Sovereign wealth funds

November 15, 2007

Free Market Foundation

Developing nations are aggressively stockpiling huge concentrations of investment money in sovereign wealth funds run by the government, says the Washington Post.

Consider:

The Abu Dhabi Investment Authority, part of the United Arab Emirates, has an estimated $875 billion to invest.

China’s first stab at a sovereign wealth fund which started last month has $200 billion.

The government of Libya, flush with oil, has amassed $40 billion and is ready to put it in play on Wall Street.

Tiny Qatar is adding $1 billion a week to its investment accounts.

Overall, most Wall Street analysts agree that the value of these funds has reached about $2 trillion and is likely to grow at least fivefold by 2012.

But some officials are concerned about what kinds of businesses might be bought by governments that are secretive about their investment activities. As a result, many sovereign funds are giving their money to U.S. managers and letting them decide where to put it:

Recently, Abu Dhabi invested $1.35 billion in the D.C. private-equity giant Carlyle Group, a 7.5 per cent ownership stake.

Likewise, China’s fund bought a 9.9 per cent stake in Blackstone Group but renounced any voting rights to avoid triggering a U.S. government response.

But with or without U.S. help, nationalistic concerns continue to rise around the globe, which may not be beneficial to developed nations in the long run, says the Post. U.S. Treasury officials worry that an emotional reaction to foreign investment may persuade deep-pocketed overseas financiers to spend their money outside the United States.

“It’s no secret that it is in the best interest of the United States to remain open to investment,” said Clay Lowery, assistant secretary for international affairs.

Source: David Cho and Thomas Heath, Oil and Trade Gains Make Major Investors Of Developing Nations, Washington Post, October 30, 2007.

For text: http://www.washingtonpost.com/wp-dyn/content/article/2007/10/29/AR2007102902130.html

For more on Trade Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=42

FMF Policy Bulletin/ 06 November 2007