Sovereign funds in the spotlight
29 February 2008- In an environment of tightly constrained equity and debt markets, attention has swung to sovereign funds as a source of M&A deal flow.
- Some disquiet has emerged in recent times from various corners of the globe regarding the growing influence of sovereign funds.
- While the Treasurer’s announcement of principles for assessment seeks to invoke a range of policy considerations beyond those applicable to private investors, most criteria are likely to be relatively easily addressed in any application.
Out of the ‘bloodbath’
Ranging from funds with specific mandates to meet future pension or other liabilities to those with a more general purpose of strengthening a nation’s financial standing or currency, such funds are now nicely positioned to acquire assets on more favourable terms than before due to what ANZ’s Mike Smith recently described as the ‘financial services bloodbath’.
Most sovereign funds have secure funding from the proceeds of commodity exports owned or taxed by government or the investment of foreign exchange reserves, seeking to yield better returns than traditional government securities. Some of the leading funds include the Abu Dhabi and Kuwaiti investment authorities, various Saudi funds, Norway’s Government Pension Fund, the China Investment Corporation, Russia’s Stabilisation Fund, Singapore’s Temasek and GIC and Australia’s Future Fund.
Investments over the past year have included Abu Dhabi’s $7.5 billion investment in Citigroup, GIC’s investment in UBS, stakes in private equity concerns including Blackstone and Carlyle and investments in Barneys,Bearn Stearns and MGM Mirage. Abu Dhabi also recently invested in AMP’s NZ Office Trust and Dubai developer Nakheel is a substantial holder in Mirvac.
Singapore has been one of the most active sovereign investors in Australia. Investments by Temasek, GIC and entities in which they have interests include a $14 billion investment in Optus, Singapore Power’s investments in energy infrastructure assets, Cityspring’s $1.2 billion investment in Basslink, CapitaLand’s investment in Australand, a substantial property portfolio (including interests in the Myer Melbourne store and other retail assets) and an investment in ABC Learning Centres.
In the past 12 months FIRB has approved Chinese investments totalling $5 billion. Much of this has been in the resources sector — most famously Chinalco’s investment in Rio Tinto — but two Chinese companies,
Anshan Iron & Steel and Shougang Steel, are reported to have pledged to invest $4 billion in expanding infrastructure and mines. China’s State Administration of Foreign Exchange is believed to have acquired small stakes in ANZ, NAB and CBA.
Principles for assessment
Some disquiet has emerged in recent times from various corners of the globe regarding the growing influence of sovereign funds, particularly whether they are creating an uneven playing field, whether their investments could be motivated other than by pure investment objectives and concerns in some cases around secrecy or perceived lack of transparency.
In Australia, this has recently been manifested in the Treasurer’s announcement of principles for the assessment by the Foreign Investment Review Board of applications by sovereign funds for approval, including the extent to which the investor:
- operates at arm’s length from the relevant government or could be controlled by it
- observes common standards of business behaviour, including how it proposes to exercise voting power in relation to the Australian company
- may not be subject to Australian tax
- behaves consistently with the government’s other policy objectives such as the environment
- might, through the investment, effect Australia’s ability to protect its strategic and security interests, and
- has plans which may impact matters such as imports, exports, local processing, R&D or industrial relations.
While, on the surface, the Treasurer’s announcement seeks to invoke a range of policy considerations beyond those applicable to private investors, most criteria are likely to be relatively easily addressed in any application. Even where independence from government may be in doubt it is difficult to envisage an application being rejected on that basis — it would certainly cause a political storm with the home country.
Interestingly, the announcement perpetuates the myth that sovereign investors must apply to FIRB for investments of any nature — even if they are below the thresholds set out in the Act. The requirement to make an application in those circumstances is purely a matter of government policy and has no legal basis. While it may be best to apply, in order to avoid a complaint to the foreign government, no approval is required unless the relevant legislative thresholds are met.
Title : Partner
Office : Melbourne
Phone : +61 3 9288 1749
Fax : +61 3 9288 1567
Email : robert.nicholson@freehills.com
