Sovereign wealth funds are the new kings of the markets

Britain missed out on establishing one in the 1980s, but today it is the SWFs and their vast reserve

The Abu Dhabi Investment Authority, still nursing its wounds after bailing out its spendthrift neighbour Dubai, is said to be bidding for the rail link between London and the Channel Tunnel. A number of secretive sovereign wealth funds (SWFs) have apparently expressed interest in buying a stake in General Motors when the company floats later this year. Whenever a major business is put up for sale, SWFs seem to be at the front of the queue.

Britain missed out on establishing an SWF in the 1980s. Tony Benn, among others, wanted to set up a fund to invest North Sea oil and gas income, but was shouted down by the Tories. In a recent report, PricewaterhouseCoopers estimated that the fund would have had about £450bn leading into the credit crisis. Norway, which did establish such a reserve, was able to draw on a similar amount as a buffer against the crash. It's another chapter in the British history of missed financial opportunities. Now the SWFs are buying up our national treasures.

China Investment Corporation, set up in 2007 to take a more active approach to the management of the country's vast foreign currency reserves, is reported to be behind an on-again-off-again bid for Liverpool Football Club. But the situation is murky. Kenny Huang, the Hong Kong businessman fronting the Chinese bid, said on 4 August that he was backed by CIC. The next day, a source "close" to CIC rubbished the claim. There has been silence from both parties since. CIC watchers, though, will have noted that the fund has quietly liquidated part of its holding in Morgan Stanley. The amount raised? £351.4m. Liverpool's outstanding debt? £351.4m.

Deep pockets

Whether or not CIC's portfolio managers end up walking through the Shankly Gates, it is clear that SWFs will shape the financial landscape over the coming decades. The move by the new economic superpowers from passive to active management of their budget surpluses may be the most significant legacy of the crash of 2008.

Before the credit crisis, foreign governments with dollar reserves were happy to park their cash in low-earning US treasury bonds or with western banks and investment managers. As the crash hit and the supposedly sophisticated financial institutions they had bought in to were revealed as wildcatters and good-time Charlies, there was a change of strategy.

The Middle Eastern investment authorities have been around for decades, channelling oil money into a variety of western corporations (the Kuwait Investment Authority has owned a stake in Daimler since 1969). Singapore's two funds, Temasek and GIC, were founded in 1974 and 1981, respectively. It wasn't until the crash, however, that these institutions came to the forefront of the financial markets. For a while they seemed like our only hope.

As the markets teetered in late 2007 and plummeted in early 2008, the SWFs were the only investors with deep enough pockets to stand in the way of the panic. We didn't know quite how much money they had (they don't have to produce annual reports), we just knew it was a lot. As the financial crisis gathered pace, the SWFs began to bail out struggling banks.

Abu Dhabi was the first to move, pumping $7.5bn into Citigroup in November 2007. CIC and GIC soon followed suit, buying large stakes in Morgan Stanley and UBS, respectively. Temasek injected $5bn into Merrill Lynch. The Qatar Investment Authority (QIA) increased its stakes in Barclays and Credit Suisse at a time when few other investors were willing to underwrite the banks' capital increases. The Libyans rescued Fortis in Belgium.
Of the $70bn committed to propping up western banks by the SWFs, $20bn has already been written off. While the QIA has made a killing on Barclays and Credit Suisse, most of the SWFs were badly burned by the crash. They had made their point, though.

Sleeping giants

I spent much of the credit crisis on investor roadshows, either trying to raise new money or gently patting the hands of nervous portfolio managers whose cash I looked after. Europe and the US were in effect shut for much of 2008 and 2009, so these gruelling tours took me across the Middle East and Asia, stumbling jet-lagged from meeting to meeting as the stories from the markets back home grew increasingly bleak.

We'd always meet the sovereign wealth funds last. In vast offices, their employees seemed to dwell in an uneasy no-man's-land between bureaucrat and banker. Ten or twelve of them would arrive and fan out along the boardroom table, carefully arranged by seniority. In Asia, their suits matched the decor: brown and dispiriting; in the Middle East shimmering dishdashas blinded me. As I talked - almost always through a translator - it was not unknown for several to place their heads on the table and snooze. We needed to see them, though. They were the financial markets.

There have been repeated calls for international regulation of SWFs. The funds grudgingly agreed to a voluntary code drafted by the IMF in 2008, but compliance has been patchy. They will continue to grow - some analysts think that the $6trn now under management across the funds could double by 2015. Harsh lessons were learned by the SWFs during the credit crisis but they established themselves as key players on the global financial stage. They already own our airports (Gatwick), skyscrapers (Canary Wharf) and department stores (Harrods). Their names will soon become as familiar as the high street banks they rescued during the crash. How George Osborne must wish he had one of his own.

This article first appeared in the 30 August 2010 issue of the New Statesman, Face off