Subject: SWFs eye domestic advantages - FT
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Date: Sun, 12 Sep 2010 16:54:04 -0400

SWFs eye domestic advantages
By Sophia Grene
Published: September 12 2010 10:01 | Last updated: September 12 2010  
10:01
Sovereign wealth funds are exploiting their overseas investments to  
contribute to economic development back home.

“In conversation with several Middle East SWFs, they see themselves  
almost as sovereign development funds,” said Nuno Fernandes, professor  
of finance at Swiss business school IMD.

This may take the form of inviting investee companies to market their  
products in the home market, influencing decisions about where to site  
offshored production facilities, building joint ventures with the  
companies in the home market, or acquiring intellectual capital to  
develop a new domestic industry.

Mubadala, one of several funds in Abu Dhabi, parlayed an initial 8.1  
per cent holding in American computer chip maker AMD into a 20 per  
cent stake and a spin-off of its manufacturing operations in a joint  
venture with the Advanced Technology Investment Company of Abu Dhabi  
(ATIC), generating a substantial return for itself.

In its annual report, Mubadala congratulated itself on the outcome:  
“As well as having a solid commercial return, the AMD partnership also  
demonstrates Mubadala’s mandate of delivering social value to Abu  
Dhabi.”

Also in Abu Dhabi, the International Petroleum Investment Company  
bought 70 per cent of MAN Ferrostaal, to give the emirate access to  
the company’s expertise in petrochemicals, solar power and project  
construction and management, according to a report from the Monitor  
Group and Fondazione Eni Enrico Mattei*.

This kind of strategic investment has been happening outside the  
Middle East too. The China Investment Corporation, for example, has  
been actively seeking to invest in resource companies such as  
Indonesia’s biggest coal company, Bumi.

“From an international perspective, SWFs help stabilise global  
financial markets and from a domestic point of view co-ordinate  
macroeconomic policy,” according to the Monitor/FEEM report. “The  
latter probably remains the dominant driver of their own choices.”

Once feared as the bogeymen of international investment, then loved as  
the white knights who, it was hoped, would bail out western financial  
institutions during the financial crisis, SWFs have developed the new  
function partly in response to criticism at home after losing money  
during the crisis. Their approach, however, is shaped by experience of  
political hostility in target nations.

SWFs have in general avoided getting formally involved in corporate  
governance, but this does not mean they are passive investors. “If you  
look at the external metrics of engagement, such as board positions,  
it’s true they’re under-represented,” said Prof Fernandes, “but there  
are many pieces of evidence that they are engaged in more backdoor  
activity.”

These activities are less likely to attract unfavourable political  
comment in the target country, while benefiting the economic  
development of the home nation, he added.

The need to support the domestic economy has become a significant  
policy driver for SWFs, according to the Monitor/FEEM report.

“As their domestic markets were hit by the effects of the global  
recession, SWFs inevitably became more active at home in providing  
financial support – patriotism proved far more important than presence  
in foreign markets,” said Vanessa Rossi of Chatham House in an article  
for the Monitor/FEEM report.

*Back on Course: Sovereign Wealth Fund Activity in 2009