As a capital markets regulator for the U.K.s Financial Services Authority, Gay Huey Evans spent nearly seven years promoting greater accountability in London as one of the banking industrys most powerful, politically connected gatekeepers. Now the 53-year-old, American-born Londoner, who in March left her post as head of governance for Citi Alternative Investments to join Barclays as its first vice chair of investment banking and investment management, is using her networking skills to spearhead the British banks services for sovereign wealth funds.
Over the past nine months, such funds have invested heavily in the financial sector including the £1 billion ($1.9 billion) purchase of a 2.1 percent interest in Barclays by Singapores Temasek Holdings. Crucial as these investments have been, they have also sparked anxiety about the funds influence. Still, Evans sees huge opportunity in helping them navigate the political and investment challenges of diversifying their vast portfolios. Last month she spoke to Institutional Investor London Bureau Chief Loch Adamson about the burgeoning power of sovereign wealth funds.
1 Institutional Investor: Sovereign wealth funds assets are growing enormously. How big could they get?
Evans: If you expect oil prices to hit $200 a barrel by the end of the year, as Goldman Sachs does, then these funds are going to grow exponentially. At the end of last year, according to Mc-Kinsey & Co., ADIA [the Abu Dhabi Investment Authority] had $875 billion in assets, and that was when they were pricing oil at $70 a barrel. Those assets are probably north of $1 trillion now, and if oil prices continue to escalate every one of these funds is expected to double its value in the next five years.
2 What are the concerns as these funds expand?
Wearing my old regulatory hat, I would say that the sovereign wealth funds are very concerned about operational and risk management issues as they continue to grow. They all value their own professionals, and they need good people to stay on top of their investments and measure those risks on an ongoing basis. Where they are growing, they need to put more people in their back and middle offices. Sovereign wealth funds need strong operational teams to oversee trade reconciliation and make sure that they close transactions in a proper length of time and if they do swaps that those records are all kept up to date.
3 How much transparency do regulators really need?
We believe that sovereign wealth funds should not be required to do something more than what the marketplace is required to do. If they are going to acquire more than 3 percent or 5 percent of a company, they will have to disclose those stakes, depending on the jurisdiction.
4 Given the current liquidity squeeze and rather dismal investing climate, how are their strategies evolving?
They still need to diversify their holdings. Weve seen a multitude of sovereign wealth funds start to invest assets in alternatives, hedge funds and private equity, but many managers have limited capacity. Real estate has long been popular; many buildings in financial centers like London and New York are already owned by sovereign wealth funds. But when these funds start to get into other types of investments, like ports, the issue of public perception becomes acute because there is a vague sense in the political realm that somehow these funds are trying to do more than what they claim to do. But they have to diversify they have no choice.
5 The sovereign wealth funds have tremendous capital. Are they being hit up by a slew of companies seeking financing?
Yes, absolutely, but these are not people who want to spend money unwisely. While some of their investments in the financial sector have gone pear-shaped for the time being, if you believe in the banking system, it will come around again and these are long-term holders.