Transcript Sovereign Wealth Funds: A Growing Global Force

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
 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.
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SWFs are Big and Getting Bigger
Global Financial Assets ($ T)
$48.1
Asset Management Industry AUM
$23.6
Retirement Funds AUM
Projected Sovereign Wealth Funds
Foreign Exchange Reserves
Sovereign Wealth Funds
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$7.5 - $10.0
$5.4
$3.0
Hedge Funds AUM
$1.9
Private Equity AUM
$1.3
SWFs: Increasingly Relevant
Assets Under Management
($ b)
*
3 * ADIA.
Foreign Inflows Keep Treasury Yields Low
Impact of Foreign Capital Flows on US 10-year Treasury Yield
 McKinsey estimates that annual net foreign purchases lowered long rates by
130 basis points
1989
1994
1999
2004
(bps)
1984
Warnock Model (1)
Warnock Model (2)
4
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 are in Increasingly High Profile Transactions
$9.75 b, Dec 07
$8.83 b, Nov 05
$7.5 b, Nov 07
$6.88 b, Jan 08
*
China Investment
Corp
$5.19 b, Aug 07
5
$5.00 b, Dec 07
China Investment
Corp
$4.40 b, Dec 07
$3.00 b, May 07
* Total Fund raising of $12.5 b included investments from KIA, Capital Research Global Inv., Capital World Inv., NJ Div. of Inv.
Recapitalizing the Financial Service Industry
Total Investments by SWFs ($ b)
$66.6
Investments in Other Industries
Investments in Financial Services
$44.6
3.8% of Total
$1.7
$42.6
63.8% of Total
$20.6
$42.9
$24.0
$19.2
$1.4
2006
6
Source: Dow Jones Newswire.
2007
Jan-08
93.3% of Total
Where the Wealth is Coming From
Deficits
Surpluses
Where the wealth is
coming from and how
will it grow?
Western
Hemisphere
$20B
Russia /
CIS
$77B
Asia (ex$19B
Japan)
$480B
Middle
Japan
East
$195B
$227B
Other
Advanced
US
$784B
C&E
Europe
$120B
Eurozone
 Surge in commodity prices
 Dramatic increase in current
account surpluses in Asia
$21B
 Willingness of governments
to allocate more funds from
Foreign Exchange Reserves
to Sovereign Wealth Funds
Global Current Account Balance 2007
Global Foreign Exchange Reserves
($ b)
6000
5000
4000
3000
2000
1000
0
1995
7
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
 2007
$3.0 trillion
 2012
$7.5 - $10.0 trillion
Commodity Producing Countries Generate Investment Assets
Petrodollar Foreign Investment Assets
($ T)
Scenarios
$8.51
CAGR
(2006-2012)
$8.51
Oil Price $100
17%
$6.93
Oil Price $70
13%
$5.88
Oil Price $50
10%
$4.83
Oil Price $30
6%
$1.58
$1.05
$1.05
$3.40
$0.07
$0.07
$3.91
$4.83
$3.77
$3.40
2006
2007
Estimated
2012
Forecast
At oil prices of $100/barrel, there is an incremental $2.3 b petrodollar
investment into the world markets per day.
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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
1950’s
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Today
KIA
$250 b, 1953
(Kuwait)
Brunei Inv.
Authority
$30 b, 1983
(Brunei)
Stabilization
Fund
$200 b, 2004
(Russia)
CIC
$200 b, 2007
(China)
Temasek
$108 b, 1974
(Singapore)
Norway Govt.
Pen. Fund
$328 b, 1990
(Norway)
QIA
$60 b, 2005
(Qatar)
Saudi Arabian
Funds
$250 b, 2007
(Saudi Arabia)
ADIA
$875 b, 1976
(UAE)
Khazanah
Nasional BHD
$18 b, 1993
(Malaysia)
Future Fund
$42 b, 2006
(Australia)
GIC
$200 b, 1981
(Singapore)
KIC
$20 b, 2005
(Korea)
LIA
$40 b, 2007
(Libya)
Where Is Sovereign Wealth Managed?
Central Banks/
Monetary
Authorities
 China
 Japan
 India
 Hong Kong
 Saudi Arabia
Sovereign
Stabilization
Funds
Sovereign Saving
Funds
Government
Investment
Corporations
Affiliated
Corporate Entities /
SOEs
 Russian Oil
Stabilization
Fund
 Abu Dhabi
Investment
Authority
 Mubadala
Development
Company
 Gazprom
 Algerian
Revenue
Regulation
Fund
 Norway
Government
Pension
Fund
 Dubai
International
Capital
 Abu Dhabi
National Energy
Company
 Dubai World
 Chilean
Economic and
Social
Stabilization
Fund
 Kuwait
Investment
Authority
 China National
Offshore Oil
Corp.
 SAGIA
 SABIC
 GIC
 China
Investment
Corporation
 Temasek
 Temasek
 Qatar
Investment
Authority
 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.
10 Source: Citi.
Activity Is Moving to the Aggressive End of the Spectrum
Stabilization
Low
Examples
Investment Objective
Russian
Stabilization
Fund
Norwegian
Government
Pension Fund
Abu Dhabi
Investment
Authority
Kuwait
Investment
Authority
Temasek
Qatar
Investment
Authority
Wealth
Accumulation
11 Source: Citi.
High
Risk Tolerance
Cash /
Gov’t
Bonds
Fixed
Income
Equity
Strategic
Stake
Building
Real
Estate
Hedge
Funds
Private
Equity
Leveraged
Buyouts
SWF Capital Can Reshape Global Economic Landscape
Scenario B:
Allocation of Incremental SWF Capital
Scenario A:
Allocation of Incremental SWF Capital
ROW: $1.13
ROW: $1.13
25%
US: $1.69
25%
37%
75%
19%
19%
China: $0.83
US: $3.38
India: $0.83
Estimated Impact on GDP Growth
12.1%
10.7%
10.0%
9.8%
Current 5-Yr GDP Growth Forecast
Estimated 5-Yr GDP Forecast With Incremental Capital Inflow
Growing Disparity in
Western and EM Economic
Growth
3.0%
2.4%
US
2.7%
2.4%
US
India
12 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?”.
China
SWF Strategic Implications for Citi Clients
SWF Benefits for Citi’s Clients
Key
investors in
IPO or
pre-IPO
financing
Core
Shareholder
with long
term
investment
focus
Source of
capital for
transformative
transaction
Strategic
partnerships can
smooth regulatory
approval, mitigate
political risks
Political
Implications
Franchise
Impact
 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
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Governments Are Weighing Their Response to SWFs
Managing political risk has become essential in SWF-related transactions.
Potential Benefits
Perceived Threats
▲Long-term investment horizon
▼Transparency
▲Low leverage
▼Political ambitions / security
concerns
▲Key source of foreign financing
▼Reversal of 25 years of privatization
▲May facilitate future investment in key
emerging markets
▼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”.
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