America should encourage global public investors, foreign asset owners – including sovereign wealth funds, government pension agencies, state managed plans and foreign currency reserve funds, a group that collectively controls unknown trillions of dollars in assets – to invest in the US economy, including in infrastructure development, the green economy, business investment and technology innovation, according to a report due to be published on Friday by well-known, non-partisan Washington DC based think-tank, the Brookings Institution.
Acting in their own capacity, not on the behalf of the organizations they work for, the reports’ authors include a group of executives sophisticated both in the ways of finance and of Washington. Among them are Goldman Sachs managing director Richard Kimball Jr, Blackstone Group senior managing director Raffiq Nathoo, Daniel Zwirn, the former CEO of hedge fund DB Zwirn, Joel Moser, a partner with the law firm Bingham McCutchen and an expert in infrastructure, and Gordon Goldstein, a senior vice president with private equity firm Silver Lake.
They argue that given the conservative investment and management practices of leading so-called global public investors such as the $627 billion Abu Dhabi Investment Authority and the $37 billion Korean Investment Corporation “xenophobic or paranoid reactions to foreign capital are not warranted”. Countries, including the UK, Canada and Australia, are already seeing or seeking investments, particularly in infrastructure, from these global entities. To stay competitive, the authors contend, the US should also be encouraging this large capital base, where sovereign wealth funds alone account for an estimated $4 trillion.
“A lot of Americans worry about foreign money” investing in this country says Brookings Institution director of Governance Studies Darrell West who worked on the report, entitled ‘Rebuilding America: The Role of Foreign Capital, Sovereign Wealth Funds and Global Public Investors.’ But in actual fact these sovereign funds tend to be very prudent, long-term investors who are not looking to take a controlling interest in companies or investments. And, West argues, “we believe foreign capital can play a very constructive role in the United Sates.” While some sectors and industries, such as those related to national security, will continue to be sensitive, other sectors of the economy could really benefit from the economic input. In particular he says “infrastructure is an area where foreign capital can be very helpful.”
Massive state and federal budget deficits, along with a significant need for new infrastructure investments in everything from bridges to wind farms, means the US is in the midst of a well-recognized infrastructure crisis. “The infrastructure challenge is one that is going to last decades,” says report co-author Goldstein. And these foreign asset owners, with their long term investment horizons and desire for steady returns, can offer a solution.
Over recent years the idea of foreign sovereign funds owning key U.S. companies and institutions has been the subject of much political push-back. Congressional criticism of the 2006 attempt by United Arab Emirates entity DP World to take over various key US ports was so intense it quashed the deal. At the same time investment from some of these non-US entities into firms such as Citibank and Barclays was important in propping up the banking system after it came under stress in late 2007.
The Brookings group conducted their research into global public investors, talking with foreign investors, government officials, analysts and others, over the past year-and-a-half. Their timing, Goldstein says, “coincided with a period of a lot of populist rhetoric coming out of Washington, what many people perceived in the US business community as a hostile public policy environment.” The environment meant many global public investors were keen to keep a low profile but also to learn more about a Washington that, Goldstein says, they often found to be increasingly opaque and confusing.
One of the reports key recommendations is the establishment of a Global Public Investors Round table to facilitate such a dialog between US policy makers, the financial industry and these foreign asset owners. “Investors need clarity, one of the most chilling variables in the equation for investment is uncertainty,” Goldstein argues. “If you can take practical steps to address that, it serves the interest of global investors.”
In an area that is of particular interest to hedge fund manager and Brookings trustee Daniel Zwirn -- that is, developing clean technology -- the report also argues for the establishment of a so-called Green Bank. The bank would facilitate the investment by foreign and domestic asset owners in green technology, providing a level of private financing that could stimulate this area of the economy. Some public sovereign funds are already making their own investments in the green economy. The Brookings report points out that in early 2008 the $85 billion Qatar Investment Authority made a commitment to the Qatar-UK Clean Technology Investment Fund, a fund that was set up as a partnership between the investment authority and Carbon Trust Investments, a UK-based not-for-profit. In his 2011 State of the Union address, President Obama highlighted the importance of the clean technology sector to the country’s future, economic and otherwise.
The Brookings report, made available exclusively in advance of publication to Institutional Investor, is bullish on the merits of foreign public funds participating in the US economy. It does acknowledge that areas of concern do exist and that these sovereign entities can pursue policy initiatives through their investments. China’s investments in mining, mineral and energy, for example, are an important area of its foreign policy. But it spends little time focusing on the negatives, taking the view that this capital is out there, actively looking to invest, and doing so in an increasingly global and an increasingly transparent manner. So it behooves the American policy and business communities, especially in these cash strapped times, to figure out how best to make use of it. Brookings will host a public forum in Washington D.C. to discuss their report and its findings on Friday.
