By Mike Caggeso
Associate Editor

Struggling U.S. financials Citigroup Inc. (C) and Merrill Lynch & Co. Inc. (MER) may get another equity injection from state-owned Kuwait Investment Authority (KIA), the fund’s managing director told Reuters.

Their valuations would make it tempting – as both firms are trading near their 52-week lows – but Bader al-Saad said it’s more about the companies’ plans for recovery.

“In Citi or Merrill, if there is good opportunity, we will look into it. Do we increase our stake? It all depends on the performance and strategy,” Saad said when asked whether KIA might raise its stakes in both troubled U.S. banks.

In January, the $250 billion Kuwaiti fund agreed to invest $3 billion in Citigroup and $2 billion in Merrill. Back in 2006, the KIA invested more than $700 million in the Industrial & Commercial Bank of China, making it the bank’s No. 1 investor at the time.

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In March later, KIA invested an undisclosed amount in Visa Inc.’s (V) historic initial public offering.

Should KIA – the world’s oldest sovereign wealth fund – follow through with its intentions, its contributions would rank near the top in the list of Citigroup’s lifesavers. In addition to the $3 billion Citigroup already received from KIA, the beleaguered Citigroup has received a $7.5 billion cash infusion from Abu Dhabi Investment Authority and nearly $7 billion from Singapore Investment Corp. Pte. since last fall.

And in addition to the previous $2 billion from KIA, Merrill said in late December it would receive a $6.2 billion cash infusion, with up to $5 billion of that coming from Singapore’s state-run Temasek Holdings.

Lehman Looking for Capital

With its stock down more than 16% this week and more than 53% on the year, Lehman Brothers Holdings Inc. (LEH) has begun looking overseas for more capital, The Wall Street Journal reported.

The Wall Street firm has already spoken with one investor in South Korea, where it is well-connected through its vice chairman Kunho Cho, the newspaper reported.

Bailouts Across the Board

State-run sovereign wealth funds currently control $3 trillion – a figure experts expect will soar to $12 trillion by 2015. For perspective, the estimated U.S. gross domestic product (GDP) for 2006 was slightly more than $13 trillion. Some forecasts say that they will control $20 trillion by the middle of the next decade.

The richest sovereign funds include the Abu Dhabi Investment Authority, or AIDA ($875 billion), the Government of Singapore Investment Corp. ($330 billion), and Norway’s Government Pension Fund Global, or GPFG ($322 billion), although several others could be even larger.

And with such a fat wallet, many of these “Global Cash Barons” have been on a spending spree bailing out financials or investing in emerging market upstarts.

For an in-depth look at sovereign wealth funds, their motives and how to profit from them, check out Money Morning’s Investment Report: Three Ways to Profit From Sovereign Wealth Funds – the “Next Wall Street”

News and Related Story Links:

• Reuters:
  Kuwait considering bigger Citi, Merrill stakes

• Money Morning:
  With a Charge Into Visa IPO, Kuwait Would Become Latest Sovereign Fund to Boost its U.S. Financial Sector Role

• Money Morning:
  Merrill Lynch is the Latest Beneficiary of Global “Cash Barons” Move on U.S. Financial Services Sector

• Money Morning:
  Merrill Lynch is the Latest Beneficiary of Global “Cash Barons” Move on U.S. Financial Services Sector

• Wall Street Journal:
  Lehman Is Seeking Overseas Capital

• Money Morning:
  Three Ways to Profit From Sovereign Wealth Funds – the “Next Wall Street”

Kuwait’s state-run investment fund is reportedly looking to invest in the upcoming Visa Inc. (V) initial public stock offering, a move that would boost the stake of government-controlled investment funds in the U.S. financial sector.

The $18.8 billion IPO – currently scheduled for next Thursday (March 20) – would be the biggest in U.S. history.

Kuwait’s investment fund, the Kuwait Investment Authority, or KIA, was founded in 1953, making it one of the oldest sovereign funds in the Middle East, if not the world. It manages an estimated $225 billion worth of assets and, because of falling prices, has become increasingly interested in making investments in European and U.S. financial-services and real-estate companies, KIA Managing Director Bader al-Saad told Reuters last month.

KIA’s interest in Visa was first reported in Kuwait’s local al-Qabas newspaper, and that report was subsequently picked up by Reuters.

Growing Global Presence

Sovereign wealth funds currently control an estimated $3 trillion in cash and other assets. That’s already believed to be more than the $1.5 trillion to $2 trillion held by worldwide hedge funds [though some sources put the hedge-fund estimate as high as $5 trillion].

According to the International Monetary Fund (IMF), the state-run funds could control $12 trillion by 2015. Ultimately, says Money Morning Investment Director Keith Fitz-Gerald, the total could actually reach $20 trillion by the middle of the next decade.

The growth rate is certainly accelerating. The U.S. Treasury says that 20 new funds have been created since 2000 – more than half of them since 2005 – bringing the total number of funds to nearly 40.

In recent months, these massive state-run investment funds have injected more than $70 billion into struggling commercial banks, brokerages and investment-banking institutions – most of them in the West. Most recently, the funds have provided bailout capital to such heavyweights as Citigroup Inc. (C), Merrill Lynch & Co. Inc. (MER), UBS AG (UBS), and Morgan Stanley (MS).

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The Kuwait fund invested in both the Citi and Merrill deals. The balance sheets of both firms have been eviscerated by the subprime-spawned credit crisis.

Veterans of IPO Deals

If the KIA follows through and invests in the Visa deal, it won’t be the first time that a sovereign fund has invested in a U.S. IPO. Last May, China’s $200 billion China Investment Corp. (CIC) opted to make the U.S. hedge fund specialist The Blackstone Group LP (BX) its first investment. Blackstone’s shares are down about 46% since the IPO, leaving CIC with a paper loss of $1.37 billion as of the stock market’s close yesterday (Tuesday).

China’s loss was actually even steeper on Monday. Blackstone’s shares rallied $1.09 each, or 7.27%, to close at $16.07 yesterday. On Monday, Blackstone announced that its fourth-quarter profits had plunged 89% because of lower takeover fees.

But the Visa IPO is attractive because the San Francisco-based firm controls the world’s largest credit-card network. And KIA wants to extend its reach into the financial-services sector, where it already has a substantial foothold.

In January, the Kuwaiti fund agreed to invest $5 billion in Merrill and Citigroup. Back in 2006, the KIA invested more than $700 million in the Industrial & Commercial Bank of China, making it the bank’s No. 1 investor at the time.

The ICBC IPO – worth about $22 billion when the over-allotment provisions were fulfilled – was the world’s biggest-ever IPO at the time.

Kuwait’s sovereign fund isn’t the only overseas financial stalwart circling the Visa IPO, Reuters reported.

Goldman Sachs Group Inc. (GS) – one of the deal underwriters – last week arranged a meeting with potential Dubai investors, seeking to tap into the Persian Gulf oil money that continues to pour into sovereign wealth funds because of record oil profits. And China Merchants Bank Co. Ltd., China’s top credit card issuer, expressed an interest in making an investment in the Visa IPO.

News and Related Story Notes:

• Reuters:
  Kuwait’s Sovereign Fund Studies Visa IPO.

• BusinessWeek:
  Extra Credit for Visa’s IPO.

• Money Morning News Analysis:
  Despite its Billion-Dollar Loss in Blackstone Deal, China SWF CIC Sees the Bigger Picture.

• Money Morning Economic Outlook Series:
  Outlook 2008: Three Ways to Profit From Sovereign Wealth Funds – the "Next Wall Street"

• Money Morning News:
  Blackstone Misses Estimates, Profit Dives 89% 

Saudi Arabia, the world’s biggest oil exporter, is considering joining its Middle East peers by setting up a sovereign wealth fund (SWF) with an initial investment of about $6 billion, Mohammad al-Jasser, vice governor of Saudi Arabia’s central bank, said. 

The vice governor didn’t reveal many specifics of the plan, but he told Bloomberg that the relatively low starting amount is designed to avoid political backlash and fear from the country’s many alliances – from Western oil consumers such as the United States to its oil-producing neighbors that already wield sizable SWFs of their own.

"There’s too much populist bias now against emerging market sovereign wealth funds," Al-Jassar said.

However, this façade of diplomacy veils the fact that the Saudi Arabian royal family controls a good portion of many of the country’s largest companies. And those companies – like many around the world – diversify their equity reserves by buying international stocks, bonds, ETFs, etc.

The best example is Saudi Basic Industries Corp. – the country’s largest public company – which is 70% owned by the government. In May, the "company" bought the plastics’ division of General Electric Co. (GE) for $11.6 billion.

That wasn’t the only big SWF purchase last year. Middle East SWFs generated a steady stream of news coverage last year, as the government-controlled bankrolls grabbed sizable stakes in blue-chip companies around the world:

• Nov. 27: Abu Dhabi pours $7.5 billion into ailing Citigroup Inc. (C). 

• Nov. 26: Dubai International Capital, a state-owned holding company, acquired an undisclosed stake in Japan’s electronics and media juggernaut Sony Corp. (SNE).

• Nov. 16: Abu Dhabi invested $622 million (an 8.1% stake) in California-based microchip-maker Advanced Micro Devices Inc. (AMD).  

• Oct. 20: Dubai International Capital agreed to invest $1.26 billion in the initial public offering of hedge fund Och-Ziff Capital Management Group LLC (OZM).

• Aug. 22: Dubai World, another investment arm of the state, plunked down $5.1 billion for a 9.5% stake in MGM Mirage (MGM).  

• Aug. 14: Istithmar, part of Dubai World, was cleared to buy Barneys New York Inc. for $942.3 million from Jones Apparel Group Inc. (JNY).

Kuwait Signals Interest in European Banks

The next big-name fund to join the fray is the $250 billion Kuwait Investment Authority, the oldest SWF in the world, which said it would like to buy stakes in capital-starved European banks currently beat down by mortgage losses, Bloomberg reported.

"We are interested if we are invited" to invest, Bader al-Saad, the fund’s diplomatic managing director, told reporters at the World Economic Forum in Davos, Switzerland, remaining just as mindful of public relations as Saudi Arabia’s al-Jasser. 

Kuwait’s SWF has already invested in U.S. banks with a $3 billion investment in Citigroup and a $2 billion investment in Merrill Lynch & Co. (MER). 

Analysts aren’t expecting a slow down of SWF spending sprees in 2008. On top of more spending from Middle Eastern SWFs, India is taking steps to launch its own SWF. And China just finished taking applications from more than 100 drooling money managers to help invest the country’s $200 billion SWF, China Investment Corp. 

And let’s not forget a wild card, Norway, whose government controls the second-largest SWF in the world, the $350 billion Government Pension Fund of Norway. However, this company may be the exception, as it refuses to invest in companies such as The Boeing Co. (BA) and Wal-Mart Stores, Inc. (WMT) that violate its ethical standards of nuclear weapons production and human rights, respectively. 

News and Related Story Links:

• Bloomberg:
  Saudi Arabia Plans Its First Sovereign Wealth Fund

• Money Morning:
  Sovereign Wealth Funds Biting into the World’s Biggest Companies…Transparency and Motives in Question

• Bloomberg:
  Kuwait Sovereign Fund Seeks Stakes in European Banks

• Money Morning:
  Surging Demand and a Nationwide Shortage: Why India Wants Coal for Christmas

• Money Morning:
  Investment Advisors Angle for Chance to Manage China’s $200 Billion Sovereign Wealth Fund

• Wikipedia: 
  Government Pension Fund of Norway