Private Equity Briefcase

November 27, 2007

PE's Bout With Sovereign Wealth Funds

If the recent investment activity by sovereign wealth funds offers any indication, US private equity funds are facing stiff, not to mention formidable, competition for deals from foreign government-backed investment vehicles.

Government investment entities, particularly those run by cash-flush Middle Eastern governments, are throwing their weight around the private investment business. Though it would be remiss to say sovereign fund investing is a new development — Singapore’s Temasek Holdings, for instance, was established in 1974 and, according to its website, has 32 companies in its more than $100 billion portfolio (38% of the portfolio is weighted in financial services) — it is here to stay.

Temasek isn’t an insignificant player in the financial services sector, either. In July, the group announced a $2 billion (£975 million) investment in Barclays.

The importance of deep-pocketed sovereign wealth funds was made more apparent this week when Citigroup announced that the Abu Dhabi Investment Authority, a sovereign wealth fund of the government of Abu Dhabi, had committed $7.5 billion to the bulge bracket bank. It was one in a series of other high-profile investments made by the UAE nation this year, following the $622 million and $1.3 billion investments in Advanced Micro Devices and the Carlyle Group, respectively, made by another Abu Dhabi entity, Mubadala Development Co.

The investments by the sovereign wealth funds of the government of Abu Dhabi follow in the wake of another particularly high-profile deal financial services deal executed by a different state-run vehicle this year, China’s $3 billion investment in New York’s Blackstone Group.

China, Singapore and the UAE aren’t the only managers of sovereign vehicles, either. Australia, Kuwait, Norway, Russia, Saudi Arabia and South Korea also manage investment funds.

The US private equity industry might just have the connection it needs to thwart a whole-scale invasion by the sovereign wealth funds, albeit from an unlikely corner. Senator Evan Bayh (D-Ind.) expressed his concerns about seven sovereign funds, totaling more than $100 billion in assets, in mid-November, noting the funds “dwarf in size the multilateral organizations designed to be the governing architecture of the global financial system.” Sovereign wealth funds, he said, present the United States with both opportunities and challenges.

But, as Senator Bayh also noted, just exactly how to deal with the challenges remains a question for the foreseeable future: “How do we attract capital from abroad and pursue our financial goals while reconciling this with other vital national concerns?”