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Our Take: Sovereigns Flex Their Muscles

Can sovereign wealth funds cure Wall Street's woes and prevent career opportunities from drying up?

Not long ago, "SWF" was an acronym associated with personal ads, not finance news. But in the final weeks of 2007 a flurry of headline-grabbing investments by sovereign wealth funds (SWFs) was thought by some to signal the industry's imminent recovery from the sub-prime meltdown's capital destruction.

By acquiring minority stakes in major U.S. and European banks, sovereign funds such as the three-month-old China Investment Corp. are seeking better returns than they could achieve at home, as well as entrée to top-drawer Western financial techniques and contacts. The targets of this largesse get more than a fiscal lifeline: Newfound sovereign ties can lend instant cachet to a Western institution pursuing business in China or elsewhere.

Investments totaling more than $33 billion from China, Singapore and the Middle East recently brought capital to such marquee names as Morgan Stanley, Merrill Lynch, Citigroup, Bear Stearns and UBS. The sudden influx is cushioning banks' balance sheets and share prices, staving off the need for Wall Street to retrench more deeply than it has already.

However, the toll taken by CDOs and other troubled assets is hardly over. Although SWFs aren't fast-money players who'll bail out when the next round of write-downs and profit warnings hits, don't expect them to continue "doubling down." For one thing, additional investments could propel their individual ownership stake in one or another Wall Street house beyond 10 percent. Holdings that large would belie the funds' stated intent to remain passive minority investors, might force unwelcome accounting changes and could raise political hackles.

In December, CIC invested $5 billion in Morgan Stanley securities that can convert to a 9.9 percent ownership stake in 2010. Also in December, the Financial Times reported Saudi Arabia plans to establish a sovereign wealth fund. If that fund combines Saudi Arabia's $300 billion in excess reserves with holdings of the royal family and government pension funds, it could surpass Abu Dhabi's as the world's largest sovereign fund, according to Brad Setser, an economic policy expert and former U.S. Treasury official. Setser estimates the Abu Dhabi Investment Authority controls $600 billion - $700 billion in assets.

Other countries with SWFs include Norway, Singapore, Kuwait and Libya. Merrill Lynch estimates SWFs could pump between $3.1 trillion and $6 trillion into world stock markets in the next five years.

What's It Mean For You?

For job candidates, the significance of SWFs goes beyond their investments in Wall Street. As their reach expands, the funds will be hiring on their own. Some already are: China's CIC has run ads for fund managers and support staff on its Web site. Dubai International Capital and the Abu Dhabi Investment Authority also have published job openings recently.

Besides ramping up their own staffs, sovereign funds will generate massive demand for external asset managers. They'll also create business for dealmakers, law firms, external managers of currency and other financial risks, and private equity firms.

CIC is currently soliciting bids to manage investments to be made outside China. (Its total portfolio is valued at $200 billion.) "Even if they only open up just a fraction ... this is going to be the largest amount of incremental money to come into the industry at any one time in recent memory," William Blair & Co. Analyst D.J. Neiman told MarketWatch.

It could be the winning financial services firms of the next decade will be those that cater to the needs of sovereign wealth funds and succeed in gaining their favor. SWFs may soon come to be viewed as the world financial markets' swing investor, its driving force - much like mutual funds were in the 1960s, pension funds were in the 70s, hostile-takeover "raiders" were in the 80s, macro hedge funds were in the 90s and PE firms have been this decade.

AUTHORJon Jacobs Insider Comment

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