Remember a few years ago when sovereign wealth funds made the news? They started a couple of decades ago but started to gain popularity and power only about 5-10 years ago. As time went by, they started diversifying their investments and going into private placements and taking important stakes for economic but also strategic reasons. The Chinese and middle eastern funds were the most active and raised the most attention. This culminated into a huge controversy in 2006 when the Dubai Ports Authority made an offer to buy six major US ports. The US government raised major issues with the transaction mostly because of security issues. And while those might have been legitimate, I think we all agree that there probably would have been no problem if a UK fund had been at the other end. In any case, this was a clear signal that sovereign wealth funds were not welcome under all circumstances and would have to subject themselves to more transparency than they were required by law to provide.
As the current economic crisis evolved, it became clear that these funds could have a useful role as they took important stakes in Western banks, mostly through big private placements. They started to be seen under a more favourable light and suddenly, their lack of transparency or motives became less relevant. Funny how that works isn’t it?
Last week saw another more important move on that front. As sovereign funds (SWF’s) have stepped back a bit from these major investments to avoid big losses, they are now being seen as an important way out of the current crisis. The governments are not asking them for any questions now it seems and have shifted to ask for money instead. “Britain would welcome investments by sovereign wealth funds to bolster its economy”, Business Secretary Peter Mandelson said on Wednesday. Funny how that works isn’t it? They are now being seen as an easy way to get liquidity into the system and have less downside than government debt issuance. The question of course is if these funds will step in and if they do, will the governments remember all of these contributions and help when things start to rebound?
I would personally think that the SWF’s will be investing more funds but they will be monitoring things very closely and could easily move things around and not come back if the governments do not lay off a bit when the economy gets back on its feet.