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The power of collective action

By Vision Reporter

Added 1st September 2007 03:00 AM

A casual observer of international business news will not have missed the rising prominence of private equity funds in recent years. Private equity funds first captured the public imagination in the 1980s with a series of major acquisitions epitomized by private equity firm KKR buyout of the food an

By Paul Busharizi

A casual observer of international business news will not have missed the rising prominence of private equity funds in recent years. Private equity funds first captured the public imagination in the 1980s with a series of major acquisitions epitomized by private equity firm KKR buyout of the food and tobacco company RJR Nabisco.

These private equity funds, investment vehicles for mainly rich individuals, pension and endowment funds, are charged with the task of investing the funds for the maximum benefit of their sponsors.

In recent years, private equity deals have grown bigger and bigger – the $26b purchase of the Hilton Hotel chain in July this year by Blackstone is an example, a result of cheap credit sloshing around the world’s financial markets.

But in recent weeks, international credit has become dearer, a backlash of the recent crisis in the American mortgage market.

Mortgage lenders awash with funds had extended their lending to borrowers with poor credit ratings.

They then bundled these loans into marketable securities and issued bonds against them, with the understanding that mortgage payments will service the interest on the bonds – billions of dollars in mortgages were securitised this way.
However, a recent increase in mortgage rates led to loan defaults, triggering the current unease in world markets.Bond holders are spread around the world and many have taken a loss on their investment.

As a result of the ensuing credit squeeze, analysts are predicting a drop in private equity activity in the near term. Enter the sovereign equity funds. Sovereign equity funds are set up by nations to invest their surplus funds.
Previously, they were content to invest in low risk government bonds but recently, they have become more aggressive in looking for better returns.

The most prominent sovereign funds have their home in the Gulf States. With oil prices reaching historic levels this year, these sovereign funds are awash with cash.

According to recent reports between them the investment arms in Kuwait, Saudi Arabia, Dubai, Abu Dhabi and Qatar, hold an estimated $1,500b in assets or 200 times the size of Uganda’s economy.

Looking to the future, aware that their oil income is finite, these countries are creating new revenue streams by investing in businesses, real estate and high interest bonds around the world. The Kuwait Investment Authority, a $213b fund, claims its portfolio returned 13.2% or $28b last year. Assuming they can continue that rate of return, the fund will double in size every five years.

Given that some oil states like Dubai are looking to a drying up of their oil reserves within the next 15 years, returns from these sovereign funds maybe more than adequate to run affairs of the state and provide world-class services. Singapore has a successful sovereign equity fund that this week was ready to bid more than $1b for a 30% stake in the London Stock Exchange.

Singapore’s 33- year old Temasek Holdings manages a portfolio of about $160b. The point of all this, is that countries need not only rely on their natural endowments – commodity exports and foreign remittances, to sustain revenues – Singapore is just a rock in the ocean with a few million people. And secondly, windfalls earned during boom periods can be wisely invested to smooth over the inevitable downward cycles that come with participation in the world markets.

As a starting point, there has to be an active attempt to mobilise internal resources, aggregate them into the formal financial sector. Across the border in Kenya, their more developed pension sector, which is liberalised and saving is encouraged through tax relief, allows them the luxury of negotiating their debt agreements with donors on a more even footing.

At an even more micro-economic level, Kenya’s Savings & Credit Co-operatives control at least $2b in deposits, more deposits than in all of Uganda’s banks! This pool of savings has kept the Kenyan economy ticking even when the donors pulled out in the 1990s.

Is it any wonder then that Kenya remains this region’s dominant economy, despite more than 10 years of economic contraction? Despite 20 years of aggressive growth by Uganda?

pbusharizi@newvision.co.ug

The power of collective action

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