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February 05, 2008

Sovereign Funds: The BusinessWeek take

Extracts from BusinessWeek's article on the favorite business/market topic these days: Sovereign Funds
The fund managers insist that Western businessmen and politicians have nothing to fear. Al Sa'ad ticks off a well-rehearsed list of reasons why CEOs should rejoice at the prospect of having Kuwait as a major shareholder. Reason 1: His fund will agree to multiyear lockups, providing long-term capital. Reason 2: Al Sa'ad expresses concerns to CEOs behind closed doors, not in the press. "If I were a CEO, I'd look for stability," he says.

But recent actions by some funds belie those soothing sentiments. The $50 billion Qatar Investment Authority, run by Qatar's Prime Minister, Sheikh Hamad bin Jassim bin Jabir al-Thani, is working with hedge fund activist Nelson Peltz to shake up British beverage company Cadbury Schweppes (CSG). Dubai Holding was so aggressive in its pursuit of OMX Group of Sweden last summer that it ran afoul of regulators there. Even companies that do business with Gulf funds are on alert. Dubai International Capital, which manages a $12 billion fund for Dubai's ruler, Sheikh Mohammed bin Rashid Al Maktoum, flabbergasted Wall Street last fall when its chief, Sameer Al Ansari, shot off letters to Morgan Stanley (MS), UBS (UBS), Goldman Sachs (GS), Citigroup (C), and other top investment banks asking them to pony up $50 million each for a new fund or risk losing future business. Several, including Goldman and UBS, complied. "So far," says Roger Altman, chairman of Evercore Partners (EVR) and a former U.S. Deputy Treasury Secretary, "sovereign wealth funds have been more stabilizing than otherwise. But everyone is waiting to see how this evolves."

...As the credit crisis deepens, investment banks and private equity firms are stepping away from dealmaking to nurse their wounds. Gulf funds are eagerly filling the void. "Sovereign funds have been shown every interesting idea in the last quarter," says Jeff Holzschuh, a Morgan Stanley banker who advised buyout firms on the TXU sale. "There is no question that they will change the deal world." But there is a question as to whether the change will be for the better. "This is capital we need desperately," says Felix Rohatyn, former Lazard Frères managing director and U.S. Ambassador to France. "But I don't think we should have any illusions that these are totally benign investments."