It’s well known that Middle East sovereign wealth funds helped to prop up European and US investment banks through the financial crisis, with mixed results. But only now is it becoming clear just how much bargain-hunting went on during the depths of the eurozone debt crisis that followed.
Research released in December by ESADEgeo, a Spanish group linked to Esade Business School, shows just how potent investment in developed-world countries, particularly Europe, has become since the global financial crisis, and in particular during the slow period of asset restructuring and recovery. Looking at sovereign funds generally, and focusing on direct investment rather than portfolio flows, the proportion of investments into OECD countries has gone from 49.8% in 2009 to 65.4% in 2014.
And nowhere illustrates the enthusiasm more clearly than the researchers’ native Spain, which they calculate received €40 billion of sovereign wealth direct investment between 2009 and 2014. Half of this is accounted for by Norway’s sovereign wealth fund’s participation in Ibex35 (the stock market index) and Spanish debt, but when it comes to individual investments, it is striking just how much of the Spanish asset base ended up in Middle Eastern hands over that period.
Qatar, whether through Qatar Holding, Qatari Diar or specialist vehicles like Katara Hospitality, was everywhere: Iberdrola, Santander Brazil, Ferrovial, SFL/Colonial, the W Hotel in Barcelona, InterContinental Hotels, Ecisa. So was Abu Dhabi, whose International Petroleum Investment Company twice bought into Cepsa and once into Bankia, and whose Mubadala bought into Sener. Kuwait Investment Authority (KIA) can be found in Tyba, a tech start-up, and in E.On Spain. Singaporean and Chinese sovereign funds were well-represented too.
And that’s before you consider any portfolio investment; it would be no surprise to find Abu Dhabi Investment Authority (ADIA), for example, active in Spanish debt when it was yielding heavily.
This goes against the grain of the popular perception that sovereign wealth funds have been tilting towards emerging markets. There’s no question that ADIA and the rest have boosted their sophistication in looking at Asia in particular, and the two positions are not mutually exclusive; Middle East funds can be opportunistic in Europe and still have a long-term eye on developing economies.
But what’s truly striking about this data is that it makes sovereign funds from the region look far smarter than was perhaps supposed. It is often said that sovereign funds went far too early into western investment banks – Temasek, ADIA, KIA and Kuwait Investment Company could all be accused of it – but it now appears they learned fast and were ready when the eurozone crisis began to generate bargains.
Most of those acquisitions have performed very credibly and are well-set for the future. By the time many other investors decided it was safe to look at Spain again, the sovereign funds had already done what they needed to do.
There are other elements to this too. The report’s key author, Javier Santiso, talks about a growing pattern for sovereign development funds: those that have a dual objective, partly to invest for good returns, but also to bring some additional benefit to their home country.
So, for example, a fund might invest in a tech start-up (like the KIA in Tyba) not only because it’s a good investment, but because the technology can be brought home and applied there. It might buy a stake in Airbus in the understanding that Airbus will then build a service hub in the home country. Where was Khazanah’s first non-Asian office? New York? London? No – San Francisco, the gateway to Silicon Valley.
Investments into developed world assets should increasingly be seen with this technology transfer in mind. This will no doubt make some policymakers nervous, but they should also ask themselves: where would Spain be now without that $40 billion?