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GE/Mubadala: More Partnership for Sovereign Wealth Funds
By Rachel Ziemba
Earlier today GE and Mubadala, one of the many investment vehicles of the Abu Dhabi government announced a joint venture in commercial and infrastructure finance as well as linking Abu Dhabi's Masdar in the GE research network around alternative energy. The financing joint venture is particularly interesting - each will invest $4 billion over the next few years, which will be leveraged up to include around $40 billion in investment and the entity will be headquartered in Abu Dhabi - this is a real way to build expertise in originating and managing loans.
This deal builds on a previously announced deal between Credit Suisse, GE and Mubadala to invest in infrastructure development in the region and longer standing ties between GE and the Emirate - Abu Dhabi is already a GE servicing center and a big purchaser of GE products in aircraft, health and energy sectors. GE’s 2007 revenues in the middle east exceeded $5 billion, an 50% increase from 2006.
By creating a joint venture, this investment may steer clear of political concerns and is likely being constructed to avoid a CFIUS filing (the U.S. national security test). The investment in GE directly will likely be relatively small (it has pledged to become one of the top 10 institutional investors in GE) but it is unlikely to take any management role in the company itself. Though it will likely influence the financing arm and any new fund to manage their joint activities. However, influence is garnered in different means and Abu Dhabi will clearly be an important investor, customer and partner for GE.
Breaking Views suggests that it could be a win-win for both entities, providing guaranteed business for GE and, for now a guaranteed floor in its price as Mubadala aims to gather a stake in GW. For Abu Dhabi, such an joint-venture might build more jobs and needed infrastructure than a ferrari theme park.
It might also be a more feasible joint venture than those contemplated with Boeing and Lockheed-Martin in the near past. But going beyond Abu Dhabi, the deal seems emblematic of many ongoing trends in the region.
Sovereign investors are seeking out partnerships and joint ventures that have domestic economic spinoffs, technology transfer contributing to the development of sectors prioritized in economic development and diversification (preferably those that will add jobs). Kuwait's partnership with Dow Chemical is another example. Not only did Kuwait petroleum invest in Dow's basic materials arm last year but the KIA provided capital to support Dow's takeover of Rohm and Haas. These deals tend to involve technology transfer and GCC countries are trying hard to encourage a local knowledge economy.
GCC funds are seeking to be more than just silent partners providing the capital. Increasingly they are seeking out deals where they can be partners not be seen as 'dumb money' adding value to the company and gaining more than just balance sheet returns. The goal is finding good companies, investing in what you know, adding value and being able to invest for the long-term. Hmm sounds like Warren Buffett? Incidentally Buffett was a co-investor in the GE/Rohm and Haas deal.
Such deals are one of many ways that GCC funds are diversifying their holdings and taking larger stakes - the hope presumeably is that investing in GE will give a better return than U.S. treasuries and agencies. Given the significant training component involved and investment in Abu Dhabi this seems very likely. With the dollar peg still in place, buying US assets is more affordable than a comparable European firm would be.
Private-equity style funds like the Qatar investment authority and funds of Dubai are also taking larger shares in foreign companies or setting up joint ventures. Not all of these have domestic spillovers but many do. In the case of Qatar, the financial sector has been a bigger attraction - perhaps because of Qatar's small population. But now almost all GCC countries (the Saudi Fund was officially approved last week) have a fund that has or will take significant stakes and in some way is targeting foreign investments with domestic spillovers. Of course, such investors are only one of the many investment models for sovereign wealth management. Even if only a small share of the petrodollar wealth is invested in such sectors, it could have a significant difference.
U.S. based global companies are seeking out new markets abroad, especially in emerging markets and to the extent possible lock in deals. In this way, GE has offset recent losses from GE capital by reporting future prospects.
Sovereign funds (or rather the government) are taking on more leverage directly by raising capital or indirectly by participating in a fund that is then leveraged. Mubadala previously announced plans to seek a credit rating (like Temasek) which may allow it easier access to financing (and require it to be more explicit about its holdings). The joint fund will be levered up, perhaps at a lower ratio than private sector counterparts. State holding companies have tended to be more willing to use leverage to increase their returns. This then makes them subject to credit costs.
The private sector (foreign and domestic) is providing more project financing - a good thing given the number of projects in the pipeline. While there is plenty of domestic liquidity, there is a risk that with global credit tight and revaluation expectations in full force that the cost of project finance in dollars may dry up (something that has been happening in Qatar and especially Saudi). This along with higher costs and supply constraints could lead to delays in some projects despite the fact that many people are looking to invest in infrastructure in the region which is in the midst of an infrastructure boom making up for decades of underinvestment.
So perhaps we'll see more of such deals?
UPDATE: On a related note, two op-eds on SWFs put forth the argument that deals like this one in which most of the investment is in emerging markets may be more the norm rather than investments in the U.S. Bill Pesek writes that ADICs investment in the Chrysler building is perhaps an aberration not a trend as funds are planning to invest outside the U.S. This is clearly the goal of many funds but While SWFs are moving away from U.S. assets and are trying to do so more in the future - they may be limited in real diversification as long as they maintain their currency pegs. Meanwhile Arnab Das suggests that SWF growth will slow as global credit market weakness will erode imbalances. He brings up a good point - much depends on the asset allocation of the entities that receive the foreign exchange, and we should focus on the real effects of such allocation shifts. But its not clearthat imbalances are really eroding, at least not yet. The surpluses of China and the Gulf seem likely to be even larger in 2008 than in 2007, though in China's case, the plateauing trade surplus means that it is capital inflows which may swell its surplus. In 2008, the largest inflows of capital have likely been to central banks not SWFs. All this means, there is a lot of capital to place, and no guarantee it will be directed at the U.S. banking system.