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Sovereign Wealth Funds: A Growing Global Force. François Bujon de l’Estang Chairman, Citi France. February 22, 2008. Sovereign Wealth Funds: A Growing Global Force.

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sovereign wealth funds a growing global force

Sovereign Wealth Funds: A Growing Global Force

François Bujon de l’EstangChairman, Citi France

February 22, 2008

sovereign wealth funds a growing global force2
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
SWFs are Big and Getting Bigger

Global Financial Assets ($ T)

2

foreign inflows keep treasury yields low

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

swfs are in increasingly high profile transactions

$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.

recapitalizing the financial service industry

$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

where the wealth is coming from

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
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.

swfs not a new concept

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
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
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
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 strategic implications for citi clients

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

governments are weighing their response to swfs

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