Barclays Gets Cash Cushion from Sovereign Wealth Funds

By Mike Caggeso

Starving for capital and hell-bent on retaining its handsome dividend, Barclays PLC (BCS) plans to raise $8.9 billion (4.5 billion pounds) by selling shares to investment banks and sovereign wealth funds around the world.

As much as 1.58 million shares will be sold to existing investors China Investment Bank and Singapore’s Temasek Holdings Pte. Ltd., as well as new investors Japan’s Sumitomo Mitsui Banking Corp., Qatar Investment Authority and Challenger - a fund that represents "the beneficial interests" of Qatar’s royal family.

Barclays, Britian’s fourth-largest bank, said the proceeds will help lift the bank’s Tier 1 capital ratio above its 5.25% target, preserve capital for its dividend and help the bank’s veiled acquisition plans, or "opportunities for new business," as Chief Executive Officer John Varley put it in a statement.

"Through our capital raising today we strengthen our capital base and give ourselves additional resources to pursue our strategy of growth through earnings diversification. We position ourselves to capture opportunities for new business at attractive margins in our retail and commercial banking businesses and in investment banking and investment management," he said. "Our ability to capture the opportunities is reinforced by the new and strengthened relationships we have announced today." 

And though Varley didn’t say it, the capital is needed to catch up with rivals including Royal Bank of Scotland Group PLC (RBS) and also give a layer of armor to protect itself from the credit plague circulating throughout European banks.

"This is both a cushion against the market environment as well as a war chest," Georg Grodski, head of credit research at London-based Legal & General Group PLC, told Bloomberg News.

As far as its dividend goes, the share sell has a Catch-22. The bank’s policy is to pay dividends and raise money for them based on underlying earnings per share. But for at least the short term, earnings per share "may be lower as a consequence of the issuance of the New Ordinary Shares," the bank said in the statement.

Little Help From Friends

Of the three major investors buying Barclays shares, two are established sovereign wealth funds: Singapore’s Temasek Holdings and Qatar Investment Authority, which Money Morning readers may remember from other recent billion-dollar investments.

In December, Merrill Lynch & Co. Inc. (MER), the largest U.S brokerage firm, said it would receive a needed cash infusion of $6.2 billion - with roughly $5 billion coming from Temasek Holdings. And in July 2006, the Singapore fund also paid $4 billion for a 12% stake in Standard Chartered Bank.

Two months ago, Qatar Investment Authority bought a 27% stake in Dragon Capital, a Vietnamese property fund, which will buy into offices and serviced apartments in Ho Chi Minh City. And in February, it bought a 15% stake in an Indian office development being built at the Bandra Kurla complex in Mumbai.

The fund has $60 billion to play with and one of its managers said that more emerging market real estate investments are in the works.

"We are focusing on prime cities in India, China, Singapore, Korea, Vietnam and Malaysia, cities around the world where there is strong [gross domestic product] growth and fundamental unmet demand for high quality real estate," Navid Chamdia, head of real estate at Qatar Investment, told Bloomberg at a wealth funds conference in Abu Dhabi. "About 40% of our real-estate investments will be in Asia."

They are just two of the several sovereign wealth funds, government cash pools, which have been investing in ventures from real estate to ailing financial juggernauts.

Dubbed the "Global Cash Barons" by Money Morning, these sovereign wealth funds currently control $3 trillion. Many experts expect that figure will soar to $12 trillion by 2015. For perspective, the estimated U.S. gross domestic product [GDP] for 2006 was slightly more than $13 trillion. Some forecasts say that they will control $20 trillion by the middle of the next decade.
The richest sovereign funds include the Abu Dhabi Investment Authority, or AIDA ($875 billion), the Government of Singapore Investment Corp. ($330 billion), and Norway’s Government Pension Fund Global, or GPFG ($322 billion), although several others could be even larger.

And with such a fat wallet, foreign governments are watering both their own back yard and those of other economically dry countries and industries.

For an in-depth look at sovereign wealth funds, their motives and how to profit from them, check out Money Morning’s Investment Report: Three Ways to Profit From Sovereign Wealth Funds - the "Next Wall Street".