Sovereign Wealth Funds (SWFs) have been making inroads to foreign assets such as US banks and real estate for some time now. Flush with cash owing to an export boom and oil bonanza, governments of export oriented Asian countries and oil rich nations set up these SWFs as investment vehicles to manage the country’s foreign exchange reserves. Some SWFs, particularly those of oil producing companies, were set up to act as stabilisers to insulate the budget and economy against oil price swings. SWFs came into lime light when they were involved in some high profile investments such as $21 billion bail out money for Citigroup and Merrill Lynch, 90% share in New York’s Chrysler building and $3 billion investment by China Investment Corporation (CIC) in Blackstone, the private equity company. Their growth and the magnitude of investments even prompted some to view SWFs with considerable hostility. Some even called for rules and policies to govern SWF investments.
End-October 2008 | ||
| $bn | Stake (%) | |
| Citigroup | 22.0 | 12.7 |
| Merrill Lynch | 12.2 | 23.0 |
| UBS | 11.5 | 12.0 |
| Morgan Stanley | 5.0 | 9.9 |
| Barclays | 5.0 | 5.2 |
| Canadian Imperial Bank | 2.7 | 11.1 |
| Bear Stearns | 1.0 | 6.0 |
| Chrysler Tower | 0.8 | n/a |
| Kaupthing | 0.3 | 5 |
| Total | 60.5 | |
| Source: Bloomberg, SWF Institute | ||
With the market meltdown SWFs also suffered but their investment overtures continued perhaps less aggressively. Things may be about to change now. CIC is in the news again, this time with the 17.5% acquisition of Teck Cominco Class B subordinate voting shares. Teck Resources Limited ("Teck") (TSX: TCK.A and TCK.B, NYSE: TCK) announced on July 03rd that CIC has agreed to purchase through a wholly-owned subsidiary 101.3 million Class B subordinate voting of Teck for C$17.21 per share. Teck is expected to use the proceeds to reduce some of its outstanding debt as the company was on the ropes due to its heavy debt burden. In its attempts to service debt and maintain operations in a falling commodity price environment, Teck suspended its dividends on both its class A common shares and class B subordinate voting shares last year. This was coupled with a $730-million Capex scale down, a sale of 60% interest in the Lobo-Marte gold property in northern Chile to Kinross Gold and many other similar measures. Teck has financed much of the acquisition of Fording Canadian Coal Trust in 2008 through debt. Following the investment, CIC will indirectly hold approximately 17.5 per cent of Teck's outstanding Class B subordinate voting shares, representing approximately 17.2 per cent equity and 6.7 per cent voting interests in Teck. Teck's Class A shareholders as a group will hold a 61.8 per cent voting interest in Teck with Temagami Mining Company Ltd. holding a 28.5 per cent voting interest. CIC has confirmed Teck that the acquisition is only for investment purposes as a long- term passive investor. Those of us who have followed China’s investments in the resources sector, it is yet another confirmation of China’s ambitions to secure base metal sources. China has been actively pursuing resources companies around the world especially in Africa and Australia. The government has set up companies such as China Nonferrous Metal Mining Group Co. (CNMC), Central Huijin Investment Co and Jiangsu Eastern China Non-Ferrous Metals Investment Holding Company to acquire assets and/or resource companies. China has shown interest not only in base metal companies but also in other metals. CNMC for instance recently reached an agreement to acquire a majority stake in the Australian rare earths miner Lynas Corp Ltd (ASE: LYC) for A$252 million ($185.7 million). Readers may also recall Chinalco's failed bid to invest $19.5 billion in Rio Tinto (ASX: RIO). CNMC is said to be currently in talks to purchase a copper mine in Zambia with reserves of 2.6 million tons of copper and 100,000 tons of cobalt. We expect similar investments by Chinese companies as well as Chinese SWFs. We expect Africa to attract much of Chinese investments in the resources sector. China has already set up a SWF called China Africa Development Fund (CADF) as a vehicle to make investments in Africa. The fund is estimated to have made $400 million investment already since its inception in 2007 largely in industrial ventures. CADF opened its first representative office in Johannesburg and Proactive Investors is planning to interview their representatives in South Africa soon. While much of the Chinese investments are expected to be in metals, we expect investments in energy companies as well. Sinopec’s (NYSE: SHI) acquisition of TSX listed Addax Petroleum (TSE: AXC) is merely a sign of developments to come. In addition to state owned mining/energy companies and SWFs such as CIC and CADF, China has established several other SWFs and investment vehicles with the mandate to invest in assets beyond its shores. CIC’s investment in Teck is just a reminder that “the dragon is coming”.
| $ bn |
| SAFE Investment Company | 347.0 |
| China Investment Corporation | 190.0 |
| National Social Security Fund | 82.4 |
| China-Africa Development Fund | 5.0 |
| Source, SWF Institute |
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