(Group 3 PM) PEI for GLOBAL SOVEREIGN WEALTH FUNDS

1. WHAT IS A SOVEREIGN WEALTH FUND ?

Sovereign Wealth Fund (SWF) has been defined as an institution that is a state-owned fund managing a portfolio of financial assets invested in stocks, bonds, property or other instruments. The capital may be a combination of foreign currency deposits, commodity funds such as oil and gas or other industrial and financial holdings. Percentage of SWFs that invests in Private Equity is about 52% and percentage of SWFs investing in Private Equity split by size of total asset is USD 50~99 billion.

Splitting the SWFs geographically shows that over 60% are based in emerging regions such as Middle East/Africa and Asia/Pacific. North America and Western Europe account for approximately 40% of relevant institutions. Breaking down SWFs in Private Equity Funds, Asia/Pacific dominates 31.6%, Middle East/Africa 30.3%, North America 19.7% and Western Europe 10.7%. SWFs make up 2% of the 2,935 LPs, of which other types of investors such as pension funds 919%), corporations (15%), and foundation/endowments (14%) are the largest constituents.

In terms of SWFs’ private investment strategies, SWFs are primarily focused on committing to funds investing in Asia/Pacific and North America, but their reach is genuinely global. Average regional 47% fund investment is centered in Asia/Pacific region, 41% in North America, 33% in Western Europe and 30% in Middle East/Asia.

In common with other types of limited partner, SWFs are most interested in buyout and venture capital funds: 36% currently invest in buyout funds and 65% invest in venture capital funds. Significant allocations to fund of funds vehicles (15%) and other type of funds can also been seen.

The appetite of SWFs for each type of fund in each region shows as follows. Approximately 40% of SWFs have an appetite for venture capital funds investing in Asia/Pacific whereas approximately 25% of the non-SWF LPs have an appetite for Asia/Pacific venture capital funds. When looking at the future plans of SWFs for private equity investments, a pattern emerges in the types of funds being targeted: appetite is fund type specific rather than region specific. Thus special situations strategies and infrastructure are among the key priorities of SWFs investing in the emerging markets of Asia/Pacific and Middle East/Africa.

Patterns of SWF investment in Private Equity are categorized into 5 types.

First, Standard LP investments in Private Equity Funds are the one adopted by ADIA, GIC, Temasek, KIA, QIA, Alaska Permanent Fund, etc. They show the pure investment rationale and limited influence on GP’s activities.

Second, Anchor LP investments in Private Equity Funds are characterized as the National Social Security Fund introduced by China, Temasek Holdings, CIC investment in dedicated JC Flowers fund. The Anchor investor in fund gives investors bigger stake and acts as catalyst for economic development purposes.

Third, often in addition to investing in funds, investments are conducted in the management company itself. The large cases are CIC investment in Blackstone, Mubadalar investment in Carlyle, ADIA stake in EFG-Hermes etc. It is also usually seen as a means of increasing exposure to private equity.

Fourth, SWFs directly invest in private companies. Istithmar World Capital dominates its sector.

Last, the PIPE (Private Investment in Public Equity) indicates the very method for Private Equity. ADIA’s investment in Citigroup might be one of the occasions.

With almost USD 3 trillion in capital, SWFs comprising large portions of their countries’ financial assets are gaining significance by the day. Increasingly, SWFs are looking to invest in alternative assets and private equity funds are fast becoming their investment vehicle of choice. SWFs already invest in private equity globally and will continue step up their international activities going forward, with particular emphasis on the emerging private equity markets of Asia. Keeping in line with other types of limited partner, SWFs are most interested in buyout and venture capital funds, but they also show significant interest in fund of funds vehicle and other types of product, such as special situations funds.


2. Private Equity Investments of Global SWFs

2.1. Singapore

The Government of Singapore Investment Corporation Private Limited (GIC) was set up in 1981 with assets of under S$10 billion ($6.6 billion). GIC invests more than $100 billion of Singapore's foreign reserves in more than 40 countries. GIC does not invest in domestic companies. Over the last 20 years to March 2008, the nominal annual rate of return of the portfolio was 5.8% in Singapore dollar terms. In real terms, the average annual rate of return was 4.5% above global inflation. It handles three quarters of its portfolio internally and outsources the rest to external fund managers. Lee Kuan Yew, Singapore's first prime minister, is the chairman of GIC's board of directors.

Another Singapore state investor, Temasek, is the world's seventh-largest sovereign wealth fund, which is headed by the prime minister's wife, Ho Ching, Temasek Holdings manages a net portfolio of about US$134 billion, weighted towards Singapore and Asia. Temasek’s total shareholder return is more than 18% compounded annually since inception. Temasek was created in 1974 to hold and manage investments in state-owned companies such as Singapore Telecommunications, Singapore Airlines and DBS Group which were previously held by the Ministry of Finance. Temasek invests in wide range of industries covering banking, real estate, transportation, consumer & lifestyle, infrastructure, telecommunications & media, bioscience & healthcare, education, energy & resource, engineering & technology. In recent years, Temasek has diversified its holdings by cutting its stakes in Singapore companies and acquiring stakes in overseas firms

2.1.1. The Government of Singapore Investment Corporation Private Limited (GIC)

According to the GIC’ first report in 2008, PE investment asset is about 8% of total asset as of 31 March 2008. In recent years, GIC has accelerated the pace of real estate and private equity investments to invest in hedge funds, natural resources and infrastructure in Asia.

GIC’s strategy to private equity investment is to identify and invest with outstanding private equity and venture capital funds globally, and grow with them in the long term. In the Asia-Pacific region, investments are made directly in well-run companies with sustainable differentiated strategies or market niches that have the potential to be industry leaders.

Especially, private equity funds are very useful tools which can lessen the political resistance. These days, some M&A attempts of sovereign wealth funds have faced the political resistance in the investee countries. But in case of the private equity fund investments participated in by other private financial investors, controversy on the investor’s nationality could have been diluted significantly.

The GIC's investement highlights are as follow

Date Investee Nationality Amount(US$Bil)
2002. 1 Li Ning China
1995 China International Capital Corporation (CICC) China
1998 Infrastructure Development Finance Company (IDFC) India
2006. 5 British Airports Authority plc (BAA) UK
2006. 8 Associated British Ports Holdings plc (ABP) UK
2007. 12 USB USA 11
2008. 1 Citigroup USA 69
Ballarpur Paper India 0.2
2008. 2 Westin Tokyo Hotel Japan 0.7
Roma Est Shopping Center Italy 0.6
Iso Omena Finland 0.2
2008. 3 Sintonia Italy 15
TGP Capital Fund USA 23

Recently, subprime shock from USA had caused huge damage to GIC balance. In February 7, 2009, The Wall Street Journal reported that GIC had lost about $ 33 billion in 2008. However, on May 2009, GIC is known to have an interest to invest in OPEL, one of GM’s divisions in Europe. But, the chairman of GIC’s board of directors, Kuan Yew Lee, Singapore’s first prime minister, disclosed that GIC would play more prudent role and pursue low risk low return asset in the Wall Street Journal on June 2009.

2.1.2. TEMASEK

TEMASEK is a holding company which has very wide range of investment sectors from banking to consumer. The major investments in TEMASEK portfolio are as follow:

Sector Company
Financial Services NIB Bank, PT Bank Danamon Indonesia, PT Bank Internasional Indonesia, DBS Group Holdings, Standard Chartered, Hana Financial Group, Merrill Lynch, ICICI Bank, China Construction Bank, Bank of China
Telecommunications & Media MediaCorp, Singapore Technologies Telemedia, Singapore Telecommunications, Shin Corporation, Bharti Airtel
Transportation & Logistics PSA International Neptune Orient Lines, Singapore AirlinesSMRT Corporation
Real Estate Mapletree Investments, CapitaLand
Infrastructure, Industrial & Engineering Singapore Technologies Engineering, Sembcorp Industries, Keppel Corporation
Technology STATS ChipPAC, Chartered Semiconductor Manufacturing
Consumer & Lifestyle Wildlife Reserves Singapore, Fraser and Neave

The recent highlights of investement acitivities are as follow:

Date Investee Nationality Amount(US$Bil)
2005. 7 NDLC-IFIC Bank Pakistan 57M
2005 Mobile TeleSystems Russia 372M
2005. 7 Chang Hwa Commercial Bank Taiwan 0.78
2005. 8 China Construction Bank China 2.4
2005. 8 Bank of China China China 3.1
2006. 3 Standard Chartered Bank UK 4
2007. 7 Barclays PLC UK 2
2007 Merrill Lynch USA 4.9
2008. 7 Merrill Lynch USA 3.49
2009. 5 China Construction Bank (CCB) China 7.3

Recently, TEMASEK has retrieved from investements. Due to the financial crisis from USA subprime mortgage, a couple of divestement were unprofitable. One example may be the exit from Bank of America. The highlights of divestements are as follow:

Date Investee Nationality Amount(US$Bil)
2008. 3 Tuas Power Singapore 4.2
2008. 9 Senoko Power Singapore 2.4
2008. 12 PowerSeraya Singapore 2.5
2008. 12 Singapore Food Industries Ltd. Singapore 334M
2009. 2 JetStar Austrillia
2009. Bank of America USA
2009. 6 Barclays PLC UK

2.2. Saudi Arabia

The Public Investment Fund (PIF) funded by natural resource - oil, was originally established in 1971 to facilitate the development of the Saudi Arabian national economy. In 1974, PIF was mandated to hold equity positions in joint-stock ventures within its domestic economy. In 2008, PIF will manage and fully own a new sovereign wealth fund. The new SWF managed by the PIF will take on a long term investment horizon similar to that of most sovereign wealth funds.

Saudi Arabia plans to establish a sovereign wealth fund that may exceed USD $900 billion - currently USD 5.3 billion - which would likely be the largest in the world. The effort is likely to be spearheaded by “Saudi Arabia's Public Investment Fund”, which has a mandate to invest only internally, the Saudis' oil wealth had gone partly to the kingdom's central bank, the Saudi Arabian Monetary Authority, and partly into the coffers of the ruling family. The new fund will be a rival for other government-owned investment funds in the Middle East and Asia, which have been increasingly investing in Western companies, particularly financial institutions which incurred in losses stemming from a mortgage meltdown in the United States.

2.2.1. Public Investment Fund (PIF)

The Public Investment Fund (PIF) was established by Royal Decree No.(M/24). The motive behind the establishment of PIF was to provide financing for certain productive projects that are of a commercial nature and are having a significant importance in developing the national economy, which the private sector lacks as the ability to under take alone, either because of insufficient experience or inadequate capital or both.

PIF's sole function is to finance investments in productive projects of a commercial nature whether they are belong to the government and its industrial lending institutions, or to public enterprises, and whether these projects are undertaken independently or in partnership between the said administrative authorities and private institutions. PIF's funding is handled through loans or guarantees, and in special cases, through allocations of public funds to specific projects.

In fulfillment of the Council of Ministers' Resolution No.508, PIF participated in providing the capital of a number of national corporations. By the end of fiscal year 1419., PIF's equity participation in such corporations amounted to SR.16,875 million. The number of corporations in which PIF had injected capital totaled (23) National Corporations, working in different activities such as cement manufacturing, transportation, agriculture, electricity and services. On behalf of the government, PIF also participated in the capital funding of a number of bilateral and Arab corporations. The number of these corporations in which PIF had a capital stake by the end of fiscal year 1419/1420H. totaled 31 bilateral and Arab corporations, working in different activities. PIF's total equity participation value in these corporations amounted to SR. 3,904 million.

2.2.2. PE Investments by SAMA Foreign Holdings

Some of the funds are managed by the Saudi Arabian Monetary Agency (SAMA), the central bank of the Kingdom of Saudi Arabia which was established in 1952. The fund is originated from the export of natural resource, oil and it can reach to USD 431 billion. Saudi Arabias Public Investment Fund would likely spearhead the stakes despite a mandate for internal investment. Part of the kingdoms oil revenues had in the past gone to its central bank, the Saudi Arabian Monetary Authority (SAMA) and into the private wealth of the ruling family, whose investment vehicles are never made public. And while SAMAs balance sheet is public information, its investment has been constrained mostly in US Treasury bonds and shares. Abu Dhabis state investment fund injected Dh 27.6 billion (USD 7.5 billion) into US financial giant Citigroup, a move which could pave the way for other symbolic American conglomerates being owned by foreign governments due to the subprime mortgage crisis.

The appetites of SWFs, whose investment vehicle used to be government debt such as the US Treasuries, have become complex as they searched for greater returns. SWFs have gobbled up a number of US firms including the Dh3.5-billion ($942 million) purchase of Barneys by Istithmar, a UAE financing arm, in August and the Dh2.3 billion ($622-million) stake acquired by Mubadala Development Co, a separate investment arm of the Abu Dhabi government, in global integrated circuits supplier AMD.


2.3. Kuwait

Kuwait realized the need of substituting a depleting asset, oil, with financial investments more than 55 years ago. This was achieved by establishing the Kuwait Investment Board in London in 1953, eight years before Kuwait’s Independence from England. In 1982, the Kuwait Investment Authority (KIA) was established to takeover the responsibility of managing the assets of Kuwait from the Ministry of Finance. The KIA manages two main funds, the General Reserve Fund (GRF) and the Future Generations Fund (FGF). The mission of KIA is to achieve a long term investment return on the financial reserves entrusted by the State of Kuwait by providing an alternative to oil reserves, which would enable Kuwait’s future generations to face the uncertainties ahead with greater confidence.

The KIA’s objectives are as follows: KIA aims to achieve a rate of return on its investment that, on a three-year rolling average, exceeds composite benchmark by designing and maintaining an uncorrelated asset allocation, consistent with the return and risk objectives that are mandated. KIA will endeavor to be a world class investment management organization committed to continuous improvement in the way it conducts business and KIA is committed to the excellence of the private sector in Kuwait while ensuring that it does not compete with or substitute it in any field.

KIA plays a pivotal role in the local economy. It directs and manages the State’s contributions and shares in various major economic entities.

KIA maintains an active involvement with economic and financial developments in Kuwait. It promotes and supports institutionalization of the market through setting up funds and companies to promote and finance local business, and participates in the launching of local investments that have feasible economic returns. KIA helps develop the role of local financial companies by giving them the opportunity to manage some of their investments locally and abroad. The private sector’s regeneration will be maintained through privatization programs that KIA is committed to undertake. Additionally, KIA provides liquidity to the State's Treasury when needed. And, as detailed in the role of the Local Investment Department, KIA has set up several companies in the last few years, primarily to promote investment in Kuwait.

Fund source of the KIA is Oil. KIA invests oil revenues in the global capital markets which mean that decisions on investing and on oil extraction are separate. By transferring oil revenues into the market, KIA contributes to enhance global capital market liquidity.

2.3.1. KIA's Sovereign Wealth Funds

2.3.1.1. General Reserve Fund (GRF)
The GRF is the main treasurer for the Government and receives all revenues (including all oil revenues) from which all State budgetary expenditures are paid. The transfers from GRF to pay the State budgetary expenditures are sanctioned by law. The GRF also holds all government assets, including Kuwait’s participation in public enterprises such as the Kuwait Fund for Arab Economic Development and Kuwait Petroleum Corporation, as well as Kuwait’s participation in multilateral and international organizations such as the World Bank, IMF and Arab Fund.

2.3.1.2. Future Generation Fund (FGF)
The FGF was created in 1976 by transferring 50% from the GRF at that time. In addition, 10% of all state revenues are transferred to the FGF on an annual basis and all investment income is reinvested. No assets can be withdrawn from the FGF unless sanctioned by law. The FGF consists of investments outside Kuwait based on an approved Strategic Asset Allocation in various asset classes. KIA’s asset allocation process is based on World GDP contributions. Exceptions to this rule are those countries where the weighting was skewed due to core holdings in BP and DaimlerChrysler.


2.4. United Arab Emirates (U.A.E)

There exist total of 7 Sovereign Wealth funds(SWFs) in UAE. By reason of existing various management entities for SWFs, it is not such an beneficial way to look over the whole SWFs in detail. Therefore, we will see the 4 largest SWFs in UAE, which show the greatest impact on the private equity investment in the globe. SWFs in UAE are funded through 3 strategies; (1) revenues on commodities owned or taxed by the government, (2) transfer of assets from foreign exchange reserves, and finally (3) financing from the disbursement of sovereign debt on international markets. SWFs of UAE are mostly originated from the revenues of natural resorces (oil) export.

2.4.1. Abu Dhabi Investment Authority(ADIA)

As established in 1976, ADIA's main funding source is originated from a financial surplus from oil exports. ADIA has replaced the Financial Investments Board created in 1967. ADIA is wholly owned and subject to supervision under the government of Abu Dhabi. The fund is an independent legal identity with full capacity to act in fulfilling its statutory mandate and objectives. As much as 75% of its assets are administered by external managers which includes around 60% that is passively managed through tracking indexed funds. Its funding sources derive from oil, specifically from the Abu Dhabi National Oil Company(ADNOC) and its subsidiaries. About receiving 70% of any budget surplus is sent to ADIA, while the other 30% of surplus goes to the Abu Dhabi Investment Council(ADIC).

ADIA invests in a variety of asset classes. Benchmarks can range from the MSCI Index to the S&P 500 Index. Some of the asset allocation consists of equities(developed & emerging markets), sovereign debts, corporate debts, real estate, private equity, and infrastructure.

Among the diversified SWFs, the emirates of Abu Dhabi controls 3 relevant SWFs, which are the most popular and profitable: the Abu Dhabi Investment Authority(ADIA), Mubadala Development Company and the International Petroleum Investment Company(IPIC). Over the course of several decades, all three of these investment funds have been established to manage the emirate's oil and gas income, strengthen its position in the regional and global oil markets, and eventually help diversify Abu Dhabi's economy away from the risks posed by volatile oil markets.

In terms of ADIA’s private equity investments it has been an active investor since 1992 and views the asset class very positively. ADIA is a flexible investor and does not have a particular fund preference or geographic investment focus but takes into consideration the history and track record of fund managers when considering new investments. As a result, ADIA has relationships with some of the top private equity fund managers worldwide including the Carlyle Group. ADIA also has a stake in private equity firm, Walden International.

ADIA will invest in private equity opportunities on a global scale including emerging markets and has previously invested in funds focused on Turkey and Eastern Europe. ADIA is also keen to take advantage of opportunities in the Gulf and MENA region itself. Typically ADIA will not commit less than USD 50 million to any fund. It is estimated that in 2007 ADIA had approximately 5~10% of its total asset under management allocated to private equity.

ADIA has actively been expanding the number of minority stakes in blue chip financial services businesses it holds which in part has been achieved through direct transactions. For example, in May 2008 ADIA took a 8% stake in Egyptian based EFG-Hermes Private equity and in November 2007 ADIA invested USD 4.5 billion in global investment bank Citigroup. In addition in Q4 2007, ADIA purchased a 9% stake in alternative investment manager Apollo Management. ADIA also has a stake in Tunisian bank, Banque de Tunisie et Des Emirats. In line with these purchases, it has been suggested that ADIA could be approached directly by private equity firms seeking loans for large scale leveraged buyouts, thus bypassing the traditional centers of banking and finance.

As the case of major direct foreign investments by ADIA, we can say the following examples: Ares Management LLC (USA) with 20% ownership, Infrastructure Leasing & Financial Services Limited (India) with 10% ownership and Apollo Management LP (USA) with 9% ownership.

2.4.2. Dubai International Capital under Dubai Holding

Dubai Holding was created in 2004 to consolidate and lead Dubai’s large-scale infrastructure and investment projects. Dubai Holding is committed to improving every aspect of life in the region by investing in life improving industries. Dubai Holding’s achievements have helped build the success and prosperity of the United Arab Emirates and the surrounding region.

Dubai International Capital (DIC) is an international investment company established in 2004 in Dubai, United Arab Emirates, as a limited liability company and is a subsidiary of Dubai Holding. With no state funding, DIC invests private funds on behalf of Dubai Holding and several large third party investors around the world. DIC’s stated investment objectives is to generate above average returns from high growth opportunities through a number of channels that include both private equity buyouts, buy-ins, bolt-ons and global public equities. By the end of 2007, DIC managed approximately USD 13 billion of assets, based on transactional values.

DIC invests through three divisions. Private equity investments are mostly conducted by Private Equity Division of DIC. It is a privately funded private investor that focuses on leading mid cap LBOs. Since its establishment at the end of 2004, it has led 6 LBOs with an aggregate value of €5.8 billion and it has invested €1.8 billion in those transactions. It has established a market leading position for secondary LBO deals valued above €500 million. 2007 was a year of considerable activity and achievement for DIC private equity. It achieved its first exit and a substantial realized gain through the sale of Tussauds to Merlin Entertainments Group. Three new businesses were added to the portfolio during 2007 – Mauser., Alliance Medical and Almatis.

The total asset it controls reaches to USD 82 billion and it is funded from the oil export. With regard to the sole PE investment, USD 13 billion is taken care of by its management experts.

As the case of major direct foreign investments by DIC, we can say the following examples: Travelodge (UK) with 100% ownership, Mauser AG (Germany) with 100% ownership and Chiranjjeevi Wind Energy Ltd (India) with 40% ownership.

2.4.3. International Petroleum Investment Company (IPIC)

IPIC is the Abu Dhabi state enterprise which is responsible for all foreign investments in the oil chemistry sector. It is established in 1984 and wholly owned by the Government of the Emirate of Abu Dhabi. The IPIC portfolio includes investments in Austria, Egypt, Pakistan, Spain, South Korea, UAE, Germany, Oman, Japan and Portugal. Investments include downstream hydrocarbon operations, petrochemical plants, pipelines, power utilities and shipping.

IPIC operates USD 14 billion, which is originated from oil export. Unlike other SWF in UAE, its entity structure is corporate, not governmental.

IPIC holds the stake of worldwide corporations. IPIC owns 70% stakes of Man Ferrostal in Germany and Hyundai Oilbank Co. Ltd in South Korea, 30% stake of Pak-Arab Refinery Limited in Pakistan, 20% stake of Oman Polypropeiene LLC in Oman, and 15% stake of Arab Petroleum Pipeline Company in Egypt.

2.4.4. Mubadala Development Company

Established in October 2002 as a Public Joint Stock Company, Mubadala Development Company (MDC) is a wholly owned investment vehicle of the Government of the Emirate of Abu Dhabi in UAE. MDC’s sole shareholder is the Government of the Emirate of Abu Dhabi. This wealth fund has the structure of a corporation. It has a tendency to invest in high technology and aerospace firms. It has also invested in oil fields, real estate partnerships and hospitals.

The source of MDC’s operation is originated from oil export, which is amounted to USD 14.7 billion. It shows the corporate entity structure.

MDC has invested several companies such as buyout, joint venture, private equity etc: Pearl Energy Ltd (Singapore) as buyout type with 100% ownership, SR Technics (Switzerland) as private stock with 70% ownership, Capitala (Singapore) as joint venture with 51% ownership, Carlyle Group (USA) as private equity fund with 7.5% ownership and Related Companies (USA) as private real with 7.5% ownership.


2.5. China

China Investment Corporation (CIC) was established on Sep. 29, 2007 - six months after China first announced its intention to create such a soverign wealth fund. In May 2007, China Jianyin Investment Company designated to manage any asset purchases until the SWF was set up, and after a few delays, CIC officially started operations with $200 billion in initial capital. According to the top Chinese officials, the CIC was created to improve the rate of return on China's $1.5 trillion in FX reserves and to soak up some of the nation's excess financial liquidity. Depending on its performance with the initial allotment, CIC may be allocated more of China's growing stock of FX reserves. Since its creation, the CIC and its subsidiaries have already made several investments. These investments were criticized as policital in nature, the CIC's top management have repeatedly asserted that future investments will be commercially-base, seeking to maximize the return on investment. A number of experts in international finance have concerned about the recent growth in SWFs and China's creation of the CIC, under the grounds that major shifts in SWF investments potentially could distrupt global financial markets and harm the U.S economy. Despite the global concerns, China has responded by maintaining CIC will prove to be a source of market stability. Again, China has stated that it has no intention of using its SWF to cause harm to the US economy or global financial markets.

The working capital for the CIC is coming indirectly from China's approximately $1.5 trillion in foreign exchange reserves. Under a plan approved by the Standing Committee of China's National People's Congress in June 2007, the Ministry of Finance was to issue up to USD 200 billion in special treasury bonds to provide the CIC with capital to purchase foreign exchange from China's central bank, PBOC (the People's Bank of China).

2.5.1. CIC's organizational structure

CIC has three major departments for its investment functions:

- Central Huijin Investment Company (CHIC), which will provide capital to domestic financial firms, China Jianyin Investment, which will manage domestic assets and the disposal of non-performing loans, and A new department to manage overseas investments.

2.5.1.1. Central Huijin Investment Company
Its main purpose was to recapitalize and stabilize China's major state-owned commercial banks. In September 2007, the Ministry of Finance issued special treasury bonds and acquired all the shares of Central Huijin from the People's Bank of China. The acquired shares were injected into China Investment Corporation as part of its initial capital contribution for around USD 67 billion. However, Central Huijin's principal shareholder rights are exercised by the State Council. It is authorized by the State Council to exercise rights and obligations as an investor in major state-owned financial enterprises on behalf of the Chinese Government. Central Huijin has stakes in a number of financial enterprises including five large commercial banks, two securities companies, one financial holding company, one investment company and one reinsurance company. This sovereign wealth enterprise makes equity investments in domestic financial institutions. It also owns the China Jianyin Investment Limited which was the original purchaser of the $3 billion stake in the Blackstone Group. It still owns a very large stake in Bank of China Limited.

2.5.1.2. Stable Investment Corporation
It is an arm of the CIC that invests in short term instruments such as money market funds. A U.S. regulatory filing showed that Stable Investment Corp, was the biggest institutional shareholder in the fund as of Sept. 1, 2008, with a stake of potentially more than $5 billion.

2.5.1.3. Beijing Wonderful Investments Ltd
It is an arm of the CIC that holds 44.2 percent economic interest in Blackstone LP.

2.5.1.4. Fullbloom Investment Corporation
It is a wholly-owned subsidiary (SPV) that holds Teck Resources Limited

2.5.2. CIC's PEI

Roughly $110 billion of the fund’s capital has been dedicated to the domestic financial sector. The remaining $90 billion, slated for international markets, has drawn the most interest from international observes.

2.5.2.1. Foreign investment
The first $8 billion of international investments went to high-profile stakes in Blackstone ($3b) and Morgan Stanley ($5b). The Blackstone deal was a direct, pre-IPO stake that has since lost nearly half of its value, provoking withering ciriticism from within China. CIC’s stake in Morgan Stanley, however, is structured to limit CIC’s potential downside. CIC holds convertible bonds with a 9% return, convertible to stock after a tie-up period. Other investments that CIC has made are described in the table below.

Investment Amount Details
Morgan Stanley $ 5 billion 9.9% stake through convertible bonds with 9% yield
Blackstone $ 3 billion 9% pre IPO stake
Visa $ 100 million Pre IPO stake
China Railway (HK) $ 100 million Pre IPO stake

2.5.2.2. Private equity investment
Private equity funds are among - CIC's so-called alternative investment products -, which also include some proposed direct investments in global property markets. Details of PE investment cases are as follows :

2.5.2.2.1. USD 260 Million investment on CITIC Capital (July 2009)
CIC has agreed to purchase a 40 percent stake in Hong Kong-based private equity and real estate fund manager CITC Capital. A report by Reuters suggests the stake would cost $258 million and that CITIC Capital would issue new shares to Beijing-headquartered CIC in a deal aimed at boosting its capital base to HK$5 billion ($645 million) from HK$3 billion. An investment in CITIC Capital by CIC would mean that CITIC Pacific and CITIC International Finance would see their holding in CITIC Capital drop from 50 percent each to 30 percent each with CIC controlling the rest, Reuters reported. The investment would provide CIC exposure to China’s real estate market through the management platform. The deal does not, however, constitute a commitment to invest in CITIC’s funds.

2.5.2.2.2. Morgan Stanley, Blackstone for investment (July, 2009)
CIC has finalized an allocation of $500 million to Blackstone Group, on July 2009. CIC also plans to have Morgan Stanley oversee additional money, the newspaper reported. The newspaper reported last month that CIC was poised to place $500 million with Blackstone. The newspaper said the $200 billion Beijing-based CIC is favoring firms it already knows as it pushes into U.S. hedge fund investing. The fund has invested $10 billion to acquire stakes in Blackstone and Morgan Stanley since 2007.

2.5.2.2.3. USD 4 Billion In J.C. Flowers Fund - Investing Indirectly (April 2008)
The CIC plans to invest $4 Billion into the J.C. Flowers Fund, a private equity fund headed by former Goldman Sachs trader, Christopher Flowers. The investment will be aimed at distressed financial institutions. It will be the first private equity fund to be launched by CIC since it was established by the Chinese government in late 2007 as part of Beijing's plan to diversify the investments of its huge foreign exchange reserves and to seek better returns from global markets.


2.6. Korea

Korea Investment Corporation (KIC) was established on 1 July 2005 with a view to enhance sovereign wealth and contribute to the development of the domestic financial industry. Its missions are increasing the long-term purchasing power of sovereign wealth by managing the country's public funds, growing into Korea's premier investment management company specializing in overseas investing and contributing for development of the local asset financial industry.

KIC manages assets entrusted by the Government, the Bank of Korea, and other public funds under the National Finance Act. KIC directly invests the entrusted assets or re-entrusts the assets to external fund managers. The scope of assets that KIC may invest in is mandated under the KIC Act. KIC is currently authorized to invest in securities as defined in the Act on Capital Market and Financial Investment Business, such as stocks, bonds, as well as hedge funds and alternative assets; foreign currencies and derivatives as defined in the Foreign Exchange Transaction Act; and real estate. At present, investments are concentrated in stocks and bonds.

Since KIC launched its first investment in November 2006, its return on net in 2007 and 2008 were 7.40% and minus 13.71% respectively.

In July 2006, the Bank of Korea and Ministry of Strategy and Finance (MOSF) entrusted KIC with the assets of $20 million in July 2006. KIC has 35% of a direct management and the remaining 65%, an indirect management. In January 2008, MOSF entrusted $2 million to invest in alternative assets. KIC invested the fund in Merrill Lynch, of which return on net reached minus 80%, aligned with financial crisis. In October 2008, KIC was entrusted the foreign exchange equilibrium fund of $2.7 million. In July 2009, MOSF entrusted $3 million.

2.6.1. KIC's PEI

As KIC's investments history has been only 2-3 years, its portfolio is concentrated on bonds or stocks. Except the U.S. treasury bond and interest invested in Merrill Lynch, among $20 million of porfolio, 51.7% is bonds and 28.3%, stocks. 16.7% was invested in asset backed securities and 3.4%, cash or derivatives.

However, investments will be expanded in alternative assets that have a low correlation with the traditional asset classes and hedge against inflation in order to preserve the long-term value of investment portfolios. According to regulations set forth under the KIC Act, KIC may pursue direct investment or indirect investments by depositing or re-entrusting assets to Korean and overseas financial institutions. KIC may re-entrust assets to financial institutions as defined in the Act on Capital Market and Financial Investment Business.

On 15 July 2009, the CEO of KIC, Young Wook Chin announced KIC would invest a part of $3 million entrusted early July by MOSF in alternative asets such as hedge fund, private equity, real estate, commodity index, etc. KIC would start investing $1 million in 2009 and increase alternative investment up to 20% in the long run. KIC would make indirect investments in principal through investment institutions.


3. Writer
(1) Singapore : Cho, Young-Sil
(2) Saudi Arabia : Park, Soo-Yong
(3) Kuwait : Kim, Young-Hwan
(4) United Arab Emirates : Yang, Jin-Wan
(5) China : Jung, Soo-Hyun
(6) Korea : Lee, Sun-Hee


4. Editor : Yang, Jin-Wan


5. APPENDIX

(1) "Kingdom of Saudi Arabia Ministry of Finance", http://www.mof.gov.sa/en///
(2) "Saudi Monetary Agency", http://www.sama.gov.sa/Pages/Home.aspx
(3) "Private Equity Connect Quarterly Report by Private Equity International", Volume 2, Issue 1, Q1 2008
(4) "Sovereign Wealth Fund Activity in Private Equity and Private Real Estate", WSG Annual Meeting, Munich 2008, September 12, 2008
(5) www.researchandmarkets.com, Sovereign Wealth Fund Review, Activity in Private Equity and Private Real Estate
(6) "Dubai International Capital", Private Equity, Annual Review 2007
(7) www.SWF Institute.com
(8) www.china-inv.cn
(9) "Sovereign Wealth Fund Institute" - China Investment Corporation
(10) "China Investment Corporation: Threat or opportunity?", M.H.Cognato, NBR Analysis
(11) "CRS report for Congress: China's Sovereign wealth fund", Michael F. Martin, CRS, 2008
(12) "2007/2008 KIC Annual Report", www.kic.kr; various sources
(13) "Report on the Management of the Government's Portfolio for the Year 2007/08", GIC, 2008
(14) "Risks & Opportunities, TEMASEK REVIEW 2008", TEMASEK Holdings, 2008


6. Common List of Abbreviations

(1) ADIA - Abu Dhabi Investment Authority
(2) CalPERS - California Public Employees Retirement System
(3) CIC - China Investment Corporation
(4) GCC - Gulf Cooperation Council
(5) GIC - Singapore's Government Investment Corporation
(6) GPF - Norway's Government Pension Fund - Global
(7) HSF - Trinidad and Tobago - Heritage and Stabilization Fund
(8) KIA - Kuwait Investment Authority
(9) KIC - Korea Investment Corporation
(10) LIA - Libyan Investment Authority
(11) LMTI - Linaburg Maduell Transparency Index
(12) NWF - National Welfare Fund (Russia)
(13) QIA - Qatar Investment Authority
(14) SAFE - State Administration of Foreign Exchange (China)
(15) SAMA - Saudi Arabian Monetary Agency
(16) SIF - Strategic Investment Fund (France)
(17) SWE - Sovereign Wealth Enterprise
(18) SWF - Sovereign Wealth Fund

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