April 14, 2008 / 5:50 PM / in 11 years

UPDATE 2-Blackstone CEO says SWF scrutiny causing chill

(Recasts lead; adds more Schwarzman and Kimmitt comments)

By Megan Davies

NEW YORK, April 14 (Reuters) - Excessive U.S. scrutiny and distrust of sovereign wealth funds is “chilling” foreign investment at a time when the credit crunch needs to be eased instead, CEO of private equity and real estate firm Blackstone Group Inc (BX.N) warned on Monday.

Chief Executive Stephen Schwarzman cited a need to “lower the temperature level” on sovereign wealth funds as the spotlight on them was producing a “chilling effect” on the desire to invest in the West.

Deputy U.S. Treasury Secretary Robert Kimmitt said that while rapid growth in the funds has benefited the global economy, the situation warrants a vigilant stance by the U.S. government. [nN14370433]

The remarks were made in a panel discussion at the Asia Society in New York.

Sovereign wealth funds have become increasingly active in buying U.S. assets with expanding foreign exchange reserves from oil sales and international trade. The funds have assets of $1.9 trillion and $2.9 trillion, and could grow to $15 trillion in the next eight years, the Treasury has estimated.

They have also played an important role in buoying global financial institutions, slammed by losses on risky U.S. mortgages and the ensuing credit crunch.

Foreign investments are scrutinized under the Foreign Investment and National Security Act, which addresses concerns about political motivations.

Opposition by the Committee on Foreign Investment in the United States blocked a $2.2 billion bid for U.S. network equipment maker 3Com Corp COMS.O by Bain Capital Partners and China’s Huawei Technologies Co Ltd [HWT.UL]. Huawei’s stake in 3Com would have been up to 21.5 percent.

Dubai Ports World’s (DPW.DI) planned purchase of a British company that owned U.S. ports in 2006 drew a wide range of criticism from U.S. lawmakers and others arguing the investment could endanger national security.

“Anyone who does not believe that the Dubai Ports issue, as well as others ... has not had a chilling effect in investment in the U.S. is quite naive,” Schwarzman said. “I’ve had people say ‘I just don’t want to buy assets in your country.’”

Schwarzman said the timing of such scrutiny was “not particularly good given the fragility of the global financial system.”

“I think we have to be pretty careful about what we’re doing in the midst of a capital crunch,” he said.

He said some recent investments by sovereign funds to support U.S. banks had been “really more acts of faith to support the capital system, to which these people were rewarded with a lot of unwanted visibility.”

“My big concern is about capital flows — it’s like oxygen, we take it for granted,” Schwarzman said. “It’s part of your life till you don’t have it.”

LOAN OPPORTUNITIES

Separately, Schwarzman said that economic downturns such as this offered a good opportunity to buy debt securities of companies.

“At this stage in the economic cycle, it’s always been a good selective opportunity to make equity-like profits by buying debt securities,” Schwarzman told Reuters on the sidelines of the panel.

He added that in the current downturn there were also opportunities to buy securities of healthy companies at depressed levels.

Blackstone is among a handful of private equity firms close to buying about $12 billion of leveraged loans and bonds from Citigroup Inc (C.N), the largest U.S. bank, people familiar with the situation said a week ago. The sale would be to private equity firms also including Apollo Group and TPG, at an average price slightly below 90 cents on the dollar, the people said at the time. (Editing by Richard Chang)

Additional reporting by Al Yoon

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