Gaim Presentation by Drosten Fisher of Monitor Group November 16, 2008

Assessing the Risks

ZAD-NED-Prez-Date-CTL Copyright © 2008 Monitor Company Group, L.P. — Confidential — CAM 1

Contents
Assessing the Risks

 Overview of SWF Landscape

 Methodology of Study

 SWF Behavior: The Evidence of Public Transactions (2000-2008q1)

 Recent SWF Behavior: 2008q1 vs. 2008q2

 Implications for the Future

 Q&A


SWF Establishment: the First Trends
Assessing the Risks
There were three major waves of SWF formation, in the 1970s, the 1980s and the 1990s. The older
SWFs, such as KIA and ADIA, tend to be more conservative in their investment approach

Source: Deutsche Bank; Standard Chartered


The Current Wave of SWF Formation
Assessing the Risks
However, about half of all existing SWFs — 18 — were formed in the fourth wave 2000–2007. Newer
SWFs, such as Istithmar, Mubadala, and DIFC, tend towards a more aggressive investment approach.



The Emergence of Sovereign Wealth Funds
Assessing the Risks
Driven by high commodity prices, and favorable balance of trade, foreign exchange reserves are high in
many emerging countries. Many countries with high foreign reserves choose to set up Sovereign Wealth
Funds (SWFs).

Foreign Reserves 1996
Foreign Reserves in USD Bn (2007) (USD 1.5 Trillion)

 China 1,528
 Russia 464
 India 280
 Taiwan 272
 South Korea 262
 Brazil 179
 Singapore 168
Foreign Reserves 2006
 Hong Kong 153 (USD 4.2 Trillion)
 Malaysia 101
 Mexico 87
 Thailand 83  Industrial countries
 Turkey 72  Asia
 Poland 63  Latin America
 Indonesia 55  CEE
 Saudi Arabia 34  Middle East
 Egypt 31

0 500 1,000 1,500 2,000

Source: The Economist, February 2007; Deutsche Bank


Size of Sovereign Wealth Funds
Assessing the Risks
As a group, SWFs are relatively small compared to other global asset classes, but individual SWFs are
significant players. SWFs are emerging as significant players in the global financial systems, both as
investors and as providers of liquidity.

Global Asset Classes in Assets Managed by Financial
USD Trillions (2005) Institutions in USD Billions (2005)
 Bank Assets 64  Barclays Global Investors 1,813

 State Global Investors 1,749
 World GDP 45
 Fidelity Investments 1,635
 Stock Market Cap 42  ADIA 875

Private Debt Securities 36  GIC 330

 Kuwait Investment Authority 250
Public Debt Securities 23
 CALPERS 250

 Investment Funds 21  China Investment Company 200

 Temasek 108
 Pension Funds 18
 Carlyle Group 80
Insurance Companies 16
 JPM Asset Management 33

 Reserves ex Gold 4  Goldman Asset Management 33

 KKR 31
 SWFs 3
 Bridgewater Associates 30
 Hedge Funds 1
 Istithmar 8

0 25 50 75 0 500 1,000 1,500 2,000 2,500

Source: Citibank; Standard Chartered; Deutsche Bank


Geographical Spread of SWFs
Assessing the Risks
Today, SWFs are estimated to hold up to $3 trillion in total assets, with the Middle East and East Asia
funds having 80 per cent by dollar value.

North and South America ($90 bn) Europe ($354 bn) Russia and Central Asia ($147 bn)
Fund Country Size Fund Country Size Fund Country Size
Alaska Permanent Government Pension Fund Stabilization Fund Russia 127
U.S. 40 Norway 322
Reserve Fund — Global
National Pensions Reserve Kazakhstan National Fund Kazakhstan 18
Alberta Heritage Fund Canada 17 Ireland 29
Fund
New Mexico State State Oil Fund Azerbaijan 1.5
U.S. 15 Government Petroleum
Investment Office Norway 2.6
Insurance Fund
Economic and Social
Chile 6
Stabilization Fund Asia and the Pacific ($927 bn)
Permanent Wyoming Middle East and North Africa ($1,571 bn)
U.S. 3.2 Fund Country Size
Mineral Trust Fund
Fund Country Size
Investment Fund for Government of Singapore
Venezuela 0.8 Singapore 330
Stabilization Abu Dhabi Investment Investment Corporation (GIC)
Abu Dhabi 875
Authority China Investment Company China 200
Pension Reserves Fund Chile 0.6
Various Funds Saudi Arabia 300 Hong Kong Monetary Authority
China 140
Investment Portfolio
Kuwait Investment Authority Kuwait 250
Temasek Holdings Singapore 108
Reserve Fund Libya 50 Australian Government Future Fund Australia 50
Sub-Saharan Africa ($16 bn)
Qatar Investment Authority Qatar 40 Brunei Investment Agency Brunei 35
Fund Country Size
Korean Investment Corp Korea 20
Excess Crude Account Nigeria 11 Reserve Fund Algeria 25
Khazanah Nasional BHD Malaysia 18
Pula Fund Botswana 4.7 Foreign Exchange Fund Iran 15
Taiwan National Stabilization Fund
Taiwan 15
Poverty Action Fund Uganda 0.4 Istithmar Dubai 12 New
New Zealand Superannuation Fund 10
Zealand
National Fund for Mubadala Abu Dhabi 10
Mauritania n/a Timor Leste Petroleum Fund East Timor 1.2
Hydrocarbon Reserves General Stabilization Fund Oman 8.2
Mineral Resources Stabilization
Reserve Fund for Oil Angola n/a PNG 0.2
DIFC Dubai n/a Fund



There Are Six Major Constituencies Affected by the Rise of SWFs
Assessing the Risks

Recipient
Country
Governments

Multilateral
Sovereign
Regulatory and
Government
Oversight
Owners
Institutions

SWFs

Companies
Other
Considering
Financial
SWF
Institutions
Investments


Constituency Interests and Concerns
Assessing the Risks
Interests
 Welcome responsible foreign investors
Interests  Protect vital economic and national security assets Interests
 Capture benefits of this form of  Ensure reciprocity in trade, investing  Maintain free flow of capital globally
investing (diversification, higher returns,  Preserve level playing field for all
Concerns
flexibility) investors
 Monitoring SWFs owned by unfriendly governments
 Increase long-term national wealth  Preserve systemic stability
 Limiting potential for nonfinancial behaviors
 Increase influence in global financial Concerns
 Fearing SWFs may be Trojan horses
affairs  Monitoring funds that are not
 Monitoring funds that are not transparent
 Increase clout in global financial system transparent
 In OECD countries, fearing potential loss of economic and
Concerns  Limiting potential for nonfinancial
political power
 Avoiding protectionist backlash that behaviors
might hurt broader trade interests  Guarding against corruption

 Protecting against poor risk
management

Interests
Interests
 Gain access to foreign sources of
 Enact desire to work with SWFs as
capital
partners, co-investors, clients
 Welcome long-term passive investors
 Maintain open access to all SWFs
 Gain access to opportunities in new
 Maintain access to opportunities in
geographies
new geographies
Concerns Concerns
Interests  Avoiding potential PR firestorms
 Fearing that SWFs will have unfair
 Preserve equal access to opportunities and talent worldwide  Preserving freedom to operate in
advantages (lower cost of capital,
privileged access to information and  Achieve and sustain highest level of professionalism certain countries or sectors
deal flow)  Preserve autonomy  Minimizing foreign political interference

 Worrying about effect on market  Maintain low profile in decision making
dynamics (asset pricing, risk Concerns
premiums)
 Avoiding regulatory barriers, uneven treatment relative to
other asset classes
 Avoiding political firestorms when investing abroad


Contents
Assessing the Risks






 Q&A


What Is a Sovereign Wealth Fund?
Assessing the Risks
SWFs are part of a range of government investment vehicles. We used three criteria to define SWFs:
1.) owned by a sovereign government, 2.) managed separately from official foreign currency reserves of
the monetary authority, and 3.) invest in a portfolio of asset classes including foreign assets

Sovereign Funds

Official Reserves / Pension Funds Domestic Sovereign Wealth State Owned
Central Bank Sovereign Funds Funds Enterprises
External assets for Investment Investment Investment Companies where
directly financing vehicles to meet vehicles to vehicles funded by the state has
international government’s encourage foreign exchange significant control
payment future pension domestic economic assets May make
imbalances obligations development Managed investments in
Highly liquid, often Funded and Funded and separately from foreign assets
OECD government denominated in denominated in official reserves
bonds local currency local currency Typically have a
higher tolerance for
EXAMPLES risk
Federal Reserve Government Pension Khazanah Nasional ADIA, Mubadala CNOOC (China)
(U.S.) Fund (Norway) (Malaysia) (Abu Dhabi) Gazprom (Russia)
Bank of England (UK) GIC (Singapore) Temasek, GIC SABIC (Saudi Arabia)
SAMA (Saudi Arabia) (Singapore)
Istithmar, DIFC
(Dubai)
CIC (China)
SAMA (Saudi Arabia)

Source: Robert Kimmitt, Public Footprints in Private Markets, Foreign Affairs, January / February 2008


Monitor SWF Transaction Database: Methodology
Assessing the Risks

Subscription
databases, press Publicly available sources
articles, websites of of SWF activity
funds, and recipient
companies
Limited
transparency and
Data assessment spotty reporting

Focus on direct investment
in equities and real estate

1,181 deals, 25 funds
1975–Q1 2008 Data collected
Funds not meeting our
SWFs and definition
recent deals
Deals before 2000

Data checked and
verified

17 funds, 785 deals
$250 bn investment
Final Dataset


Funds Used in the Monitor Database
Assessing the Risks
Monitor’s SWF Transaction Database includes 17 funds for which we found public deal information

Year of Assets Under Management Transactions in Monitor
Country Fund Name
Founding (USD Bn)
Bn) Database
Singapore Temasek Holdings 1974 108 393
Malaysia Khazanah National BHD 1993 18 76
Singapore Government of Singapore Investment Corporation 1981 330 74
UAE Istithmar 2003 12 63
Libya Libyan Investment Authority N/A 50 45
UAE Mubadala Development Company 2002 10 34
Qatar Qatar Investment Authority 2005 40 22
UAE Abu Dhabi Investment Authority 1976 875 16
Kuwait Kuwait Investment Authority 1953 250 13
Brunei Brunei Investment Agency 1983 35 12
UAE Dubai International Financial Centre Investments 2006 N/A 11
China China Investment Company Limited 2007 200 9
New Zealand New Zealand Superannuation Fund 2003 10 8
Ireland National Pensions Reserve Fund 2001 29 5
Iran Foreign Exchange Reserve Fund 2000 15 2
Hong Kong Hong Kong Monetary Authority Exchange Fund N/A N/A 1
Azerbaijan State Oil Fund 1999 1.5 1

Source: Truman, “SWFs: The Need for Greater Transparency and Accountability”, Peterson Institute, August 2007


Contents
Assessing the Risks






 Q&A


Recent SWF Investments by Year
Assessing the Risks
Since 2000, there has been a marked increase in SWF direct investment in equities and real estate.

SWF Equity Transactions by Number and Volume Since 2000
160
Number 146
Value ($Bn) 137
129

120

90 92
85 85
80
63 60
53 49
47
40
28

4 6 8
3 3
0
2000 2001 2002 2003 2004 2005 2006 2007 2008


(H1)

Note: Publicly available data for SWF equity deals
Source: Monitor SWF Transaction Database


SWF Investment by Area
Assessing the Risks
Since 2000, some two thirds of SWF investment by value has been in the OECD. However, two thirds of
the deals by number were in emerging markets.

Number of Deals by Region Value of Deals by Region
(785 deals) ($250 Bn)

BRIC
BRIC
14%
19%
OECD
31%


Non-OECD
(excluding
BRIC) OECD
Non-OECD

25% 61%


(excluding BRIC)
50% 

Note: Publicly available data for SWF equity deals 2000-Q1 2008


Investment Flows: Middle East and North Africa (MENA)
Assessing the Risks
Since 2000, funds based in MENA have invested $100 billion in 205 deals. $73 billion has gone to North
America and Europe, but this accounted for fewer than half the deals.

Note: Publicly available data for MENA SWF equity deals 2000-Q1 2008


Investment Flows: Asia-Pacific
Assessing the Risks
Since 2000, Asian SWFs invested $150 billion in 573 deals. These invest more heavily in their own region;
half of the total investment by value and some 80% of deals by number took place in Asia.

Note: Publicly available data for Asia-Pacific SWF equity deals 2000-Q1 2008


Domestic / In-Region / Out-of-Region
Assessing the Risks

Number % % In-
In- % Out-of-
Out- of-
Fund
Number of Deals by Region of Deals Domestic Region Region
2000–Q1 2008 Temasek Holdings 393 43% 45% 12%
(785 deals)
Khazanah Nasional Bhd 76 79% 20% 1%

Government of Singapore Investment
74 1% 61% 38%
Corporation (GIC)
Out-of-region Domestic
29%

35%

Istithmar 63 16% 6% 78%

Libyan Investment Authority 45 4% 40% 56%

Mubadala Development Company 34 29% 18% 53%
In-region
36%
Qatar Investment Authority (QIA) 22 ─ 23% 77%

Abu Dhabi Investment Authority (ADIA) 16 19% 13% 69%

Kuwait Investment Authority (KIA) 13 15% 38% 46%

Brunei Investment Agency (BIA) 12 33% 25% 42%

Dubai International Financial Centre 11 18% ─ 82%

China Investment Co. Ltd. 9 22% 22% 56%
Note:


SWF Investment by Sector
Assessing the Risks
By number of deals, SWFs invest across sectors, including financial services, real estate, industrials,
consumer and IT. However, by value, almost half the deals are in financial services, which reflects atypical
intensity of investment in that sector during the sub-prime mortgage crisis during 2007 and early 2008.

Number of Deals by Sector Value of Deals by Sector
(785 deals) ($250 Bn)
Transport Other
4% 3% Healthcare Other
Healthcare 2% 8%
4% Telecom
Telecom 2%
6%  Financials
22% IT
Energy




1%
 Energy 11%
8% 
 Financials
Consumer 46%
IT  Real Estate 3% Industrials


 10% 18%
 8% 

Consumer  Real Estate
Industrials

19%
10% 

15% 

Note: Publicly available data for SWF equity deals 2000-Q1 2008


SWF Investment: Analyzing Ownership and Control
Assessing the Risks
Contrary to popular opinion, SWFs do take controlling stakes, however they rarely do so in OECD
markets.

Stake Data by Sector and Geography, 2000–Q1 2008
100% 3% Controlling Stake in
8% quot;Sensitivequot; Sectors - OECD
8% 

90%
11% Controlling Stake in
Non-Sensitive Sector - OECD
80%
10% Controlling Stake - Non-OECD
70% 39%

60%

50%

40%
71% Not a Controlling Stake
30%
50%
20%

10%

0%
Number of Deals Value of Deals

Notes: Sensitive sectors include Energy & Utilities, Financials, Information Technology, Infrastructure and Government, Telecom, and Transportation & Aerospace


Summary of Findings on Investment Behavior of SWFs
Assessing the Risks

SWFs invest heavily in domestic and emerging markets. A majority of SWF investments by value occur in
1 OECD markets, although the proportion is magnified by recent large investments during the credit crunch of
2007–2008. More than half of all transactions by number have occurred in domestic and emerging markets.

Recent SWF investments in U.S. and European financial services firms are atypical and opportunistic,
2 reflecting the credit crunch of 2007–2008. Most SWF investments have occurred in financial services, real
estate, and industrial companies, with most publicity focused on financial services. Controlling for the effects of
the recent credit crunch, the apparent appetite for investment in this sector drops markedly, though it remains
significant.

SWFs are willing to take controlling stakes in companies. In contrast to prevailing views, since 2000,
3 SWFs have acquired controlling stakes in half of their transactions for which stake data are available. By far
most of these deals occurred in emerging markets and in sectors not generally deemed politically sensitive.

SWFs are taking more financial risk with their investments. Most SWFs are adjusting their portfolios to
4 combine conservative and relatively liquid asset classes, such as government bonds, with higher-risk, illiquid
assets such as equities, real estate, and alternative instruments.

SWFs do not appear to be investing for political motives. Some funds are making strategic investments to
5 hasten economic development in their home country, but they do not appear to be active in ways that threaten
the economic or national security of foreign countries where they invest.


Contents
Assessing the Risks






 Q&A


Recent SWF Behavior: Q2 2008 vs. Q1, by Target Sector
Assessing the Risks
In Q2 of 2008 SWFs investing $26.5 billion in public equity deals, compared to $58.3 billion in Q1. Of this
total value in Q2, half was invested in real estate, while significantly less went into financial services

Value of SWF Investments Q1 and Q2 2008 by Target Sector
70
Infrastructure
Services
60 58.3
Technology
2.1
2.2 Healthcare
50 Transportation
9.5 

and Aerospace
Telecom
40
$ Bn Consumer
Real Estate
30 26.5

Industrials
1.6

Energy & Utilities
43.4
20 Financials
13.7

10
2.5
3.2
4.0
0
 Q1 2008 Q2 2008
Note: Publicly available data for SWF equity deals Q2 2008


Recent SWF Behavior: Q2 2008 vs. Q1, by Target Region
Assessing the Risks
By geographic region, SWFs continued to invest actively in emerging markets (over half of the Q2 total),
while dramatically reducing their investment in North America

Value of SWF Investments Q1 and Q2 2008 by Target Region
70
MENA
Sub-Saharan Africa
60 58.4
Multiple Regions
11.1 Europe
50 (including Russia)
North America
Asia Pacific
40
$ Bn 23.1
30
26.4

20 11.1

2.0
24.2
10 8.0
0.9
4.4
0
 Q1 2008 Q2 2008
Note: Publicly available data for SWF equity deals Q2 2008


Q2 Highlights
Assessing the Risks

In the second quarter of 2008, funds in the Monitor SWF Transaction Database executed
1 43 deals totaling $26.5 billion. In contrast, those funds executed 42 deals totaling $58.3
billion during the previous quarter (Q1 2008).

Half of the deals by value in Q2 were in real estate. Real Estate had the largest number of
2
deals (12) and the highest investment ($13.7 billion) in Q2 2008.

During Q2 2008, investment shifted away from financial services. SWFs carried out 10
3 deals and invested $4 billion in the financial services sector during Q2 2008. In the previous
quarter (Q1 2008), funds carried out 13 deals totaling $43.4 billion.

SWFs continued to invest actively in emerging markets. In Q2 2008, over half of the deals
4 and funds invested were in emerging markets. SWFs carried out 26 deals and invested $15
billion in BRIC and other non-OECD countries.

Investment in North America dropped dramatically. In Q2 2008, 4 deals totaling less than
5 $1 billion were received by North America. In contrast, this region received 7 deals totaling $23
billion during the previous quarter (Q1 2008).


Contents
Assessing the Risks






 Q&A


Implications for Key Constituencies
Assessing the Risks

 Treat SWFs on equal terms to other foreign investors
 Assess potential risks on the basis of clear, transparent criteria
 Increase scrutiny and review for transactions in sectors
that have national security implications  Ensure that changes to regulatory
frameworks preserve the benefits
SWFs’ offer and avoid penalising them
 Treat SWFs like other investors and
Recipient
 Invest in a way that encourages watch closely for signs of inappropriate
Country
development of domestic industries Governments
influence of sovereign government
leaders
 Develop a track record of investment
behavior that meets internationally  Develop common and effective
Multilateral standards of SWF transparency
accepted standards Sovereign
Regulatory and
 Increase transparency around Government
Oversight
Owners
political intentions and investment Institutions
strategy
 Understand SWF motivation
SWFs and also potential risks
 Acknowledge and address
concerns of corporate
Companies
Other stakeholders and other
Considering
Financial
SWF
constituencies
Institutions
Investments
 Study SWF investment patterns
to identify opportunities for
 Create distance from sovereign government owners to
collaboration and co-investment
reinforce perceptions of autonomy
 Get to know principals at SWFs
 Demonstrate that funds are professionally managed
and understand their needs
 Put in place robust risk-management systems
 Build and disclose a track record illustrating pursuit of
financial goals


SWFs: Looking Forward
Assessing the Risks

 SWFs will become fixtures of the global financial system, with more and bigger funds
emerging and with continued appetite for higher risk-adjusted returns. Current market
forces and improved reception of the funds will tend to reinforce their positive impact

 The recently released, voluntary Santiago Principles of the IMF’s International Working
Group of SWFs are very positive step in the creation of an international framework for
fund best practices
– Further progress still can be made on third-party verification of compliance either
through IWG’s Standing Group or individual fund actions (e.g., ADIA)

 Similar progress is required in creating a reciprocal framework among recipient
governments to ensure open and fair investment access to SWFs
– OECD Declaration on SWFs adopted in June is only a minimal first step

 SWFs are just one form of government investment vehicle. Central banks (e.g., SAFE
and SAMA) and state-owned enterprises, which are also participating in a broad range of
foreign assets classes, warrant attention as well


Contents
Assessing the Risks






 Q&A


Gaim Presentation by Drosten Fisher of Monitor Group November 16, 2008

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (20)

Similar to Gaim Presentation by Drosten Fisher of Monitor Group November 16, 2008

Similar to Gaim Presentation by Drosten Fisher of Monitor Group November 16, 2008 (20)

Recently uploaded

Recently uploaded (20)

Gaim Presentation by Drosten Fisher of Monitor Group November 16, 2008