Why government-owned funds would beneﬁt from a code of conduct.
Since Kuwait took the pioneering step of establishing the world’s ﬁrst Sovereign Wealth Fund (SWF) in 1953 followed by Abu Dhabi with its Investment Authority (ADIA) in 1977, along with their Norwegian and Singaporean counterparts, government-owned ﬁrms have been investing their excess funds, mostly from oil, in the capital and real estate markets of the western world quietly and professionally.
Other than the famous incident in which the British government objected to Kuwait’s attempt to gain a controlling stake in British Petroleum in 1988, not one of these respectable funds has ever attempted to court media attention. They preferred to invest the money entrusted to them by the government and ultimately the citizens of their nations in opportunities that promise solid growth and returns. These funds have been so careful in maintaining discretion (the IMF estimates Abu Dhabi Investment Authority at “somewhere” between US$275 billion to US$800 billion, roughly speaking of course1) that several decades after their founding the world business community still doesn’t know for certain how much money is held by them or in which ﬁrms they have decided to invest.
Although much is left unknown, one thing is for certain – their returns have been exemplary.
Recently, as the economies of developing countries have ﬂourished, they have decided to join the elite club of SWFs. Dubai, an uncharacteristic follower in this case, was joined by Qatar and China. The original formula was simple: invest in long-term opportunities while keeping the noise to a minimum. With new players the formula was reversed: make the loudest bang for the smallest buck.
Respectively, each of these funds has gone for trophy prizes whether one looks at Madame Tussauds and Doncasters, the very public failed bids for Thames Water and Sainsbury’s or the rushed investment decision into Blackstone and Unocal (which also failed).
Now, thanks to these new kids on the block, governments in Europe and the US have painted all SWFs with the same brush and started scrutinising any new investment into so-called sensitive sectors.
If one looks carefully at Qatar’s recent case, it would be evident that had they really wanted to purchase the giant supermarket chain for US$22 billion; the extra US$1 billion that was asked (a 4.5 per cent more) would have sealed the deal and not been a deterrent. Headlines around the world reported on the unprofessional behavior and lack of experience that QIA in particular and SWFs in general possess. The Qatari prime minister had reportedly ﬂown the Sainsbury family members to the exotic island retreat of Sardinia in Italy to woo them into accepting the bid2. Is this how professionals conduct business nowadays? QIA ultimately came out as being the black stain on the ﬂowing white dishdashas of the GCC.
Borse Dubai also committed not just one, but a series of errors when it decided to purchase OMX. The manner in which the bid was launched was criticised by the Swedish Financial Regulator to the extent that the Dubai government-owned fund received an ultimatum to clearly state its objective or be prohibited from voting as an OMX shareholder and forced to transfer its shares to a third party3. In addition to all that, Borse Dubai could have been ﬁned US$16 million and banned from bidding for OMX in the future4. As late as May 28, Borse Dubai was denying any intention to buy OMX, dismissing it as “grapevine talk” when the intention was clearly there5. Borse Dubai then secretly acquired 18 per cent above the 10 per cent limit for a single shareholder without seeking approval from the authorities6, which caused the regulator to scrutinise the deal.
As the world of SWFs expands by 2012 into a US$12 trillion industry7 that can provide for Gulf economies in times when oil is not hovering around the three-digit range, adolescent funds are threatening to endanger growth and prosperity for the sake of a few headlines and photo opportunities. Thanks to these new kids’ unprofessional behaviour, for the ﬁrst time in over three decades the G7 meetings of the world’s biggest industrial powers discussed how to impose controls and limits as well as a code of conduct on government owned funds. Surely not a good omen for things to come. Julius Rosenwald, the US philanthropist, once said: “Do not be fooled into believing that because a man is rich he is necessarily smart. There is ample proof to the contrary.”
Or is that just grapevine talk?
This article was originally published in MONEYworks on December 2007. (PDF Download)