The Wall Street Journal-20080128-Ascent of Sovereign-Wealth Funds Illustrates New World Order

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Ascent of Sovereign-Wealth Funds Illustrates New World Order

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Davos, Switzerland -- Like any junior high school, the World Economic Forum here has a clearly defined pecking order, surrounded by a swirl of gossip. In junior high school, excess hormones fuel the maelstrom. In Davos, it's excess money.

That's why private-equity firms, riding a temporary gusher of cheap credit, attracted so much notice in 2007 and why sovereign-wealth funds displaced them this year.

"I'm surprised they are paying so much attention to us," said Abdul- Aziz Abdullah Al Ghurair, chief executive of Dubai's Mashreqbank PSC, after 48 hours in the Davos hothouse.

"We are in the limelight and getting the same scrutiny that private equity was a year ago," said Sameer Al Ansari, chief executive of Dubai International Capital LLC.

Meanwhile, Silver Lake Partners' Glenn Hutchins said he and his private-equity brethren "have returned to the obscurity that we so richly deserve."

For all its attention to environmental and social goals, Davos is ultimately a celebration of global capitalism. And these days, it is the sovereign-wealth funds, or government-controlled investment pools, of the Middle East and Asia that are sitting on capital gushers. Their assets total nearly $3 trillion and may hit $12 trillion by 2015, according to Morgan Stanley.

Defenders of sovereign-wealth funds aren't hard to find here. The funds are, after all, bailing out troubled financial institutions. Without their money, Wall Street would be an even bigger mess. SWFs also are crafting their investments to minimize influence over corporate affairs and avoid political controversy. Ask any of the chief executives who wandered the snow-covered streets here in recent days whether they would prefer an investment from an SWF, a hedge fund or the California Public Employees' Retirement System, and they'll choose the SWF.

That leaves even the most articulate skeptics confined to hypotheticals. Imagine, said former U.S. Treasury Secretary Lawrence Summers, that a SWF makes an investment in a major bank of another nation that goes bad. "Is there anybody in the world that can assert that, with billions of dollars on the line, their head of state and foreign minister are not going to get involved in the negotiations?" Mr. Summers said.

For decades, Mr. Summers and like-minded U.S. officials have traveled the globe preaching the virtues of privatization. In the postcommunist world, they sought to improve economic efficiency by wresting control of businesses from government. So it's jarring for them to see businesses suddenly selling sizable stakes in themselves to government-controlled funds.

Beneath all of this is a broader truth about this year's Davos conference, which ended yesterday. After two decades of talk about a "multipolar" world, that world has arrived. American technology fascinated Davosians in the late 1990s, American foreign policy obsessed them from 2001 to 2006, and American private equity diverted them in 2007. This year, it is finally clear that the U.S. is no longer the only big kid on campus.

"I think we've reached a tipping point," said Mark Foster, of consulting company Accenture Ltd., who advises businesses on dealing with a multipolar world.

Ultimately, the trend may presage a steady transfer of ownership of the world's productive assets away from the U.S. and its traditional allies in Europe and Japan, and into the hands of others.

A study by the McKinsey Global Institute shows that while $56.1 trillion, or one-third, of the world's financial assets were held in the U.S. in 2006, the total held by emerging markets reached $23.6 trillion. And their assets are growing twice as fast as those in developed countries.

For those living in the developed world, there are clear benefits to this new world order. Capital from SWFs will cushion the blow of the current financial crisis on businesses and consumers. And continued growth in emerging countries will soften the effects of a possible recession elsewhere. Over time, the global economy is hardly a zero- sum game. Americans, Europeans and Japanese can all prosper, even as their share of the world economy declines.

But losing a place in the playground pecking order is unsettling. And that may be part of what fueled the debate over SWFs in Davos and is fueling the strains of protectionism and nativism in political debates in the U.S.