1.
Financial Institutions COMM 3203
Dalhousie University
Maria Pacurar
COMM 3203 Winter 2019
Dalhousie University
Financial Institutions COMM 3203 Dalhousie University
Maria Pacurar
COMM 3203 Winter 2019
Dalhousie University
Table of Contents
Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?.....................5
Standard Chartered Bank: Valuation and Capital Structure...........................................................29
Cutting through the Fog: Finding a Future with Fintech..................................................................41
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ALDO MUSACCHIO
EMIL STAYKOV
Sovereign Wealth Funds: Barbarians at the Gate or
White Knights of Globalization?
Sovereign wealth funds are not a big bad wolf at the door. They have injected liquidity and helped stabilize
financial markets. They can offer reliable long-term investments our companies need.
— Jose Barroso, President of the European Commission 1
I’d like nothing more than to get more of that money.
— Henry Paulson, U.S. Treasury Secretary2
What about the day when a country joins some “coalition of the willing” and asks the US president to
support a tax break for a company in which it has invested? Or when a decision has to be made about whether to
bail out a company, much of whose debt is held by an ally’s central bank?”
— Lawrence Summers, Director of the US National Economic Council 3
While foreign governments may invest money in our country to make a profit, they may also do so in order
to further their foreign policy ambitions, to acquire national security assets or to purchase a stake in strategic
industries,”
— Virginia Senator Jim Webb4
2007 saw the first slump in housing prices in the US in five decades. Some of the largest financial
institutions in the world were in dire need of fresh capital to shore up their suddenly fragile balance
sheets. Few had the necessary billions of cash available to readily invest quickly in the ailing Wall
Street giants. That is when sovereign wealth funds (SWFs), a somewhat unknown source of
investment up to that point, came to the rescue with a total of $50 billion of investment in less than
half a year5. At the time, these investments were more than welcome – Treasury Secretary Henry
Paulson claimed he would “like nothing more than to get more of that money”6. Such enthusiasm
was, however, quite recent. Prior to that, a rising wave of direct SWF investment in US and European
companies had elicited mixed responses. The foundation and rapid expansion of China’s SWF which
________________________________________________________________________________________________________________
Professor Aldo Musacchio and Emil Staykov (MBA 2011) prepared this case. HBS cases are developed solely as the basis for class discussion.
Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
Copyright © 2011 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized,
photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
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OCTOBER 4, 2011
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Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?
SWFs were symbolic of two major trends in the global economy in the previous decade: 1) a
redistribution of wealth and financial clout from mature to emerging economies; and 2) the return of
the state as a major economic player 7 to a level of importance not seen since the chain collapse of
command economies in the late 1980s. This time around, governments were embracing rather than
denouncing free markets in what was becoming known as “state capitalism”.
The increasing activity and size of SWFs fueled heated debates in politics and business. Were
SWFs worse asset managers than the private sector, or did they contribute to the stability of the
global financial system with large pools of capital and long-term horizons? How should cross-border
flows of state-owned capital be regulated? Should foreign states with different cultural and political
characteristics be allowed to own major stakes in large domestic enterprises at all? Where was the line
between financial protectionism and national security?
What are Sovereign Wealth Funds?
History of SWFs
The term “sovereign wealth fund” was coined by State Street analyst Andrew Rozanov in 20058.
Rozanov did not provide a clear definition at the time and ever since the term has been used to
describe a group of funds that are highly diverse in geography, capital source, size, age and
investment strategies. The Government Pension Fund of Norway ($430 bn of assets under
management), the Chinese Investment Corporation (at estimated $330 bn) and Kiribati’s Revenue
Equalization Reserve Fund ($0.6 bn) all can belong to this group depending on the definition.
While this heterogeneous group was only recently lumped together in the same investor class,
some of its members had been around for a while. The first SWF, the Kuwait Investment Authority,
was set up in 1953, a good eight years before Kuwait even gained political sovereignty from the
United Kingdom. Some of the largest funds, such as the Abu Dhabi Investment Authority (ADIA)
and the Government of Singapore Investment Corporation (GIC), dated back to the 1970’s. Recently,
however, the number and size of SWFs had increased and they had gained unprecedented attention,
particularly with the considerable investments in marquee Western financial institutions at the
beginning of the global financial crisis and the inception of the China Investment Corporation (CIC)
in 2007. The remaining BRIC countries had generally followed suit and either established their own
SWFs recently (in Russia and Brazil) or stated their intention to do so soon (in India, Angola, Bolivia,
and Thailand).
Following some international pressure and realizing their own growing significance in global
markets, SWFs moved to set up their first industry association, the International Working Group
(IWG) of SWFs, in 2007. The IWG included most of the biggest SWFs, had the OECD and the IMF as
observers and drafted the Generally Accepted Principles and Practices for SWFs, named the Santiago
Principles (Exhibit 5a).
Definitions
There is no shortage of definitions on what a SWF is. The UK House of Commons says SWFs are
“state-owned bodies intended to deliver financial returns from the investment of a country’s foreign
exchange reserves or other assets acquired through those reserves” 9. The political and risk consultant
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wasted no time in purchasing stakes in flagship US companies like Blackstone, Morgan Stanley and
energy giant AES exacerbated the debate on SWFs.
Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?
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SWFs themselves put down a definition in the Santiago Principles that outlined their three key
characteristics – they are owned by governments, they invest at least partially in foreign assets and
invest to achieve financial objectives with a long time horizon (Exhibit 5b). Some of the funds
discussed here have even explicitly stated that they do not consider themselves SWFs, but are still
included as they meet these broad criteria.
There has been some confusion between SWFs and other agents of state capital. It is important to
distinguish SWFs from large state-owned enterprises (e.g., Russia’s Gazprom), privately owned
corporations or investment funds that are accused of receiving implicit assistance by states (e.g. some
of the Middle Eastern airline carriers), large but privately owned pension funds (e.g. the Canada
Pension Plan) and standard central bank reserves.
What makes SWFs important?
Large and concentrated
SWFs controlled very large pools of capital. At $4 trillion in 2007, the estimated size of assets
under management (AUM) of SWFs exceeded the combined assets of the private equity and hedge
fund industries (Exhibit 1). Following a drop in market value during 2008 and 2009, estimated AUM
of SWFs surpassed the $4 trillion threshold in 2010 again. SWFs had smaller assets than pension,
mutual and insurance fund assets, and even smaller relative to total global financial assets, estimated
at US$190 trillion11. However, they were significant relative to total stock market capitalization in
both mature and emerging markets12. SWFs combined features of all other investor classes. They had
the financial prowess of large pension funds but, similar to PE funds and hedge funds, often had
greater flexibility with regards to the risk profile of their investments. SWFs were also unique in that
they only reported to a single shareholder – the respective national government.
Furthermore, the SWF industry was significantly more concentrated than other investor classes
(Exhibit 2). At the financial markets peak in 2007, the Abu Dhabi Investment Authority (ADIA) was
said to manage close to $900 billion13, or about a quarter of all SWF assets. When the Chinese
government set up the Chinese Investment Corporation in 2007, it did so with a capital infusion of
$200 billion overnight, about four times the size of the largest hedge fund at the time. The assets of
the largest hedge funds and private equity firms still barely exceed $50 billion. Despite the shortage
of publicly available data and the recent proliferation in the number of SWFs, one can safely assume
that 50-70 percent of sovereign wealth is still concentrated in the five largest funds 1. The five largest
players in the PE and hedge fund industries make up for less than 10% of total industry assets.
Bound to grow larger
The Financial Times announced in 2007 that SWFs were “rapidly becoming a huge force in global
markets and economies”14. The latest growth rates of SWF assets were impressive [Exhibit 3a], albeit
likely generated through government deposits and still not mostly through financial returns.
Rozanov conservatively estimated the size of SWF assets at close to 900 billion in 2005. The IMF
reported that “total size worldwide has increased dramatically over the past 10–15 years”15.
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Assuming SWF assets of $4 trillion; 4 of the 5 largest SWFs (ADIA, SAMA, SAFE, GIC and CIC) do not disclose the size
of AUMs.
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Ian Bremmer defines SWFs as “state-managed pools of excess cash that can be invested
strategically”10.
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Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?
The trend of increase in size was likely to persist. First, there was potential for immediate growth
in SWF assets through the vast holdings of foreign currency already available in some central banks.
Net exporters in emerging markets accumulated up to $6 trillion of foreign exchange reserves; China
alone controlled at least a third of that17. If China deposited most of its foreign exchange holdings in
the CIC, it could become one of the top three asset managers in the world overnight. Second, the
current account imbalances and high commodity prices that funded some of the rapid growth of
SWFs in the past ten years were expected to continue in the short term. Lastly, SWF assets could
grow organically too through appreciation of already existing investments. SWFs assets were forecast
to grow to $13.4– 17.5 trillion by 201718. SWFs were expected to account for one eighth of world’s
investment flows by 2012.19
The different types of SWFs
The industry was certainly diverse. Allocating different funds to specific categories was,
unfortunately, often done on the basis of limited information given the widespread lack of
transparency in the industry. In general, SWFs could be classified in four categories based on their
investment mandate and the source of funding: stabilization funds, savings/ pension reserve funds,
economic development funds or reserve investment corporations depending on their primary
objective. Some SWFs had multiple objectives (e.g. Kuwait Investment Authority and Norway’s
Government Pension Fund-Global), and a number of countries also had more than one SWF,
including Chile, Russia, the UAE and Singapore.
The majority of established SWFs are either savings funds for future generations or fiscal
stabilization funds. There are only a handful of traditional pension reserve funds operating today that
are owned by governments, and even fewer reserve investment corporations.
Saving and pension reserve funds
These funds have been set up with the primary purpose of capital preservation for future
generations. They are generally large, relatively old funds that invest in minority holdings in public
stocks, as well as fixed income securities, and are primarily focused on developed markets. Notable
examples include the Abu Dhabi Investment Authority (ADIA), Norway’s Government Pension
Fund - Global (GPF) and Chile’s Pension Reserve Fund.
Stabilization funds
These funds had mostly been set up in the past 20 years with the primary purpose of providing a
fiscal stabilization mechanism for their countries (spending during recessions and accumulating
reserves during times of growth). They were often similar to savings SWFs in their investment
strategies but had formally outlined responsibilities to engage in countercyclical investment activities.
Chile’s Economic and Social Stabilization Fund and Mexico’s Oil Income Stabilization Fund were
typical examples of such funds.
Economic development funds
These were also mostly young funds whose goal is to promote economic development and, in the
case of resource-rich countries, economic diversification away from the dependence on a single
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International Financial Services London (IFSL) supported that estimate saying SWF assets more than
doubled between 2001 and 200716.
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commodity. These funds generally preferred direct investments with some focus on the domestic
economy and often held majority shares of both public and private companies. To distinguish
themselves from other, more traditional state-owned investment vehicles, economic development
funds sometimes explicitly stated they were not SWFs. The first and largest fund of this type is
Singapore’s Temasek Holdings, which was set up in 1975. More recent funds include Mubadala
Development Company in the UAE, Khazana and 1MDB in Malaysia, and Brazil’s BNDESpar.
Reserve investment corporations
These were funds created as a result of the accumulation of large foreign exchange reserves by
national banks. They typically sought to invest these reserves in liquid assets that provided higher
returns than money market and government bonds, and could also help manage currency risk. While
smaller in number, reserve investment corporations were some of the largest SWFs. The most famous
reserve corporation was arguably the Chinese Investment Corporation, which was set up in 2007 to
manage around $200 billion (at the time) of China’s $2.5 trillion in dollar-denominated securities in
the context of increasing expectations for dollar depreciation. Other large reserve corporations
included the Saudi Arabia Monetary Authority (SAMA), the Korean Investment Corporation (KIC)
and the Government of Singapore Investment Corporation (GIC).
Benefits of SWFs
A solution to the resource curse
There was a tendency to discuss the importance of SWFs in terms of their influence on global
financial markets and, more broadly, the world economy. This often resulted in neglecting the
primary reason for their existence – the benefits they brought to their own nations.
First, SWFs were a natural solution to the “resource curse” problem. In countries that had large
reserves of natural resources (such as oil, gas, or metal ores), the strong world demand for that
resource could lead to real exchange rate appreciation through either nominal appreciation, inflation,
or a combination of both. This lowered the competitiveness of other exports and could leave the
national economy dependent on a single commodity that was both impossible to replenish and
vulnerable to unpredictable price fluctuations.
This was where SWFs were particularly useful. They could convert finite, expendable natural
assets into financial assets that generated returns in perpetuity. For instance, the oil reserves of some
of the GCC countries had already run out (e.g. in Bahrain and Dubai) and while others had reserves
that can last a few decades, oil and gas could not be replenished in the short run. Furthermore, a
technological breakthrough in alternative energy sources might cause the demand for oil and gas to
greatly diminish long before that. Thus SWFs allowed resource exporters to switch from a relatively
unpredictable cash inflow that is limited in time to a well-diversified and more stable cash inflow in
perpetuity through a portfolio of financial and real assets.
SWFs helped to maintain export competitiveness as well. In an environment of high commodity
prices, the sudden inflow of cash from export earnings or fiscal surpluses into the real economy could
overheat the economy through consumption bubbles and rising inflation. Channeling that excess cash
into a SWF was a form of sterilization that kept a lid on inflation (and real exchange rate
appreciation) and preserved the competitiveness of non-commodity exports.
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Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?
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Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?
SWFs, particularly stabilization funds, also helped governments of resource-rich countries
manage rapid falls in commodity prices and smooth out economic cycles. SWFs could provide the
necessary financing for fiscal stimuli and the ensuing boost in demand, saving jobs and protecting
against speculative attacks on national currencies.
During the prolonged hike in oil prices in the 1970s, GCC countries chose to drastically raise
government spending. Those without well-developed SWFs suffered serious budget problems in the
1980s when oil prices fell back to levels unseen for a decade. In the latest oil and gas price hike,
governments diverted excess earnings into SWFs and kept a lid on spending increases. As a result,
they went through the rapid drop in oil prices from $147 per barrel to $46 per barrel in 2008 largely
unscathed and preserved balanced or surplus budgets.
Bolstering national security
SWFs could be a mechanism of national defense for smaller countries in politically unstable
regions since their assets were difficult to seize. The reason behind setting up SWFs in places like
Qatar, the UAE, Kuwait and Singapore might have partially been the realization of national leaders
that their countries are geographically indefensible. Investments abroad represented a reliable
insurance policy against a hypothetical foreign attack. The Iraqi invasion in Kuwait in 1991, for
instance, did not hurt the Kuwait Investment Authority. The fund was able to provide considerable
assistance to the local government in re-building the national economy after the end of the war20.
A caterpillar of global financial markets
SWFs were, in some respect, the embodiment of the stereotype of the large and patient
institutional investor. Such investors are crucial to the long-term health and performance of global
capital markets for a number of reasons.
First, large institutional investors can help to increase capital market returns. They often take a
significant part of the shares of a company or take it over entirely, which gives them incentives to
monitor firm activities, reduces agency problems and leads to better corporate governance focused on
long-term sustainability. They can also enhance firm values by facilitating beneficial takeovers. The
global scope and connections of some SWFs in particular entails greater access to exit opportunities
for companies and can lower transaction costs in deals. 21 Large investors can also benefit its
shareholders as they are able to enter investment opportunities with illiquidity discounts. The larger
the size of the necessary capital deployment, the fewer investors can afford it. This can leave SWFs as
the sole potential investor in some opportunities resulting in favorable acquisition prices. Market
players can also think of large institutional investors as possessing superior information as these
institutions usually hold well diversified portfolios allowing access to multiple industries and
geographies. An investment by a SWF in a firm could then positively affect a firm’s value through
signaling22.
In addition, large investors with long-term horizons are also more immune to “animal spirits” and
could more easily withstand market panic. Even the biggest investments are a relatively small
fraction of their portfolios – for instance, ADIA’s much criticized investment in Citibank in late 2007
was less than a percent of its estimated assets under management. Besides, without any short-term
pressure to return a significant portion of assets in cash to their governments, SWFs could afford to
stay in their investments during market troughs. SWFs have demonstrated that they can have a
stabilizing influence on markets in the recent financial turmoil. The rise of SWFs might not simply
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Protection against domestic economic shocks
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lead to the decrease in power in ‘incumbent’ financial centers such as New York and London 23. SWFs
played an important role in enabling the survival of the financial services system in many incumbent
centers during the financial crisis, by capital infusions totaling over US$50 billion over less than six
months in late 2007 and early 2008 (Exhibit 4). Furthermore, SWFs were pretty much the only ones
investing in late 2007 – 75% of all investments made between November 2007 and January 2008 at the
height of the financial crisis were by SWFs 24 making them somewhat of an international lender of last
resort.
Successful removal of capital constraints
The amount of capital at the disposal of SWFs made them very suitable for large risky investments
with expected late returns that would otherwise remain outside the scope of most funds. Large
infrastructure projects in particular were a preferred domain of some funds (e.g. Temasek Holdings)
long before they attracted the attention of college and university endowments in the West. For
instance, the capital available to SWFs vastly exceeded that of traditional sources of financing in
emerging markets such as the World Bank and the Asian Development Bank.
Not at fault for their size
Even if the size of SWFs indicated a problem with the global economy, their prominence was
more of a symptom than a root cause. Goldman Sachs pointed out that the rise of is due to global
imbalances in the world economy, and that SWF investments in developed markets restored
balance.25 In the past it had been primarily countries with oil and gas reserves, such as Norway and
the Gulf States, or other commodities that had operated SWFs, sourced from their foreign exchange
earnings. China’s fund (like Singapore’s funds) was based on the rapid growth of foreign exchange
from exports of goods, and in particular its current account imbalance with the U.S. That could be
blamed on factors like China’s alleged manipulation of its exchange rate, the persistent reluctance of
U.S. households and governments to spend within their means, or simply on the increasing
productivity of Chinese labor. However, the SWFs of the People’s Republic were beneficiaries of
imbalances rather than their cause.
Criticisms against SWFs
Bad investment managers
A common criticism of SWFs was that, as other state-owned institutions, they were poorly run
and generated less value than a private sector alternative would. Economic research abounds with
evidence that governments, on average, are not very good at capital allocation. Indeed, the recent
experience of SWFs that made large investments in Western financial institutions in the months
preceding Lehman Brothers’ bankruptcy was mixed. The $127 billion of SWF investments in publicly
listed companies suffered close to 57 billion in mark-to-market losses through March 2009 at the
trough of stock markets (although it is unclear how much of the value has been recovered) 26. The
CIC’s investment in Blackstone at $35 per share at its IPO in 2007 was still to pay off in 2011 - the
stock was currently trading at $19 after hitting a low of $4 in February 2008. ADIA’s investment in
Citigroup turned acrimonious – the SWF agreed to buy a minority holding at $32 per share only to
see the stock price fall below a dollar within a year. Despite the partial recovery of the stock, ADIA
was now in the middle of a lawsuit against Citibank for fraudulent representation.
This, however, was only anecdotal evidence, and it did not really distinguish SWFs from other
asset managers who suffered large losses in 2008 and 2009. Some funds seemed highly successful. In
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Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?
Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?
contrast to ADIA, GIC and KIA made $1.6 bn and $1.1 bn in profit by selling their stakes in Citigroup
in 200927. The disclosures by some of the biggest SWFs seem to indicate that they are fulfilling their
mandates with at least moderate success. The capital preservation funds of Singapore, Abu Dhabi
and Norway posted long-term annualized returns in the range of five to eight percent. Singapore’s
Temasek, which was founded with riskier investments in mind, reported a respectable 17% annual
return since inception (Exhibit 7).
A cause of asset bubbles
SWFs were accused of being partially responsible for financial bubbles (e.g. the Latin American
sovereign debt crises of the 1980s and the stock market crash in the US in 2008). For instance,
following the oil price hikes of the 1970’s, SWFs from oil-exporting countries invested their money
with global investment banks, which channeled a lot of the capital into Latin American government
debt. In response to the high inflation caused by the oil price increase, the U.S. Federal Reserve and
European central banks raised interest rates in the 1980s. Latin American governments saw their
currencies quickly depreciate against the US dollar and ended up with untenable debt payments. A
similar pattern took place during the oil and gas price rises in the 2000’s. This time, however, the
recipients of SWF capital were largely publicly listed companies in developed markets, as well as
hedge funds and private equity firms. Such events lead to concerns that SWF investment failures
would not just hurt their domestic constituencies but could actually jeopardize the global financial
system instead of contribute to systemic stability.
Too big to fail… too
If banks and insurance companies should not be “too big to fail” because of systemic risks, why
should regulators treat other large financial institutions more leniently? In the case of a troubled large
SWF that could spread contagion throughout the entire world, who would address the resulting
systemic threat? Private financial institutions faced regulatory regimes that could limit their size and
closely monitored their exposures to risky assets. What could guarantee that SWFs will not commit
the same mistakes that the private sector did in the build up to the global financial crisis?
Some SWFs, for instance, relied partially on debt financing by international private sources. These
were typically funds with portfolios with a substantial proportion of real assets—stakes in
government-owned companies (GLCs), joint ventures or fully-owned corporate entities, and real
estate holdings. Debt financing from the private sector made a fund responsible to various
stakeholders with potentially diverging interests and attracted criticism – that is, it made SWFs no
more truly sovereign. SWFs justified their use of debt financing with the very favorable interest rates
(and, respectively, greater returns on equity) they could obtain. In addition, debt financing had clear
benefits in bringing market discipline to the funds, forcing them to improve corporate governance
and solidify their risk management practices.
But what if, in the course of trying to maximize returns to their shareholders, they took on more
debt and became highly levered investors? In 2008, Dubai World came within hours of defaulting on
its debt payments as a result of highly levered investments in real estate that suddenly faced a
shortage of buyers. Dubai World was technically a private company and was much smaller than the
biggest SWFs. However, its connections to government officials and the lack of transparent corporate
structure raised concerns that similar issues could occur with a SWF. The appropriate level of
leverage for a SWF remained largely a subjective decision made by the fund managers themselves or
by government officials. SWFs could become indistinguishable in capital structure from hedge funds,
but their much larger size bore greater systemic risks.
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Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?
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The attempted purchase by Dubai Ports of the rights to operate major US ports in 2006 and the
rapid expansion in Europe by Russia’s Gazprom fueled concerns about the possibly political
motivation of such investments. 28 Such concerns ignored the fact that Dubai Ports and Gazprom
were not SWFs but state-owned companies. In fact, empirical studies confirmed that there was no
statistically significant difference between the investments of publicly known SWF investments and a
control group of mutual funds29. Unsurprisingly, SWFs have almost unanimously denied that they
invest with political objectives in mind.
Some evidence, however, seemed to support such fears. For example, in a recent transaction
China’s State Administration of Foreign Exchange (SAFE) agreed to purchase $300 million in bonds
from Costa Rica on the condition that Costa Rica switch diplomatic recognition from Taiwan to the
People’s Republic of China. The CIC's investments into iconic global financial institutions (e.g.,
Morgan Stanley in 2007) and energy and resource assets (e.g., in Australia and Canada) of strategic
importance to China's national development caused some backlash and raised concerns about
national security in the West. These concerns had less to do with the effectiveness of governments as
financial investors than with the specific governments in question. The Washington Post
unequivocally concluded that ownership of US assets by foreign governments was “a benign
prospect if the buyer is Norway, a member of NATO. It is more troubling if the government behind it
is that of China, Russia, or Venezuela.”30
SWF deals also came under scrutiny for placing both too little and too much importance on ethics.
In 2006, Temasek purchased a controlling stake in Shin Corporation – the family business of
Thailand’s prime-minister Thaksin Shinawatra who was later indicted with crimes against humanity
and had his assets frozen by the next government. The portfolio of the Libyan Investment Authority
(LIA) drew much attention during the civil unrest in the country in the first half of 2011 when it was
widely publicized that LIA held a stake of 2.5 percent in UniCredito, Italy’s largest bank by assets
(other Libyan state vehicles held an additional five percent). The resulting unrest among Italian
shareholders after LIA’s investment was said to have cost UniCredito’s CEO his position. At the other
end of the spectrum, Norway’s GPF explicitly stated that in addition to financial objectives, it
imposed ethical standards on investments. Its list of companies that did not meet its ethical standards
included aeronautics giants EADS and Boeing. GPF famously disinvested from Wal-Mart because of
its labor practices in Mexico, drawing criticism by the US Ambassador in Oslo.
Insufficient transparency
Accusations of politically motivated investing by SWFs went hand in hand with criticism about
their lack of transparency. SWFs were generally as transparent about their activities as their
governments31. The SWF Institute, an independent research organization, developed an index to
measure the level of transparency in different funds based on best practices in disclosure. Some funds
like Norway’s GPF were exemplary in terms of transparency – in fact, GPF has received praise even
from SWF skeptics as it is “more transparent, more accountable and has clearer governance
structures than many private institutional investors”32. Others were more opaque and were
persistently reluctant to disclose information.
SWFs initially met calls for greater transparency by OECD governments and the IMF with caution
and found them perplexing. After all, they often disclosed even more information than hedge funds
and private equity firms which seemed to be exempt from such criticism. Furthermore, transparency
might actually diminish long-term returns. It could discourage fund managers from taking up good
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Political motivation behind investments
Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?
investment opportunities if they involved short-term risk and subsequent pressure from the public.
The media backlash against large pension fund and endowment managers in the West after the stock
market crash in 2008 seemed to justify that. Managers of some of the most successful funds (such as
the Canada Pension Plan Investment Board and the Yale Endowment) came under heavy criticism for
unrealized losses in 2008 that neglected decades of over-performing the markets. The possibility of
such pressure may have lead managers to skip good investment opportunities. Norway’s GPF, the
leader in transparency, reported annualized returns of 5% since 1998 – a not too glamorous
performance that would look even less impressive if adjusted for inflation. On the other hand, ADIA,
which had long shunned disclosure and was still far from the level of transparency of the GPF,
reported annual returns of 8% for the past 30 years (Exhibit 7).
Recently SWFs had warmed to the idea that greater transparency was desirable and embraced
some of the requirements of Western governments and the IMF in the Santiago principles (Exhibit
5a). Most published annual reports and an increasing number were reporting the size of assets under
management. Very few of the largest ones, though, disclosed all of their investments.
A trigger of financial protectionism
Free-market advocates warned that SWFs might inadvertently encourage capital account
protectionism, through which countries “pick and choose who can invest in what”33. Indeed,
protectionist sentiment stating that foreign governments should not be allowed to own the
“commanding heights” of a national economy was as old as international investment itself. Even
governments that traditionally supported the free flow of capital had been prone to protectionist
intervention. When the Kuwait Investment Authority (KIA) purchased 20 percent of British
Petroleum in its IPO in 1989, Margaret Thatcher’s government famously intervened and ordered KIA
to reduce its holding to less than 10 percent. More recently, the French government had considered
launching its own SWF as a defensive measure against foreign SWF investment. Financial
protectionism could hurt the effectiveness of global capital markets and result to inefficient capital
allocation, thus slowing global growth. While the blame hardly lay with SWFs only, their critics
argued that greater transparency would go a long way in fending off protectionism.
The road ahead
Sovereign wealth had gradually become a controversial but increasingly important part of the
global financial system. Their recent dynamism raised multiple questions in the minds of policy
makers and businessmen alike. Should SWFs be regulated at all? One option was to let countries
decide individually and rely on bi-lateral agreements, similar to the 2008 agreements the U.S. struck
with Singapore and Abu Dhabi34. Even those agreements were, however, very broad and simply
stated that investments were not made with geopolitical purposes, without specifying monitoring or
penalty mechanisms. Another option was to involve (or create) a global regulatory body regulating
cross-border investment similar to the World Trade Organization which regulated cross-border trade.
Would either option prove effective? Were SWFs a source of stability in global finance or just political
vehicles and a new source of systemic risk? Ultimately, what role should states have in a globalized
economy? Could they succeed on a global level in the 21st century having largely failed in their
national economies in the previous century?
10
14
For use only in the course Financial Institutions at Dalhousie University taught by Maria Pacurar from January 07, 2019 to April 30, 2019.
Use outside these parameters is a copyright violation.
712-022
Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?
Global AUMs by type of fund manager
Assets under management,
2008, USD trillion
Pension funds
Mutual funds
Insurance funds
SWFs in 2017 (1)
SWFs
PE funds
Hedge funds
ETFs
0
5
10
15
20
25
30
Source: Compiled from IFSL Research, “Sovereign Wealth Fund Investment Behavior”, (PDF file), downloaded from Les
Echos’ website, http://bit.ly/fxgMKq , accessed April 2, 2011.
(1) A range of projections by Morgan Stanley, Standard Chartered, Merrill Lynch, and the International Monetary Fund cited
by the World Bank (http://bit.ly/gaygdU).
11
15
For use only in the course Financial Institutions at Dalhousie University taught by Maria Pacurar from January 07, 2019 to April 30, 2019.
Use outside these parameters is a copyright violation.
Exhibit 1
712-022
712-022
Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?
Exhibit 2
Largest SWFs by assets
Government Pension Fund - Global (Norway)
Abu Dhabi Investment Authority (UAE)
China Investment Corporation (China)
Kuwait Investment Authority (Kuwait)
Government of Singapore Investment
Corporation (Singapore)
Temasek Holdings (Singapore)
National Wealth Fund (Russia )
Qatar Investment Authority (Qatar )
Libyan Investment Authority (Libya )
0
50 100 150 200 250 300 350 400 450 500
Source: Adapted from Monitor Group, “Sovereign Wealth Fund Investment Behavior”, (PDF file), downloaded from Monitor
Group’s website, http://bit.ly/gNWGdE , accessed March 15, 2011.
1 The data represent estimates based on publicly available information and Monitor’s analysis. Monitor Group does not track
two of the largest SWFs in the world, the Saudi Arabia Monetary Authority (SAMA) and China’s State Agency for Foreign
Exchange (SAFE). Both SAMA and SAFE invest at least a portion of their assets in public and private equity and could be
classified as SWFs. The SWF Institute estimates SAMA’s assets at $439 bn and SAFE’s at $347 bn.
12
16
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Use outside these parameters is a copyright violation.
Largest SWFs by assets1,
USD bn, Q2 2010
Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?
SWF investments over time1
Total investment,
USD bn
120
100
80
60
40
20
0
2000
Exhibit 3b
2001
2002
2003
2004
2005
2006
2007
2008
2009
SWF investments by destination- developed vs. emerging markets
Geographical distribution of investment,
Percent of deal value
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Emerging Markets
OECD
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Adapted from Monitor Group, ““Sovereign Wealth Fund Investment Behavior”, (PDF file), downloaded from
Monitor group’s website, http://bit.ly/gNWGdE , accessed March 15, 2011.
1 The data is restricted only to the publicly available investments of 33 SWFs tracked by Monitor group. The size of the
investments may be significantly larger.
13
17
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Use outside these parameters is a copyright violation.
Exhibit 3a
712-022
712-022
Date
Selected SWF investments in Western companies
Fund
Country
Target
Stake
Value
(USD bn)
Stakes in investment banks:
2007
ADIA
UAE (Abu Dhabi)
2007
GIC
Singapore
2007
KIA
Kuwait
2007
Temasek
Singapore
2008
KIC
South Korea
2008
KIA
Kuwait
2007
CIC
China
2007
GIC
Singapore
2007
SAMA
Saudi Arabia
2008
QIA
Qatar
Citigroup
Citigroup
Citigroup
Merrill Lynch
Merrill Lynch
Merrill Lynch
Morgan Stanley
UBS
UBS
Credit Suisse
4.6%
4.2%
4.7%
10.8%
4.3%
7.4%
9.9%
9.8%
1.8%
2.0%
7.6
6.8
7.7
5.0
2.0
3.4
5.0
9.8
1.8
0.6
Stakes in private equity and hedge funds:
2007
ADIA
UAE (Abu Dhabi)
2007
ADIA
UAE (Abu Dhabi)
2007
Mubadala
UAE (Abu Dhabi)
2007
CIC
China
2007
DIC
Dubai
2011
KIA and GIC Kuwait, Singapore
Apollo
Ares
Carlyle
Blackstone
Och-Ziff
TPG
9.0%
20.0%
7.5%
9.9%
9.9%
5.5%
n.a.
n.a.
1.4
3.0
1.3
0.6
SWFs also owned stakes in Daimler, Sony, EADS, Harrods, Volkswagen.
The list is not exhaustive.
Source: United States Government Accountability Office (GAO), Sovereign Wealth Funds: Publicly Available Data on Sizes and
Investments for Some Funds Are Limited. Report to the Committee on Banking, Housing, and Urban Affairs, U.S. Senate,
September 2008; author’s research.
14
18
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Use outside these parameters is a copyright violation.
Exhibit 4
Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?
Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
“Santiago” principles
The legal framework for the SWF should be sound and support its effective operation and the achievement
of its stated objective(s).
1.1. The legal framework for the SWF should ensure legal soundness of the SWF and its
transactions.
1.2. The key features of the SWF’s legal basis and structure, as well as the legal relationship
between the SWF and other state bodies, should be publicly disclosed.
The policy purpose of the SWF should be clearly defined and publicly disclosed.
Where the SWF’s activities have significant direct domestic macroeconomic implications, those activities
should be closely coordinated with the domestic fiscal and monetary authorities, so as to ensure consistency
with the overall macroeconomic policies.
There should be clear and publicly disclosed policies, rules, procedures, or arrangements in relation to the
SWF’s general approach to funding, withdrawal, and spending operations.
4.1. The source of SWF funding should be publicly disclosed.
4.2. The general approach to withdrawals from the SWF and spending on behalf of the
government should be publicly disclosed.
The relevant statistical data pertaining to the SWF should be reported on a timely basis to the owner, or as
otherwise required, for inclusion where appropriate in macroeconomic data sets.
The governance framework for the SWF should be sound and establish a clear and effective division of roles
and responsibilities in order to facilitate accountability and operational independence in the management of
the SWF to pursue its objectives.
The owner should set the objectives of the SWF, appoint the members of its governing body(ies) in
accordance with clearly defined procedures, and exercise oversight over the SWF’s operations.
The governing body(ies) should act in the best interests of the SWF, and have a clear mandate and adequate
authority and competency to carry out its functions.
The operational management of the SWF should implement the SWF’s strategies in an independent manner
and in accordance with clearly defined responsibilities.
The accountability framework for the SWF’s operations should be clearly defined in the relevant legislation,
charter, other constitutive documents, or management agreement.
An annual report and accompanying financial statements on the SWF’s operations and performance should
be prepared in a timely fashion and in accordance with recognized international or national accounting
standards in a consistent manner.
The SWF’s operations and financial statements should be audited annually in accordance with recognized
international or national auditing standards in a consistent manner.
Professional and ethical standards should be clearly defined and made known to the members of the SWF’s
governing body(ies), management, and staff.
Dealing with third parties for the purpose of the SWF’s operational management should be based on
economic and financial grounds, and follow clear rules and procedures.
SWF operations and activities in host countries should be conducted in compliance with all applicable
regulatory and disclosure requirements of the countries in which they operate.
The governance framework and objectives, as well as the manner in which the SWF’s management is
operationally independent from the owner, should be publicly disclosed.
Relevant financial information regarding the SWF should be publicly disclosed to demonstrate its economic
and financial orientation, so as to contribute to stability in international financial markets and enhance trust
in recipient countries.
15
19
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Use outside these parameters is a copyright violation.
Exhibit 5a
712-022
Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?
18. The SWF’s investment policy should be clear and consistent with its defined objectives, risk tolerance, and
investment strategy, as set by the owner or the governing body(ies), and be based on sound portfolio
management principles.
18.1.The investment policy should guide the SWF’s financial risk exposures and the possible use of
leverage.
18.2.The investment policy should address the extent to which internal and/or external investment
managers are used, the range of their activities and authority, and the process by which they
are selected and their performance monitored.
18.3.A description of the investment policy of the SWF should be publicly disclosed.
19. The SWF’s investment decisions should aim to maximize risk-adjusted financial returns in a manner
consistent with its investment policy, and based on economic and financial grounds.
19.1.If investment decisions are subject to other than economic and financial considerations, these
should be clearly set out in the investment policy and be publicly disclosed.
19.2.The management of an SWF’s assets should be consistent with what is generally accepted as
sound asset management principles.
20. The SWF should not seek or take advantage of privileged information or inappropriate influence by the
broader government in competing with private entities.
21. SWFs view shareholder ownership rights as a fundamental element of their equity investments’ value. If an
SWF chooses to exercise its ownership rights, it should do so in a manner that is consistent with its
investment policy and protects the financial value of its investments. The SWF should publicly disclose its
general approach to voting securities of listed entities, including the key factors guiding its exercise of
ownership rights.
22. The SWF should have a framework that identifies, assesses, and manages the risks of its operations.
22.1.The risk management framework should include reliable information and timely reporting
systems, which should enable the adequate monitoring and management of relevant risks
within acceptable parameters and levels, control and incentive mechanisms, codes of conduct,
business continuity planning, and an independent audit function.
22.2.The general approach to the SWF’s risk management framework should be publicly disclosed.
23. The assets and investment performance (absolute and relative to benchmarks, if any) of the SWF should be
measured and reported to the owner according to clearly defined principles or standards.
24. A process of regular review of the implementation of the GAPP should be engaged in by or on behalf of the
SWF.
Source: Adapated
from
International
Working
Group
of
swf.org/pubs/eng/santiagoprinciples.pdf, accessed April 2, 2011.
16
20
SWFs,
(PDF
file)
http://www.iwg-
For use only in the course Financial Institutions at Dalhousie University taught by Maria Pacurar from January 07, 2019 to April 30, 2019.
Use outside these parameters is a copyright violation.
712-022
Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?
Definition of SWF in the Santiago Principles
1. SWFs are defined as follows:
2. SWFs are defined as special purpose investment funds or arrangements, owned by the general
government. Created by the general government for macroeconomic purposes, SWFs hold, manage,
or administer assets to achieve financial objectives, and employ a set of investment strategies which
include investing in foreign financial assets. The SWFs are commonly established out of balance of
payments surpluses, official foreign currency operations, the proceeds of privatizations, fiscal
surpluses, and/or receipts resulting from commodity exports.
3. This definition excludes, inter alia, foreign currency reserve assets held by monetary authorities
for the traditional balance of payments or monetary policy purposes, operations of state-owned
enterprises in the traditional sense, government-employee pension funds, or assets managed for the
benefit of individuals.
4. Three key elements define an SWF:
Ownership: SWFs are owned by the general government, which includes both central
government and sub-national governments.
Investments: The investment strategies include investments in foreign financial assets, so it
excludes those funds that solely invest in domestic assets.
Purposes and Objectives: Established by the general government for macroeconomic purposes,
SWFs are created to invest government funds to achieve financial objectives, and (may) have
liabilities that are only broadly defined, thus allowing SWFs to employ a wide range of
investment strategies with a medium- to long-term timescale. SWFs are created to serve a
different objective than, for example, reserve portfolios held only for traditional balance of
payments purposes. While SWFs may include reserve assets, the intention is not to regard all
reserve assets as SWFs.
Source: Adapted
from
International
Working
Group
of
swf.org/pubs/eng/santiagoprinciples.pdf, accessed April 2, 2011.
SWFs,
(PDF
file)
http://www.iwg-
17
21
For use only in the course Financial Institutions at Dalhousie University taught by Maria Pacurar from January 07, 2019 to April 30, 2019.
Use outside these parameters is a copyright violation.
Exhibit 5b
712-022
Exhibit 6a
Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?
SWF transparency index
The Linaburg – Maduell Transparency Index allocates a point for each of the practices that is considered
key to corporate transparency. Index value vary from 0 (least transparent) to 10 (most transparent)
Point
Principles of the Linaburg-Maduell Transparency Index
+1
Fund provides history including reason for creation, origins of wealth, and
government ownership structure
+1
Fund provides up-to-date independently audited annual reports
+1
Fund provides ownership percentage of company holdings, and geographic
locations of holdings
+1
Fund provides total portfolio market value, returns, and management
compensation
+1
Fund provides guidelines in reference to ethical standards, investment policies,
and enforcer of guidelines
+1
Fund provides clear strategies and objectives
+1
If applicable, the fund clearly identifies subsidiaries and contact information
+1
If applicable, the fund identifies external managers
+1
Fund manages its own web site
+1
Fund provides main office location address and contact information such as
telephone and fax
Developed by Carl Linaburg and Michael Maduell
Source: Adapted from SWF Institute, “Linaburg-Maduell Transparency Index,” http://bit.ly/fBJ8tx , accessed March 10,
2011.
18
22
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Use outside these parameters is a copyright violation.
712-022
Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?
SWF transparency rankings of top funds by assets
Transparency of the largest SWFs,
Linaburg Maduell Index, Q2 2010
Government Pension Fund - Global (Norway)
Temasek Holdings (Singapore)
China Investment Corporation (China)
Kuwait Investment Authority (Kuwait)
Government of Singapore Investment Corporation…
National Wealth Fund (Russia )
Qatar Investment Authority (Qatar )
Saudi Arabia Monetary Authority
Abu Dhabi Investment Authority (UAE)
State Agency for Foreign Exchange (China)
Libyan Investment Authority (Libya )
0
1
2
3
4
5
6
7
8
9
10
Source: Adapted from SWF Institute, “Linaburg-Maduell Transparency Index,” http://bit.ly/fBJ8tx , accessed March 10, 2011.
19
23
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Use outside these parameters is a copyright violation.
Exhibit 6b
712-022
712-022
Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?
Long-term returns of selected SWFs
Annualized returns,
Percent
GPF - Global
(Norway)
Time period
1998 - 2010
5%
ADIA (UAE)
1980 - 2010
8%
Temasek
(Singapore)
17%
1975 - 2010
KIA (Kuwait)
n.a.
n.a.
GIC
(Singapore)
n.a.
n.a.
SAMA (S.
Arabia)
n.a.
n.a.
SAFE (China)
n.a.
n.a.
0%
5%
10%
15%
20%
Source: Adapted from Annual reports, accessed April 10, 2011.
The funds are selected based on two criteris: 1) age (in operations for more than 20 years) and 2) size (estimated AUM > $100
bn).
20
24
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Use outside these parameters is a copyright violation.
Exhibit 7
Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?
712-022
Appendix: Abbreviations
For use only in the course Financial Institutions at Dalhousie University taught by Maria Pacurar from January 07, 2019 to April 30, 2019.
Use outside these parameters is a copyright violation.
ADIA – Abu Dhabi Investment Authority
AUM – Assets under management
CIC – China Investment Corporation
GIC – Government of Singapore Investment Corporation
GPF – Government Pension Fund – Global (Norway)
KIA – Kuwait Investment Authority
KIC – Korea Investment Corporation
LIA – Libya Investment Authority
SAFE – State Administration of Foreign Exchange (China)
SAMA – Saudi Arabia Monetary Authority
QIA – Qatar Investment Authority
21
25
712-022
Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?
Endnotes
Ian Townsend, Economic Policy & Statistics Section, “Sovereign Wealth Funds”, House of Commons
Library, July1, 2008. Available at http://bit.ly/emwSeR , accessed March 11, 2011.
2 Stephen Weisman, “A Fear of Foreign Investments”, The New York Times, August 21, 2007. Available at
http://nyti.ms/ec3XId , accessed March 11, 2011.
3
Lawrence Summers, “Funds That Shake Capitalist Logic”, The Financial Times, July 29, 2007.
4 U.S. Senate press release, “Senator Jim Webb's Remarks to the U.S.-China Economic and Security Review
Commission on the National Security Implications of Sovereign Wealth Funds”, February 7, 2008. Available at
http://1.usa.gov/hgHdEE , accessed March 11, 2011
5 United States Government Accountability Office (GAO), “Sovereign Wealth Funds: Publicly Available Data
on Sizes and Investments for Some Funds Are Limited”. Report to the Committee on Banking, Housing, and
Urban Affairs, U.S. Senate, September 2008; author’s research.
6 Stephen Weisman, “A Fear of Foreign Investments”, The New York Times, August 21, 2007,
http://nyti.ms/ec3XId , accessed March 11, 2011.
7
Truman, Edwin M. Sovereign Wealth Funds: Threat or Salvation? Washington, DC: Peterson Institute, 2010
8
Andrew Rozanov, State Street Global Advisors, “Who Holds the Wealth of Nations”, August 2005
9
Ian Townsend, “Sovereign Wealth Funds”.
10
Bremmer, Ian. The End of the Free Market: Who Wins the War between States and Corporations? New
York, NY: Penguin Group, 2010, p. 69
11International
Monetary Fund. Sovereign Wealth Funds—A Work Agenda. Prepared by the Monetary and
Capital Markets and Policy Development and Review Departments, February 29, 2008
12
Ibid.
13
United States Government Accountability Office, Sovereign Wealth Funds.
14 Tony Tassell and Joanna Chung , “How Sovereign Wealth Funds Are Muscling in on Global Markets” ,
The Financial Times, May 24, 2007. Available at http://on.ft.com/fXba4l, accessed on March 15, 2011
15Ian
Townsend, “Sovereign Wealth Funds.”.
16
Ibid.
17
Bremmer, Ian. The End of the Free Market, p. 71
18 Curto, Stefano. “Sovereign Wealth Funds in the Next Decade.” World Bank, April 2010.
http://bit.ly/gaygdU , accessed March 10, 2011
19
Bremmer, Ian. “State Capitalism Comes of Age”. Foreign Affairs, 00157120, May/Jun2009, Vol. 88, Issue 3
20
Bremmer, Ian. The End of the Free Market, p. 72
21
Dewenter, Kathryn; Han, Xi; Malatesta, Paul. “Firm Values and Sovereign Wealth Fund Investments”.
Journal of Financial Economics, vol. 98, no. 2, November 2010, pp. 256-78
22
Ibid.
23
Faulconbridge, James. 2010. “Rebalancing the geographies of financial services power: the role of
sovereign wealth funds”. Environment and Planning A 42, 2280-2283. Available at http://bit.ly/hvKNRF ,
accessed March 11, 2011
22
26
For use only in the course Financial Institutions at Dalhousie University taught by Maria Pacurar from January 07, 2019 to April 30, 2019.
Use outside these parameters is a copyright violation.
1
Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?
712-022
24
25
Ian Townsend, Ian. “Sovereign Wealth Funds.”.
26
Bortolotti, Bernardo; Fotak, Veljko; Megginson, William; William Miracky. Sovereign Wealth Fund
Invetsment Patterns and Performance. FEEM working paper, 2009. Available at http://bit.ly/g5scsd , accessed
April 5, 2011.
27
The Economist. Falling knives. December 10, 2009. Available at http://econ.st/gNVPvX, accessed March
10, 2011
28
Truman, Edwin M. Threat or Salvation.
29Avendano,
Rolando; Santiso, Javier. Are Sovereign Wealth Funds' Investments Politically Biased? A
Comparison with Mutual Funds. OECD, Development Centre, OECD Development Centre Working Papers: 283,
2010
30
The Washington Post. “Countries Buying Companies; The rise of sovereign wealth funds is nothing to fear
-- if they operate out in the open.” Editorial, 24 October 2007, accessed March 15, 2011, through Factiva
31
Bremmer, Ian. The End of the Free Market, p. 72
32
Ibid., p.73
33
Ian Townsend, “Sovereign Wealth Funds.”.
34
John Brinsley, “U.S., Abu Dhabi, Singapore Agree on Wealth Fund Rules (Update2)” , Bloomberg, March
20, 2008. Available at http://bloom.bg/fWwuFI , accessed on March 15, 2011
23
27
For use only in the course Financial Institutions at Dalhousie University taught by Maria Pacurar from January 07, 2019 to April 30, 2019.
Use outside these parameters is a copyright violation.
Aizenman, Joshua; Glick, Reuven. 2008, “Sovereign wealth funds: stylized facts about their determinants
and
governance”,
working
paper,
National
Bureau
of
Economic
Research,
http://www.nber.org/papers/w14562, accessed February 10, 2011
3.
STANDARD CHARTERED BANK: VALUATION AND CAPITAL
STRUCTURE1
Ruth S. K. Tan, Zsuzsa R. Huszár and Weina Zhang wrote this case solely to provide material for class discussion. The authors do not
intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and
other identifying information to protect confidentiality.
This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission
of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order
copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario,
Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com.
Copyright © 2015, National University of Singapore and Richard Ivey School of Business Foundation
Version: 2015-12-07
In November 2014, Standard & Poor’s (S&P) — a major U.S. credit rating agency — downgraded Standard
Chartered Bank’s long-term debt from AA– to A+, and its short-term debt from A-1+ to A-1.2 The new rating meant
that Standard Chartered Bank (SCB) had a “strong capacity to meet its financial commitments, but was somewhat
more susceptible to the adverse effects of changes in circumstances and economic conditions.”3 The downgrade
came after a string of profit warnings issued by the bank, and was the first downgrade for SCB in 20 years since S&P
started rating the bank in 1994.4 According to the rating agency, SCB remained one of the most creditworthy in its
class, but “the group [was] no longer materially less exposed to unexpected losses than [its] peers.”5
There were reasons to be bearish about SCB’s outlook. Its shares had been amongst the worst performing stocks
of the 30 global, systemically important banks (G-SIBs).6 G-SIBs were banks that, should they fail, might
trigger a financial crisis. The list of such banks was published by the Financial Stability Board in 2014.7 SCB’s
large exposure to emerging markets in Asia, Africa and the Middle East weighed heavily on the minds of
investors as interest rates started to creep upwards along with the recovery of the U.S. economy.8 The threat of
large-scale defaults in these emerging markets, coupled with slowdowns in China and India, had increased the
vulnerability of the bank’s balance sheet.
In October 2014, U.S. authorities had reopened investigations into whether SCB had withheld prohibited
transactions from investigators in 2012, when it paid a total of US$667 million.9 Portions of this total were paid
to the New York State Department of Financial Services ($340 million), the New York City District Attorney
and Department of Justice ($95 million), the Treasury Office of Foreign Assets Control ($132 million) and the
Federal Reserve ($100 million).10 The authorities also signed a deferred prosecution agreement to resolve a
criminal case of sanction breaches in Iran, the Sudan and Myanmar.11
Some of the bank’s largest investors pushed for radical changes, such as the departure of its chairman, Sir John
Peace, as well as its chief executive, Peter Sands.12 They also pushed for the relocation of its London, England,
base of operations to either Hong Kong or Singapore, for tax purposes.13
29
For use only in the course Financial Institutions at Dalhousie University taught by Maria Pacurar from January 07, 2019 to April 30, 2019.
Use outside these parameters is a copyright violation.
9B15N030
Page 2
9B15N030
The Singapore investment fund Temasek Holdings became the single largest shareholder of SCB in March 2006,
after its purchase of an 11.5 per cent stake in the company (worth about $4 billion) from the estate of the hotelier
Khoo Teck Puat. Khoo was a reclusive Singaporean billionaire who had died in 2004. By December 2007,
Temasek had increased its investment to 18 per cent, and its stake hovered between 18 and 19 per cent thereafter.14
Investment in a bank which specialized in emerging markets with a strong Asian focus placed Temasek in a
position to benefit from Asia’s economic growth. From 2008 to 2013, SCB benefited from its Asian focus
because these emerging markets grew faster than the U.S. and European economies did.15 As a result, SCB
weathered the financial crisis relatively unscathed.16
When Asia started experiencing slower economic growth in 2013, SCB’s fortunes took a turn for the worse.
The slower growth and the U.S. investigations caused SCB’s stock price to plummet. As of March 31, 2014,
Temasek had a net debt-to-equity ratio of 0.0217 and a risk-adjusted aggregated hurdle rate of 8 per cent.18
EFFORTS TO IMPROVE FINANCIAL PERFORMANCE
SCB had made deliberate moves to cut costs and increased its business focus. In early January 2015, the bank
dismantled its stockbroking, equity research and equity listing desks worldwide, becoming one of the first
global banks to get out of the equity capital markets business completely. A total of 200 jobs were cut — almost
all of them in Asia. SCB also announced plans to cut 4,000 jobs in retail banking, which represented
approximately 5 per cent of the bank’s 86,000 employees.19
VALUATION
On the London Stock Exchange,20 SCB’s adjusted closing share price stood at $13.0821 on March 1, 2006,
around the time of Temasek’s initial purchase. It hit a peak of $24.35 on March 14, 2013, and was on a
downward trend thereafter. The share closed at $14.71 on February 16, 2015. The decline of SCB’s share price
raised concerns that it might in fact be oversold and under-priced. However, it was obvious that bearish
sentiments regarding the share remained.
As far back as October 2011, there were some signals that Temasek might move away from its SCB stake when
it raised $502 million by selling a zero-coupon bond that could be exchanged for SCB shares if the bank shares
rose beyond the requisite 27 per cent premium to the then share price of $21.98.22 The poor record in 2014 reignited speculation that Temasek might offload its stake.
If Temasek decided to sell a part of, or all of, its stake in SCB on February 16, 2015, what would be a reasonable
valuation for SCB’s shares based on its past financial performance and other relevant market information?
Summaries of the historical financial statements are provided in Exhibits 1 and 2.
Some assumptions and projections of the free cash flow to equity for 2014 through to 2024 and beyond are
available in Exhibit 3. Corresponding projections with attendant assumptions that would be useful for a dividend
discount model valuation are presented in Exhibit 4. This includes information on the required return on equity,
and the estimated dividends from 2014 through to 2024 and beyond.
30
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Use outside these parameters is a copyright violation.
TEMASEK’S STAKE IN SCB
Page 3
9B15N030
NEW CAPITAL RULE UNDER BASEL III
Under Basel III23 regulatory rules, banks that held “significant” investments in other financial groups (classified
as more than 10 per cent of their total equity) would have to hold more capital against these investments.
Specifically, the investments in excess of the 10 per cent threshold were to be excluded in the calculation of
Tier 1 capital. The Tier 1 capital ratio is defined as the ratio of a bank’s core equity capital (common stock and
retained earnings) to its risk-weighted assets.
This new rule made it more expensive for banks to hold investments in other banks.24 It trapped capital on the balance
sheet and could force banks to shrink if they chose to dump these investments. Holding more capital against these
investments, on the other hand, would cause a bank’s returns to decline and might also hurt share prices.
Because Standard Chartered held significant investments in the Agricultural Bank of China ($621 million),25
PT Bank Permata ($638 million), Vietnam’s Asia Commercial Joint Stock Bank ($105 million), and China
Bohai Bank ($123 million),26 it would have to raise funds equivalent to the total excess investments in these
financial institutions. Thus, SCB might find it unattractive to hang on to these bank investments.
Assuming that SCB decided to hold on to these bank investments and to raise funds to satisfy the higher capital
requirement, what could be some possible financing alternatives? Would it help to attract more bank deposits?
Should it raise debt? Should it go for a seasoned offering? What would be the impact of these financing
alternatives? What would be a suitable recommendation on how to raise the funds if one took the valuation
results into consideration?
31
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Use outside these parameters is a copyright violation.
For a relative valuation analysis using a peer comparison, data had been collected, but a suitable peer group had
yet to be identified (see Exhibit 5). Stock charts that show the price performance of SCB relative to its
competitors are offered in Exhibits 6 and 7.
Page 4
9B15N030
2008
2009
2010
2011
2012
2013
Interest income
16,378
12,926
13,500
16,584
17,827
17,593
Interest expense
8,991
5,303
5,030
6,431
7,046
6,437
Net interest income
7,387
7,623
8,470
10,153
10,781
11,156
Non-interest income
6,581
7,561
7,592
7,484
8,002
7,621
13,968
15,184
16,062
17,637
18,783
18,777
1,321
2,000
883
908
1,196
1,617
12,647
7,611
13,184
7,952
15,179
9,023
16,729
9,917
17,587
10,722
17,160
10,193
-468
-81
-34
-37
-14
-903
Profit before tax
4,568
5,151
6,122
6,775
6,851
6,064
Provision for income taxes
1,224
1,674
1,708
1,842
1,866
1,864
Net income
3,344
3,477
4,414
4,933
4,985
4,200
Total income
Provision for credit losses
Gross income
Non-interest expense
Others (other impairment and
profit from associates)
Source: Standard Chartered PLC, “Standard Chartered PLC Annual Report 2013: Driving Investment, Trade and the Creation
of Wealth across Asia, Africa and the Middle East,” 2014, http://reports.standardchartered.com/annual-report-2013/pdf/2013Annual-Report.pdf, accessed February 16, 2015.
32
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Use outside these parameters is a copyright violation.
EXHIBIT 1: INCOME STATEMENT FOR STANDARD CHARTERED BANK (US$)
Page 5
9B15N030
Short-term assets
Cash and due from banks
Federal funds
Other short-term investments
Investment securities held available-for-sale
Total investment
Customer loans
Commercial loans
Real estate construction loans
Residential mortgages
Consumer loans
Lease financing (commercial real estate)
International loans
Total customer loans
Impairment provision, customers
Loans and advances to customers
Other assets
Premises and equipment
Customer liability on acceptance outstanding
Accrued income and prepayments
Other assets
Total assets
2008
2009
2010
2011
2012
2013
46,583
50,885
52,058
65,981
67,797
83,702
24,161
18,131
32,724
47,364
60,537
54,534
92,575
67,327
79,709
88,845
80,422
93,965
61,849
69,040
70,967
79,790
95,374
99,888
225,168
205,383
235,458
281,980
304,130
332,089
89,817
98,563
118,172
133,229
138,733
149,312
2,325
2,523
2,454
3,804
4,645
3,967
47,567
57,637
70,662
72,574
72,627
69,789
33,097
36,946
46,488
52,676
57,790
60,013
6,357
7,008
9,388
10,255
11,543
13,630
179,163
202,677
247,164
272,538
285,338
296,711
4,985
4,385
6,806
5,748
5,700
6,003
174,178
198,292
240,358
266,790
279,638
290,708
3,586
4,103
4,507
5,078
6,620
6,903
2,574
3,080
4,847
5,485
4,957
5,501
3,466
3,241
2,127
2,521
2,552
2,510
26,096
22,554
29,263
30,832
33,311
36,669
435,068
436,653
516,560
592,686
631,208
674,380
33
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EXHIBIT 2: BALANCE SHEET FOR STANDARD CHARTERED BANK (US$)
Page 6
9B15N030
2008
2009
2010
2011
2012
2013
24,195
30,572
40,820
38,510
42,230
45,482
93,092
126,726
137,255
153,185
173,103
181,159
145,206
133,882
162,652
193,035
201,123
200,142
12,084
4,509
5,249
6,502
6,056
8,714
250,382
265,117
305,156
352,722
380,282
390,015
Total deposits
Financial liabilities held at fair
value through profit or loss
274,577
295,689
345,976
391,232
422,512
435,497
8,660
5,984
10,433
10,210
13,211
10,914
Total deposit liabilities
265,917
289,705
335,543
381,022
409,301
424,583
2,539
2,963
4,774
5,473
4,900
5,501
4,132
4,113
4,528
4,458
4,811
4,668
139,785
111,952
132,850
160,358
166,141
192,787
412,373
408,733
477,695
551,311
585,153
627,539
Deposits
Non-interest-bearing deposits
Saving deposits
Customer certificates of
deposits
Institutional certificates of
deposits
Total interest-bearing deposits
Other liabilities
Short-term borrowings
Acceptances outstanding
Accruals and deferred income
Other liabilities
Total liabilities
Share capital
Share premium account
Capital and capital
redemption reserve
Merger reserve
Available-for-sale reserve
Cash flow hedge reserve
Translation reserve
Retained earnings
Parent company
shareholders’ equity
Non-controlling interest
Total equity
Total equity and liabilities
948
1,013
1,174
1,192
1,207
1,214
4,743
4,828
5,386
5,432
5,476
5,493
18
18
18
18
18
18
5,450
7,284
12,421
12,421
12,421
12,421
-5
-93
306
-109
478
446
-83
15
57
-13
81
15
-1,784
-1,185
-412
-1,394
-885
-2,106
12,853
15,460
19,260
23,167
26,566
28,745
22,140
27,340
38,212
40,714
45,362
46,246
555
580
653
661
693
595
22,695
27,920
38,865
41,375
46,055
46,841
435,068
436,653
516,560
592,686
631,208
674,380
Source: Standard Chartered PLC, “Standard Chartered PLC Annual Report 2013: Driving Investment, Trade and the Creation
of Wealth across Asia, Africa and the Middle East,” 2014, http://reports.standardchartered.com/annual-report-2013/pdf/2013Annual-Report.pdf, accessed February 16, 2015.
34
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Use outside these parameters is a copyright violation.
EXHIBIT 2: (CONTINUED)
Page 7
9B15N030
1.
2.
3.
4.
5.
Interest income is expected to grow at the rates shown in the table below. From 2014 to 2016, with SCB’s downturn,
modest growth using the average growth rate from 2008 to 2013 of 2.48 per cent is projected. From 2017 to 2023,
SCB will enter a higher growth phase and a 4.5 per cent growth is assumed. Beyond that, the terminal growth rate
is estimated to be 5 per cent. The base interest income at Year -1 (FY2013) is $17,593. Year 0 is FY2014. Discount
the free cash flows starting from 2015.
Other items are assumed to grow proportionately with interest income. Interest expense, non-interest income,
provision for credit losses, and non-interest expense are estimated to be 41.35 per cent, 48.04 per cent, 8.58 per
cent and 58.47 per cent of interest income, respectively. Tax is applied at 28.714 per cent on taxable income.
As SCB’s interest expense is considered a “cost of goods sold” due to the nature of the banking business, the free
cash flows are calculated after deducting interest expense and therefore are essentially cash flows to equity.
The valuation assumes that capital spending and net operating working capital are negligible.
No adjustments for outstanding warrants and share options are made in calculating value per share.
Year-on-Year Interest Income Growth
Year (estimates)
2014
2015
2016
2017
2018
2019
Interest income (%)
2.48
2.48
2.48
4.5
4.5
4.5
2020
2021
2022
2023
2024
4.5
4.5
4.5
4.5
5
Source: Created by the authors based on assumptions stated above.
EXHIBIT 4: DIVIDEND DISCOUNT MODEL VALUATION ASSUMPTIONS AND OTHER SELECTED
FINANCIAL DATA
Financial Year End:
Ordinary Shares Outstanding:
Equity Beta:
U.K. Government Bond Yield:
Market Risk Premium:
Dividend per Share in 2014 (Year 0):
Book Value per Share:
December 31
2.427 billion
1.23
2.62%
6.35%
US$0.86
US$19.05
Dividends are expected to grow at the rates shown in the table below. From 2015 to 2017, with SCB still working towards
recovery, modest growth of 3 per cent is expected. From 2018 to 2023, SCB will have rebounded and with its retail banking
growth potential, a higher growth of 5 per cent is assumed. The terminal growth rate is estimated to be 7 per cent.
Year-on-Year Dividend Growth
Year (estimates)
2014
Dividend growth rate (%)
Dividend per share ($)
0.86
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
3
3
3
5
5
5
5
5
5
7
0.89
0.91
0.94
0.99
1.04
1.09
1.14
1.20
1.26
1.35
Source: Created by the authors based on assumptions stated above.
35
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EXHIBIT 3: DISCOUNTED CASH FLOW VALUATION ASSUMPTIONS
Page 8
9B15N030
SCB
Ticker
STAN
Royal Bank of
Barclays HSBC
Scotland
RBS
BARC HSBA
UBS
ING
UBS
ING
Deutsche
Bank
DB
Stock exchange
London
London
London London New York New York New York
Share price
956.40*
385.60*
257.87* 602.2*
Market capitalization
23.21B
43.73B
Employees
Qtrly revenue growth (yoy)
(%)
Revenue (ttm**)
86,000
110,800
-9.20
58.90
16.18B
14.3B
Gross profit (ttm):
17.03B
11.43B
N/A
N/A
N/A
N/A
Operating margin (ttm) (%)
35.63
-14.71
26.93
Net income (ttm)
4.17B
-6.43B
EPS (ttm, diluted)
1.70
P/E (ttm, forward)
14.03
32.29
53.80B 121.52B 64.53B
54.08B
44.52B
139,600 254,000 60,205
84,718
98,138
7.00
14.90
23.80
24.19B 58.36B
30.23B
29.02B
35.14B
24.87B 58.96B
N/A
3.89B
N/A
N/A
N/A
N/A
32.25
9.55
34.47
16.01
1.03B
15.32B
3.84B
3.03B
1.90B
-0.57
0.06
0.81
0.99
0.37
1.49
9.23
0.12
0.10
6.69
11.16
10.02
21.77
P/S (ttm)
2.23
3.08
2.21
2.07
2.11
3.39
1.24
P/B (mrq***)
0.74
0.71
0.89
0.62
1.17
0.92
0.55
Total cash
146.8B
486.5B
717.2B 964.52B
N/A
178.26B
1,170B
Total debt
143.8B
463.4B
647.7B 541.46B
N/A
205.87B
918B
EBITDA† (ttm)
9.10
11.30
17.19
Note: SCB’s balance sheet and income statements are in USD, but the share prices are quoted in GBP. Use exchange rate
of 1 USD = 0.65 GBP on February 16, 2015.
†
Earnings Before Interest, Taxes, Depreciation and Amortization.
*share price quoted in GBP (pence).
**ttm = trailing 12 month
***mrq = most recent quarter
Source: Yahoo! Southeast Asia Pte. Ltd., “Standard Chartered PLC (STAN.L) — Key Statistics,” https://sg.finance.yahoo.com/
q/ks?s=STAN.L, accessed February 16, 2015; Yahoo! Southeast Asia Pte. Ltd., “Royal Bank of Scotland Group plc (RBS.L) —
Key Statistics,” https://sg.finance.yahoo.com/q/ks?s=RBS.L, accessed February 16, 2015; Yahoo! Southeast Asia Pte. Ltd.,
“Barclays PLC (BARC.L) — Key Statistics,” https://sg.finance.yahoo.com/q/ks?s=BARC.L, accessed February 16, 2015; Yahoo!
Southeast Asia Pte. Ltd., “HSBC Holdings plc (HSBA.L) — Key Statistics,” https://sg.finance.yahoo.com/q/ks?s=HSBA.L,
accessed February 16, 2015; Yahoo! Southeast Asia Pte. Ltd., “UBS Group AG (UBS) — Key Statistics,”
https://sg.finance.yahoo.com/q/ks?s=UBS, accessed February 16, 2015; Yahoo! Southeast Asia Pte. Ltd., “ING Groep N.V.
(ING) — Key Statistics,” https://sg.finance.yahoo.com/q/ks?s=ING; Yahoo! Southeast Asia Pte. Ltd., “Deutsche Bank AG (DB)
— Key Statistics,” https://sg.finance.yahoo.com/q/ks?s=DB, accessed February 16, 2015.
36
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Use outside these parameters is a copyright violation.
EXHIBIT 5: KEY FINANCIAL FIGURES AND MARKET-COMPARABLE MULTIPLES OF SELECTED
PUBLICLY TRADED FIRMS
Page 9
9B15N030
EXHIBIT 6: STOCK CHART FOR SCB AND MAJOR COMPETITORS ON LSE,
JANUARY 2013–FEBRUARY 2015
0.3
0.2
0.1
0
‐0.1
‐0.2
‐0.3
STAN
RBS
BCS
HSBC
‐0.4
‐0.5
Source: Yahoo! Southeast Asia Pte. Ltd., “Standard Chartered PLC (SCBFF),” https://sg.finance.yahoo.com/q/hp?s=SCBFF,
accessed August 25, 2015; Yahoo! Southeast Asia Pte. Ltd., “Royal Bank of Scotland Group plc (RBS.L) — Historical
Prices,” https://sg.finance.yahoo.com/q?s=RBS.L, accessed February 15, 2015; Yahoo! Southeast Asia Pte. Ltd., “Barclays
PLC (BARC.L) — Historical Prices,” https://sg.finance.yahoo.com/q/hp?s=BARC.L, accessed February 15, 2015; Yahoo!
Southeast Asia Pte. Ltd., “HSBC Holdings plc (HSBA.L) — Historical Prices,” https://sg.finance.yahoo.com/q/hp?s=HSBA.L,
accessed February 15, 2015.
37
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Cumulative returns (on investment from Jan 1. 2013)
0.4
Page 10
9B15N030
EXHIBIT 7: STOCK CHART FOR SCB (CROSSLISTED AS SCBFF) AND MAJOR COMPETITORS ON
NYSE AND NASDAQ, JANUARY 2013–FEBRUARY 2015
0.6
0.4
0.2
0
‐0.2
‐0.4
‐0.6
SCBFF
DB
UBS
ING
Source: Yahoo! Southeast Asia Pte. Ltd., “Standard Chartered PLC (SCBFF),” https://sg.finance.yahoo.com/q/hp?s=SCBFF,
accessed August 25, 2015; Yahoo! Southeast Asia Pte. Ltd., “Royal Bank of Scotland Group plc (RBS.L) — Historical
Prices,” https://sg.finance.yahoo.com/q?s=RBS.L, accessed February 15, 2015; Yahoo! Southeast Asia Pte. Ltd., “Barclays
PLC (BARC.L) — Historical Prices,” https://sg.finance.yahoo.com/q/hp?s=BARC.L, accessed February 15, 2015; Yahoo!
Southeast Asia Pte. Ltd., “HSBC Holdings plc (HSBA.L) — Historical Prices,” https://sg.finance.yahoo.com/q/hp?s=HSBA.L,
accessed February 15, 2015.
38
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Cumulative returns (on investment from Jan 1. 2013)
0.8
Page 11
9B15N030
1
This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives
presented in this case are not necessarily those of Temasek, Standard Chartered or any of their employees.
2
The Telegraph, “S&P Downgrades Standard Chartered for the First Time in Bank’s History,” November 28, 2014,
www.telegraph.co.uk/finance/newsbysector/epic/stan/11260273/SandP-downgrades-Standard-Chartered-for-the-first-timein-banks-history.html, accessed February 15, 2015.
3
Standard & Poor’s, “Standard & Poor’s Ratings Definitions,” June 22, 2012, www.standardandpoors.com/spf/general/
RatingsDirect_Commentary_979212_06_22_2012_12_42_54.pdf, accessed February 15, 2015.
4
The Telegraph, “S&P Downgrades Standard Chartered for the First Time in Bank’s History,” op. cit.
5
Reuters, “Standard Chartered Hit with First S&P Downgrade in 20 Years,” November 28, 2014, www.business
times.com.sg/banking-finance/standard-chartered-hit-with-first-sp-downgrade-in-20-years, accessed February 15, 2015.
6
Financial Stability Board, “2014 Update of List of Global Systemically Important Banks,” November 6, 2014,
www.financialstabilityboard.org/2014/11/2014-update-of-list-of-global-systemically-important-banks, accessed February 15,
2015.
7
Financial Times, “Temasek Should Sit Tight on Troublesome Stake in StanChart,” January 1, 2015, www.ft.com/intl/cms/
s/0/1c0175de-90f9-11e4-914a-00144feabdc0.html#axzz3f4qsC5dI, accessed February 16, 2015.
8
Ibid.
9
All dollars amounts are in U.S. dollars. The exchange rate on December 10, 2012, was US$1 = GBP£0.62241.
10
The Wall Street Journal, “Standard Chartered’s Fine Tally Runs to $667 Million,” December 10, 2012,
http://blogs.wsj.com/deals/2012/12/10/standard-chartereds-fine-tally-runs-to-667-million, accessed February 26, 2015.
11
Financial Times, “Temasek Should Sit Tight on Troublesome Stake in StanChart,” op. cit.
12
The Telegraph, “Standard Chartered Chief and Chairman to Leave in Dramatic 6-man Board Exodus,” February 26, 2015,
www.telegraph.co.uk/finance/newsbysector/epic/stan/11436307/Standard-Chartered-chief-and-chairman-to-leave-indramatic-director-exodus.html, accessed March 30, 2015.
13
Financial Times, “StanChart Investors Press Bank to Consider Leaving London,” March 20, 2015, www.ft.com/intl/cms/
s/0/0dd8924a-ce65-11e4-900c-00144feab7de.html#axzz3f4qsC5dI, accessed March 30, 2015.
14
Bloomberg, “Temasek Raises Stake in Standard Chartered to 18 Percent,” December 24, 2007, www.bloomberg.com/
apps/news?pid=newsarchive&sid=a9kK9GTD37GU, accessed February 16, 2015.
15
Reuters, “StanChart Eyes Bank Stake Sales as It Tries to Slim Down,” January 16, 2015, www.reuters.com/
article/2015/01/16/stanchart-restructuring-idUSL3N0UU18Y20150116, accessed February 16, 2015.
16
Reuters, “Standard Chartered Considers HK Consumer Finance Unit Sale: Sources,” February 19, 2014,
http://wincountry.com/news/articles/2014/feb/19/standard-chartered-considers-hk-consumer-finance-unit-sale-sources,
accessed February 16, 2015.
17
Temasek, “Temasek Review 2014,” http://tr14.temasekreview.com.sg/content/dam/temasek/annual-review2014/documents/en/Temasek_Review_2014_en.pdf, accessed February 15, 2015, p. 83.
18
Ibid., p. 19.
19
Singapore Press Holdings Ltd., “Standard Chartered Axes Equities Business, Cuts 4,000 Jobs,” AsiaOne, January 9,
2015, http://news.asiaone.com/news/business/standard-chartered-axes-equities-business-cuts-4000-jobs, accessed
February 16, 2015.
20
Share prices for SCB were taken from the London Stock Exchange.
21
All original share prices were in GBP and converted using the exchange rate of US$1 = GBP£0.65.
22
Financial Times, “Temasek Reconsiders StanChart Stake,” September 24, 2012, www.ft.com/intl/cms/s/0/a27e3094-067111e2-bd29-00144feabdc0.html#axzz3XLPXccKc, accessed February 16, 2015.
23
KPMG LLP, “Basel III: Issues and Implications,” www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/
Documents/basell-III-issues-implications.pdf, accessed February 15, 2015.
24
Financial Times, “BBVA Raises £1 Billion from Citic Bank Stake Sale,” October 17, 2013, www.ft.com/intl/cms/s/0/
6341974c-36f7-11e3-b42e-00144feab7de.html#axzz3hLn2ahxE, accessed February 15, 2015.
25
US$1 = GBP£0.65071 on February 16, 2015.
26
Reuters, “StanChart Eyes Bank Stake Sales as It Tries to Slim Down,” op. cit.
39
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Use outside these parameters is a copyright violation.
ENDNOTES
4.
UVA-F-1767
Cutting through the Fog: Finding a Future with Fintech
Then comes a strange moment, the sort of thing that happens often at Microsoft, which seemingly within moments
turns disaster into salvation. Talk has turned to broader trends in banking. Where’s it going, what’s in it for
us? Banks are dinosaurs, says Gates. We can “bypass” them. The Raptor is unhappy with an alliance involving
a big bank-card company. “Too slow.” Instead he proposes a deal with a small—and more easily controllable—
check-clearing outfit. “Why don’t we buy them?” Gates asks, thinking bigger. It occurs to him that people
banking from home will cut checks using Microsoft’s software. Microsoft can then push all those transactions
through its new affiliate, taking a fee on every one. Abruptly, Gates sheds his disappointment with Money.
He’s caught up in a vision of Microsoft at the center of the “transformation of the world financial system.” It’s
a “pot of gold,” he declares, pounding the conference table with his fists, triumphant and hungry and wired.
“Get me into that and goddamn, we’ll make so much money!”1
Carolina Costa was a consultant at Florida Optimum Group (FOG), which, funnily enough, aimed to “help
our clients cut through the fog.” She was working on engagement, advising a large global bank.
The weather had turned and after leaving the client’s office at 7:00 p.m., Costa was able to enjoy a walk to
both clear her head and synthesize her thoughts. To many, fintech was still a buzzword with foggy definitions
and an unclear path forward. Luckily, Costa had caught the itch to learn more about fintech during the second
year of her MBA at a major business school. She had been asked to lead a team to advise Alex Linger-Turpin,
a senior managing director, on the strategic path that the bank should take in the wake of fintech growth.
A few choices were becoming clear, though she wanted to make sure she analyzed the various options. She
also wanted to make sure she had the right context to share with her client—Linger-Turpin and his colleagues
knew something was bubbling beneath the surface, but they could not quite figure it out. Costa was ready to help
them put their finger on fintech.
1
Newsweek staff, “Culture Club,” Newsweek, July 10, 1994, http://www.newsweek.com/culture-club-189982 (accessed Oct. 27, 2016).
This public-sourced case was prepared by Kayla Cartwright (MBA ’16); and Yiorgos Allayannis, Professor of Business Administration and Associate
Dean for Global MBA for Executives. The assistance of Daniel Gavino is greatly appreciated. It was written as a basis for class discussion rather than
to illustrate effective or ineffective handling of an administrative situation. Copyright © 2016 by the University of Virginia Darden School Foundation,
Charlottesville, VA. All rights reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced,
stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the
permission of the Darden School Foundation. Our goal is to publish materials of the highest quality, so please submit any errata to
editorial@dardenbusinesspublishing.com.
41
For use only in the course Financial Institutions at Dalhousie University taught by Maria Pacurar from January 07, 2019 to April 30, 2019.
Use outside these parameters is a copyright violation.
Rev. Jul. 7, 2017
Page 2
UVA-F-1767
In the aforementioned Newsweek quote, Bill Gates forecasted the convergence of technology and the
financial-services industry in 1994.2 Over 20 years later, fintech had become an industry segment of its own,
garnering global funding of more than $11.2 billion for fintech start-ups in the first three quarters of 2015.3
Despite becoming a more common term, the definition of fintech was still nebulous. A few sources, however,
began to paint a more vivid picture:
“As a definition, Fintech is usually applied to the segment of the technology start-up scene that is
disrupting sectors such as mobile payments, money transfers, loans, fundraising and even asset
management.”4
“The answer seems obvious at first: technology that relates to conducting financial services activities,
with the end client/user being a financial institution. But after many, many meetings, I’ve realized that
the currently held definition of fintech is not only stale, but also unrepresentative of the opportunity
in this industry.”5
“It’s time for a new definition of fintech: technology that serves the clients of financial institutions,
covering not only the back and middle offices but also the coveted front office that for so long has
been human-driven.”6
“Use of technology in finance is not new, nor are many of the products and services that are offered
by new entrants to the sector. Rather, it is the novel application of technology and its speed of evolution
that make the current wave of innovation unlike any we have seen before in financial services.”7
“Fintechs have two unique selling points: better use of data and frictionless customer experience.”8
This amalgam of definitions showed that the horizon of fintech was indeed foggy, though it tended to be much
easier to say what fintech was than what fintech was not.
Take the breadth of organizations that occupied the fintech space. Figure 1 shows the wide distribution
of fintech companies across markets and service offerings. In addition, Exhibit 1, a sample list of fintech
companies, could span tens of pages if all-encompassing given the rise of new start-ups.
http://www.newsweek.com/culture-club-189982.
Steve Davies, Manoj Kashyap, and Joerg Ruetschi, “Meeting the Fintech Challenge,” strategy + business, April 18, 2016, http://www.strategybusiness.com/article/Meeting-the-Fintech-Challenge?gko=bd900 (accessed Oct. 27, 2016).
4
Jens Munch, “What is Fintech and Why Does it Matter to All Entrepreneurs,” Hot Topics: Tech Stories,
https://www.hottopics.ht/stories/finance/what-is-fintech-and-why-it-matters/ (accessed Oct. 27, 2016).
5 Karl Antle, “The New Definition of Fintech,” ValueStream, September 30, 2013, http://www.valuestreamlabs.com/blog/2013/the-new-definitionof-fintech (accessed Oct. 27, 2016).
6 http://www.valuestreamlabs.com/blog/2013/the-new-definition-of-fintech.
7 World Economic Forum, prepared in collaboration with Oliver Wyman, “The Role of Financial Services in Society,” April 2016,
http://www3.weforum.org/docs/WEF_FS_RoleFinancialServicesSociety_Stability_Tech_Recommendations_2016.pdf (accessed Oct. 27, 2016).
8 Maria Aspan, “Why Fintech is One of the Most Promising Industries of 2015,” Inc., September 2015, http://www.inc.com/magazine/201509/mariaaspan/2015-inc5000-fintech-finally-lifts-off.html (accessed Oct. 27, 2016).
2
3
42
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Use outside these parameters is a copyright violation.
The Fintech Landscape
Page 3
UVA-F-1767
Figure 1. Percent of fintech companies by product and customer segments.
Insurance
Capital Markets
Lending
Savings and Investments
Payments
0%
10%
20%
IB/Markets
30%
40%
Corporate
50%
60%
70%
80%
90%
Personal/SME
Data
source:
Citi
Global
Perspectives
Solutions,
“Digital
Disruption,”
Citi,
March
2016,
https://ir.citi.com/D%2F5GCKN6uoSvhbvCmUDS05SYsRaDvAykPjb5subGr7f1JMe8w2oX1bqpFm6RdjSRSpGzSaXhyXY%3D
(accessed Nov. 1, 2016).
A December 2015 Forbes article spoke to the abundance of companies in the fintech domain:
The number of fintech start-ups is difficult to pinpoint, but data sources and industry watchers estimate
that Asia has approximately 2,500 fintech start-ups while the U.K. and the U.S. have a combined total
of 4,000. Even these estimates are best guesses and underestimate the true count, since fintech startups that haven’t received funding are likely not to be documented in any database.9
The Evolution of Fintech
It was not quite known when exactly fintech started. Some analysts said that the first fintech start-ups began
in 2005,10 however, the New York Times reminded the public that PayPal, the first major fintech company, was
founded in 1998, paving the way for others to disrupt the financial-services industry.11 Records from Mountain
View, California, technology incubator Y Combinator indicated that the first significant wave of fintech
innovation began in 2005, with the creation of the incubator’s first fintech company, TextPayMe, a service that
enabled payments through SMS. TextPayMe was quickly acquired by Amazon in 2006, and the acquisition
served as an early indicator of how the industry might evolve over time.12
Since 2005, with the exponential growth of mobile technology and the 2008 crash of the financial markets,
the environment ripened for the emergence of fintech. One indicator illustrated the growth: between 2013 and
9
Falguni
Desai,
“The
Fintech
Boom
and
Bank
Innovation,”
Forbes,
December
14,
2015,
http://www.forbes.com/sites/falgunidesai/2015/12/14/the-fintech-revolution/#1fb09ef336da (accessed Oct. 27, 2016).
10
Ryne Landers, “How FinTech is Changing Business (and Bank Accounts),” Business.com, January 7, 2016,
http://www.business.com/finance/how -fintech-is-changing-business-and-bank-accounts/ (accessed Oct. 27, 2016).
11
“Ranking
the
Top
Fintech
Companies,”
New
York
Times,
April
6,
2016,
http://www.nytimes.com/interactive/2016/04/07/business/dealbook/Th e-Fintech-Power-Grab.html?_r=0 (accessed Oct. 27, 2016).
12 “Amazon/TextPayMe,” crunchbase.com, October 1, 2006, https://www.crunchbase.com/acquisition/6a387c3d81a66c7f7590f28ec3034fe6
(accessed Oct. 27, 2016).
43
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Overall
Page 4
UVA-F-1767
Long seen as a highly technical, highly regulated industry dominated by giant banks that resist
disruption—other than the occasional global meltdown—finance is now riding an entrepreneurial
wa...
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