More on sovereign wealth funds
In the flurry of east-west role-reversal commentary prompted by Asian and Middle Eastern sovereign wealth funds buying into Citi and Merrill Lynch, an interesting sub-plot has been missed. What is a Korean state agency doing buying into a Wall Street investment bank?
It is perhaps the strangest contribution of the lot. The Gulf’s sovereign funds have been investing internationally for decades, Singapore’s funds have been shifting their portfolios to a more global mix for almost as long, and even Mizuho’s involvement at Merrill, while interesting, is still simply a cash-rich private sector enterprise taking a tilt at a good valuation opportunity.
But the Korea Investment Corp? This just isn’t how Korea behaves. Even its corporations rarely make acquisitions overseas. Its stock market heavyweights, such as Samsung Electronics and Posco, have international operations but they rarely buy (in Samsung’s case because it’s still hurting from the last time it tried in the 1990s). Any cross-border acquisition involves cultural and language barriers but fears of such a clash seem to be particularly intense for Korean acquirers.
The first signs that this might be changing began last year, and in particular with Doosan Infracore’s $4.9 billion purchase of Bobcat, a loader and excavator manufacturer, from US company Ingersoll-Rand. The Bobcat deal was the landmark but there have been others, such as STX, a Korean shipyard, buying Norwegian company Akey Yards for $800 million. Even a pension fund for Korea’s military turned up, via Macquarie, in a consortium to buy the largest stake in Thames Water.
But even with that trend, the KIC’s $2 billion investment in Merrill is really something. A recent invention, KIC was launched in July 2005 to invest some of the nation’s foreign currency reserves. It now manages $20 billion. Until recently, though, almost all the investments it had made were in corporate and treasury bonds. The expectation had always been that it would pursue a bolder allocation but until the Merrill deal there had been no sign of it appearing.
One could argue that these acquisitive steps come in tandem with Seoul’s intention to be seen as a regional financial centre. Today, this seems an awfully long shot: the region is full of established and aspiring financial centres already, most of them without the language barriers that Korea has. But whether or not it succeeds in that grand design, there is a definite mood of trying to improve the standing of the country’s financial industry, with the asset management industry in particular in a good position for growth.
It’s a bit of a leap for a new investment agency to go from government bonds to 3% of an US investment bank in one hit but it would appear this is the start of a bolder approach by Korea to managing its reserves, and that other international purchases will follow. Whether that turns out to be a smart move remains to be seen.