Sovereign wealth: Elite clients for elite firms

Big-ticket private equity deals may be gone for now, but last year a raft of sovereign wealth funds from Asia and the Middle East began pumping money into foreign investments, providing much-needed cash injections amid the ongoing credit squeeze.

Investments from funds such as Singapore’s Temasek and the Abu Dhabi Investment Authority (ADIA) have advanced across the Western world, helping to bail out beleagured US banks. The question is, how are the world’s top law firms responding to this new flow of work? And how sustainable is this method of investment long term?

“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.”

In February, The Lawyer broke the news that Latham & Watkins was set to launch offices in Abu Dhabi, Dubai and Qatar simultaneously (18 February). 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.”

Although inbound investment in infrastructure and energy is still driving activity in the Middle East, outbound sovereign wealth fund activity has picked up considerably. 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. “Cohen 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. Sullivan’s presiding partner led on China Investment Corporation’s $4bn (£2bn) investment into a vehicle designed to fund ailing financial institutions from private equity house JC Flowers. 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’re 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 China Development Bank, which is partowned 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. Despite the recent activity, however, some feel this level of investment from sovereign wealth funds will be limited.

“We may see some more during the next six months or so, but there won’t be large-scale investment into these institutions again,” believes 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 may be a shortlived 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 argues.

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 playing a pivotal role in the global markets. “It may take 10 years for these funds to compete aggressively with private equity funds, but it certainly seems likely,” says one partner.