Sovereign Wealth Still Under Spotlight

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The past few weeks have seen renewed calls from the US and EU for Sovereign Wealth Funds (SWFs) to sign-up to voluntary regulations. In a sign of intent on the part of the US government, two senior figures visited Abu Dhabi Investment Authority (ADIA) executives in the same week late February.

Senator Evan Bayh (Democrat, Indiana), chairman of the Senate subcommittee on security and international trade and finance, met with senior executives of ADIA to raise his concerns about sovereign wealth transparency. Sen. Bayh has already chaired one Senate hearing on SWFs, and has written recently in the Wall Street Journal that "more are needed".

The second delegation was led by Clay Lowery, a US Treasury dept. official. He was in Abu Dhabi to discuss formal investment guidelines for SWFs. The Treasury is understood to prefer a voluntary code of conduct, as outlined by the G7 last year, to be administered by the International Monetary Fund (IMF), which is currently drawing up such guidelines. Sen. Bayh has already said he does not believe these will be sufficient to protect US national interests, and has called for primary legislation requiring "passive investment" by foreign governments.

For its part, the EU published its own preliminary proposals on SWFs late February. While arguing SWFs "are not a big bad wolf at the door", Commission President José Manuel Barroso nonetheless said a voluntary code of conduct was required to "avoid some funds being run in an opaque manner or used for non-economic objectives". The Commission called for "greater clarity and insight into the governance of SWFs and improving the quality of information they provide to markets on their size, investment objectives, strategies and source of resources".

Sovereign wealth has been attracting attention for several years in the US, but particularly since the sub-prime crisis. Current interest was arguably triggered by the highly publicised recapitalisation of Citigroup by ADIA and the Kuwait Investment Authority (KIA) last November. That particular investment generated new controversy this week when Sameer Al Ansari, CEO of Dubai International Capital (DIC), was reported to have told delegates at an investment conference in Dubai that not even sovereign wealth could save the troubled US bank.

Ansari's comments, if indeed they were ever made, were quickly retracted, with DIC releasing a statement saying it "has never expressed an opinion on the investment merits or financial condition of Citi. Further, we have not been privy to any non-public information about the Company, neither has Citi approached Dubai International Capital for a capital raise. Dubai International Capital maintains an ongoing relationship with Citi and has substantial respect for the company".

The curious incident may recall the dog that never barked, but Ansari's comments appear to reflect nothing more than market opinion: Citi has seen a further third fall of its share price despite ADIA's intervention, with shares now trading below $22. Ansari later added that he agreed with the need for further transparency to remove the "mystique" surrounding Gulf funds.

Indeed, the recent interest surrounding SWFs may perhaps prompt ADIA to reconsider its traditional reticence. Despite being the world's largest SWF, with funds estimated at anywhere between $600bn and $900bn, the Authority's website consists of only a single page and has only recently employed a PR company. ADIA's attitude to some extent reflects its origins: it was established in the 1970s to diversify Abu Dhabi's current account surplus beyond gold and short-term paper. Yet both ADIA, and indeed the oil that funds it, have grown in value remarkably since those days. It is increasingly inevitable that if ADIA wishes to continue to pursue publicly-listed stocks and shares, it will open up to some extent.

There is no doubt either though that Gulf funds are not the target of current EU and US concerns. As Bayh noted, "the oil-rich nations of the Gulf have a long track record of passive investing, but Russia's recent behaviour and China's drive for economic advantage raise serious concerns about how sovereign funds might be used". ADIA, it would seem, is currently in the unfortunate position of being caught in the cross-fire of a much bigger rock fight.

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