November 27, 2007 | posted by Michael Baxter in IABN |

Two giants of the corporate world have found themselves on the receiving end of multi billion dollar investments from sovereign funds, this morning. The two companies are as different as you can get, but maybe the two announcements made yesterday signify something far deeper and far reaching, than the media and analysts say, with their pre-occupation with the short term.

One of the two companies is Citibank, the world’s second-largest bank by market valuation. The bank is in a right royal mess over sub-prime, massive write-downs, and the resulting departure of its boss Chuck Prince. But maybe $7.5 billion worth of new capital will help. The Abu Dhabi Investment Authority has thrown in the slug of money in return for an 11 per cent annual interest, and then conversion into shares in 2010 and 2011. The investment will ultimately furnish Abu Dhabi with a 4.9 per cent stake in the bank.

Win Bischoff, Citigroup’s acting CEO said, “This investment, from one of the world’s leading and most sophisticated equity investors, provides further capital to allow Citi to pursue attractive opportunities to grow its business.”

Meanwhile, in an economy and industry far, far away, sits another set of crises. Sony, the company which once had the world’s second most-famous brand name, almost has enough problems to make US banks feel smug. The consumer electronics industry seems to be sitting on a bubble of its own, with changes in technology coming so thick and fast that not even early adopters can keep pace. Usually in technology, new innovations bring in big bucks from small numbers, then as the price falls, the mass market takes an interest, until eventually the product becomes a type of commodity, leaving little room for unusual profits for any of the participants. But in the consumer electronics business, this cycle seems to be getting shorter, with the commoditization end of the cycle seemingly becoming ever more pervasive.

Sony also has this problem in the shape of a state-of-the-art games machine it spent billions in developing, being soundly thrashed by a clever little gismo with an unusual user interface.

But then, this morning, Dubai International Capital, a private equity firm owned by Dubai’s Sheikh Mohammed bin Rashid Al Maktoum, the prime minister of the United Arab Emirates and the ruler of Dubai has forked out $1.5 billion, buying shares in the Japanese giant.

The chairman of Dubai International Capital talked about Sony being “a compelling investment case” and talked about Sony’s “truly global brand.”

Today’s developments follow the recent announcement of a $622 million investment into Intel’s main rival, Advanced Micro Devices, by Dubai International Capital.

But we appear to be merely witnessing the latest examples of a trend that has been developing all year, what with Qatar’s investment into the London Stock Exchange, and China’s investment into US private equity giant Blackstone and Barclays Bank.

It seems these massive funds are no longer content with lousy returns on the bond markets. They want a real slice of the action, which is significant for this reason:

Up until now, the US and UK trade deficits have partially been funded by the more-savvy investment practices from British and American investors. While the Anglo Saxons invested in shares, bringing good healthy returns over the long-term, many overseas investors put their money into bonds. In the UK, for example, this meant our flow of money from abroad in the form of dividend and interest payments was greater than the flow moving away, and that despite the fact that there are more British assets held abroad than overseas assets that we hold.

But, it would appear the sovereign funds have become more discerning. They want more bang for their bucks and pounds, and it seems inevitable that over the longer-term this is what they will get.

We have already seen the dollar slide, but in the longer term, as our payments abroad to these sovereign fund investors increase, it seems the dollar may come under even more pressure, while the pound could end up looking as vulnerable as the dollar.