Presentation on main trends on investment by Sovereign Wealth funds, given to the students at Harvard Business School

1. Assessing the Risks
William Miracky Davis Dyer Drosten Fisher Victoria Barbary Edward Chin
Harvard Business School
Cambridge, MA
December 6, 2008
Drosten Fisher
drosten_fisher@monitor.com
+1 617 252 2397
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2. Monitor SWF Transaction Database: Methodology
Assessing the Risks
Subscription
databases, press Publicly available sources
articles, websites of of SWF activity
funds, and recipient
companies
Limited
transparency and
Data assessment spotty reporting
Focus on direct investment
in equities and real estate
1,181 deals, 25 funds
1975–Q1 2008 Data collected
Funds not meeting our
SWFs and definition
recent deals
Deals before 2000
Data checked and
verified
17 funds, 785 deals
$250 bn investment
Final Dataset
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3. Recent SWF Investments by Year
Assessing the Risks
Since 2000, there has been a marked increase in SWF direct investment in equities and real estate.
SWF Equity Transactions by Number and Volume Since 2000
160
Number 146
Value ($Bn) 137

129 131
120
100
90 92
80
63 60
53 49
47
40
28
4 6 8
3 3
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
(Q1-Q3)
Note: Publicly available data for SWF equity deals
Source: Monitor SWF Transaction Database
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4. SWF Investment by Area
Assessing the Risks
Since 2000, some two thirds of SWF investment by value has been in the OECD. However, two thirds of
the deals by number were in emerging markets.
Number of Deals by Region Value of Deals by Region
(785 deals) ($250 Bn)
BRIC
BRIC
14%
19%
OECD
31%

Non-OECD
(excluding
BRIC) OECD
Non-OECD

25% 61%

(excluding BRIC)
50% 
Note: Publicly available data for SWF equity deals 2000-Q1 2008
Source: Monitor SWF Transaction Database
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5. Investment Flows: Middle East and North Africa (MENA)
Assessing the Risks
Since 2000, funds based in MENA have invested $100 billion in 205 deals. $73 billion has gone to North
America and Europe, but this accounted for fewer than half the deals.
Note: Publicly available data for MENA SWF equity deals 2000-Q1 2008
Source: Monitor SWF Transaction Database
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6. Investment Flows: Asia-Pacific
Assessing the Risks
Since 2000, Asian SWFs invested $150 billion in 573 deals. These invest more heavily in their own region;
half of the total investment by value and some 80% of deals by number took place in Asia.
Note: Publicly available data for Asia-Pacific SWF equity deals 2000-Q1 2008
Source: Monitor SWF Transaction Database
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7. SWF Investment by Sector
Assessing the Risks
By number of deals, SWFs invest across sectors, including financial services, real estate, industrials,
consumer and IT. However, by value, almost half the deals are in financial services, which reflects atypical
intensity of investment in that sector during the sub-prime mortgage crisis during 2007 and early 2008.
Number of Deals by Sector Value of Deals by Sector
(785 deals) ($250 Bn)
Transport Other
4% 3% Healthcare Other
Healthcare 2% 8%
4% Telecom
Telecom 2%
6%  Financials
22% IT
Energy


1%
 Energy 11%
8% 
 Financials
Consumer 46%
IT  Real Estate 3% Industrials

 10% 18%
 8% 
Consumer  Real Estate
Industrials

19%
10% 
15% 
Note: Publicly available data for SWF equity deals 2000-Q1 2008
Source: Monitor SWF Transaction Database
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8. SWF Investment: Analyzing Ownership and Control
Assessing the Risks
Contrary to popular opinion, SWFs do take controlling stakes, however they rarely do so in OECD
markets.
Stake Data by Sector and Geography, 2000–Q1 2008
100% 3% Controlling Stake in
8% quot;Sensitivequot; Sectors - OECD
8% 
90%
11% Controlling Stake in
Non-Sensitive Sector - OECD
80%
10% Controlling Stake - Non-OECD
70% 39%
60%
50%
40%
71% Not a Controlling Stake
30%
50%
20%
10%
0%
Number of Deals Value of Deals
Notes: Sensitive sectors include Energy & Utilities, Financials, Information Technology, Infrastructure and Government, Telecom, and Transportation & Aerospace
Source: Monitor SWF Transaction Database
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9. Summary of Findings on Investment Behavior of SWFs
Assessing the Risks
SWFs invest heavily in domestic and emerging markets. A majority of SWF investments by value occur in
1 OECD markets, although the proportion is magnified by recent large investments during the credit crunch of
2007–2008. More than half of all transactions by number have occurred in domestic and emerging markets.
Recent SWF investments in U.S. and European financial services firms are atypical and opportunistic,
2 reflecting the credit crunch of 2007–2008. Most SWF investments have occurred in financial services, real
estate, and industrial companies, with most publicity focused on financial services. Controlling for the effects of
the recent credit crunch, the apparent appetite for investment in this sector drops markedly, though it remains
significant.
SWFs are willing to take controlling stakes in companies. In contrast to prevailing views, since 2000,
3 SWFs have acquired controlling stakes in half of their transactions for which stake data are available. By far
most of these deals occurred in emerging markets and in sectors not generally deemed politically sensitive.
SWFs are taking more financial risk with their investments. Most SWFs are adjusting their portfolios to
4 combine conservative and relatively liquid asset classes, such as government bonds, with higher-risk, illiquid
assets such as equities, real estate, and alternative instruments.
SWFs do not appear to be investing for political motives. Some funds are making strategic investments to
5 hasten economic development in their home country, but they do not appear to be active in ways that threaten
the economic or national security of foreign countries where they invest.
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10. Recent SWF Behavior: Q1 Through Q3 2008, by Target Sector
Assessing the Risks
Value of SWF Investments Q1 through Q3 2008 by Target Sector
70
Other
Energy and Utilities
60 58.3
Industrials
9.5 Real Estate
50 Financials
2.2
2.1
40
$ Bn
30
26.5
3.1
43.4 3.2
20 2.5 15.9
2.7
10 13.7
4.1
3.2
4.0 4.0
0
2008q1 2008q2 2008q3
Note: Publicly available data for SWF equity deals
Source: Monitor SWF Transaction Database
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11. SWF Investment by Target Sector
Assessing the Risks
Number of Deals by Target Sector, 2000–Q3 2008
53 63 60 47 90 137 129 146 42 43 46
100%
Other
Industrials
31% Real Estate
36%
Financials
44% 47%
75% 50% 50% 51%
55% 54% 57% 59%
10%
9%
2%
50% 15%
29%
12% 23%
23% 20%
19% 28%
21% 17% 15%
23%
25% 22%
4% 10% 13%
9%
15%
32% 17%
31%
21% 23%
17% 17% 17% 19%
16%
12% 9%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008q1 2008q2 2008q3
Note: Publicly available data for SWF equity deals 2000-Q3 2008
Source: Monitor SWF Transaction Database
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12. Recent SWF Behavior: Q1 Through Q3 2008, by Target Region
Assessing the Risks
Value of SWF Investments Q1 through Q3 2008 by Target Region
70
Other
Asia Pacific
60 58.3
MENA
Europe
50 North America
24.2
40
$ Bn
30
11.1 26.5
4.4
20
15.9
11.1
10 23.1 6.8
8.0 5.1
0 0.9 2.4
2008q1 2008q2 2008q3
Note: Publicly available data for SWF equity deals
Source: Monitor SWF Transaction Database
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13. SWF Investment by Location of Target: OECD vs. Emerging Markets
Assessing the Risks
Value of Deals by OECD vs. Emerging Markets, 2000–Q3 2008 ($Bn)
2.9 4.2 3.0 6.2 7.9 27.9 48.9 91.9 58.3 24.5 15.9
100%
OECD
15% Emerging Markets
19% 22%
32%
38% 38%
75% 52%
59% 63%
65%
84%
50%
85%
81% 78%
68%
62% 62%
25%
48%
41% 37%
35%
16%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008q1 2008q2 2008q3
Note: Publicly available data for SWF equity deals 2000-Q3 2008
Source: Monitor SWF Transaction Database
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14. 2008 Q2 and Q3 Highlights
Assessing the Risks
In the third quarter of 2008, funds in the Monitor SWF Transaction Database executed 46 deals
1
totaling $15.9 billion. This is a decline from 58.3 billion in Q1, and 26.5 in Q2, during which period
the total number of deals per quarter was similar.
Investment in financial sector targets has fallen off significantly since Q1; real estate
2 investment, which spiked up in Q2, also dropped sharply in Q3. Financials comprised $43.4
billion of deal value in Q1, compared to $4 billion each in Q2 and Q3. Real Estate deals were $3.2
billion in Q3 (16% of the total), compared to $13.7 billion (52%) in Q2 2008.
Investment in North America dropped dramatically. In Q3 North American targets were involved in
3 7 SWF deals totaling $2.4 billion; in Q2 the totals were 4 deals and less than $1 billion invested. In
contrast, there 7 North American deals totaling $23 billion during Q1 2008. Overall, investment in
OECD countries has declined sharply during 2008, from $37 billion in Q1 to $9 billion in Q2 and $8
billion in Q3
SWF recent behavior shows a marked shift toward domestic and emerging markets deals. 46%
4 of reported deals in Q3 were domestic transactions, the highest percentage since 2003. Also, 54% of
Q2 and Q3 deals by value ($23 billion out of $42 billion) were in emerging markets, the highest share
of total deal value since 2005.
SWFs from the MENA region were the most active in Q3, carrying out some 90% of the deals
5
by value. Asian and European SWFs were much less active in Q3 2008 than in previous years.
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