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Sovereign Wealth Funds: A Growing Global Force
February 22, 2008
François Bujon de l’EstangChairman, Citi France
Sovereign Wealth Funds: A Growing Global Force
Sovereign Wealth Funds (“SWFs”) are a prominent investor class with their assets rivaling Global Hedge Funds and Private Equity combined
Not all SWFs are created equal as they lie along a spectrum of risk appetite
SWFs are hiring best-in-class investment talent to serve long-term investment goals
Governments are weighing perceived threats of SWFs against potential benefits. Managing political risk in SWF-related transactions is key
Citi is playing a central role in the intermediation of these capital flows.
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$48.1
$23.6
$5.4
$3.0
$1.9
$1.3
$7.5 - $10.0
Asset Management Industry AUM
Retirement Funds AUM
Projected Sovereign Wealth Funds
Foreign Exchange Reserves
Sovereign Wealth Funds
Hedge Funds AUM
Private Equity AUM
SWFs are Big and Getting Bigger
Global Financial Assets ($ T)
2
SWFs: Increasingly Relevant
*
* ADIA.
Assets Under Management
($ b)
3
Warnock Model (1)Warnock Model (2)
Foreign Inflows Keep Treasury Yields Low
McKinsey estimates that annual net foreign purchases lowered long rates by 130 basis points
Source: McKinsey Global Institute: “The New Power Brokers: How Oil, Asia, Hedge Funds and Private Equity are Shaping Global Capital Markets,” Oct. 2007. Warnock and Warnock: “International Capital Flows and US Interest Rates,” NBER 12560, Oct 2006.
Impact of Foreign Capital Flows on US 10-year Treasury Yield(b
ps)
1984 1989 1994 1999 2004
4
SWFs are in Increasingly High Profile Transactions
$9.75 b, Dec 07 $7.5 b, Nov 07
$5.19 b, Aug 07
China InvestmentCorp
$5.00 b, Dec 07
$6.88 b, Jan 08
*
* Total Fund raising of $12.5 b included investments from KIA, Capital Research Global Inv., Capital World Inv., NJ Div. of Inv.
China InvestmentCorp
$3.00 b, May 07$4.40 b, Dec 07
$8.83 b, Nov 05
5
Recapitalizing the Financial Service Industry
Source: Dow Jones Newswire.
Total Investments by SWFs ($ b)
2006 2007 Jan-08
$42.9 $24.0
$1.4
$19.2
$42.6
$44.6
$66.6
$20.6
Investments in Other Industries
Investments in Financial Services
63.8% of Total
93.3% of Total
$1.7 3.8% of Total
6
Where the Wealth is Coming From
Where the wealth is coming from and how
will it grow?
Surge in commodity prices
Dramatic increase in current account surpluses in Asia
Willingness of governments to allocate more funds from Foreign Exchange Reserves to Sovereign Wealth Funds
2007 $3.0 trillion
2012 $7.5 - $10.0 trillion
0
1000
2000
3000
4000
5000
6000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Global Foreign Exchange Reserves ($ b)
Global Current Account Balance 2007Global Current Account Balance 2007Global Current Account Balance 2007
Deficits Surpluses
Western Hemisphere
Asia (ex-Japan) $480B
Asia (ex-Japan) $480BMiddle
East $227B
Middle East
$227B
Japan $195BJapan $195B
Russia / CIS
$77B
Russia / CIS
$77B
Other Advanced
US$784B
US$784B
C & E Europe$120B
C & E Europe$120B
Eurozone
$20B$20B
$21B$21B
$19B$19B
7
Commodity Producing Countries Generate Investment Assets
At oil prices of $100/barrel, there is an incremental $2.3 b petrodollar investment into the world markets per day.
Source: McKinsey Global Institute: “The New Power Brokers: How Oil, Asia, Hedge Funds and Private Equity are Shaping Global Capital Markets,” Oct. 2007. Warnock and Warnock: “International Capital Flows and US Interest Rates,” NBER 12560, Oct 2006.
$3.40 $3.77$4.83
$1.05
$1.05
$1.58
$0.07
$0.07
2006 2007 2012
Petrodollar Foreign Investment Assets
$8.51
$6.93
$5.88
$4.83
Estimated Forecast
Oil Price $100
Oil Price $70
Oil Price $50
Oil Price $30
ScenariosCAGR
(2006-2012)
17%
6%
10%
13%
$3.40$3.91
$8.51
($ T)
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SWFs: Not a New Concept
1950’s Today
KIA$250 b, 1953
(Kuwait)
Temasek$108 b, 1974(Singapore)
ADIA$875 b, 1976
(UAE)
GIC$200 b, 1981(Singapore)
Brunei Inv.Authority
$30 b, 1983(Brunei)
Norway Govt.Pen. Fund
$328 b, 1990(Norway)
KhazanahNasional BHD
$18 b, 1993(Malaysia)
QIA$60 b, 2005
(Qatar)
KIC$20 b, 2005
(Korea)
Future Fund$42 b, 2006(Australia)
CIC$200 b, 2007
(China)
LIA$40 b, 2007
(Libya)
StabilizationFund
$200 b, 2004(Russia)
Saudi ArabianFunds
$250 b, 2007(Saudi Arabia)
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Central Banks/Monetary
Authorities
Sovereign SavingFunds
Sovereign Stabilization
Funds
AffiliatedCorporate Entities /
SOEs
Government Investment
Corporations
China
Japan
India
Hong Kong
Saudi Arabia
Russian Oil Stabilization Fund
Algerian Revenue Regulation Fund
Chilean Economic and Social Stabilization Fund
Abu Dhabi Investment Authority
Norway Government Pension Fund
Kuwait Investment Authority
China Investment Corporation
Temasek
Qatar Investment Authority
Gazprom
SABIC
Abu Dhabi National Energy Company
China National Offshore Oil Corp.
Mubadala Development Company
Dubai International Capital
Dubai World
SAGIA
GIC
Where Is Sovereign Wealth Managed?
Note: Some central banks and monetary authorities, such as the Saudi Arabia Monetary Authority, may not only manage official foreign-exchange reserves, but other foreign assets as well.
Source: Citi.
Temasek
Qatar Investment Authority
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Activity Is Moving to the Aggressive End of the Spectrum
Source: Citi.
StabilizationRisk Tolerance
Inve
stm
ent
Ob
jec
tive
Examples
Cash / Gov’t Bonds
Fixed Income Equity
Strategic Stake
BuildingReal
EstateHedge Funds
Private Equity
Leveraged Buyouts
Russian Stabilization Fund
Norwegian Government Pension Fund
Abu Dhabi Investment Authority
Kuwait Investment Authority
Temasek
Qatar Investment Authority
Low
Wealth Accumulation
High
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2.4%
9.8% 10.0%
2.7%
12.1%
10.7%
US India China
US: $1.69
India: $0.83
China: $0.83
ROW: $1.13
US: $3.38
ROW: $1.13
SWF Capital Can Reshape Global Economic Landscape
Scenario A:Allocation of Incremental SWF Capital
Growing Disparity in Western and EM Economic
Growth
Scenario B:Allocation of Incremental SWF Capital
Estimated Impact on GDP Growth
Note: Estimates of SWF capital inflow effects based on historical relationship between GDP growth and FDI, as estimated by Carkovic and Levine (2005), “Does Foreign Direct Investment Accelerate Economic Growth?”.
2.4% 3.0%
US
Current 5-Yr GDP Growth Forecast
Estimated 5-Yr GDP Forecast With Incremental Capital Inflow
75%
25%37%
19%19%
25%
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SWF Strategic Implications for Citi Clients
Key investors in
IPO or pre-IPO financing
Source of capital for
transformative transaction
Strategic partnerships can
smooth regulatory approval, mitigate
political risks
Core Shareholder
with long term
investment focus
Competition for assets
Support for
national
champions
Political ImplicationsFranchise
Impact
SWF Benefits for Citi’s Clients
Large, liquid funds with the ability to quickly close transactions
Supportive source of funding for potential acquisitions
Core investors with a long-term horizon bring added stability to shareholder base
Typically utilize low leverage levels in their investments
Business Opportunities for Citi
Intermediary between SWFs and global corporations
Advisory and financing
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Governments Are Weighing Their Response to SWFs
Perceived Threats
▼Transparency
▼Political ambitions / security concerns
▼Reversal of 25 years of privatization
▼Potential for reciprocity / restricted market access
Potential Benefits
▲Long-term investment horizon
▲Low leverage
▲Key source of foreign financing
▲May facilitate future investment in key emerging markets
Managing political risk has become essential in SWF-related transactions.
In light of the importance of these issues for global policymakers, one can expect continued public discussion about the need for international consensus on “best practice”.
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