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SWFs eye domestic advantages
By Sophia Grene
Published: September 12 2010 10:01 | Last updated: September 12 2010
10:01
Sovereign wealth funds are exploiting their overseas investments to
contribute to economic development back home.

“In conversation with several Middle East SWFs, they see themselves
almost as sovereign development funds,” said Nuno Fernandes, professor
of finance at Swiss business school IMD.

This may take the form of inviting investee companies to market their
products in the home market, influencing decisions about where to site
offshored production facilities, building joint ventures with the
companies in the home market, or acquiring intellectual capital to
develop a new domestic industry.

Mubadala, one of several funds in Abu Dhabi, parlayed an initial 8.1
per cent holding in American computer chip maker AMD into a 20 per
cent stake and a spin-off of its manufacturing operations in a joint
venture with the Advanced Technology Investment Company of Abu Dhabi
(ATIC), generating a substantial return for itself.

In its annual report, Mubadala congratulated itself on the outcome:
“As well as having a solid commercial return, the AMD partnership also
demonstrates Mubadala’s mandate of delivering social value to Abu
Dhabi.”

Also in Abu Dhabi, the International Petroleum Investment Company
bought 70 per cent of MAN Ferrostaal, to give the emirate access to
the company’s expertise in petrochemicals, solar power and project
construction and management, according to a report from the Monitor
Group and Fondazione Eni Enrico Mattei*.

This kind of strategic investment has been happening outside the
Middle East too. The China Investment Corporation, for example, has
been actively seeking to invest in resource companies such as
Indonesia’s biggest coal company, Bumi.

“From an international perspective, SWFs help stabilise global
financial markets and from a domestic point of view co-ordinate
macroeconomic policy,” according to the Monitor/FEEM report. “The
latter probably remains the dominant driver of their own choices.”

Once feared as the bogeymen of international investment, then loved as
the white knights who, it was hoped, would bail out western financial
institutions during the financial crisis, SWFs have developed the new
function partly in response to criticism at home after losing money
during the crisis. Their approach, however, is shaped by experience of
political hostility in target nations.

SWFs have in general avoided getting formally involved in corporate
governance, but this does not mean they are passive investors. “If you
look at the external metrics of engagement, such as board positions,
it’s true they’re under-represented,” said Prof Fernandes, “but there
are many pieces of evidence that they are engaged in more backdoor
activity.”

These activities are less likely to attract unfavourable political
comment in the target country, while benefiting the economic
development of the home nation, he added.

The need to support the domestic economy has become a significant
policy driver for SWFs, according to the Monitor/FEEM report.

“As their domestic markets were hit by the effects of the global
recession, SWFs inevitably became more active at home in providing
financial support – patriotism proved far more important than presence
in foreign markets,” said Vanessa Rossi of Chatham House in an article
for the Monitor/FEEM report.


*Back on Course: Sovereign Wealth Fund Activity in 2009