Schwarzman defends sovereign funds

Speaking on a World Economic Forum panel dedicated to sovereign funds, the Blackstone chairman and chief executive praised the funds and likened them to US state pensions as institutional investors.

The Blackstone Group’s Stephen Schwarzman defended foreign sovereign wealth funds before delegates at the World Economic Forum in Davos today, saying that his firm has worked with these funds for years and that they are “model investors”.

The difference of going to a sovereign wealth fund for money and going to a state pension fund in the US … is veritably nothing.

Stephen Schwarzman

Sovereign wealth funds, state-owned pools of capital that have amassed huge sums in the Gulf States and Asia in particular, have been in the spotlight after injecting capital into several prominent Wall Street investment firms in recent weeks.

Schwarzman, who sold a 9.9 percent stake in his firm to China’s Government Investment Corporation for $3 billion ahead of his firm’s initial public listing last June, said he welcomes investment from such funds.

“The difference of going to a sovereign wealth fund for money and going to a state pension fund in the United States, which is the largest source of money for a lot of the alternative investment activities, is veritably nothing,” he said. “Our experience with the sovereign funds is that they’re smart, they’re long-term, they’re highly professional. All they’re looking for is to earn the highest rate of return that they can.”

Schwarzman also noted that China's investment in Blackstone is “prototypic” of sovereign fund style in terms of disinterest in voting rights. “They’re not trying purposely to influence our activities,” he said.

Blackstone is not the only private equity firm partially owned by a sovereign wealth fund. In November The Carlyle Group sold a 7.5 percent stake to Abu Dhabi’s Mubadala Development Company for $1.35 billion.

Sovereign wealth funds also compete with private equity firms from time to time. Singapore’s Temasek, for example, partnered with Actis Capital, global power company AES Corporation and Pine Brook Partners to buy an undisclosed stake in oil and gas exploration company Asia Pacific Exploration Consolidated last October.

Sovereign funds have aroused suspicion among some in the West who fear the funds might use their financial clout to further national political agendas. France’s Nicolas Sarkozy and Germany’s Angela Merkel have both said they would push legislation to give their governments the power to block sovereign wealth fund investments that are deemed a threat to national security.

Several managers of sovereign wealth funds defended themselves from such criticism at Davos.

“I don’t think for those countries that have sovereign wealth funds, that we have seen any abuses, or any irresponsible behavior in the global financial markets,” said Muhammad Al-Jasser, vice governor of the Saudi Arabian Monetary Agency. “They have always taken a long-term, stabilising role in the global financial markets.”

Schwarzman, too, said that he has never had any reason to be wary of sovereign wealth funds.

“We’ve encountered sovereign wealth funds as investors in our funds and as investors in our firm. This has been a 20-year kind of relationship and It's almost amusing to see pools of capital that we've dealt with forever in a normal way have a new name called sovereign wealth funds, where they're supposed to be an inherent threat that journalists write about,” he said.

Not all Western government leaders have expressed opposition to sovereign wealth funds. At a UK financial conference in December, UK City Minister Kitty Ussher invited the China Investment Corp to use London as a base of operations.

“I want to send a strong message today that Britain is open for business to investors of all nationalities,” she said.

So far the US government has yet to comment officially about the funds, although several of the funds have bought stakes in major Wall Street firms. Citi has sold a 4.9 percent stake to the Abu Dhabi Investment Authority for $7.5 billion, as well as a 4 percent stake to the Government Investment Corporation of Singapore for $6.9 billion. Merrill Lynch has sold stakes worth a total of $11 billion to the Kuwait Investment Authority, the Korean Investment Corp, and Singapore’s Temasek Holdings. Morgan Stanley sold a 9.9 percent stake to the China Investment Corp for $5 billion. Dubai International Capital bought a 9.9 percent stake in hedge fund Och-Ziff Capital, and Singapore’s GIC bought a 9 percent stake in UBS for $9.75 billion.