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SWFs Cautious on Further Bail-Outs of Distressed Firms

DUBAI - Global Sovereign Wealth Funds (SWFs), accounting for collective assets worth $5 billion, are awaiting the bottom of the market before committing to further substantial investments, according to a survey by Financial Dynamics International (FD).

The survey finds out that most SWFs that have lost heavily on large recapitalisations of big financial institutions over the past couple of years, are particularly cautious with regard to supporting further bail-outs of distressed companies.

According to the survey, SWFs see their role as that of passive long term investors, with no desire to behave in an activist manner towards investee companies. “SWFs, which are primarily interested in acquiring minority equity stakes in listed companies, with no desire to take management control, have board representation or act as activist investors, currently see Brazil, China and areas of Central America as the most attractive regions for investment,” the survey shows.

FD survey, based on interviews with senior executives of the world’s leading SWFs whose total assets accounted for well over 50 per cent of the $5 trillion worth of collective global funds currently held by the funds, focused on current attitudes towards valuations, investment strategies and where they see regional investment opportunities.

According to A.T. Kearney, a global strategic management consulting firm, SWFs from the Middle East, dominated by Abu Dhabi Investment Authority, had a combined $3.3 trillion assets under management before the global meltdown started to take its toll on their assets in 2008. Analysts believe almost 40-50 per cent of assets controlled by SWFs worldwide had eroded in the turmoil. Some investment analysts believe that since some of the leading SWFs had lost money in the large recapitalisations, they might be reluctant to get back in the water.

Charles Watson, FD’s Group CEO, said while SWFs were adopting a very cautious investment approach to world markets, they are clearly poised to re-enter the global equity markets in the not too distant future with compelling valuation propositions beginning to present themselves across North American and Western European equity markets. “Our research has also determined that contrary to widespread perceptions, Sovereign Wealth Funds are primarily genuine long term passive investors who have no agenda to exercise management control or behave in an activist way.” The findings showed that SWFs are keeping a watchful eye on global markets, waiting for the right time to make deep value investments.

“The bottom has yet to come,” said one SWF executive. “Obama’s first 100 days may see bear markets rally but the entire financial system and capital market has been stressed to the point of collapse and now needs time to adjust.”

Comments from other respondents are as follow:

“We are behaving in a very cautious manner at present. We are convinced there will better value in markets later this year.”

“We are ready to re-enter the market in a major way - but not for several months given that we are sure prices are only heading down.”

· issacjohn@khaleejtimes.com