Abu Dhabi Investment Authority makes a play for the London-Channel Tunnel high-speed rail link

Global corporate mergers and acquisitions involving sovereign wealth funds (SWFs) increased to more than $12bn in the second quarter of 2010 - a rise of $11bn from the previous quarter, according to data from Thomson Reuters. The number of deals rose to 33 from 24 between January and March.

Many SWF balance sheets suffered during the financial crisis due to ill-timed investments into Western financial institutions, which lost about $80bn. SWFs are now moving away from foreign investment to long-term infrastructure and resource development projects. For example, Abu Dhabi Investment Authority is looking at a joint bid with Morgan Stanley and private equity group 3i for the high-speed railway linking London with the Channel Tunnel.

According to estimates by Prequin, SWFs have regained some of their strength and currently hold $3590bn in assets, an increase of 11% from last year. But many are tapping the capital markets for more funding as governments seek to make quicker, riskier, short-term gains. Abu Dhabi, Bahrain, Kazakhstan, Qatar and Singapore are all looking to raise funds. Samruk-Kazyna, Kazakh government's $70bn wealth fund, is planning to raise $6bn in bank loans as well as obtain a credit rating so as to eventually launch an initial public offering.

While private sector investment brings further validity to SWFs - often criticised for their secrecy - if SWFs start to invest in riskier assets with bigger short-term returns then some analysts fear government-owned funds may begin to resemble unregulated hedge funds. They also worry that short-term views and outside investment may also undermine the main purpose of SWFs - to maximise wealth for future generations.


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