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Sovereign wealth funds appear to have lost their way

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Sovereign wealth funds appear to have lost their way

By Tony Jackson

Published: September 8 2008 03:00 | Last updated: September 8 2008 03:00

The forward march of the sovereign wealth funds seems in slight disarray these days. Some have been lured off the track by glittering baubles such as football clubs and trophy buildings. But even the steadier troops face a wider issue. How far can they count on seizing assets from the stricken west on the cheap?

To pose the question more generally, in what circumstances can foreign buyers identify value not perceived by the locals? The burden of proof, after all, is normally the other way round. Too often, foreigners only discover why the locals were selling after the deal is done.

One clear exception to this should be where the buyer is a sovereign entity under no pressure for short-term results. Conventional investors mostly stand to be penalised if the asset falls further in the near term, so they require a risk premium in the form of a cheaper price. For the genuine long-term investor, that is free money. But how far that description fits the SWFs is debatable. China, which has lost heavily on strategic stakes in western banks, seems to have drawn some fairly conventional lessons.

Beijing recently blocked a proposed takeover by China Development Bank of Germany’s Dresdner Bank and indeed has not approved any large investment in foreign banks this year.

This is a stunning reversal from 2007, when the SWFs spent a collective $46bn (£26bn) on bank stakes in the last nine months alone.

So far so good, perhaps. Other countries are less prudent – witness the very odd proposal by the Korea Development Bank to take a stake in Lehman Brothers.

For many years, South Korean banks were mere servants of the state’s industrial policy, lending to the likes of Samsung and Hyundai as instructed by government – hardly the best way to learn risk management.

Since the Asian crisis of 1997, Korean commercial banks have apparently made great progress. But the Korea Development Bank is still a government department.

Granted, it has a former Lehman executive as chairman, ahead of next year’s proposed flotation. But the Korea Development Bank still seems the last outfit in the world to be capable of policing the animal spirits of Wall Street investment bankers.

Mention of the Asian crisis, meanwhile, reminds us of another factor which students of the SWFs should never forget. In certain aspects, what the west is seeing today is payback for the events of a decade and more ago.

At the height of the crisis, I recall a meeting at the Davos World Economic Forum at which western executives salivated over the knock-down bargains to be had across corporate Asia.

One veteran European chief executive admonished them. If they exploited the situation today, he said, it would come back to haunt them later.

Too true. Let us not forget, either, that this was the era of $10 oil. The travails of BP and Shell in Russia today owe much to the fact that their joint-venture deals there were struck at a time of Russian desperation. Given that more than 70 per cent of the money in SWFs is oil or gas related, this is worth pondering.

Which brings us to trophy assets. The Chinese authorities are reportedly very aware of the disastrous precedent set here by Japan 20 years ago. Other SWFs, on the other hand, seem to be set on following the Japanese example with the utmost fidelity.

Thus, Abu Dhabi announced last week it was putting $1bn into film production in Hollywood and elsewhere. In 1989, Sony of Japan bought Hollywood’s Universal Studios, and suffered a $2.7bn write-off five years later.

Again, Abu Dhabi spent $800m last month on the Chrysler building in New York, while the GM building was bought for $2.8bn the month before by a group including Kuwait and Qatar. In 1989, Mitsubishi Estate of Japan bought the Rockefeller Center, only to hand back the keys and walk off in disgust in 1995.

A final ingredient in all this may be the fatal lure of the apparent bargain. To take another Korean example, a decade ago I visited an excavator plant in the north of England and a television plant in Berlin, both bought by Samsung from the receivers. Both have since been shut.

On top of all that, it is not clear whether grand projections for the size of the SWFs are still on track.

Last year, global foreign exchange reserves rose $1,200bn to $7,000bn, having been only $2,000bn in 2000. With emerging markets slowing and the oil price falling, such growth can scarcely be counted on in future.

None of this is to say the SWFs will not remain important players, nor yet to deny that the balance of power is shifting from west to east. But neither is the grand advancing army quite as unstoppable as it seemed a year ago.

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