Cooperation Begets Commercial Success

Ashby Monk

Natsuko Waki of Reuters has a great article out this morning on SWFs working in concert, which is a recurring theme on this site.* Indeed, Waki has picked up on the fact that SWFs are increasingly making joint strategic investments in order to better manage investment risks and maximize returns:

“State-owned funds from China, Singapore, Malaysia , Korea, Abu Dhabi and Kuwait are among those which have recently signed agreements to form investment partnerships with each other.”

While we have looked at these issues at length, Waki still advances our work by securing some elite interview evidence. According to the director of Kazakhstan’s SWF:

“They [the SWFs] realize that their level of expertise is not universal and find that obtaining additional expertise via cooperation is a viable option for them. They are sharing risk and enabling access to welcome co-financing…In the crisis and post-crisis environment, such cooperation allows them to achieve a new level of legitimacy in markets where they have not operated before…Recent examples of SWFs working together are much more commercially oriented than having any political imperative.”

This is fascinating (and gratifying). Part of my interest in SWFs working in concert was based on the idea that such partnerships are illustrative of these funds’ sincere commercial orientation. As I said in a previous post,

“SWFs can fruitfully work together to facilitate local understanding in foreign markets. This in turn can lead to higher returns over the long term thanks to information asymmetries obtained by local investors. In short, by bringing together two or three funds with diverse backgrounds into a cooperative arrangement, the effectiveness of the investment function in a specific economic geography is maximized.”

Indeed, I view these cooperative arrangements as a sign that SWFs are maturing into more sophisticated investors; cognizant of their limitations and looking for the tools to overcome them. This in turn (as Waki suggests) will contribute to SWFs’ international acceptance. For example, that Mubadala is a welcome partner in France is a testament to the positive effect that these joint funds have on legitimacy.

*Waki’s article also draws on our survey of SWF asset managers. If you are interested, you can find it here.

5 Responses to “Cooperation Begets Commercial Success”

  1. 1 rien huizer August 19, 2009 at 5:04 am

    It will be interesting to see which funds will be cooperating in what. The France-Malaysia example is probably a case of enlisting Malaysian money for French industrial policy, from the looks of it and a case of apparently strong information asymmetry. It would be interesting to know more about this, since it would make an enormous difference if Malaysia was a purely passive partner, or could be selective, or, would be entitled to industrial policy benefits (Malaysia has a strongly interventionist state)for itself.Probably not really a case of purely commercial motivation. I doubt the cooperations involving Kazakhstan and its neighbours, Oman and India and possibly Malaysia and AD are anything different from state-to-state arrangements, where the fund is merely instrumental.Interesting also that all these countries have low Polity IV scores for democracy (except India of course) and high scores in international surveys for opacity and corruption.

    For private equity managers this could be an opportunity. For conventional asset managers this might be a threat, as it may help funds with limited internal resources pool in order to deduce the expertise gap with external sdvisors, or share an expensive advisor for less cost.

  2. 2 Ashby Monk August 19, 2009 at 1:29 pm

    Interesting point about the opportunities for asset managers. I agree that cooperation may limit SWFs’ need for traditional asset managers. Also, I should note, my understanding is that Frances FSI is partnered up with Mubadala (i.e. UAE) not Malaysia. Nonetheless, I think the French see such partnerships as a way to have their cake and eat it too…they can receive SWF capital all the while ensuring that these funds don’t run off with any of France’s national champions.

  3. 3 MMcC August 25, 2009 at 7:22 am

    Those investment partnerships, at least with China, are defining limits as well as opportunities. At least two of the firms listed above had, last year, strong ambitions to invest in a number of Chinese financial sector companies. Post-agreement, they have withdrawn all such expressions of interest. My second-hand understanding is that China now sees most global SWFs as undesirable owners for security companies, asset managers and trust companies, although it has, in past, tolerated exceptions to that rule.

  4. 4 Ashby Monk August 25, 2009 at 1:20 pm

    Interesting. So there are limits to the extent to which SWF cooperation will extend? IE certain industries and sectors will never avail themselves to joint SWF investing?

  1. 1 Five Stories to Remember from 2009 « Oxford SWF Project Trackback on December 22, 2009 at 3:37 pm

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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