Sovereign Wealth Funds Forced to Rethink Strategy

As we usher in a new year, the outlook remains uncertain in the investment world. Investors the world over are trying to fathom where is best to buy into. Even the super rich Sovereign wealth funds are being cautious – despite some assets looking arguable cheap.

The head of Qatar’s $100 billion Sovereign wealth fund told German newspaper Handelsblatt recently that the debt crisis in Europe is the worst in decades, clouding the investment outlook and making any long term decision very tricky.

”Currently, we can only act with a view to the short term, longer term forecasts cannot be maintained in view of the insecure situation in Europe and the United States,” Qatar Holding chief executive Ahmad Mohamed Al-Sayed was quoted as saying.

”This situation dwarfs everything that the continent has seen in the past 50 years … It remains to be seen whether all the various states truly decide in favour of a common future.” He added.


The uncertain outlook for oil prices and the need to increase domestic spending could make things even harder for Gulf Sovereign wealth funds, making them even more selective when investing abroad. If oil falls below $80 a barrel analysts fear there will be very little capital to invest for the Gulf funds. To date, OPEC is on course for near-record oil export revenue thanks to over $100-a-barrel oil, and many members will be hoping prices stay there as they tackle the challenges from higher social spending.

The era of cheap oil is over according to Petrobas Chief Executive Office Jose Sergio Gabrielli de Azevedo. At the annual Platts Global Energy Outlook Forum he said the “new normal will be a very tight oil market”. Good news for the Middle East Sovereign wealth funds, but probably not enough for them to put their hands deep in their pockets.


Distressed period are typically a time, as history shows, that the oil-rich Sovereign wealth funds snap up ‘opportunities’ to acquire trophy assets. This would normally appeal to Gulf investors, who have long favoured European assets to Asian ones. But there is a new caution in the air.

As the Euro zone debt crisis drags on, there is a turning of the tables, and despite the fact that there could be many opportunities to buy European companies on the cheap, Sovereign wealth funds are beginning to turn their attention away from the West and divert their attention eastwards – where there is growth.

The lessons learned from the 2007-2008 crisis have been a wake up call to many – and non-more so than the Sovereign wealth funds that jumped in head first to rescue the likes of Western banks. Funds snapped up stakes in several banks including Barclays, Credit Suisse, Citigroup and Merrill Lynch.


Despite the caution; there has been some action. Abu Dhabi’s investment fund Mubadala recently became part-owner of struggling music giant EMI – ending months of drawn out negotiations. The London-based group is being split in two after 80 years as an independent British music company after finally reaching a $4.1 billion consortium deal led by Japan’s Sony and Vivendi’s Universal Music.

Sony won the auction for EMI’s music publishing operations in a deal worth $2.2 billion, while France’s Vivendi’s Universal Music Group won EMI’s recorded music auction in a deal worth $1.9 billion. They beat off rival bidders Warner Music Group and BMG.

“We plan to acquire EMI’s recorded music division on attractive terms, adhering to our principle of total financial discipline,” Vivendi Chief Executive Jean-Bernard Levy said in a statement.

It marked Sony’s biggest acquisition since 1989 when it bought out Columbia Pictures in a deal worth just short of $5 billion.

“It is good to see asset management companies getting involved,” Mike McGuire, Vice President of Gartner’s Media Industry Advisory Services told Global Citizen. “They obviously see some value in the catalog, and they see the opportunities. There are so many ways to monetize music, and it is interesting to see asset managers going after that space.”

He added that buyout firms have significant backgrounds in being able to help businesses streamline, “They now need to determine the roles of the label versus the role of the management.”


Mubadala, the Arabic word for ‘exchange’ was established in 2002 by the Government of Abu Dhabi, with a mandate to facilitate the diversification of Abu Dhabi’s economy.

Under Abu Dhabi’s Economic Vision 2030, officials plan to cut the emirate’s reliance on oil to 36 per cent of GDP by 2030.

And it is paying off; non-oil activity was the biggest driver of the emirate’s GDP last year, despite rising oil output. Non-oil activity accounted for more than half of growth last year, contributing 50.3% to GDP.

Described by Mubadala CEO Khaldoon al-Mubarak as having a “unique mandate” to act as a “catalyst for economic diversification,” the group’s investments now encompass much more than oil and gas, and includes aerospace interests at home and abroad. The $45 billion Sovereign wealthy fund is also heavily invested in property and communications — and it owns a stake in Ferrari.

Despite its international mandate, Mubadala’s core asset is a 51% stake in Gulf-based gas and liquids project Dolphin Energy and it also oversees Masdar, Abu Dhabi’s green city project.

Mubadala may have deep pockets, but it is not immune to the global economy, and the SWF is picking its business partners carefully.

It is well aware of its burgeoning young population, more than half of the GCC is under 30 years of age. This growing population presents many unlocked business opportunities – and Mubadala wants to be there to foster the talent of the future, and capitalize on it.

“There is huge potential here. A number of people wanted to partner EMI to be able to tap into the desire that young people have, and to be able to provide them a service that is potentially very valuable,” said McGuire.

This new conservative approach from the wealthy from Abu Dhabi to Qatar may see less buyouts in Europe until the future of the 27-member bloc becomes more apparent, and until a credible plan is devised to tackle the debt crisis we may see funds shun Europe in favour of more stable economies in the East.