Cash-rich sovereign wealth funds from Asia and the Middle East may be turning cautious after getting burnt by investments in Western firms hit by the financial turmoil, analysts said.
Despite fresh opportunities, prudence now prevails as countries that own the funds sit on massive paper losses from investments made just before problems in the US housing market erupted into a full-blown global crisis.
Their multi-billion-dollar forays into Western financial giants such as Citigroup and Merrill Lynch appeared to be good bargains but the banking shakeout has since sharply reduced the value of their holdings.
“I think they’ve been burnt ... They are not sure this is the right time and they are more cautious,” said Zanny Minton-Beddoes, a Washington-based editor with The Economist.
“They put a lot of capital into financial institutions earlier on and they lost a lot of money,” said Minton-Beddoes, a former economist with the IMF.
Since last year, financial institutions hit by the unfolding slump in the US housing market have sought and received billions of dollars in fresh capital from sovereign wealth funds created to invest national savings and surpluses fed by crude-oil windfalls in the Gulf and rapid industrialization in Asia.
The funds have come under increasing scrutiny after making high-profile investments in distressed banks and companies.
They were also criticized as too opaque in their operations and, in some cases, stakes in strategic sectors like telecommunications were seen as potential threats to national security.
The IMF has estimated that sovereign wealth funds collectively hold total assets of between US$1.9 trillion and US$2.8 trillion and could be worth US$12 trillion by 2012, while the UN Conference on Trade and Development puts their current holdings at about US$5 trillion.
Christopher Balding, a researcher with the University of California, said sovereign wealth funds are by nature risk-averse and the ongoing financial turmoil would further accentuate that position.
“The current turmoil will, in my estimation, only reinforce the inherent conservative investment outlook,” said Balding, who specializes in international economics and sovereign wealth funds. “Right now there is a lot of fear in the marketplace from all investors ... Sovereign wealth funds are not interested in making more large investments because of how their previous investments have turned out.”
Singapore was among the most prominent investors with its two main funds, Temasek Holdings and the Government of Singapore Investment Corp (GIC), emerging as sought-after sources of capital by ailing Western financial firms.
Temasek invested US$8.3 billion into Merrill Lynch, which was later acquired by Bank of America in an all-stock deal worth US$50 billion, while GIC pumped billions into Citigroup and Swiss banking behemoth UBS.
GIC and Temasek both said they would continue to explore all investment opportunities but declined to give further details.
Funds from the oil-rich Middle East were also courted in the West.
The state-owned Kuwait Investment Authority injected a total of US$5 billion in Citigroup and Merrill Lynch in January.
The Abu Dhabi Investment Authority, controlled by the largest member of the United Arab Emirates, poured US$7.52 billion into Citigroup late last year.
Analysts said that sovereign wealth funds from Asia and the Middle East would continue to be major financiers, but any potential partnerships would be carefully weighed before the checkbook is taken out.
“Western financials need the capital and they [sovereign wealth funds] have the capital ... I just think they will be carefully considered,” Minton-Beddoes said.
Michael Backman, an author of several business books on Asia, said now was the time for the region’s funds to look at long-term investments in Western firms.
“It’s a good time to have a lot of cash. Assets are being over-sold and there will be plenty of bargains,” Backman said from London. “It’s an excellent opportunity for sovereign wealth funds to diversify to the developed economies and to do it at bargain basement prices.”
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