Jan Randolph, head of Sovereign Risk for London-based Global Insight Inc., says the secrecy factor has raised concerns, but the reality is SWFs have been the financial markets' golden goose. But, he believes SWFs may have "taken a pause" from financial investments. "There is a growing interest in real estate and commodities, whether directly or indirectly," he tells GlobeSt.com. He says Middle Eastern SWFs are spending billions to acquire real estate in Morocco, Egypt, Turkey and Spain, and that's just the tip of the iceberg on the SWF bricks-and-mortar front.
"I think real estate as an asset class is probably one of the largest categories for investment by SWFs," says Pierre N. Rolin, founder, chairman and CEO of London-based Strategic Real Estate Advisors. "I think the preference is larger economies-of-scale transactions with higher rates of return." SWFs are running the gamut from direct investments in private equity real estate funds to real estate-backed securities.
 Rolin |
Rolin points out that SWFs quietly invested in US Treasuries and the debt markets for years, without raising any concerns. But, he says SWFs' shift to equity investments has pushed them into the limelight. Their abundance of capital is thanks to skyrocketing prices of commodities like oil, gold and diamonds.
"Because of the lack of liquidity in the western financial markets and the value of the dollar falling, SWFs believe this to be a potentially opportunistic time to enter the market," says John C. Alvarado, managing director of the capital markets group in Jones Lang LaSalle's Dallas office. "From the real estate equity side, we are seeing more activity than we have in a decade."
Alvarado says SWFs' real estate interest is office-focused, with New York City, Chicago, Boston, San Francisco, Los Angeles and Washington, DC on the buy list. "As they do more research and become more comfortable with what they're learning, I think the rest of the country becomes attractive as well," he says.
 Alvarado |
Not only are SWFs shy, but they also are the least transparent in the investment world. That, Randolph says, makes them extremely difficult to track. "They are out of the sunlight of the regulatory media," he says. "Their connection with private equity and hedge funds is important because it's a cover for them." And, the repercussions could be grave if something went wrong.
The G7 and its members have mounted an assault for the International Monetary Fund to step up to the plate to impose a code of conduct on SWFs. The world's been told the IMF code will be published in October.
US Sen. Charles Schumer [D-New York] has "suggested that if the IMF does not come up quickly with a voluntary code of conduct for SWFs, the US Congress will consider legislation to ensure that SWFs' operations and intentions are made transparent," according to Global Insight. Schumer is questioning if the investments are making the US economy stronger or posing serious national security risks.
On the flip side, US senior Treasury official David McCormick has offered assurances that the Feds carefully monitor SWFs. He says the US doesn't want to create the perception that it's not open to foreign investments, adding thus far that investments have been passive and are extremely important to the country's economy.
Global Insights estimates that more than $60 billion has been injected into the financial system in the past six months through bank equity stakes. "SWFs have become the key capital support to the Western banking system through the credit crunch," Randolph concludes. SWFs' investments have recapitalized Citigroup, Morgan Stanley, Merrill Lynch and Bear Stearns.
Randolph says the UK's approach has been "to say we will treat all investors equally as long as they abide by the same rules." He says the goal is to maintain London's reign as the financial center of the world.
Whether liked or not, SWFs are necessary to move capital from surplus countries to deficit countries, Randolph explains. "At the end of the day, it's debt-free cash and it's for investment." And though one country may not like the "source" of the cash, the SWF investor has "a stake in the prosperity of the US and Britain," he says. "They could try and sabotage if they pulled out, but they would be damaging their own investment."
Randolph fully admits there is cause for concern for SWFs to use their investment power to influence public boards. "We can't be naïve in not accepting that collective investment does open up the possibility of influence," he says. "The activities of SWFs are just one drama of a deeper Darwinian-type struggle of balance sheets, where the stronger absorb the weaker from opportunities created by crisis and change the financial and power landscape in the evolutionary process."
Global Insights calculates SWFs worldwide spent $20.6 billion in January on acquisitions, nearly one third of the total they spent on last year's mergers and acquisitions activity. The research firm has tied SWFs to 35% of 2007's M&A transactions. In the US alone, SWFs accounted for 28% of January's M&A activity and "have clearly overtaken private equity buyouts," Randolph concludes. In addition, he estimates 10% of private equity investments worldwide are funded by SWFs.
China remains the world's leading capital exporter through SWFs with $1.2 trillion. Next in line are Russia and Kuwait. But, there's a new crop emerging from the oil-producing regions of the Middle East and Africa. Randolph has found that Nigeria is the fastest growing SWF, spiking 296% in the past five years, with Oman and Kazakhstan right behind. Based on the 24% annual growth rate, Randolph projects SWFs will exceed the economic output of the US by 2015 and the EU by 2016.
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