Sovereign funds take the reins of investment

A financial ghost of 11 trillion dollars, as heavy as the GDP of the United Kingdom, France and Germany combined, travels through Europe with an unknown lavishness.

Oliver Thansan
Oliver Thansan
16 September 2023 Saturday 04:25
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Sovereign funds take the reins of investment

A financial ghost of 11 trillion dollars, as heavy as the GDP of the United Kingdom, France and Germany combined, travels through Europe with an unknown lavishness. It is the specter of sovereign funds, with which a group of states invest oil profits, export surpluses and the pensions of their citizens around the world. Determined to gain weight and influence in European companies, they do not lose sight of Spain, where Saudi Telecom, 64% controlled by the Saudi sovereign fund Public Investment Fund (PIF), has just purchased 9.9% of Telefónica. Their money is welcome, but that does not free them from suspicion in a European Union in search of lost strategic autonomy.

Sovereign funds, especially Arab ones, have become new protagonists of investment amid increases in oil prices and financial restrictions in the euro zone. They are no longer satisfied with buying debt or fixed income, but are seeking influence and international projection. The latest Icex report on this type of firms, published last year, shows that after the pandemic they tripled their investments internationally and dedicated 2.8 billion to Spain. If traditional banks dominated investment until the 2008 crisis and venture capital funds took over in the years of ultra-low interest rates, sovereign funds now seem called upon to play a relevant role. The bet on Telefónica alone is worth 2.1 billion euros.

“A lot of commotion has been generated with the entry of Saudi Telecom into Telefónica, but there are already Spanish companies with significant participations in funds of this type,” recalls Judith Arnal, senior associate researcher at the Elcano Royal Institute and independent director of the Bank of Spain. He sees it as difficult for the Government to reject the operation and considers an authorization with conditions more likely, in view of the fact that there are Spanish companies with important interests in Saudi Arabia and the risk that slamming the door on the country's investments "will generate tensions."

Nearly 70 states have their own sovereign funds, in many cases depositaries of the pensions of millions of citizens, but it is now that the most powerful group is managing to influence internationally and alter corporate geopolitics. Uber, Amazon or Tesla have received investments from this type of firms, which for years had preferred to hide behind the purchase of public debt of countries, including the Spanish one in 2012, and which now model abroad the growing global influence of countries such as China, India, Singapore, Qatar or Saudi Arabia.

According to the Sovereign Wealth Fund Institute (SWFI), the largest sovereign fund in the world is the Norwegian Pension Fund, with 1.4 trillion dollars under management, ahead of the Chinese CIP, with 1.35 trillion, equivalent to the GDP of Spain. Next on the list are the Chinese company SAFE, the Abu Dhabi company ADIA, the Kuwaiti company KIA and the Singapore companies GIC and Temasek. The smallest of them is around half a billion dollars, equivalent to the capitalization of all the Ibex companies. The Global SWF association estimates that they have gone from managing 3.9 trillion dollars in 2008 to a historical record at the end of 2022 of 11 trillion.

In Spain, the closest things to a sovereign fund are Sepi and Cofides, with minimal investor potential. This generates frustration for businessmen such as the president of Merlin, Ismael Clemente, who publicly lamented, when the Saudi investment in Telefónica became known, that in Spain “the vast majority of companies are backed by fundamentally international money.” France, with the Bpifrance fund of just 2.5 billion euros, and Germany, with the Zukunftsfonds of 10 billion, are also out of the game.

“If there is no European strategy, we are going to have a difficult time,” says the coordinator of the International Relations degree at the European University of Valencia, Frederic Mertens, alluding to the entry of this public but foreign capital. “Three years ago, Covid made us wake up and realize that in the health field we were at the mercy of a distant power like China,” he recalls. What is happening now, he adds, is still part of a model created by the Europeans themselves "since colonization and post-colonization", which "has slipped out of their hands and others are taking advantage of it."

While the EU debates a new concept of strategic autonomy and the Government analyzes in Spain a decision about Telefónica that could send an important signal about the arrival of these investments, public money from other countries does not stop filtering into the economy, especially the from oil. The turning point is located at the moment in which the financial participations become control. In the case of Cepsa, it happened in 2011, when the Abu Dhabi fund Mubadala acquired 100% of the company, now reduced to 60%.

Power ambitions aside, the bet of these firms seems to be redoubling. “Traditionally, the Saudi strategy has been, rather than controlling companies, to obtain a return. It is a country with very important surpluses and they are trying to sell it. If it is confirmed that the objective is not to control Telefónica, what the operation does show is a significant increase” in the commitment to Spain, indicates Raymond Torres, director of Economic Situation at Funcas.

The Norwegian sovereign fund, which manages the pensions of millions of citizens fattened by oil revenues, has these days become the first shareholder of the group as a result of the absorption of Credit Suisse by UBS. It is also one of the main investors in the Ibex, with 3% of Cellnex, 3.1% of Iberdrola, 3.2% of Repsol, 3.1% of Solaria or 4.4% of Unicaja. The Qatar fund has 8.6% of Iberdrola, 19% of Colonial or 25% of IAG, parent of Iberia, and the Singapore fund GIC owns 7% of Cellnex.

Among the pension funds that are also betting on Spain are Canada, which has just paid almost 1 billion for 25% of FCC Medio Ambiente and is a leading investor in renewables. The Australian company, IFM, has 14.5% of Naturgy, in an operation that was approved by the Government with conditions.

From the GBS firm, with experience in channeling foreign investments in Spain, they indicate that sovereign funds "look for very tangible assets, with recurring returns and that can become liquid in a certain period of time." They are not satisfied with much, but go in search of the most valuable in each country. “They usually buy flagships, not second-line things,” they say.

Top-line real estate assets, infrastructure, renewables and large listed companies are part of the Spanish catalog of interest to these firms. Added to these are leisure, sports and culture, especially among Arab groups, which aspire to improve their global image and project themselves to the world.

However, there is still a favorite area: “Sovereign funds continue to invest massively in technologies as their preferred sector,” say the authors of the latest Icex report on sovereign funds, María Peña Mateos and Manuel Muñiz, in the latest edition of this work. . “Companies with new software solutions, fintech companies that offer innovation, online education tools or new mobility companies receive million-dollar investments daily,” they add.

The Arab Emirates recently entered Vodafone and, together with other investors, has caused changes in the company's management. And Saudi Telecom has also invested in Vodafone's own tower subsidiary, Vantage. Therefore, the landing at Telefónica, despite being hatched in secret, is not surprising.

Judith Arnal appreciates, in the specific case of European telecommunications companies, “a regulatory environment that is not ideal.” “There is a framework from the 1990s focused on offering competition and low prices, and now they are simultaneously asked to invest,” which generates “a contradiction between regulation and objectives.” If European champions are to be sought, the debate of “abandoning hypercompetitiveness” should be addressed. It is in this context of expectation and financial reinforcement of telecoms that the Saudi sovereign fund takes advantage of to position itself.