Sovereign Wealth Funds: A Growing Global Force François Bujon de l’EstangChairman, Citi France February 22, 2008
Sovereign Wealth Funds: A Growing Global Force • Sovereign Wealth Funds (“SWFs”) are a prominent investor class with their assets rivaling Global Hedge Funds and Private Equity combined • Not all SWFs are created equal as they lie along a spectrum of risk appetite • SWFs are hiring best-in-class investment talent to serve long-term investment goals • Governments are weighing perceived threats of SWFs against potential benefits. Managing political risk in SWF-related transactions is key Citi is playing a central role in the intermediation of these capital flows. 1
SWFs are Big and Getting Bigger Global Financial Assets ($ T) 2
Assets Under Management ($ b) SWFs: Increasingly Relevant * * ADIA. 3
Warnock Model (1) Warnock Model (2) Foreign Inflows Keep Treasury Yields Low • McKinsey estimates that annual net foreign purchases lowered long rates by 130 basis points Impact of Foreign Capital Flows on US 10-year Treasury Yield 1984 1989 1994 1999 2004 (bps) Source: McKinsey Global Institute: “The New Power Brokers: How Oil, Asia, Hedge Funds and Private Equity are Shaping Global Capital Markets,” Oct. 2007. Warnock and Warnock: “International Capital Flows and US Interest Rates,” NBER 12560, Oct 2006. 4
$8.83 b, Nov 05 $7.5 b, Nov 07 $6.88 b, Jan 08 * China Investment Corp China Investment Corp $5.19 b, Aug 07 $4.40 b, Dec 07 $3.00 b, May 07 SWFs are in Increasingly High Profile Transactions $9.75 b, Dec 07 $5.00 b, Dec 07 5 * Total Fund raising of $12.5 b included investments from KIA, Capital Research Global Inv., Capital World Inv., NJ Div. of Inv.
$66.6 Investments in Other Industries Investments in Financial Services $44.6 3.8% of Total 63.8% of Total $1.7 $42.6 $20.6 93.3% of Total $42.9 $19.2 $24.0 $1.4 Recapitalizing the Financial Service Industry Total Investments by SWFs ($ b) Source: Dow Jones Newswire. 6
Global Foreign Exchange Reserves ($ b) Where the Wealth is Coming From Where the wealth is coming from and how will it grow? • Surge in commodity prices • Dramatic increase in current account surpluses in Asia • Willingness of governments to allocate more funds from Foreign Exchange Reserves to Sovereign Wealth Funds • 2007 $3.0 trillion • 2012 $7.5 - $10.0 trillion 7
Commodity Producing Countries Generate Investment Assets At oil prices of $100/barrel, there is an incremental $2.3 b petrodollar investment into the world markets per day. Petrodollar Foreign Investment Assets ($ T) CAGR (2006-2012) Scenarios $8.51 $8.51 Oil Price $100 17% $6.93 Oil Price $70 13% $5.88 Oil Price $50 10% $4.83 Oil Price $30 6% $3.91 $3.40 Estimated Forecast 8 Source: McKinsey Global Institute: “The New Power Brokers: How Oil, Asia, Hedge Funds and Private Equity are Shaping Global Capital Markets,” Oct. 2007. Warnock and Warnock: “International Capital Flows and US Interest Rates,” NBER 12560, Oct 2006.
KIA $250 b, 1953 (Kuwait) GIC $200 b, 1981 (Singapore) LIA $40 b, 2007 (Libya) StabilizationFund $200 b, 2004 (Russia) Future Fund $42 b, 2006 (Australia) Temasek $108 b, 1974 (Singapore) Brunei Inv. Authority $30 b, 1983 (Brunei) QIA $60 b, 2005 (Qatar) ADIA $875 b, 1976 (UAE) Saudi ArabianFunds $250 b, 2007(Saudi Arabia) CIC $200 b, 2007 (China) KIC $20 b, 2005 (Korea) Norway Govt. Pen. Fund $328 b, 1990 (Norway) KhazanahNasional BHD $18 b, 1993 (Malaysia) SWFs: Not a New Concept 1950’s Today 9
Where Is Sovereign Wealth Managed? Central Banks/MonetaryAuthorities Sovereign StabilizationFunds Sovereign SavingFunds Government Investment Corporations AffiliatedCorporate Entities / SOEs • China • Japan • India • Hong Kong • Saudi Arabia • Russian Oil Stabilization Fund • Algerian Revenue Regulation Fund • Chilean Economic and Social Stabilization Fund • Abu Dhabi Investment Authority • Norway Government Pension Fund • Kuwait Investment Authority • China Investment Corporation • Temasek • Qatar Investment Authority • Mubadala Development Company • Dubai International Capital • Dubai World • SAGIA • GIC • Gazprom • SABIC • Abu Dhabi National Energy Company • China National Offshore Oil Corp. • Temasek • Qatar Investment Authority Note: Some central banks and monetary authorities, such as the Saudi Arabia Monetary Authority, may not only manage official foreign-exchange reserves, but other foreign assets as well. Source: Citi. 10
Activity Is Moving to the Aggressive End of the Spectrum Stabilization Risk Tolerance Low High Investment Objective Wealth Accumulation Source: Citi. 11
SWF Capital Can Reshape Global Economic Landscape Scenario B: Allocation of Incremental SWF Capital Scenario A: Allocation of Incremental SWF Capital 25% 25% 37% 75% 19% 19% Estimated Impact on GDP Growth Growing Disparity in Western and EM Economic Growth Note: Estimates of SWF capital inflow effects based on historical relationship between GDP growth and FDI, as estimated by Carkovic and Levine (2005), “Does Foreign Direct Investment Accelerate Economic Growth?”. 12
SWF Benefits for Citi’s Clients • Large, liquid funds with the ability to quickly close transactions • Supportive source of funding for potential acquisitions • Core investors with a long-term horizon bring added stability to shareholder base • Typically utilize low leverage levels in their investments Business Opportunities for Citi • Intermediary between SWFs and global corporations • Advisory and financing Support for national champions Competition for assets Key investors in IPO or pre-IPO financing Source of capital for transformative transaction Strategic partnerships can smooth regulatory approval, mitigate political risks Core Shareholder with long term investment focus Political ImplicationsFranchise Impact SWF Strategic Implications for Citi Clients 13
Managing political risk has become essential in SWF-related transactions. Governments Are Weighing Their Response to SWFs Potential Benefits • Long-term investment horizon • Low leverage • Key source of foreign financing • May facilitate future investment in key emerging markets Perceived Threats • Transparency • Political ambitions / security concerns • Reversal of 25 years of privatization • Potential for reciprocity / restricted market access In light of the importance of these issues for global policymakers, one can expect continued public discussion about the need for international consensus on “best practice”. 14