Sovereign Wealth Funds As Market Operators

Over the past several years, the most prominent sovereign wealth funds have moved from investment in securities effectuated through securities markets to seeking important positions in securities markets themselves.  By 2009, several Middle East funds had acquired substantial minority interests in the London Stock Exchange (Qatar SWF; UAE Dubai SWF),  NASDAQ (UAE Dubai SWF); and the Bombay Stock Exchange (UAE Dubai SWF).   As a consequence, SWFs are moving into positions of influence in contests for control of some of these Exchanges--a role that puts them in a position to affect the scope and character of markets in which securities are traded, and which serve as a source for corporate regulation beyond the state.

 (Jill Treanor, Rival bid for Toronto exchange may leave LSE open to takeover, The Guardian U.K., May 16, 2011 ("The LSE had planned to merge with the Toronto exchange but the offer has been trumped by a far higher bid by a Canadian consortium. Photograph: Linda Nylind/Guardian" Id.)

Recent events suggest the shape of this new role for SWFs.  NASDAQ-OMX Group is in merger talks with the London Stock Exchange all of which largest owners are SWF's. The NASDAQ (as of 2008/09) was 43% owned by the UAE-Dubai SWF while the London Stock Exchange is 21% owned by the same SWF and 15% owned by the Qatar Investment Authority. "It is understood that Nasdaq chief executive Bob Greifeld has a deal in mind that would value the LSE at 1275p a share. LSE shares ended the week at 1033p, down 28p on Friday but still at a three-year high.  . . . The two major shareholders in the LSE – Bourse Dubai and Qatar Investment Authority – which together control about 36 per cent of the shares, bought in at between 1500p and 1700p a share and would be unlikely to want so publicly to realise a large loss on their investment. They have said they are not interested in selling." (Mark Foxwell, Nasdaq ready to pounce on London Stock Exchange, This is Money.co.uk, July 3, 2011.).

This follows a failed attempt by the LSE to merge with the Canadian group TMX (operator of the Toronto Stock Exchange) which left the LSE scrambling to find another global stock exchange to merge with. "A global bid battle among the world's biggest stock exchanges was in disarray on Monday, leaving the London Stock Exchange vulnerable to a hostile takeover bid. Plans by the LSE to merge with the Toronto stock exchange have been jeopardised by the intervention of nine of Canada's banks and pension funds, which tabled an alternative, higher offer for the Canadian exchange. The consortium, which has nationalistically dubbed itself the Maple Group, has proposed paying C$3.58bn (£2.27bn) for TMX Group."  Jill Treanor, Rival bid for Toronto exchange may leave LSE open to takeover, The Guardian U.K., May 16, 2011.  The fear is that if the Deutsch Boerse and NYSE Euronext merge then that will give the LSE a disadvantage in market size. If the LSE and NASDAQ-OMX group were to merge it would combine the significant ownerships that the Dubai and Qatar Sovereign Wealth Funds already have in the exchanges. The Dubai Sovereign Wealth Fund owns 43% of the NASDAQ and 21% of the LSE while the Qatar Investment Authority owns 15% of the LSE, easily making the two funds the largest shareholders of the exchanges.  (Luke Jeffs and Thomas Reggiori Wilkes, LSE's future in Middle East hands after TMX failure, Reuters, June 30, 2011.)

The Qatar and Dubai Sovereign Wealth Funds have both been created in the last decade and have assets that total well into the tens of billions and have invested heavily in western financial institutions including over 10% stakes in Citigroup, Credit Suisse, and The Carlyle Group among others. "Qatar, once content to attach its name to trophy assets, may use its investments to garner political goodwill as foreign leaders fly in to woo the fund, arguably now the world's most aggressive. . . . "They want to generate superior returns through high quality investments, but they also want to build strategic networks across the world, particularly bridges into emerging markets," said one source close to the fund, declining to be named." Regan E. Doherty and Dinesh Nair, Analysis - Qatar SWF's hefty appetite draws global players, Reuters, March 3, 2011.  Ashby Monk has also noted the increased activity of the Qatari Fund.  See Ashby Monk, Qatar’s Busy SWF, Oxford SWF, May 11, 2010 ("Is there a more active SWF in the world today than the Qatar Investment Authority? I’m not sure. It definitely rivals the China Investment Corporation. Stories about the QIA — and its various subsidiaries — seem to pop up on an almost daily basis.").  The DUbai SWF is part of a complicated arrangement that makes the use of sovereign investing more difficult to follow.

(From Investment Corporation of Dubai, SWF Institute).

The investments that the funds make have had note worthy controversy follow them including the Dubai Ports World buyout of US ports in 2006 and the ownership of various airports by the funds. While both funds deny influencing politics, their purchases appear to be strategic and directed into specific sectors of the global economy.  See, David A. Andelman, Dubai, Inc., Forbes, March 3, 2006.

Whatever the effect of this move to investment in exchanges, it seems likely that the Santiago Principles, created to provide a framework for assurance to developed states to continue to keep their investment borders open to sovereign inbound investment, might not provide a necessary guidance on this issue.  Perhaps it ought to be revised on this score; something for the International Forum of Sovereign Wealth Funds to consider .