The world's sovereign wealth funds made 11 investments totalling $3.5bn in the second quarter, the lowest spending since the final three months of 2004, according to a report to be published this week.Global consultancy Monitor Group said transactions completed in the second quarter represented only two-fifths of the deals of the first quarter and just over the half of their value. The world's leading sovereign wealth funds (SWFs) kicked off a two-day meeting in Baku, Azerbaijan, on Thursday to discuss investment strategies and review how self regulation and efforts to enhance transparency in this often secretive industry are leading to wider global acceptance.
Nineteen deals have been either announced or were pending completion during the three months ending June, suggesting that activity might improve later this year. Monitor added the funds returned to investing in real estate after they had steered well clear over the previous two quarters. "SWFs are cautiously returning to the market with a long-term approach to their investments, putting their losses behind them and resuming the business of investing abroad," the report said.
"This was a time of reflection for SWFs, as global markets began to calm after the turbulence of the previous quarters." The funds made only two investments in domestic markets in the second quarter, and over half were in developed OECD countries.
Publicly reported SWF investment activity in the first half of 2009 was down 60 percent on the same period in 2008, representing only 13 percent of the value of those made in the first half of 2008. At the height of the spending boom in 2008, sovereign wealth funds spent a total of $128 billion in 175 deals.
The $3 trillion industry, which invests national windfall revenues from oil or other exports, has been on a rollercoaster since the credit crisis as the funds invested an estimated $80 billion in ailing Western banks, only to see their investment implode within months.
Their investment, coming at a time when liquidity dried up for previous buyers such as hedge funds and private equity, was largely welcomed by host countries in the developed economies. But many SWFs suffered double-digit losses of up to 40 percent and came under heavy criticism by the public at home. At the same time, their owners - governments - have directed existing and new funds of SWFs into bailing out domestic institutions to support the local economy, reducing the size of assets under management and blurring the original mandate of the funds, which is to invest over a multi-decade horizon for future generations. Monitor said SWFs reorganised the structure in the second quarter to adjust themselves after losses and improve performance of existing assets.
"They are also rebalancing existing portfolios to maximise their performance, through divestments, establishing lower risk profiles, and investing in alternative assets, such as commodities," it said. SWFs have been also teaming up with each other to make joint strategic investments to make the most of local knowledge, leverage capital, spread investment risks and maximise returns.
"Such collaborations may have the effect of creating more transparency by highlighting the commercial aspects of their investments and quelling the concerns among some constituencies about potential political motivation," Monitor said. (Reuters)
Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.