Saudis may start buying real stuff in a big way instead of Treasuries

Saudis Plan Huge Sovereign Wealth Fund

By Henny Sender, David Wighton, and Sundeep Tucker
Financial Times, London
Friday, December 21, 2007

http://www.ft.com/cms/s/0/412752ae-afa4-11dc-b874-0000779fd2ac.html?ncli...

Saudi Arabia plans to establish a sovereign wealth fund that is expected to dwarf Abu Dhabi's $900 billion and become the largest in the world.

The new fund will be a formidable rival for other government-owned investment funds in the Middle East and Asia, which are playing an increasingly active role in channelling capital to Western companies, particularly financial companies hard hit by the US mortgage meltdown.

News of the Saudi plan comes as Temasek of Singapore is in "preliminary" talks with Merrill Lynch concerning a multibillion-dollar stake in the ailing investment bank, according to a person familiar with the matter.

"Merrill and Temasek have been talking for a while about this, although there are no indications that a deal is imminent," the person said. Temasek was also approached as a possible investor in UBS and Morgan Stanley, although the investment banks later struck deals with Government of Singapore Investment Corp. and China Investment Corp. respectively, the person said.

These stakes have avoided a serious political backlash but potential investments from the Saudis are likely to be subject to greater scrutiny.

The effort is likely to be spearheaded by Saudi Arabia’s Public Investment Fund, which has a mandate to invest only internally. Previously, 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.

While the balance sheet of SAMA is public information, bankers say the figures capture only a small percentage of the total wealth of the country. The myriad investment vehicles of the various members of the royal family have never been transparent.

Until now, SAMA's investment policy has been conservative and largely limited to investment in bonds, especially US Treasuries, and shares. That contrasts with the mandate of its peers in the Gulf, which is increasingly geared to higher returns for when oil runs out, by investing in alternative assets such as private equity and hedge funds.

That emphasis has lately yielded to a focus on buying major stakes in troubled financial firms on both sides of the Atlantic in the wake of the subprime mortgage meltdown.

In contrast to its neighbours, Saudi Arabia has expanded its spending, and next year's budget includes ambitious infrastructure projects. King Abdullah, Saudi Arabia's ruler, is believed to be a key sponsor of the investment initiative.

People close to the situation said Merrill's strategy was being driven from New York, giving John Thain, who succeeded Stan O'Neal as chairman and chief executive this month, an early chance to stamp his mark on the bank.

However, Bill McDonough, a former president of the New York Federal Reserve, is also expected to play a key role in the talks. He is one of the 11 luminaries on Temasek's international advisory panel, which also includes David Bonderman, the founder of TPG, and Ratan Tata, the Indian industrialist.

Mr McDonough is also an influential figure at Merrill Lynch, having joined the bank last year as vice-chairman and special adviser to the chairman.

In October Merrill announced $8.4 billion of writedowns on mortgage-related investments and corporate loans, and the departure of Stan O'Neal, its long-serving chief executive.

Some analysts predict that Merrill will announce an additional $8bn writedown when it unveils its fourth-quarter results in mid-January.

The US bank's stock price has nearly halved this year, cutting its market capitalisation to about $47 billion. Dealmakers believe that Merrill would be comfortable with Temasek taking a stake of around 10 per cent, should a deal materialise.

Merrill Lynch and Temasek declined to comment on Friday.

Morgan Stanley announced this week that it is to receive a $5 billion capital injection from China Investment Corporation, having disclosed a total writedown in the fourth quarter of $9.4 billion after a disastrous subprime bet.

Last week UBS took nearly $10 billion from the Government of Singapore Investment Corp, a sister sovereign wealth fund of Temasek, while Citigroup received $7.5 billion last month from the Abu Dhabi Investment Authority.

The deals have underlined the growing importance of sovereign wealth funds in the Middle East and Asia, and their increasingly bold moves to take advantage of the need for capital among western institutions.

The three deals have yet to be endorsed or scrutinised by shareholders of the investment banks. The Financial Times reported on Friday that UBS is facing a shareholder revolt over its planned re-capitalisation deal with GIC and a mystery investor based in Saudi Arabia.

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