BGI: Sovereign Wealth Funds are trying again. Eighteen months ago, they rode to the rescue of ailing investment banks reeling from gargantuan mark-to-market losses on asset-backed securities. Some, including the Government of Singapore Investment Corporation (GIC), got severely burned. But GIC and the Kuwait Investment Authority’s financing for BlackRock’s $13.5 billion acquisition of Barclays Global Investors should prove much less fraught.
The SWFs lost out last time because they tried to catch a falling knife. The value of GIC’s $11 billion punt on UBS in December 2007 fell to $6 billion by the following March. True, this investment, as well as KIA’s in Merrill Lynch and both SWFs’ move on Citigroup, took the form of mandatory convertibles, which didn’t convert for two years and yielded 10 per cent in the meantime. But the funds still made a basic error in assuming the banks were undervalued rather than about to go bust.
The purchase of Barclays’ fund management business carries fewer dangers. GIC, KIA and an unnamed Chinese SWF are putting in $2.8 billion in exchange for a stake in BlackRock. A holding in what will be far and away the world’s biggest asset manager looks a far better bet than commanding stakes in soon-to-be-bust banking giants.
The deal looks good for Barclays. The bank’s chief executive John Varley and Barclays Capital boss Bob Diamond get seats on the BlackRock board. The $6.6bn cash component of the $13.5 billion price tag price will push the bank’s core Tier 1 capital ratio to 8 per cent, all but ending concerns about capital adequacy. And the price is generous – almost 12 times BGI's 2008 earnings before interest, tax, depreciation and amortisation.
But even if the price is high, the SWFs aren’t necessary the losers. It’s much better to invest as partners in a business with good prospects than as would-be saviours of collapsing institutions. For these patient investors, a privileged position in BlackRock could pay off well.