Sovereign wealth funds (SWF) are an increasingly important class of investor in today's uncertain economic environment, with more than $5 trillion worth of funds, according to the latest United Nations estimates. With significant capital at their disposal, SWFs are likely to continue playing a key role in mergers and acquisitions activity.
The lack of information about SWFs in the public domain has made it difficult for other market participants to fully understand the motivations of these significant funds and the people behind them.
Hoping to glean some insight, a team of consultants at Financial Dynamics conducted a series of interviews with some of the world's largest SWFs to try and get some answers.
What Financial Dynamics found was that while a number of significant acquisitions had been made by SWFs in the past 18 months, these funds were now keeping a watchful eye on the global financial crisis and awaiting the bottom of the market before committing to further substantial investments.
"The bottom has yet to come. [United States President Barack] Obama's first 100 days may see bear markets rally, but the entire financial system and capital market has been stressed to the point of collapse and now needs time to adjust,"one SWF executive told Financial Dynamics.
Another fund manager commented: "Valuations of the assets we are targeting are certainly more attractive, but we still feel they have further to go during 2009. Our view is that valuations may bottom out towards the end of this year."
In particular, SWFs seem cautious with regard to supporting bailouts of distressed companies.
"We see the real opportunities as investing in well-managed sound companies whose shares are trading at all-time lows, rather than putting good money into failed companies," one fund said.
It seems SWFs are broadly adopting a very cautious approach to the current market, expecting better value to materialise further down the track.
But those investing in the current market are all clear on one thing: they are not looking to take operational control of their investments. One hundred per cent acquisitions and majority stakes are not on the agenda and have not historically been of particular interest to SWFs regardless.
"We have no interest in controlling assets," said one of the funds surveyed.
"We do not want seats on the board. We are traditional long-term investors."
The major SWFs surveyed by Financial Dynamics saw themselves as long-term passive investors that made their investment decisions on a minimum five-year investment perspective, with dividend yield and capital growth of equal importance.
Those interviewed also confirmed Asia and South America were the two regions deemed to be the most attractive for a combination of qualitative and quantitative reasons. Mexico and Brazil were cited as the most attractive countries.
Meanwhile, proprietary research from Financial Dynamics comparing the current price-earnings valuations of the top 800 companies in major markets across the world to market highs indicates the deepest value proposition for investment could well be in North America and western Europe.
While Asia-Pacific companies have fallen from considerable highs, the market is still comparatively expensive due to a continuing belief in the more positive fundamentals of the region.
Charles Watson is Financial Dynamics chief executive and is based in London.
