Sovereign wealth funds: cavalry or Calvary?

Telegraph (UK) ^ | 11:28pm GMT 22/12/2007 | By Sylvia Pfeifer, Deputy Business Editor

[DeaconBenjamin]

Like the cavalry appearing over the brow of the hill, sovereign wealth funds have ridden to the rescue of the world's leading investment banks. Funds from China, Singapore and the Middle East have splashed out more than $30bn over the past few months, buying stakes in some of the best known names in the industry. Citigroup, Morgan Stanley, UBS, and Bear Stearns have all taken the foreign shilling. Last week it was the turn of Merrill Lynch to seek funds from Singapore 's Temasek.

At first glance, it all looks like a good deal. John Mack at Morgan Stanley gets an injection of $5bn from the Chinese Investment Corp, a fund set up and run by the government. In exchange, CIC gets just under a 10 per cent stake in the bank. Coming at a time when Morgan Stanley has just announced higher than expected writedowns of $9.4bn, largely related to sub-prime related assets, it's no wonder Mack turned to the Chinese - the queue of Western investors at his door was probably very short indeed. Aside from bolstering its balance sheet, the deal means Morgan Stanley has snared a strong ally to help its own expansion plans in China. The US bank already has a strong position there but is keen to expand in what is expected to become an increasingly lucrative market.

But is all this too good to be true? What are the chances that if Morgan Stanley hadn't racked up huge losses, it would have turned to the Chinese? In the case of Citigroup, the Abu Dhabi Investment Authority will be repaid handsomely for its $7.5bn cash injection in the form of a coupon that will deliver a fixed rate of 11 per cent. On top of that, the equity units it buys will convert, over the next five years, into an equity stake of 4.9 per cent in the US group. advertisement

Rather surprisingly, the creeping influence of sovereign wealth funds is an issue that has so far not raised the political temperature in Washington or London. Which politician would suggest a bank should go bust or shed jobs if a Middle-East or Chinese investor is proffering what seems to be a "get out of jail free" card?

At his year-end press conference last week, President Bush dismissed concerns over sovereign wealth funds taking stakes in US financial groups, noting that he was "fine" with capital coming in from overseas to help. It was a very different message from the protectionist sounds that were made at the time of Dubai Ports World's takeover of P&O in 2006.

Given the crisis among the world's financial institutions, it may not be an issue today but despite hailing from emerging markets, it is worth remembering that these state-run funds are not in the business of charitable giving. Just like every capitalist investor in the West, they are focused on eventually getting a return for their investment.

Kloppers risks being beached

While the rest of us are tucking into our turkey on Christmas Day, the heads of the world's miners will be enjoying the sunnier climes of South Africa. Industry insiders say Marius Kloppers, the head of BHP Billiton who is currently trying to land the world's biggest takeover, usually heads to Plettenberg Bay in the Western Cape. Brian Gilbertson, who held the same job a few years ago and attempted the same deal - to take over rival Rio Tinto - is also expected to make an appearance on the famous Golden Mile Beach.

Gilbertson's tilt at Rio was thwarted by BHP's chairman Don Argus, an intervention that prompted Gilbertson to leave the company. Argus is still chairman of BHP but has given his backing to the venture this time round. Perhaps Gilbertson can give Kloppers some advice on what to do next if he really wants his bid for Rio to succeed.

With Rio's shares still trading above Klopper's proposed three-for-one share offer, the message from investors is clear: BHP needs to pay up. Not only that, but the proposed deal has sparked deep concerns among the Chinese who fear that the creation of the world's dominant producer of iron ore will lead to inevitable pressure on the price they pay for the metal.

Kloppers wants a friendly deal with Tom Albanese, his counterpart at Rio. The latter's defence has so far been focused firmly on price, suggesting that even Rio can't argue against the strategic logic of the deal.

The Takeover Panel on Friday set BHP a deadline of February 6 to make a formal offer or walk away, giving Kloppers time to enjoy his barbecue on the beach. But if he really wants to get his hands on Rio he needs to dig a bit deeper into this pockets.

[Does so]

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