The IUF's Private Equity Buyout Watch

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Sovereign Wealth Funds (SWF) – state-owned, state-run investment entities– have begun to generate controversy and debate as they have recently emerged as significant global financial players. The debate has largely focused on SWFs derived from central bank foreign exchange reserves (e.g. Singapore, China) or earnings from non-renewable natural resources, chiefly oil and gas (the Middle East), as distinct from government-owned pension reserve funds (such as Norway's state pension fund). Fed by rapid increases in commodity prices and in foreign reserves resulting from growing global trade imbalances, the SWFs (some of which are decades old) have begun to shift their investment strategy away from bonds and small, diversified stakes in public equities into both high-profile big stakes in listed equities and into "alternative assets", chiefly private equity.

The recent infusion of SWF money into major global investment banks in the wake of the sub-prime crisis has highlighted their new role as "mainstream" financial actors. Concern about SWFs has to date been largely expressed in terms of threats to national ownership of politically or economically "strategic industries", loosely and variously defined as ranging from infrastructure (e.g. US ports) to the French food TNC Danone; loss of control over supplies of raw materials; heightened potential for international financial instability, as major investors acquire/divest assets with no regulation or transparency; and the potential subordination of corporate governance to questionable, even hostile political agendas.

SWFs have recently taken large stakes in public stock exchanges, major manufacturing, service and infrastructure transnationals, and thrown a lifeline to private equity funds searching for "permanent money". In addition to the Chinese SWF stake in Blackstone, for example, two Abu Dhabi government investment entities have taken large stakes in Apollo and Carlyle. The funds have also been operating aggressive buyout operations of their own.

Estimates of the size, portfolio composition and investment strategies of the SWFs vary enormously, highlighting the total lack of transparency at the heart of their operations. Estimates for the assets under management of the Abu Dhabi Investment Authority, for example, the largest SWF, range from USD 500 billion to 875 billion; for the Singapore Investment Corporation from USD 100 billion to 330 billion. Estimates of their portfolio composition are simply guesses.

The OECD estimates the total current global SWF wealth at ca. USD 2.4 trillion. This compares with some USD 1.6 trillion attributed to global hedge funds, though this figure is also a guess.

Comparison with the assets under management by private financial corporations is instructive. According to the United Nations Commission on Trade and Development (UNCTAD), whose most recent ranking of the top 50 financial TNCs dates from 2004, each of the top 10 had assets under management of well over USD 1 trillion (e.g. UBS 1.73, Citigroup 1.48 trillion, etc.), dwarfing even the largest SWF.

Morgan Stanley has predicted that by 2015, foreign reserve-based funds like those of China and Singapore will have caught up with today's leading commodity-based funds, and that both classes will dispose of assets on the order of USD 6 trillion. This again is a guess based on fragile suppositions.

All available evidence, however, points to a general and pronounced shift of SWF investment into equity and into "alternative assets" – hedge funds, private equity and real estate. Apart from sensitive political issues, these investments bear directly on employment, and require direct engagement by unions.

The transparency/governance issues raised by SWF investments are similar to those raised by private equity and hedge fund investments. TUAC has sensibly proposed that from this point of view SWFs not be treated separately from other unregulated pools of global financial capital in proposals for greater regulation.

For unions organizing workers in companies in which SWFs threaten to acquire significant or total control, the issues are also similar to those confronting unions faced with a hedge fund incursion or private equity takeover: gaining access to information about investment/employment plans before and under the acquisition, maintaining continuity of employment conditions/union rights and recognition, establishing employer responsibility and accessibility and securing long-term investment in the future of the company.

The failed bid for UK supermarket chain Sainsbury's by the Qatar Investment Authority, which ultimately floundered when pension fund trustees insisted on the buyer meeting stringent pension fund reserve requirements, can serve as a positive example of successful union action in this situation.