Surplus cash from Middle East energy producing countries has been running around the world for over three decades, seeking better returns in offshore havens. However, since the 1970s, investments by Arab states have had the potential to alarm destination countries. An important example of this came after the Kuwaitis acquired about 20% of British Petroleum in 1988 and the UK forced them to reduce the holding by over half, amid concerns about OPEC member influence on one of the world’s giant oil companies.
More recently, Dubai Ports World (DPW) faced the American Congress’ opposition to acquisition of US ports; the controversy started in early 2006 with some Americans arguing that no Arab government should own such strategic assets. Later that year, DPW pulled out and sold its US port operations to an American group.
The DPW controversy reinforced fears that investments in the West had become politically risky for Arabs. However, part of the problem there seems to have been the high-profile hands-on status of the investor, and the answer may be to deployment of state money in subtler ways.
Giving mounting surpluses, this issue will undoubtedly become even more important in the next few years as Sovereign Wealth Funds (SWFs) of Arab countries roam the globe looking even more assiduously for investments. Previously, most Gulf countries had put their liquid assets (mainly dollars) in bank deposits or government bonds, typically American. However, Arab state agencies have been getting fidgety over the value of greenback deposits and American federal securities; so many Gulf SWFs are increasingly moving money into global equity markets.
The largest sovereign fund may be the Abu Dhabi Investment Authority, with as much as $500 billion under management, with Saudi Arabian SWFs not far behind. The Kuwait Investment Authority, created in 1960 to invest the emirate’s oil revenues, has accumulated more than $100 billion of assets; big Arab sovereign funds also include the Qatar Investment Authority with $40 billion, and UAE SWFs outside Abu Dhabi.
With oil revenues gushing in, these SWFs feel that their governments hold enough dollar-denominated government bonds, and so will increasingly target Western shares. A recent example came two months ago when France, Germany, and Spain welcomed Arab SWF money into the European Aeronautic Defense and Space Company (EADS), the world’s second largest aerospace conglomerate. The group includes the aircraft manufacturer Airbus, the world’s largest helicopter supplier Eurocopter, and EADS Astrium, the European leader in space programs. EADS is also the major partner in the Eurofighter consortium, develops the A400M military transport aircraft, and holds a stake in a joint venture that is the international leader in missile systems.
The $2 billion Global Strategic Equities Fund (GSEF) founded and sponsored by Dubai International Capital (DIC), the international investment arm of the state-owned firm Dubai Holding, acquired over 3% of the outstanding share capital of EADS, allowing the SWF to become one of the largest institutional shareholders in the company. In line with GSEF’s investment strategy, neither the fund nor DIC will seek a board seat or take an active role with EADS but will “build a strategic relationship with the EADS management and shareholders.”
This transaction comes less than two months after GSEF made a substantial investment in HSBC Bank Middle East, becoming one of the leading shareholders in the company. Another major investment by DIC, GSEF’s parent, was the $1.3 billion acquisition of the Doncasters Group (UK), which produces precision engineering components. Most important, target firms and host countries mostly welcomed these and other deals.
The bad news is that growth in Arab SWFs could create new risks for the global financial system, as opaque investment policies could mean that comments or rumors would tend to increase volatility in capital markets. In addition, in autocracies like the Gulf countries, officials imperfectly accountable to those for whom they are ultimately investing run the funds.
To counter these negative factors, SWFs need to be more open and commercially minded. The Norwegian Government Pension Fund, which invests much of the country’s oil riches, and is now worth over $300 billion, is a model of good governance and accountability, listing all 3,500 investments on its website; the fund’s stakes are typically small in each company so, far from feeling threatened by its investments, firms often welcome it. This seems to be the strategy of DIC, which is also aiming for greater transparency: if the deals of Arab SWFs are not to trigger protectionism, they must become transparent.
In any case, Arab SWFs are so large that a change in their investment strategy away from bonds and toward stocks could eventually cause prices to go up in major equities. In the present troubled state of the markets, this will be a good thing: as the financial acumen of Arab SWFs increases, so will the attraction of investments cleverly presented as saviors of Western interests.