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FEEM-Monitor SWF Annual Report 2009

 

Abstract

From the Editors Bernardo Bortolotti, FEEM Executive Director and  William F. Miracky, Senior Partner, Monitor Group.

In 2008 FEEM and Monitor established a partnership to develop a database of SWF transactions based on publicly available information that would be as complete and comprehensive as possible. As of December 31, 2009, the Monitor-FEEM SWF Transaction Database contains 1,181 deals completed by 22 funds based in 14 countries since January 1, 1981. New funds added to our database during the year included Abu Dhabi’s International Petroleum Investment Company and the Oman Investment Fund. We are also adding three new funds to track from 2010: China’s National Social Security Fund; Ireland’s National Pensions Reserve Fund; and the New Zealand Superannuation Fund.

2009 opened to the most challenging economic and financial climate since the Great depression. With slowing income from plummeting oil prices and contracting global trade in 2008, the volatile investment climate made sovereign wealth funds (SWFs) more risk averse. The beginning of the year saw the lowest levels of publicly reported SWF investment for half a decade as they continued to be cautious actors in the global economy, scaling back their acquisitions to reflect their perception of increased market risk. This was exacerbated by SWFs suffering mark-to-market losses of an estimated $67 billion on their investments in publicly-listed companies by the end of Q1 2009, and some SWFs stepping in to bail out their countries’ faltering financial service sectors.

During 2009, funds in the Monitor-FEEM SWF Transaction Database executed 113 deals worth $68.8 billion. This represented a sharp break on the trend of increasing SWF activity, with both the number and value of investments about 40 percent below totals in 2008.

SWFs invested considerably less in financial services in 2009 than in 2008, dropping from 49 publicly reported investments valued at $81.7 billion to just 28 deals with a reported value of only $10.2 billion.  They were also more cautious in real estate acquisitions, with activity dropping by more than half.  Instead, they looked to invest in a wider range of sectors, most notably in energy, natural resources and engineering- or technology-based sectors.  This bears greater similarity to the patterns characterizing SWF behaviour before 2005, although the sectors of interest reflect current economic realities.

Continuing the trend from 2008, Europe remained the largest market for SWF investment in terms of recorded value, despite the financial crisis. European targets accounted for 42.5 percent by value of 2009’s publicly reported SWF investment ($29.2 billion), about a third of the reported value from 2008.  SWFs also invested more widely in 2009, with investment in Latin America, sub-Saharan Africa and Non-Pacific Asia doubling in real terms to $3 billion.

Once more Asia Pacific accounted for the largest number of investments (32) in 2009.  Europe was the second most popular region for SWFs (29) transactions.  MENA overtook North America in terms of investment volume, with 21 deals against North America’s 19, most of which took place in the final quarter of the year.

The most active funds were the China Investment Corporation and the Government of Singapore Investment Corporation, making 17 and 18 publicly reported investments, respectively.  However, the largest spending fund was the Qatar Investment Authority, which undertook 14 publicly reported investments valued at over $32 billion.

The inhospitable global economy at the end of 2008 manifested itself in our data in Q1 and Q2 2009—both quarters were the lowest investment volumes since 2005 and 2003, respectively. SWF activity picked up during the second half of the year, with Q3 and Q4 accounting for 85 percent of publicly reported expenditure and two-thirds of the total number of deals.

These and other significant trends and highlights of 2009 are spelled out below. This report also includes sections introduced last year that we expect to be standards in the annual reports going forward. These include separate highlights of SWF activity in the fourth quarter, a timeline of significant news and events of the year, a table of the year’s biggest deals, and an overview of recent noteworthy publications about SWFs.

This report includes important articles from leading SWF commentators: Ashby H. B. Monk, co-director of the Oxford SWF Project, who analyzes the potential for SWFs to redirect and re-allocate vast sums of money globally toward longer-term, relatively risky investments; Vanessa Rossi of Chatham House assesses the future role of SWFs in the global economy; Steffen Kern from Deutsche Bank looks at how SWFs have reacted to the changing political environment of recent years; Victoria Barbary of Monitor Group, assesses the asset allocation of SWFs and suggests that seeking increasingly sophisticated strategies to preserve and increase the value of their portfolios; and Rachel Ziemba of Roubini Global Economics examines the trend among certain SWFs to enter partnerships with co-investors.

The partnership continues to yield a strong academic dividend. The revised version of a joint academic paper by Monitor-FEEM researchers and currently under review for a leading finance journal) provides new evidence about SWF’s’ investment patterns and performance. We show that SWFs are sizable minority shareholders, but keep a very low profile in the corporate governance of target firms as they seldom seat in boards. Furthermore, SWFs acquisitions are good news at the time of announcements, but are associated with strong under-performance in the long run. This combined evidence seems consistent with the view of SWFs as a constrained foreign investors—large shareholders, but reluctant to play an active role in monitoring. More research and insight is needed to provide more definite conclusions. At any rate, an interesting question we beg is if and when SWFs will become active for the sake of their own economic interest. Monitor and FEEM will follow these exciting developments closely.

 
 
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