Friday, December 28th, 2007
Saudi Arabia Aiming to be “King of the Cash Barons” by Launching its First Sovereign Wealth Fund
By William Patalon III
Executive Editor
Money Morning/The Money Map Report
In yet another example of the growing global importance of state-run investment pools, Saudi Arabia said it’s establishing a sovereign-wealth fund that will eclipse Abu Dhabi’s $900 billion venture to become the largest in the world.
As the new "King of the Cash Barons" coterie, the state-controlled Saudi investment pool will be positioned as a major rival to other government-run venture funds currently controlled by cash-rich nations in Asia and the Middle East.
As Money Morning has chronicled in a series of reports, these funds increasingly have been capitalizing on the widespread fallout from the U.S. housing meltdown and the associated subprime mortgage crisis - and using the market weakness to buy big stakes in such struggling financial giants as Citigroup Inc. (C), Merrill Lynch & Co. Inc. (MER), UBS AG (UBS), and Morgan Stanley (MS).
In many of the cases - Citigroup being an excellent example - the sovereign funds have snapped up prime U.S. assets with terrific long-term futures at near-term bargain prices.
Many of these "Cash Barons" are looking for more than just an investment return: They are looking for the deal-making know-how that will enable them to one day usurp Wall Street as the deal-making Mecca of the capitalist world.
It could happen.
Sovereign-wealth funds currently control more than $3 trillion. The International Monetary Fund (IMF) and other experts predict the state-run venture funds could control $12 trillion by 2015. Money Morning Investment Director Keith Fitz-Gerald estimates that the total capital under the control of the global Cash Barons will be more in the region of $20 trillion by the middle of the next decade.
No matter which estimate proves the most accurate, it’s clear the state-run funds will be major financial forces in the world economy in just a few short years. For some context, consider that the estimated U.S. gross domestic product for 2006 was slightly more than $13 trillion.
The Saudi’s new sovereign-wealth venture will probably be created and managed by the Saudi Arabia Public Investment Fund, which up until now has been limited to internal investments, The Financial Times reported. Previously, that country’s oil-generated wealth had been apportioned among the Saudi kingdom’s central bank, Saudi Arabian Monetary Agency, also known as SAMA, and partly into the personal coffers of the nation’s ruling family, the international financial newspaper reported.
This new fund will represent a major shift in the investment policy of SAMA, which, up to now, had been limited to conservative stocks and bonds, especially U.S. Treasuries.
Interestingly, while SAMA’s balance sheet is public information, banking-sector insiders in the region say that those figures portray only a sliver of Saudi Arabia’s actual wealth. The reason: The royal family has stakes in scores of investment vehicles, most of which are not known.
Contrast that with Saudi Arabia’s Persian Gulf peers, which have increasingly shifted their investment strategies to prepare for the day when the region’s oil reserves run dry: These other countries have been investing in such alternative investments as high-risk hedge funds and other alternative investments. What’s more, as recent news reports underscore, these venture funds are increasingly taking direct stakes in major corporations - especially financial-service firms.
Unlike its peers in the Gulf, Saudi Arabia has expanded its spending and its budget for 2008 includes spending for important infrastructure projects, the Financial Times reported.
In addition to the Abu Dhabi Investment Authority, some of the world’s top sovereign wealth funds include Singapore’s Temasek Holdings Pte. Ltd. and Government of Singapore Investment Corp., Mainland China’s China Investment Corp., and Dubai’s Dubai International Corp.
India also is looking to start a sovereign fund of its own.
News and Related Story Links:
- Zawya.com/The Financial Times:
Saudis Plan Huge Sovereign Fund Body. - Money Morning News Analysis:
Merrill Lynch is the Latest Beneficiary of Global "Cash Barons" Move on U.S. Financial Services Sector. - Money Morning Investment Analysis:
Citigroup: Why This Turnaround Play Has Legs - Big Ones. - Zawya.com:
Saudi Arabia Public Investment Fund. - Money Morning News Analysis:
Fang-Temasek Partnership the Latest in a String of High-Profile Sovereign Wealth Deals. - Zawya.com:
Saudi Arabia Monetary Agency. - Money Morning News:
Cash Infusion Brightens Morgan Stanley’s Dismal Fourth Quarter. - Money Morning News Analysis:
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