Attracting foreign investment

Sovereign wealth funds take a bigger share of Spain’s leading companies

The Hotel W in Barcelona.
The Hotel W in Barcelona. JOAN SÁNCHEZ

Among the most notable changes to the global economy in recent years has been the growth of the emerging economies, at the expense of those of Europe and the United States, which are stagnating.

This shifting balance has seen the accumulation of reserves in countries that control large parts of the world's natural resources or that are successful exporters: the Middle East, Latin America, and Southeast Asia — as well as China — are currently holding the liquidity that Western economies need.

The boom in oil prices and world trade has endowed a number of emerging economies with vast wealth. Many of these countries have saved their surpluses in sovereign wealth funds, (SWFs), which have the express remit of investing money abroad for commercial return, to provide income for future generations when their commodity reserves are depleted and to cover future pension liabilities. There are now more than 70 SWFs, with funds of some $5 trillion globally.

Javier Santiso teaches at the ESADE business school in Madrid, and is also the co-author of a report published by the ICEX foreign trade institute into the role SWFs can play in the recovery of the Spanish economy. He says that in 2012: "For the first time, emerging economies now make up more than a third of global foreign direct investment (FDI). Until 2008, Spain met its financial needs via the conventional markets, and wasn't that interested in SWFs, but since the crisis it has begun moving in that direction."

SWF investments in Spain are growing rapidly, in part thanks to the efforts of the ICEX. "We are continually meeting with the managers of these funds to explain the government's economic policy and the structural reforms underway, and to highlight the investment opportunities in Spain," says Santiso. In the past year, ICEX has taken its Invest in Spain roadshow to the United Arab Emirates, Qatar, Kuwait and Singapore. "We also help Spanish companies and regional governments contact these investment funds," Santiso adds.

Antonio Hernández of KPMG, and an advisor to the ICEX, says that the key to attracting SWFs is "establishing a steady relationship with these countries. Relations with sovereign wealth funds need to be built up over time and coordinated at the highest levels of state and of multinationals' management."

Spain was Europe’s biggest recipient of wealth fund investments in 2011

Over the last two decades Spanish companies have established a stronger international presence. In 2010, foreign revenues of the IBEX 35 companies exceeded 50 percent of the total for the first time. Another way of gauging this internationalization is to look at the attraction exerted by the country's listed companies on foreign investors. At the end of 2009, foreign investors held more than 40 percent of their capital, another all-time record.

But Santiso says there also less encouraging signs. "Corporate shareholdings in Spain's banks and savings banks have been drastically reduced, going from 15 to 5 percent between 1995 and 2010. Looking ahead, the redrawing of the savings banks map and the impact of Basel III will further accelerate this trend. And this dynamic now combines with the imperatives of many non-financial companies, which increased their holdings to 26 percent of total market capitalization of listed companies but are now faced with unsustainable levels of indebtedness.

"So we are in a situation in which, in this new decade, 2010-2020, it is quite likely that a large portion of the capital on the stock exchange is going to have to change hands," Santiso says.

He points to the case of oil company Repsol: with more than a third of its capital held by savings banks or financial institutions. "Repsol in turn holds a third of another blue chip IBEX 35 company, Gas Natural, whose main shareholder is La Caixa. Other companies such as Abertis, Iberdrola, Iberia, Indra, Mecalux, NH Hoteles, Pescanova, SOS Cuétara and Tecnocom are also in a situation where a quarter or a third of their capital is held by savings banks. From this point of view the recent transaction whereby Chinese oil company Sinopec took a stake in Repsol Brazil is good news, since it provides the Spanish multinational with a new financial margin," Santiso says. Sinopec paid more than $7.1 billion for 40 percent of Repsol's Brazilian subsidiary.

To put it another way, says Santiso: "A considerable part of Spain's listed companies could be acquired by industrial rivals. An alternative is for more financial investors, particularly foreign ones, to show interest in investing yet more in our companies. One possibility could be sovereign wealth funds."

A considerable part of Spain’s listed firms could be acquired by industrial rivals”

But these investment vehicles still have a relatively limited presence in Spanish companies' capital. One exception is the Norwegian fund, the world's second biggest sovereign wealth fund, with investments in the Spanish stock market in excess of 17 billion euros in 2011. It has investments in more than 8,300 companies, 77 of which are Spanish. Santander and Telefónica are its biggest positions in Spain.

In 2010, Banco Santander sold 5 percent of its Brazilian affiliate to Qatar Holding. But the key year was 2011: "We were the biggest recipients in Europe. Of the 14 billion euros invested in the euro zone that year, 8.4 billion went to Spain. The United Kingdom only attracted 2.8 billion, and Germany 700 million euros." Most of the investment into Spain was accounted for through Abu Dhabi's purchase of CEPSA and Qatar Holding's purchase of 6.2 percent of Iberdrola for 2 billion euros.

The following year saw Ferrovial sell 10 percent of its holding in Heathrow Airport to Qatar Holding for 590 million euros, while Abertis sold 7 percent of Eutelsat to China's CIC. Qatar strengthened its position within Iberdrola, increasing its stake to 8 percent.

The rise of sovereign wealth funds represents a financial opportunity, but also an industrial opportunity for Spain, says Santiso: "But we need to promote a more systematic strategy of establishing relations with sovereign wealth funds in both the Middle East and Asia, and also with those of Africa and Latin America, seeking to have them establish their European headquarters here, and carrying out actions via business schools, soccer clubs or Spanish government cooperation."

He says that for example, Spain could leverage its football clubs to really spearhead the national brand. Spain's business schools could also be more actively drawn into the endeavor, developing ad hoc programs for these funds, and road shows to train executives working in both the public and private sectors of emerging countries that have sovereign wealth funds.

Santiso and Hernández say that there is still huge potential to sell off more of the Spanish economy to SWFs. "Spain has a large number of world-class companies in many sectors that are very competitive and operate in the higher levels of the value chain — companies with a strong international presence," says Hernández.

Recomendaciones EL PAÍS
Recomendaciones EL PAÍS