Citigroup-Abu Dhabi deal: A sign of the times

Sovereign wealth funds are looking to park more of their $2 trillion with U.S. companies.

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By David Ellis, staff writer


NEW YORK ( -- Citigroup's newfound $7.5 billion cash infusion from Abu Dhabi's state investment fund may not cure all that ails the embattled bank, but it heralds the growing influence of sovereign wealth funds.

With similar government-owned funds swimming in cash, more iconic U.S. firms like Citigroup may find themselves owned, at least in part, by foreign governments.

Sovereign wealth funds, which act as a country's investment arm, have long been investing money gained through exports or from the sale of commodities such as oil.

But because of their rapidly expanding size, these funds have become harder to ignore.

Located both in the oil-rich Middle East, as well as other nations such as Russia and Singapore, the funds' combined assets under management are expected in the next three years to quadruple in size to $7.9 trillion from $1.9 trillion, according to Merrill Lynch.

While government debt like U.S. Treasuries have long been their investment vehicle of choice, the funds' appetites have grown more complex as they have searched for greater returns, said Jay Bryson, global economist at Wachovia Corp.

"There are only so many Treasury securities or government bonds out there they can buy, so they are looking to diversify," said Bryson.

This year alone, sovereign wealth funds have gobbled up pieces of a number of U.S. firms. In May, China Investment Corp. purchased a nearly 10 percent stake of the private equity firm Blackstone Group (Charts).

In August, Istithmar, a financing arm of the United Arab Emirates, agreed to buy the department store operator Barneys for $942 million. And earlier this month, Mubadala Development Co., a separate investment arm of the government of Abu Dhabi, acquired a $622 million stake in the chipmaker AMD (Charts, Fortune 500).

Economists argue that investments by sovereign funds are important to the U.S. economy, providing capital to firms such as Citigroup (Charts, Fortune 500) and supporting the dollar. At the same time, the funds have have faced plenty of criticism.

World leaders at the October G7 meeting, worried that the funds may try to wield their investments as a diplomatic tool, called for greater transparency about investments.

Lawmakers in Washington have been equally cautious, despite a recent push by both the White House and some members of Congress to court foreign investors after last year's widely-publicized failure of Dubai Ports World to manage six U.S. ports.

The Citigroup-Abu Dhabi deal got a different reception on Tuesday. In a televised interview, Sen. Charles Schumer (D-N.Y.) said the investment would make the Wall Street firm "stronger."

"We just want to make sure other countries are as open to us investment as we are to them," Schumer said.

Going forward, sovereign wealth funds will most likely try to avoid scrutiny altogether by acquiring small stakes and forgoing management control, similar to the Citigroup-Abu Dhabi deal, said Edwin Truman, senior fellow at the Peterson Institute for International Economics.

"Sovereign wealth funds have learned from their experiences," said Truman. To top of page

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