Soveriegn Fund Lobby Group Formed In Washington: Now They Just Need Some SWF Members

The head of the recently formed Washington lobby group for sovereign wealth funds, the investment arm of foreign governments, expects the U.S. government will take action regarding these investment vehicles in 2009-- and that decision will help other countries compete for these funds’ investments.

“We believe the US will take some actions regarding SWF in 2009 and we believe these steps will serve as a model for other nations,” said Thomas Karol, president of Sovereign Investment Council , a recently formed organization to represent sovereign funds in Washington, at a conference hosted by The European Institute. “Some will follow the US model and some nations will use that model to compete with the US for sovereign investments.”

Despite his reservations, Karol and the newly minted Sovereign Investment Council, have yet to gain any members from the asset class the organization represents. Typically lobbying shops are set up by a group of businesses who seek to have a voice in Washington, not the other way around. In any event, expect Karol to launch a major global wooing initiative to try and bring some real sovereign funds to the council’s table.

In his address, Karol argued that lawmakers and other legislators are contemplating a litany of responses to the phenomena of SWFs and these measures will likely discourage sovereign fund investment in the U.S.

One bill, that was being considered by the California state legislature, would have precluded state pension funds, the California Public Employees’ Retirement System, or CalPERS, and California State Teachers’ Retirement System, from engaging in any transaction with private equity companies that are affiliated with sovereign funds (Many U.S. buyout shops have sovereign funds as limited partners and the burgeoning Chinese sovereign fund, China Investment Corp. Ltd., or CIC, has a $3 billion investment in Blackstone Group LP). This could have a chilling action, Karol said, not just for sovereign funds but also U.S. buyout shops, while at the same time drive buyout shop investment to other countries such as the U.K.

Karol also expressed concern by an initiative launched by Senate Finance Committee chairman Max Baucus and ranking member Charles Grassley to have the non partisan joint committee on taxation to analyze the U.S. tax rules that apply to SWF, which are tax exempt entities. “Countries may yield to political pressure to use tax laws to make SWF act in a certain manner to retain that tax exemption,” Karol argued. “Or worse, change the entire government to government tax relationship.”

Finally, Karol raised concern about pressures put on sovereign funds by critics that argue the government investment vehicles should periodically, perhaps once annually as is the case with a sovereign fund in Norway, disclose their positions. “If people know what you’re going to do with your portfolio: everything you buy will be expensive and everything you sell will be cheap,” Karol said. “In certain countries in the middle east, sovereign funds may have investments they may not want to have disclosed to their neighbors. It may not be prudent to tell the people around you, who might be heavily armed, just how rich you are. You may not want to tell people that you are investing with someone who may not be friendly with the country around you.”

That may be true, but many in other countries may want to know about a sovereign wealth fund’s positions and links to the government in Sudan responsible for the Darfur humanitarian crisis, for example. -- Ron Orol