A view from Dubai: Sovereign wealth and private equity funds increasingly working together

High profile investments by sovereign wealth funds has generated discussion and courted
controversy, but also significantly raised hopes within the global investment community, says Peter
Martyr, Chief Executive of Norton Rose.

The liquidity crisis in the global
financial community has been a
constituent part in pushing
sovereign wealth funds (SWFs) into
the public spotlight. Commentators have
subsequently expressed concerns about their
transparency, their investment strategies,
their size and whether the investments made
by SWFs are affected by political objectives.
At the same time, concerns have also been
raised about the potential for protectionist
restrictions being imposed on SWF
investments.

The International Monetary Fund (IMF)
and International Financial Services London
estimate that SWFs now manage assets
worth as much as $3.3 trillion (€2.3tn) and
this figure could rise to $10tn (€7tn) by 2015.

With their perceived growing influence,
and capital, concerns have inevitably focused
on how SWFs deploy their tremendous
wealth, but also on the management and
decision-making processes both within and
behind their operations. Indeed, a number of
financial regulators have suggested remedial
action to combat what they perceive as an
apparent lack of transparency.

Complimentary investors

Against this background, our firm together
with the Emerging Markets Private Equity
Association (EMPEA) recently conducted a
survey to canvass opinion from SWFs, but
also from the private equity industry,
financial institutions and corporates with
which they are increasingly interacting.

The survey showed that SWFs are
generally regarded as long term, commercial
investors who are becoming increasingly
important sources of finance for established
and emerging markets alike.

Among the key findings were that while
non-SWF respondents were divided as to
whether SWFs are primarily driven by
returns, the majority of SWFs themselves
regard the 'highest economic return' as
their most important investment criterion.

A clear majority of all respondents
perceive SWFs as long term, largely passive
investors and that they would increasingly
co-invest alongside private equity firms.

Their role is generally seen as
complimentary rather than competitive.
Indeed, the majority of SWFs believe that
they have a similar risk profile to private
equity companies, and that they may indeed
share common investment goals and
objectives.

SWF respondents stated that they were
expecting to invest extensively across the
globe in the next 12 months, and especially
in North America and in emerging markets.
The expected investment emphasis of most,
the survey reveals, is towards three key
sectors: financial services, infrastructure and
energy. Nonetheless half of all respondents
stated that the impact of the 'credit crunch'
would however be the most important factor
in determining the number of deals executed
over the coming year.

As to the operation of SWFs, more than
80% of non-SWF respondents believe that
there is a need for them to disclose more
information, though a majority thought this
should be through voluntary processes
rather than under obligation. Although SWF
respondents indicated they would not
necessarily be deterred from investing by the
imposition of disclosure requirements.

There would seem to be a perception
however that the hand of the SWFs may in
any event be forced. A majority of all
respondents said that they believed that a
lack of common transparency rules would
result in governments restricting SWF
investments.

Such questions and concerns as
highlighted by the research, particularly as
regards transparency and disclosure, will
need to be confronted sooner rather than
later, but the deeper global credit crunch was
seen as the most influential factor ultimately
facing SWFs. It waits to be seen whether the
events of recent weeks across the global
financial sector has helped drive sentiment
closer towards them, or further away.

With the amount of investment monies at
their disposal, SWFs are in any event
emerging as increasingly important investors
across the globe. The survey showed that the
private equity industry, financial institutions
and corporates, despite some shared
concerns, generally welcome them. And that
they are recognised as commercial, not
political, organisations which have an active
and influential role to play in the modern
investment community.