Sovereign wealth funds may be flowing again

WASHINGTON -- Government investment funds from China and Qatar are moving new money into Western financial companies, a sign that the cash-rich funds haven't completely pulled back from the volatile U.S. and European markets.

The funds, often known as sovereign wealth funds, plowed about $40 billion into troubled institutions such as Citigroup Inc. and Merrill Lynch & Co. Inc. early this year but then largely avoided U.S. and European banks as the financial crisis worsened.

Any renewal of interest from the sovereign funds could provide much-needed capital to Western financial institutions and other companies.

On Thursday, Swiss bank Credit Suisse Group said it had raised $8.75 billion in new capital, most of it from the Qatar Investment Authority, the Persian Gulf state's sovereign wealth fund.

Also Thursday, private equity firm the Blackstone Group said in a regulatory filing that it has agreed to raise the ownership limit for China's sovereign fund, the China Investment Corp., from 9.9 percent to 12.5 percent.

The funds don't invest solely in banks. Abu Dhabi's Mubadala Development Co., which manages about $10 billion, agreed this month to pay $314 million to raise its stake in semiconductor company Advanced Micro Devices Inc. to 19.3 percent from 8.1 percent.

"It's not clear if it's a trend," said Brad Setser, a fellow at the Council on Foreign Relations, referring to the deals announced Thursday.

Funds in other Persian Gulf states such as Kuwait and Abu Dhabi are focusing on stabilizing their own markets amid the global financial crisis, he said.

Sovereign wealth funds control about $2.5 trillion in assets, a figure the IMF estimates could reach $11 trillion by 2013. Oil-exporting states have set up funds to invest their petroleum revenue, while Asian countries such as China and Singapore use the money to invest trade surpluses.

The funds say they are long-term investors that can ride out the current financial crisis and aren't panicked by the declines in the value of their stakes in Western banks. Their long-term horizons could also make it easier for them to take on new investments despite the risks of the ailing financial sector.

In addition, their previous deals weren't necessarily as bad for the funds as they may appear, representatives of some funds have said. While shares of Citigroup have dropped by about half since ADIA invested in it, for example, ADIA received convertible securities that pay an 11 percent dividend, mitigating the loss.

Other sovereign funds negotiated similar terms with companies such as Morgan Stanley.

Still, there is evidence that the funds remain reluctant to make large investments in the United States.

The Monitor Group, a consulting firm, said in a study last week that many sovereign funds have shifted their attention to developing countries in the Middle East and Asia. The group, which tracks 17 sovereign funds, found that they made 26 investments worth $15 billion in emerging markets in the second quarter, while investing less than $1 billion in four deals in North America.

Should the funds shift their focus back to the United States, they are likely to find a more welcoming political environment than they have in the past.

Earlier this year, many members of Congress worried that sovereign funds might invest with political motives, such as to gain access to sensitive technology. Now, with the U.S. government spending billions to bail out its financial sector, any additional capital would likely be welcomed.

The shift in tone was apparent during last weekend's meetings of the IMF and World Bank in Washington. Last year, the meetings had served to highlight U.S. and European concerns about the newly prominent funds.

"The irony of the situation and how the tables have turned in the last year is not lost on us," said Nasser Al Shaali, chief executive of the Dubai International Financial Center, which oversees Dubai's financial markets. Dubai, like Abu Dhabi, is part of the United Arab Emirates.

Last weekend, a working group of sovereign funds, coordinated by the IMF, released a set of voluntary principles intended to guide the funds and assuage concerns in the United States and Europe.

The 24 principles call for greater openness about the funds' assets and investment strategies and urge that they invest solely for economic and financial, rather than political, reasons.

AP-WS-10-17-08 1645EDT