presentation on swf investment at hbs by drosten fisher of monitor group

Copyright © 2008 Monitor Company Group, L.P. — Confidential — CAMZAD-NED-Prez-Date-CTL 1

Assessing the Risks

Harvard Business School

Cambridge, MA

December 6, 2008

William Miracky Davis Dyer Drosten Fisher Victoria Barbary Edward Chin

Drosten Fisher

[email protected]

+1 617 252 2397


Assessing the RisksMonitor SWF Transaction Database: Methodology

Publicly available sourcesPublicly available sourcesof SWF activityof SWF activity

SWFsSWFs andandrecent dealsrecent deals

Data assessment

Focus on direct investmentFocus on direct investmentin equities and real estatein equities and real estate

Final DatasetFinal Dataset

Data collected

Data checked andverified

Limitedtransparency andspotty reporting

1,181 deals, 25 funds1975–Q1 2008

Funds not meeting ourdefinition

Deals before 2000

17 funds, 785 deals$250 bn investment

Subscriptiondatabases, pressarticles, websites offunds, and recipientcompanies


Assessing the Risks

131

146

129137

90

47

6063

53

10092

49

28

86343

0

40

80

120

160

2000 2001 2002 2003 2004 2005 2006 2007 2008(Q1-Q3)

Number

Value ($Bn)

Recent SWF Investments by Year

Since 2000, there has been a marked increase in SWF direct investment in equities and real estate.

SWF Equity Transactions by Number and Volume Since 2000

Note: Publicly available data for SWF equity dealsSource: Monitor SWF Transaction Database


Assessing the RisksSWF Investment by Area

Since 2000, some two thirds of SWF investment by value has been in the OECD. However, two thirds ofthe deals by number were in emerging markets.

OECD61%

BRIC14%

Non-OECD(excluding BRIC)

50%

BRIC19%

OECD31%

Number of Deals by Region(785 deals)

Value of Deals by Region($250 Bn)

Non-OECD(excluding

BRIC)25%

Note: Publicly available data for SWF equity deals 2000-Q1 2008Source: Monitor SWF Transaction Database


Assessing the Risks

Since 2000, funds based in MENA have invested $100 billion in 205 deals. $73 billion has gone to NorthAmerica and Europe, but this accounted for fewer than half the deals.

Investment Flows: Middle East and North Africa (MENA)

Note: Publicly available data for MENA SWF equity deals 2000-Q1 2008Source: Monitor SWF Transaction Database


Assessing the RisksInvestment Flows: Asia-Pacific

Since 2000, Asian SWFs invested $150 billion in 573 deals. These invest more heavily in their own region;half of the total investment by value and some 80% of deals by number took place in Asia.

Note: Publicly available data for Asia-Pacific SWF equity deals 2000-Q1 2008Source: Monitor SWF Transaction Database


Assessing the Risks

By number of deals, SWFs invest across sectors, including financial services, real estate, industrials,consumer and IT. However, by value, almost half the deals are in financial services, which reflects atypicalintensity of investment in that sector during the sub-prime mortgage crisis during 2007 and early 2008.

Number of Deals by Sector(785 deals)

Value of Deals by Sector($250 Bn)

Other3%

Transport4%

Healthcare4%

Telecom6% Financials

22%

Real Estate18%

Industrials15%

IT10%

Energy8%

Other8%

Healthcare2%

Telecom2%

IT1%

Consumer3%

Industrials8%

Financials46%

Real Estate19%

Energy11%

Consumer10%

SWF Investment by Sector



Assessing the RisksSWF Investment: Analyzing Ownership and Control

Contrary to popular opinion, SWFs do take controlling stakes, however they rarely do so in OECDmarkets.

Notes: Sensitive sectors include Energy & Utilities, Financials, Information Technology, Infrastructure and Government, Telecom, and Transportation & AerospaceSource: Monitor SWF Transaction Database

8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%3%

8%

39%

50%

Number of Deals

11%

10%

71%

Value of Deals

Controlling Stake in"Sensitive" Sectors - OECD

Controlling Stake inNon-Sensitive Sector - OECD

Controlling Stake - Non-OECD

Not a Controlling Stake

Stake Data by Sector and Geography, 2000–Q1 2008


Assessing the RisksSummary of Findings on Investment Behavior of SWFs

SWFs invest heavily in domestic and emerging markets. A majority of SWF investments by value occur in

OECD markets, although the proportion is magnified by recent large investments during the credit crunch of

2007–2008. More than half of all transactions by number have occurred in domestic and emerging markets.

Recent SWF investments in U.S. and European financial services firms are atypical and opportunistic,

reflecting the credit crunch of 2007–2008. Most SWF investments have occurred in financial services, real

estate, and industrial companies, with most publicity focused on financial services. Controlling for the effects of

the recent credit crunch, the apparent appetite for investment in this sector drops markedly, though it remains

significant.

SWFs are willing to take controlling stakes in companies. In contrast to prevailing views, since 2000,

SWFs have acquired controlling stakes in half of their transactions for which stake data are available. By far

most of these deals occurred in emerging markets and in sectors not generally deemed politically sensitive.

SWFs are taking more financial risk with their investments. Most SWFs are adjusting their portfolios to

combine conservative and relatively liquid asset classes, such as government bonds, with higher-risk, illiquid

assets such as equities, real estate, and alternative instruments.

SWFs do not appear to be investing for political motives. Some funds are making strategic investments to

hasten economic development in their home country, but they do not appear to be active in ways that threaten

the economic or national security of foreign countries where they invest.

11

22

33

44

55


Assessing the RisksRecent SWF Behavior: Q1 Through Q3 2008, by Target Sector

Value of SWF Investments Q1 through Q3 2008 by Target Sector


9.5

3.2

0

10

20

30

40

50

60

70

15.9

3.2

2.7

Financials

Real Estate

Industrials

Energy and Utilities

Other

2008q32008q2

26.5

4.0

13.7

4.0

2.5

3.1

2008q1

4.1

58.3

43.4

2.12.2

$ Bn


Assessing the RisksSWF Investment by Target Sector

Number of Deals by Target Sector, 2000–Q3 2008

0%

25%

50%

75%

100%

2000

54%

19%

10%

17%

63

2001

50%

23%

15%

12%

60

2002

57%

17%

9%

17%

47

2003

50%

20%

13%

17%

90

2004

44%

15%

23%

19%

137

2005

51%

12%

22%

16%

129

2006

36%

9%

23%

32%

146

2007

31%

10%

29%

31%

42

2008q1

47%

2%

55%

23%

43

2008q2

59%

15%

17%

9%

46

28%

Other

Industrials

Real Estate

Financials

21%

4%

21%

53

2008q3



Assessing the RisksRecent SWF Behavior: Q1 Through Q3 2008, by Target Region


24.2

4.4

0

10

20

30

40

50

60

70

0.9

11.1

23.1

58.3

2008q1

11.1

8.0

26.5

2008q2

6.8

5.1

2.4

15.9

2008q3

Other

Asia Pacific

MENA

Europe

North America

Value of SWF Investments Q1 through Q3 2008 by Target Region

$ Bn


Assessing the RisksSWF Investment by Location of Target: OECD vs. Emerging Markets

Value of Deals by OECD vs. Emerging Markets, 2000–Q3 2008 ($Bn)

0%

25%

50%

75%

100%

41%

2003

32%

2.9

2000

68%

7.9

19%

81%

2004

38%

4.2

2001

62%

27.9

22%

78%

2005

65%

3.0

2002

35%

48.9

15%

85%

2006

84%

6.2

16%

38%

62%

91.9

2007

59%

2008q2

63%

37%

52%

48%

24.5

2008q1

15.9

2008q3

OECD

Emerging Markets

58.3



Assessing the Risks2008 Q2 and Q3 Highlights

In the third quarter of 2008, funds in the Monitor SWF Transaction Database executed 46 dealstotaling $15.9 billion. This is a decline from 58.3 billion in Q1, and 26.5 in Q2, during which periodthe total number of deals per quarter was similar.

Investment in financial sector targets has fallen off significantly since Q1; real estateinvestment, which spiked up in Q2, also dropped sharply in Q3. Financials comprised $43.4billion of deal value in Q1, compared to $4 billion each in Q2 and Q3. Real Estate deals were $3.2billion in Q3 (16% of the total), compared to $13.7 billion (52%) in Q2 2008.

Investment in North America dropped dramatically. In Q3 North American targets were involved in7 SWF deals totaling $2.4 billion; in Q2 the totals were 4 deals and less than $1 billion invested. Incontrast, there 7 North American deals totaling $23 billion during Q1 2008. Overall, investment inOECD countries has declined sharply during 2008, from $37 billion in Q1 to $9 billion in Q2 and $8billion in Q3

SWF recent behavior shows a marked shift toward domestic and emerging markets deals. 46%of reported deals in Q3 were domestic transactions, the highest percentage since 2003. Also, 54% ofQ2 and Q3 deals by value ($23 billion out of $42 billion) were in emerging markets, the highest shareof total deal value since 2005.

SWFs from the MENA region were the most active in Q3, carrying out some 90% of the dealsby value. Asian and European SWFs were much less active in Q3 2008 than in previous years.

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44

presentation on swf investment at hbs by drosten fisher of monitor group

Economy & Finance

swf equity deals source

mena swf equity deals

swf direct investment

thirds of swf investment

sectorvalue of deals

asiapacific swf equity

recent swf investments

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