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Monitor Group Research Reveals Sovereign Wealth Funds Alter Investment Strategies During Worsening Global Financial Crisis

December 17, 2008 Monitor Group

ARTICLE

Funds Focus on Joint Ventures and Home Market Investments

In the third quarter of 2008, as the global financial crisis continued to worsen, Sovereign Wealth Funds (SWFs) sought to limit their exposure to the riskiness of OECD markets while putting more capital to work in their domestic economies, according to research by Monitor Group. Monitor Group, one of the world's leading advisory and consulting firms, has been tracking the investment activities of the sovereign funds on a quarterly basis since releasing a report in June 2008, “Assessing the Risks: The Behaviors of Sovereign Wealth Funds in the Global Economy.”

"Our transaction data show that in Q3, SWFs continued to shy away from investments in the global financial services sector and continued to resist OECD investments in general, relative to alternatives in emerging markets," said William Miracky, Senior Partner of Monitor Group. "In particular, SWFs during the most recent quarter showed a marked and renewed interest in domestic investments, which rose in percentage terms to their highest level since 2003."

The latest Monitor Group analysis of SWF transactions during the third quarter includes the following key findings:

SWF recent behavior shows a marked shift toward domestic and emerging markets deals. 46 percent of reported deals in Q3 were domestic transactions, the highest percentage since 2003. Also, 54 percent of Q2 and Q3 deals by value ($23 billion out of $42 billion) were in emerging markets, the highest share of total deal value since 2005.
Investment in OECD countries has declined sharply during 2008, from $37 billion in Q1 to $9 billion in Q2. SWF investment in OECD countries reached $8 billion in Q3. In Q3, North American investments were involved in seven SWF deals totaling $2.4 billion. While the number of deals was the same in Q1 of 2008, the total investment was much greater: $23 billion.
Investments in the financial sector has fallen off significantly since Q1; real estate investment, which spiked up in Q2, also dropped sharply in Q3. Financials comprised $43.4 billion of deal value in Q1, compared to $4 billion each in Q2 and Q3. Real Estate deals were $3.2 billion in Q3 (16 percent of the total), compared to $13.7 billion (52 percent) in Q2 2008.
SWFs from the Middle East and North Africa (MENA) region were the most active in Q3, carrying out some 90 percent of the deals by value. Asian SWFs were much less active in Q3 2008 than in previous quarters.
In Q3, funds in the Monitor SWF Transaction Database executed 46 deals totaling $15.4 billion. This is a decline from $58.3 billion in Q1, and $26.5 billion in Q2, although the total number of deals per quarter was similar in all three quarters.

Monitor Group collected and investigated data on SWF investments following on the research originally identified in the “Assessing the Risks” report. Monitor’s database includes completed and pending M&A deals, joint ventures, and investments that were undertaken between 1 January 2000 and 30 September, 2008.