The Wall Street Journal-20080116-Domestic Wealth Joins Rush To Grab Piece of Wall Street
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Domestic Wealth Joins Rush To Grab Piece of Wall Street
When the head of New Jersey's pension fund learned that giant Wall Street financial firms were courting investments from foreign governments, he wondered: Isn't our money just as good?
So a week ago, William G. Clark called Merrill Lynch & Co. and Citigroup Inc. to discuss a deal with each. Yesterday, his fund said it was buying up $300 million of Merrill's preferred shares, joining government-run funds from South Korea and Kuwait in a $6.6 billion deal.
Separately, the $81 billion New Jersey fund said it was putting $400 million in a preferred-share offering from Citigroup. It did that deal alongside Singapore's Government Investment Corp.
"We asked ourselves, 'why shouldn't we take advantage of the same opportunities'" that the foreign governments have, says Mr. Clark, director of the New Jersey Division of Investment.
As banks and brokerage firms scrambled to shore up their balance sheets in recent months, the first wave of money poured in from foreign-government affiliated "sovereign-wealth funds." Now, U.S. institutional investors are elbowing their way in, drawn by the attractive terms being offered.
Late last month, mutual-fund manager Davis Selected Advisers bought $1.2 billion of Merrill Lynch stock at $48 a share -- a considerable discount to the then share price of about $54. Baltimore-based mutual- fund company T. Rowe Price invested in the Merrill Lynch preferred- stock issue on behalf of some of its clients.
New Jersey received enticing terms, too. The preferred-share offerings pay a higher return than the firm's common stock because Merrill and Citigroup were willing to offer better yields in exchange for a quick infusion of cash to help them through any further reverberations from the credit crisis.
Whether these stakes pay off in the long run remains to be seen. The markets immediate response wasn't encouraging. Despite Citigroup's $12.5 billion capital injection, and Merrill Lynch's $6.6 billion infusion, investors focused on Citigroup's losses, and its shares fell 7.3% in New York Stock Exchange trading. The Dow Jones Industrial Average dropped 2.2%.
Still, that won't necessarily inhibit other U.S. institutional investors looking at potential deals. "We've been approached, too," says Christianna Wood of the massive California Public Employees' Retirement System, which manages about $250 billion in assets, the most of any U.S. public fund.
Ms. Wood said Calpers's large size often makes investing more challenging. But that size also makes the fund attractive to companies looking for big, one-off investments. She says Calpers has already been approached by a U.S. financial company seeking more capital. Earlier this month, Calpers took a 10% stake in private-equity firm Silver Lake.
That's not to say that many U.S. pension funds, endowments or foundations can swim in the same water as the biggest foreign- government funds.
Before yesterday's deals, foreign governments had invested about $27 billion in Merrill, Citi, UBS AG and Morgan Stanley. But Stephen Nesbitt, chief executive officer of the consulting firm Cliffwater LLC, says most U.S. funds aren't in the position to do the necessary research that goes into making these large-scale investments because they outsource the management of their money.
There is also a question of timing. Some pension funds with the necessary infrastructure to make these investments believe it's too risky at this stage to place large investments in struggling financial firms.
Christopher Ailman of the California State Teachers' Retirement System says his fund currently isn't "taking as big of a bite in these types of investments." Calstrs manages about $22 billion in U.S. stocks internally. "We believe there's still more tough times coming" for some financial firms.
Yet U.S. investment firms hold one potentially big advantage over foreign-government funds: American politics. Some lawmakers have expressed unease with the prospect of sovereign nations taking large stakes in prominent U.S. companies.
Senator Charles Schumer, a Democrat from New York, says the large number of participants in the Citi deal makes it acceptable. But he says that future deals will be closely scrutinized.
"As investments by sovereign-wealth funds in American companies increase," he said, "and the specter of control and undue influence by government entities looms, we have to be careful." Mr. Schumer says pension funds are far less likely than foreign-government funds to act in a way "that is detrimental to the security of the U.S."
Others suggest that state pension funds themselves can get caught up in local politics. "I wonder how many employees at Citi and Merrill are living in New Jersey," says Mark Ruloff of consulting firm Watson Wyatt, referring to the two New York-based companies. "Political reasons are definitely there."
Mr. Clark of the New Jersey pension system says such considerations played no role in his investments.
