Private equity turns to SWF for help on leveraged deals

Source: Exec Digital UK

Date :28/02/2008 11:05:55

Following their well-publicised investments in struggling financial services firms like Citigroup and Morgan Stanley, private equity firms are starting to become part of the SWF investment trend as well.

According to the Financial Times, private equity firms are now approaching sovereign wealth funds (SWFs) for loans for big leveraged acquisitions as investment banks struggle through the credit squeeze.

Firms are already talking to wealthy state-backed funds in the Middle East and Asia about raising debt as leveraged buy-out firms are realising the credit squeeze may last longer than first expected.

The $200 billion of impaired LBO debt that banks are still trying to sell may mean they cut back on new private equity loans for 18-24 months, buy-out executives now forecast.

Guy Hands, head of Terra Firma told the Super Return conference in Munich: “Effectively you will just intermediate Wall Street and the City of London out of the picture. It is already happening.”

The Abu Dhabi Investment Authority (ADIA), the world’s biggest SWF, “will effectively replace Wall Street,” he continued.

Western banking

State-run investment vehicles, Chinese and Middle East sovereign wealth funds have recently bought stakes in a number of Western banks and other businesses.

Chinese sovereign wealth fund China Investment Corp recently spent $5 billion (£2.5 billion) on a 9.9 percent stake in US banking giant Morgan Stanley, while fellow US bank Merrill Lynch sold a $4.4 billion stake to the investment arm of the Singapore government.

But such developments have raised some concerns about political interference. It is thought that China Investment Corps’ purchase of stakes in mining firms Fortescue and Rio Tinto was an effort by the Chinese government to guard itself from the raises in steel prices that the latter’s proposed merger with BHP Billiton could bring about. The involvement of Middle Eastern SWFs in traditional American blue-chips such as Citigroup and Morgan Stanley has caused some controversy over potential conflicts of interest.

Code of conduct

Later this month the EU will consider plans for an EU-wide law to regulate sovereign wealth funds, a move which will effectively increase transparency in a step to quash growing concerns over the opacity of some SWFs.

The Commission said: “Indeed, in recent months, several [EU] states have been under pressure to explore applying exceptions to the free movement of capital and establishment. This pressure can only be increased by SWFs future expected growth in size and importance."

Under the proposals, funds will be asked to declare their investment policies, disclose the national regulations and oversight rules governing their activities, to reveal investment positions and asset allocations every year, and to disclose the size and origins of their resources.

"Sovereign wealth fund countries must acknowledge that their growing weight in global financial markets brings responsibilities," said Joaquin Almunia, EU Monetary Affairs Commissioner.

Sovereign funds

Despite having only entered the public consciousness over the last five years, sovereign funds have built up a vast arsenal of money to invest in markets.

According to The Economist, SWFs market capitalization is about $2.5 trillion. However this number is highly uncertain because of the difficulty of counting SWF holdings.

Of the "Super Seven" funds, all of which have assets over $100 billion, the famously secretive Abu Dhabi Investment Authority (ADIA) is the world’s largest, with estimated assets of around $875 billion.

These funds are: The Government Pension Fund of Norway ($350 billion); Government of Singapore Investment Corporation ($330 billion); Kuwait Investment Authority ($250 billion); China Investment Corporation ($200 billion); Singapore's Temasek Holdings ($159.2 billion); and the Stabilisation Fund of the Russian Federation ($158 billion).

February 28, 2008