Liquidity has all but dried up in the UK and US in recent months, but the emerging markets have managed to make some massive investments.
Big-ticket private equity deals may have dwindled, but sovereign wealth funds from Asia and the Middle East have been pumping money into foreign investments, providing much-needed cash injections amid the ongoing credit squeeze.
With the trend of investments from funds such as Singapore’s Temasek and the Abu Dhabi Investment Authority (ADIA) advancing across the Western world, how are law firms responding to this new flow of work? Which firms are winning the mandates and how sustainable is this method of investment in the long run?”There’s no doubt we’re seeing law firms moving into the Middle East,” says Shearman & Sterling partner Stephen Besen. “You’ve just got to look at the level of investment these entities are making outside of the Middle East to see how lucrative it is for law firms moving to the region.”
Last month (25 February), The Lawyer reported that Latham & Watkins was set to launch offices in Abu Dhabi, Dubai and Qatar simultaneously. The firm’s strong relationship with Qatar’s sovereign wealth fund Qatar Investment Authority (QIA) was a driving force behind the launch.
Latham Middle East chairman Bill Voge says: “We’ve been working with QIA for a long time now and being on the ground in Qatar is very important to us.”
Their close ties were underlined further when London-based partner Andrew Longmate moved to QIA to take up the post of general counsel.
Latham’s move to the Middle East was hardly seminal, though, with a raft of firms launching offices in the region during 2007. Among them, Allen & Overy and Denton Wilde Sapte strengthened their Middle East offerings by launching in Saudi Arabia, while White & Case parachued in partner Villiers Terblanche to head its Abu Dhabi office.
Although in-bound investment in infrastructure and energy is still driving activity in the Middle East, outbound sovereign wealth fund activity has picked up considerably and has quickly become vital for the region. Legal services in the Middle East are in demand and both US and UK firms have responded by ramping up their on-the-ground capabilities.
Since last summer there has been a wave of sovereign wealth fund transactions involving global investment banks and private equity vehicles.
In November 2007 Besen led the Shearman team advising ADIA on its $7.5bn (£3.7bn) investment in Citi, with Sullivan & Cromwell‘s New York-based chairman Rodgin Cohen and partner Mitch Eitel leading the team advising Citi.
More recently (1 February), The Lawyer reported that Cohen and Cleary Gottlieb Steen & Hamilton New York partner Jeff Karpf advised Citi on its $19bn (£9.57bn) equity offering, which saw three sovereign wealth funds – Government of Singapore Investment Authority, Kuwait Investment Authority and a fund controlled by Saudi Arabia’s Prince Alwaleed bin Talal – pump cash into the bank.
According to one US partner, several firms have already moved to corner the sovereign wealth fund market, some having more success than others.
“Rodgin Cohen at Sullivan & Cromwell is an excellent lawyer and has fantastic ties with the bank regulatory bodies in Washington. This has undoubtedly enabled the firm to succeed in this area,” the partner says.
Cohen has certainly made waves in this sector of investment. Last month (14 February), The Lawyer reported on Cohen leading Sullivan & Cromwell on China Investment Corporation’s $4bn (£2bn) investment into a vehicle from private equity house JC Flowers designed to fund ailing financial institutions. Simpson Thacher & Bartlett partner Tom Bell advised JC Flowers on the deal.
“Clearly relationships with private equity houses are going to benefit certain firms,” says one New York partner. “There have been so many of these deals in the US and they are very lucrative to a firm.”
Close ties with private equity houses make firms such as Simpson Thacher and Cleary strong contenders to hold on to the work generated by sovereign wealth funds.
“We are definitely seeing a trend of private equity houses sourcing their own financing,” explains Besen. “If the market of syndication is out of shape, it’s not hard to see why these private equity houses would turn to other sources that are highly liquid. It’s just another pool of capital and many of these funds don’t operate all that differently from hedge funds.”
Away from the private equity market, deals such as the Citi equity offering are proving popular. Last summer (The Lawyer, 30 July), China Development Bank, which is part-owned by the country’s sovereign wealth fund, and Temasek made major investments in Barclays. Clifford Chance advised Barclays while Temasek turned to Lovells and China Development Bank instructed Norton Rose.
That said, Besen feels this type of activity from sovereign wealth funds will be limited.
“We may see some more during the next six months or so, but really there won’t be largescale investment into these institutions again,” says Besen. “Many of these are convertible with investment converting into common stock in years to come. These sovereign wealth funds are also not able to invest in these banks again.”
While direct bank investments are likely to be a short-lived trend, sovereign funds’ position in the private equity arena has the potential to develop into an increasingly sophisticated model.
“Although it will take some time, we can expect to see sovereign wealth funds competing directly with private equity houses,” one partner explains. “Although there are some funds that have the expertise and appetite for direct investment, many have opted for benefiting from the expertise and global reach a private equity house provides.”
Cleary Gottlieb partner Neil Whoriskey adds that, as many of these funds have been operating for some time, their skills have been honed over a fairly long period even if their profiles have not.
“Many of these funds, such as Singapore’s Temasek, have been active for a long time,” he adds. “There has certainly been a profile change in investment during the last six months or so. The less stable markets have certainly contributed to that.”
With sovereign wealth funds making the business pages every week and market conditions showing few signs of improvement in 2008, these highly-liquid entities look set to continue piling capital into private equity funds.
“It may take 10 years for these funds to compete aggressively with private equity funds, but it certainly seems likely,” says one partner.
The lack of liquidity and fragile economic conditions in the West have made it possible for areas such as the Middle East to invest in Western entities where once political tensions would have been prohibitive.
With law firms desperate to win mandates and benefit from these deals with office launches across the Middle East and emerging markets, sovereign wealth could become an intrinsic part of global financing for years to come.