Sovereign wealth fund money, which exceeds $7.8 trillion, are emerging as one of the most powerful clandestine forces shaping equity markets and company strategy.
In the past few months they have hit the headlines as the white knights of global equity markets, baling out struggling investment banks such as Morgan Stanley, Merrill Lynch, UBS and Citigroup.
Rather than making takeover bids for big companies that would attract the attention of politicians and foreign investment review boards, they are buying minority stakes, or bidding for small companies, which makes them appear harmless, passive investors.
But as hedge funds have proven, owning a small stake in a company can influence strategy and even survival.
The reason is simple: sovereign funds are financially opaque, lack transparency and in less than four years will triple their wealth to at least $20 trillion.
The following are some of the ways sovereign wealth funds can influence a company’s strategic direction in Australia without having to make a takeover bid.
1. Build equity stakes in a company through nominee companies. This means they can buy as many shares as they like across a range of nominee companies without being detected as to who the real owner is. In more and more cases sovereign wealth funds are using nominee companies to build up stakes in companies.
2. Borrow shares from superannuation funds and custodians before an annual general meeting or extraordinary general meeting to cast votes for or against particular agenda items. In Australia most superannuation funds lend out their shares for a fee. This means companies can borrow shares before an annual meeting for the purpose of using those shares to cast votes. This can be anything from the appointment of a director who is sympathetic to the sovereign wealth fund, through to knocking back or accepting something as important as a takeover proposal.
3. Sovereign wealth funds have been building stakes in hedge funds and private equity funds as a loophole to escape foreign investment review board approval. China Investment Corp has a big stake in private equity giant Blackstone These funds act as the friendly face of the sovereign wealth fund. In addition, under the Foreign Acquisitions and Takeovers Act (FATA) paragraph eight outlines that any state-owned entity that takes a direct investment or interest in an Australian company, regardless of the stake, must ask for FIRB approval. But under the Act an investing company need seek approval only when it is seeking 15 per cent or more of an Australian company. Over the past few years many private equity funds have set up shop in Australia and formed joint ventures with local private equity operators or local companies to get stakes in Australian companies. For instance, the Nine Network is now more than 50 per cent owned by private equity. This type of structure allows sovereign wealth funds to build stakes in companies as they increasingly buy stakes in private equity and hedge funds.
4. Take substantial stakes in strategic projects of companies. This escapes FIRB and gives huge control over a company’s strategy. For instance, Santos announced on June 30that it had formed a $US2.5 billion partnership with Malaysia’s Petron as to develop a coal seam gas-fed LNG plant in Queensland.
5. Buy smaller resources companies which are capital constrained as it has always been part of accepted policy and interpretation of national interest guidelines that it isin the interests of Australia to access capital from overseas to develop these resources. These projects can end influencing price and industry.
6. Buy a 10 per cent stake in a big company and wield power behind the scenes as a substantial share holder by threatening to dump the stake if certain things aren’t agreed to. Headline-making deals such as the surprise $14 billion raid on Rio Tinto shares by Aluminum Corp of China (Chinalco) coupled with the $1.37 billion bid by China’s state-backed Sino steel bid for iron-ore hopeful Midwest do not attract attention but in the future can shape policy.