Private equity is becoming an increasingly important sector globally, particularly in the United States and Europe, but also in emerging markets. In fact, the past year was a remarkable one for emerging markets private equity: fundraising for the asset class tripled, driven largely by a strong rise in exits and cash returned to international investors. The numbers were up for all regions.
Perhaps even more telling, the picture that is taking shape today is fundamentally different from before: private equity in emerging markets is no longer considered an exotic asset class. Private equity professionals are breaking down the borders of investing, recognizing that globalization is transforming the private equity business.
As the World Bank tries to rebuild after a global economic crisis that arguably boosted its reputation but left it strapped financially, the agency will get support from a new quarter: sovereign wealth funds.
Under a program announced last week, state-owned investment vehicles from South Korea, Azerbaijan, Netherlands and Saudi Arabia have agreed to invest $600 million in a bank-sponsored equity fund for less-developed countries.
The investment is not large on a global scale. But it opens a new pool of capital that World Bank President Robert B. Zoellick said could prove to be important in creating a new "architecture" for the post-crisis global economy.
Sovereign wealth funds are established by countries with trade surpluses from manufacturing or petroleum exports and used to invest in projects, typically ones in developed countries or emerging markets. The crisis, Zoellick said, showed investors that there are no havens and helped them become open to the idea of teaming with the World Bank on investments in Africa, the Caribbean and Latin America.
From these cases, the form of a relevant jurisprudence has emerged. States are free to engage in market activities for their own account with respect to which the private law of such transactions would apply. However, because States never lose their public character, market transactions involving state actors and corporations chartered domestically appear to be presumptively regulatory in nature. Because states can or might regulate their position as shareholders, any state activity involving domestic corporations appears to be treated as direct or indirect regulation, or regulation in effect. As a consequence, such activity, to the extent it might affect the willingness or ease of transactions in those shares by nationals of other Member States, would violate the fundamental right to free movement of capital enshrined in the EC Treaty. . . . Completing this analysis was the framework of public private equal treatment written into European Competition Law in the form of the state aids provisions of the EC Treaty. These suggested the same result as the golden share cases—a presumption that states did not act to maximize profit (and thus their private activity was public in character). The presumption could be overcome only where a state could convince the Commission that its actions were private in form and fact. Using the language of the state aid cases, this would require a showing that the state was investing “under normal market economy conditions.”
Left unanswered, however, was whether these ideas could apply when the state acted purely as a private party or engaged in private economic (investment) activity in another Member State. To that end, the opinions of the Advocates General in those golden share cases might prove useful. In particular, Advocate General Colomer’s suggestion of the relevance of article 295 EC and Advocate General Maduro’s sophisticated construction of a theory of the public character of state private transactions suggested a framework for analyzing the choice of law. The implication of these approaches is that the private law of corporate investment must be divided into a private and public component. The ordinary rules of private transactions in shares might not apply when a state purchases stock, and seeks to assert the rights of a shareholder. When a state engages in that activity, it is presumptively engaging in regulatory activity indirectly and public law must apply (in the case of Member States, the overriding law of the EC Treaty). The reason advanced is both deceptively simple and troubling—because a state can never duplicate the internal construction of a private entity, it can never act to maximize its welfare. Instead, as a political body, it must necessarily act to maximize its political capital. As a consequence, it cannot participate in the market in the same way as a private individual.