this opportunity and is setting up a sovereign wealth division, with Makram Azar, who is an M&A maestro (in the global media sector), as its chief. He will set up shop in Dubai, the center of the universe for sovereign wealth funds.
This week on CNBC, Azar talked about his new role. Basically, he'll be developing a platform to help sovereign wealth funds diversify their bulging assets into commodities, minority investments, hedge funds, real estate and so on.
It will mean lots of coordination among the divisions of Lehman, but more importantly, if things work out, it could be a much-needed source of fees.
Tom Taulli is the author of various books, including The Complete M&A Handbook (www.mergerbook.com) and is also a principal in Averiware, which provides an ERP system to small and midsize businesses.
Sovereign Wealth Funds (SWFs) -- the $3 trillion worth of capital managed by countries to invest their oil or foreign exchange profits -- got quite a bit of attention earlier this year when they bought big chunks of the U.S. finance industry. But yesterday at a conference at Stanford, a Fed official suggested, without officially saying it, that despite their big wallets, SWFs are not the brightest investors on the block.
I spoke on a panel regarding SWFs at the Forum for American/Chinese Exchange at Stanford (FACES). I was joined on the panel by Brad Setser of the Council on Foreign Relations and Reuven Glick of the San Francisco Federal Reserve. I suggested that China, which in June 2007 bought a big stake in Blackstone Group (NYSE: BX) (for reasons I discussed here) may not have even read the prospectus before buying a $3 billion stake. If China had read the prospectus, it could have saved itself the embarrassment of what is now an investment trading 46% below its purchase price.
During our panel discussion, Glick unofficially argued that if China or any other SWF wanted to make an investment in a U.S. company, they were welcome to do so. He noted that in retrospect, China might be viewed the way Japan was when it famously overpaid for Rockefeller Center and Pebble Beach in 1989. Both investments were subsequently sold at a loss. When I summarized Glick's remarks: "So the Fed thinks that China is a greater fool." He smiled and said, "I didn't say that."
News that Washington Mutual (NYSE: WM) is close to receiving a $5 billion cash infusion from a U.S. consortium bucks the trend that we have seen of late where U.S. banks take money from foreign sovereign wealth funds. I think that this is a very important step.
First, it shows that American private equity groups believe that U.S. banks are starting to get cheap and they are willing to pull the trigger on some big deals. This should help drive the market forward, as it will be a sign to many that the worst is over.
Additionally, it keeps the financial system in U.S. hands. I posted a while back about the potential security threats posed to the U.S. by foreigners taking control of our financial system. One of the big tools in the war on terror has been using the banks to track all kinds of money transfers. With foreigners taking over sizable chunks of the banking system, this tool will be much harder for the security agencies to use.
Thirty years ago, when Washington Mutual was just a small local bank operating in the state of Washington, its slogan was "a friend of the family." It looks as if it is going back to its roots.
Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 4/7/08
News that the European Commission is planning to adopt proposals next week that will ask sovereign wealth funds to accept a code of conduct to govern their investment activities, raises the question if the U.S. government should take a look at the impact these funds may have on U.S. security.
Peter Mandelson, the European trade commissioner, said the code will outline standards of governance and transparency for such funds.
"The emphasis in their investments should be on commercial motivations, not national or strategic considerations. I think such a code is possible to draw up and would get acceptance from the wealth funds," the report quoted Mandelson as saying.
German companies, for example, are worried that China will steal their intellectual property or that Russian President Vladimir Putin wants to use such investments "as a political instrument," according to European Member of Parliament Wolf Klinz.
Some senators from the South still wear linen suits and believe that foreign interests should not own land or a part of any business in the U.S. They also probably still smoke and eat fatty foods.
But the serious side of congressional concern about overseas investments in big U.S. companies and financial firms is that sovereign funds could find a more and more hostile reception to their investments in companies like Citigroup (NYSE: C).
According to the FT, "The Treasury, which considers the discussions with the funds a priority, hopes it can pursue its agenda through the International Monetary Fund, which is drawing up a code for SWF investments, expected in draft form in April." The document is probably no more than a "feel good" piece of paper that Treasury can wave around in the offices of Congress and regulators.
The fact of the matter is that the government here would like sovereign funds to have different rules than those that govern people like Carl Icahn. If a raider can take over an entire company and break it into pieces, why can't the same be done by rich interests from Kuwait, if they have the money? Any "state secrets" at a firm like Citi can be burned before the process starts, in the name of keeping important government data confidential.
The bonfire from the documents can warm the management as they leave the building.
Douglas A. McIntyre is an editor at 247wallst.com.
It looks like the sale of equity in Merrill Lynch (NYSE: MER) is not over, as losses at the firm are likely in Q4. According toThe New York Post, "Merrill Lynch & Co. is in talks with Chinese and Middle Eastern sovereign wealth funds to raise capital by selling another 'big' stake in the company."
That is bad news for current Merrill shareholders, who just watched Singapore's Temasek Holdings put $4.4 billion into the broker. The value of Merrill's shares is off almost 50% this year to under $53. If the company has to raise another $10 billion, the dilution could take the stock below $40.
Shareholders in Merrill have to wonder why the company does not sell its piece of Blackrock (NYSE: BLK). The investment company has a market cap of $14 billion. Merrill owns about half of the company.
Merrill also has the option of breaking its brokerage and wealth management businesses off from its investment bank.
It is not clear that bringing in cash from outside the firm is the best answer for Merrill shareholders.
Douglas A. McIntyre is an editor at 247wallst.com.
Sovereign Wealth Funds (SWFs) are estimated to be between $2 trillion and $15 trillion. That's a wide range, but even at the low end, it's a lot of money. The SWFs are potentially economic and political Trojan horses. They are using the current problems in the credit markets as a chance to buy stakes in U.S. banks for relatively paltry sums. It remains to be seen whether they are getting in at the bottom or whether they're foolishly buying in way too soon.
However, if they get big enough stakes in strategic industries in the U.S., they will be in a position to influence U.S. policy. For example, if the funds do not like U.S. Middle East policies, they can threaten to withdraw their capital. If that capital is hard to replace, the U.S. will find itself needing to choose between imperiling the survival of its banking system or changing its foreign policies.
When the global markets entered the credit crunch, sovereign wealth funds (SWFs) funneled billions of dollars into a variety of struggling companies, especially financial institutions like Citigroup (NYSE: C) and Merrill Lynch (NYSE: MER). 
So far, sovereign wealth funds have had bad luck with investments in U.S. financial institutions such as with 
. He also operates 
Traditionally, sovereign wealth funds (SWFs) have focused on highly liquid investments, such as equities and bonds. But as these funds get bigger and bigger, the focus has been changing. In fact, some SWFs are moving into alternative investments and even buying up whole companies.
Just a year ago, if you mentioned "sovereign wealth funds," you probably would have gotten a blank stare. But, of course, this is now the hot thing in finance. More importantly, it looks like sovereign wealth funds are poised for strong long-term growth. In fact, 
Sovereign Wealth Funds (SWFs) -- the $3 trillion worth of capital managed by countries to invest their oil or foreign exchange profits -- got quite a bit of attention earlier this year when they bought big chunks of the U.S. finance industry. But yesterday at a conference at Stanford, a Fed official suggested, without officially saying it, that despite their big wallets, SWFs are not the brightest investors on the block.
It looks like the sale of equity in 
Comfort Zone Investing: Getting beyond today
Stock picks and pans for troubled times: RIMM, ED, ISRG, GLW, LEA, SLB, GOOG ...
Is Berkshire Hathaway better than S&P Index?
