By Natsuko Waki
LONDON, Dec 15 (Reuters) - The fallout from the global credit crisis is changing, or perhaps correcting, the perception that sovereign wealth funds (SWFs) or state-owned investors will always patiently ride out paper losses on their investment.
Sovereign funds lost an estimated $600 billion over the past two years as the credit crisis sent global stock markets into tailspin and large stakes in Western banks imploded.
Now the $3 trillion sector is taking longer than many had expected to emerge from the refuge of safe, low-yielding securities, dashing hopes that they would help sustain market recovery into next year by buying and holding well valued equity, commodities, property or other alternative assets.
"In practice, the notion that SWFs are more patient than private investors does not really hold water. SWFs often face the same horizon as other market players, and are subject to the same exigencies -- they need to maximise return for their shareholders," an advisor to an Asian SWF told Reuters.
"And governments can be even less patient than private investors. SWFs pursue industrial goals of the government that can be quite pressing. They are operating under very tight schedules."
SWFs are policy vehicles that exist to achieve policy objectives. Their stakeholders -- governments -- may draw down on funds as rainyday capital or decide to sell assets if they see the need to do so, which did happen in many countries such as Russia during the crisis.
Likewise, even if valuations are attractive, sovereign funds just as other cautious investors will wait until they can be pretty confident about a recovery before buying risky assets.
"We're not different from any other asset managers. The notion of being a long term investor does not mean you discard the main rationale for any investment. There is tremendous pressure on an institution like us (to make profit), because we belong to our people," Israfil Mammadov, chief investment officer at Azerbaijan's sovereign fund, told Reuters.
"In this low yielding environment, people are trying to enhance yields by going up the risk curve in terms of increasing exposure to risky assets. We are observing the situation as there are still many uncertainties. We still think it's time to wait and see."
IMPATIENT CAPITAL
The crisis surrounding the debts of state-owned Dubai World -- which might face an asset firesale to finance commitments -- also challenges assumptions that state investors automatically hold longer-term investment horizons than the average asset manager.
Dubai Holding, which belongs to the emirate's ruler, just sold its stake in Egyptian investment bank EFT Hermes, while a Dubai World investment arm Istithmar was forced to sell W Hotel in Manhattan, one of their trophy investments, in a foreclosure auction last week for $2 million. It bought the property for $282 million in 2006.
Indeed, more SWFs have said market conditions are still not yet right for them.
Chin Young-wook, chief executive officer of Korea Investment Corp, told Reuters last month that global financial markets will likely slow next year because the private sector is not strong enough to make up for waning effects of stimulus measures.
Chin also said Korea's SWF had no immediate plan to sharply increase investment in assets such as property or commodities.
Even Norway, whose $400 billion fund owns an average 1 percent of the world's listed companies and is Europe's biggest equity investor, expects consolidation in global stocks in the coming months.
BOON FOR SOME
As for those sovereign funds who are already risk hungry, the global credit crisis is proving to be a boon as they operate in a world with firesale prices on assets as well as cheap human resources and advisory service fees.
China Investment Corporation, whose assets under management are estimated to have risen 50 percent to $300 billion since its birth in 2007, is reported to have invested in property, infrastructure, natural resources, U.S. mortgages, a hedge fund and distressed assets this year.
Some bankers have told Reuters that China Investment Corporation caps its M&A transaction fees at $3 million, no matter how big the deal is, while another banker said the fund has never paid an M&A advisory fee.
With the threat of long-term inflation, they are also now able to freely and legitimately invest in natural resources -- a practice which stirred concerns back in 2007 that they would take over strategically important assets and resources.
"Sovereign wealth funds don't have any liabilities and they are free to invest in illiquid assets at a time there's huge a liquidity premium," said Ashby Monk, SWF expert and research fellow at the Oxford University.
"Certain SWFs are recruited for domestic purposes... to bolster the domestic financial system. If you can avoid that, like CIC, the crisis has swept the problems off their table."
(Editing by Ruth Pitchford)