The Foreign Capital Influx: The Promise and Fear of Sovereign Wealth Funds
Widmer, Lori, Risk Management
Suppose your company had just suffered one of its worst quarters ill history. Revenue is absent and an influx of cash is much needed. Along comes an investor handling you $5 billion. The investor: Kuwait. Still interested?
This is the world of sovereign wealth investments. It is a world of overflowing nationally held piggy banks looking to invest aggressively in U.S. corporations. And it is one that can no longer be ignored.
To date, nearly 40 sovereign wealth funds exist arm although estimates vary by source, the total assets of the sovereign wealth market come in somewhere around $3 trillion. Moreover, this wealth is expected to top $12 trillion by 2015, according to Morgan Stanley, and it is now pouring into the United States by the billions. While this fact should be making both capital-strapped U.S. companies and Washington giddy, it is also wrought with fear and hesitation.
Why? These are not your typical private investors or public pension funds. These are government-owned investment tools from countries that often do not support U.S. foreign policy or interests and include nations with strained relations with Washington. Oil-rich nations such as Kuwait and United Arab Emirates (UAE) top the list of investors looking to strategically invest in U.S. companies and although their goal is by and large the same as any other good capitalist--high returns on investment--the level of scrutiny paid to the source is only increasing.
The most infamous sovereign wealth fund story nearly drew President Bush and Congress to a stalemate. In 2006, the sovereign wealth fund Dubai Ports World (DPW), a subsidiary of Dubai World and a holding company located in the UAE, purchased Peninsular and Oriental Steam Navigation Company (P&O), a UK-based port-operating company. P&O was the fourth-largest ports operator in the world, overseeing 12 of the largest U.S. ports, including Baltimore, Miami, New Orleans, New Jersey, New York and Philadelphia. After DPW bought P&O for $7 billion, Washington's Committee on Foreign Investment (comprised of members of the Treasury Department and the Departments of State, Commerce, and Homeland Security) reviewed the deal. After deliberation, the committee approved the transaction.
Some members of Congress, however, opposed the deal, citing 9/11 Commission reports that two of the 9/11 hijackers may have been UAE nationals. As Congress deliberated, President Bush threatened to veto any attempt to block the deal. "It would send a terrible signal to friends and allies not to let this transaction go through," said the president.
DPW postponed its takeover to allow time for Congress and the White House to reach an agreement. They did not. Instead, a House panel voted to block the deal--a move not supported by the Senate. The President vowed once again to veto any legislation that blocked the deal, and amid the growing controversy, DPW stepped in to announce it had sold P&O's American operations to AIG's asset management wing, thus ending the political storm.
Regulating Sovereign Wealth Investments
On the surface, there is little to fear from a sovereign wealth fund. They exist as a means to stabilize surplus revenues from the sale of a commodity, such as oil or gas. Still others exist as channels for surpluses in government pensions, social security or other tax or government revenue, which are then invested in a variety of domestic and foreign assets with the understanding that they can benefit from foreign exchange differences, trade imbalances and the like. Sovereign wealth funds operate with many of the same investment strategies of more traditional investment funds--they seek maximum return for minimal risk.
"The Central Bank of China has about $1.7 trillion in assets," says Eliot Kalter, senior fellow at the Medford, Massachusetts-based Fletcher School at Tufts University, a world-renowned international affairs institute. …