Sovereign funds join forces for strategic investment

LONDON Tue Aug 18, 2009 9:35am EDT

LONDON (Reuters) - An increasing number of sovereign wealth funds are working in concert to make joint strategic investments in order to reduce risks and maximize returns, which could provide a stabilizing force in financial markets.

State-owned funds from China, Singapore, Malaysia, Korea, Abu Dhabi and Kuwait are among those which have recently signed agreements to form investment partnerships with each other.

These partnerships will enable state-owned funds to optimize local knowledge, leverage capital, spread investment risks and maximize returns.

They could also create a bigger, more diverse and transparent entity, whose long-term investments -- often holding assets for years -- might help stabilize global markets.

Furthermore, by highlighting their commercial motives, partnerships might also help quell concerns among regulators and politicians who suspect SWFs investments are politically driven.

"They realize that their level of expertise is not universal and find that obtaining additional expertise via cooperation is a viable option for them. They are sharing risk and enabling access to welcome co-financing," Alexander Mirtchev, independent director of Kazakhstan's SWF Samruk-Kazyna, told Reuters.

"In the crisis and post-crisis environment, such cooperation allows them to achieve a new level of legitimacy in markets where they have not operated before. SWFs have the potential to stabilize companies they invest in since these funds do not live by quarterly returns."

Samruk-Kazyna's investment arm Kazyna Capital Management is also planning to set up a fund with Tajikistan and Kyrgyzstan to co-invest in the region.

OPENING UP

Sovereign wealth funds (SWFs) form a $3 trillion industry which invests windfall revenues from oil or other exports for future generations.

Since the start of the credit crisis, SWFs have replaced hedge funds and private equity as major drivers of corporate takeover. And even before the crisis their flashy yet secretive style of investments often raised the eyebrows of regulators and politicians, some of whom suspected that they were buying up assets to achieve political, rather than commercial, objectives.

However, partnerships could encourage these funds to open their books more, which would increase transparency in the often secretive industry.

"At least several parties to the transaction have to open books to each other, negotiate agreements that all parties are comfortable with, and overall increase the level of transparency about the application of the sovereign wealth," Mirtchev said.

"Recent examples of SWFs working together are much more commercially oriented than having any political imperative."

GOING LOCAL

Most of the partnerships so far have stemmed from taking advantage of local expertise.

Abu Dhabi's Mubadala signed a partnership deal with 1Malaysia Development Berhad (1MDB), the country's new wealth fund, to make a $1 billion investment in Malaysia in the energy, real estate and hospitality sectors.

France's FSI (Fonds Strategique d'Investissement) is looking at investing jointly with Mubadala in the French biotechnology sector, spending just over 10 million euros per company.

Local knowledge is a powerful driver in enhancing returns on investment. An academic research paper in the United States has shown that local investments, defined as holdings within 100 kilometers of the fund headquarters, can increase returns by over one percent due to the local information advantage.

"Most of the ventures seem to be about tapping into local knowledge and driven by commercial interest. There are a lot of synergies to be leveraged," Cynthia Sweeney Barnes, head of sovereigns and supranationals at HSBC Global Asset Management.

India and Oman have a joint investment fund with an initial investment of $100 million over the next few years and the amount could reach $1.5 billion. Korea Investment Corp signed cooperation agreements in June with Malaysia's Khazanah Nasional Berhad and Australia's institutional investor QIC.

SWFs from China, Singapore and Kuwait joined forces to support Blackrock's (BLK.N) acquisition of Barclays Global Investors in June.

And experts predict more funds will join forces. In an Oxford University survey in July, 60 percent of 146 asset managers who have routine contact with SWFs expected collaboration or clubbing among SWFs from different countries as these funds consider how best to achieve investment objectives.

"If you are looking to make major strategic investments, you can get some comfort if anther major government institution wants to do the same," said Guy Henriques, head of official institutions at Schroders.

"They want partners, people with whom you can share risks. Having a partner is a powerful thing."

(Editing by Jon Boyle)

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