In November the banking giant Citigroup, reeling from subprime losses, sold a 4.9 percent stake to the Abu Dhabi Investment Authority (ADIA) for $7.5 billion. Six months earlier, the newly formed China Investment Corp., a $300 billion pool controlled by the Chinese government, bought 10 percent of the Blackstone Group for $3 billion.
The global financial markets are like a 24-hour singles bar. And banks and private-equity firms—and retailers and technology companies—are hooking up with the hottest thing on the international dating scene: SWFs. No, not single white females. Sovereign Wealth Funds.
As capital sloshes around the world, it wells up in places that produce lots of oil, like the Persian Gulf, and places that export a lot of goods to the United States, like China. To invest this cash, governments have created SWFs. Economist Stephen Jen of Morgan Stanley last summer estimated that SWFs collectively held about $2.5 trillion in assets. That makes them larger than the hedge-fund industry and larger than U.S. mutual-fund giants like Fidelity Investments. ADIA manages $875 billion, enough to buy GE, Google and AT&T. "These players are now a permanent feature of global capital markets," says Diana Farrell, director of the McKinsey Global Institute.
Until recently, SWFs were generally content to invest their dollars in U.S. government bonds. But with interest rates low and the dollar slumping, they've been looking at alternatives, like stocks. And some are starting to act like private-equity funds, amassing big stakes in blue chips and buying entire companies. Istithmar, the Dubai government investment agency, last summer paid $825 million for the retailer Barneys New York. According to Dealogic, SWFs announced nearly $35 billion in takeovers in 2007.
As analyst Al Jolson put it: you ain't seen nothing yet. With U.S. banks and financial institutions retrenching in the wake of the subprime debacle, cash-seeking American hedge funds, private-equity firms and corporations will be booking passage for Beijing and Bahrain. "They [SWFs] have almost replaced U.S. pension funds as the principal source of capital for alternative investments," says Michael Klein, chairman of Citigroup's investment-banking unit.
The rising pace of SWF investment in blue-chip American companies will provoke plenty of angst. SWFs operate with a Cheneyesque opacity. Americans tend to imagine free trade and globalization as McDonald's in Riyadh and shoe factories in Vietnam producing cheap goods. But governments of nondemocratic countries in the Persian Gulf and Asia owning big chunks of America's financial infrastructure? Not so much.
Thanks in large part to self-inflicted credit wounds, we need their money a lot more than they need our stocks and bonds. The only thing more troubling than foreign governments' snapping up shares of companies like Citigroup, says McKinsey's Farrell, "would be having them bypass the United States altogether."