By Ariana Eunjung Cha
Washington Post Foreign Service
Thursday, March 27, 2008; A01

KUWAIT CITY -- It was not Bader al-Saad's idea to buy huge chunks of Citigroup and Merrill Lynch.

It was early January and Saad, managing director of one of the world's largest investment funds, was in his office as usual, reviewing potential deals in Kuwait and elsewhere in the Persian Gulf region, when the banks asked him to invest, he recalled.

"They called us. . . . We receive calls on most transactions," said Saad, whose fund bought stakes of $3 billion in Citigroup and $2 billion in Merrill Lynch.

The increasing pace of acquisitions in the United States by sovereign wealth funds such as Saad's Kuwait Investment Authority is raising concern about their goals and motivations. Run by nation-states to invest their government revenues, the funds are estimated to control $2.5 trillion and are projected to have $12 trillion by 2015. The six Arab states on the Persian Gulf's western shore, which control nearly a quarter of the world's oil supply, provided more than half of the money currently in the funds, according to Morgan Stanley.

At one extreme, the funds have been characterized as saviors, propping up the struggling U.S. economy with capital infusions. At the other, there are fears that their investments could turn political, that the funds could buy stakes in entities that could someday be used to compromise the security of the United States while furthering their national interests.

Saad and other fund managers from the Persian Gulf region say their investments are purely commercial and are made with one goal in mind: profit. They express exasperation that they are attacked for providing money that U.S. companies ask for.

"Why is everybody after sovereign wealth funds? What have they done? Did they misbehave in any country where they invested in? . . . All they are talking about is a fear of something that did not happen and will not happen," said Saad, whose fund is estimated to be worth $213 billion.

Muhammad al-Jasser of the Saudi Arabian Monetary Agency, which is forming a fund that may exceed $900 billion to become the world's largest, has said that "it's like the sovereign wealth funds are guilty until proven innocent." Sultan Ahmed bin Sulayem, head of Dubai World, which manages a $8 billion sovereign wealth fund, has warned critics in Western countries that if their money is not welcome, there are plenty of other places to invest.

Talal al-Zain, chief executive of Bahrain's $10 billion sovereign wealth fund, which hopes to make its first purchases in the United States this year, expressed similar sentiments. "I hope the hype about the sovereign wealth funds doesn't close the market, because that would be a shame," Zain said.

In recent weeks, the debate over the transparency and oversight of sovereign wealth funds has intensified. Officials in the United States and Europe acknowledge that they desperately need foreign investment but want to be assured that the funds providing the cash do not have political aims. The International Monetary Fund, backed by the U.S. Treasury Department, is drafting a voluntary code of conduct for sovereign wealth funds.

Many of the funds have resisted, arguing that there are no similar guidelines for private-equity or hedge funds, and that it's unfair to single out one group.

Last week, the U.S. Treasury department; Abu Dhabi's sovereign wealth fund, estimated to hold $250 billion to $1 trillion; and Singapore's GIC fund, believed to be worth $100 billion to $330 billion, announced that they agreed to a "philosophy" for the operation of sovereign wealth funds. For example, they said that investments should be strictly commercial.

Abu Dhabi's fund, in a letter sent to Treasury Secretary Henry M. Paulson Jr. last week, said it would not use its investments for political advantage. However, its promises fall short of promising the specific disclosures -- such as a list of investments -- that Treasury officials seek.

The six Arab states on the Persian Gulf, which together make roughly $1.5 billion a day from the sale of oil at roughly $100 a barrel, have been on a buying spree in the past year.

They bought stakes in some of corporate America's most famous brand names, including trendy retailer Barneys New York, District-based private-equity giant Carlyle Group, MGM Mirage and the Nasdaq Stock Market.

Leading the effort to make the voices of the sovereign wealth funds heard in this debate is the Kuwait Investment Authority. Founded in 1953, it is the world's oldest such fund, and was set up to save and build on government revenue to prepare for when the country's oil fields run dry. The returns in recent years have been spectacular -- 13.3 percent in 2007, 15.8 percent in 2006, and 11 percent in 2005.

Managed by the Kuwaiti Finance Ministry, the fund employs roughly 420 deal-makers, analysts and other workers, more than 80 percent of whom are Kuwaiti.

The fund's assets are 2.5 times the gross domestic product of Kuwait and, according to a report by Standard Chartered Bank, it is the fourth-largest fund in the world. Only those from Abu Dhabi, Norway and Singapore have more money.

Other than a stake in Chrysler purchased in the 1970s, the Kuwait Investment Authority had invested mostly within its own borders or in neighboring countries. For example, it held shares in a livestock development company in Syria, a real estate company in Yemen and a hospital in Egypt.

Then, in 2003, Saad came on board.

Saad, who had worked at Chase Manhattan and First National Bank of Chicago, wanted to shake things up. He remodeled the fund after the Harvard and Yale universities' endowments, two of the most successful investment funds of all time, and began looking toward overseas targets.

It wasn't until January, with the acquisitions on Wall Street, that the Kuwait Investment Authority became widely known around the world. "I'm sure we are now in the phone books of investment banks, as we are better known now," said Saad, 50.

Over the next few years, Saad said, "I would like to build a 'trophy portfolio' consisting of some of the most prestigious names" in business.

He said the next big purchases of assets in the United States may be in the real estate sector, which he expects will peak as an investment target -- in other words, hit rock bottom -- in the next few months. Saad said he also thinks U.S. telecommunications companies and more financial firms would make good investments.

"There are certain opportunities which do not come every day," he said. "We consider the recent crisis as creating some opportunities in certain sectors. I look at history, such as the savings-and-loan problem. It created golden opportunities."

But even as Saad mentions, without naming names, that some deals in the United States are in the works and may be announced soon, it's clear that he has moved on. "I think Vietnam is a coming star," he said. He is also looking at Turkey, which he predicted will be the hub for the Balkans region.

Another big interest of Saad's is Africa, with its seemingly infinite supplies of copper, iron, gold and other minerals. "I think Asia's growth will be history in the coming years and Africa will be next," he says. "I don't know how soon, but I think in two to three years."

But as sovereign wealth funds like Kuwait's expand their investments around the world, they are acutely aware that they must address the concerns of countries where their money goes.

Saad said the Kuwaiti fund's investments in any given region are roughly proportional to that region's share of worldwide production. There are exceptions, he said: Because of the recent acquisitions of financial firms, its holdings in the United States are significantly higher.

Saad said that all the stakeholders who need to know the inner workings of the fund -- the Kuwaiti parliament -- have all the information they need and that he does not expect any changes in what it discloses.

Officials of several other funds, however, said they were moving toward making changes to appease a public that isn't sure whether to be concerned about their expansion.

For example, Singapore's pioneering Temasek fund said in November that as a result of rising nationalism it would seek to work with local partners and back away from seeking controlling interests in overseas firms. Its chairman, S. Dhanabalan, said the $108 billion fund would take into account "emotional sentiments" when considering acquisitions.

Bahrain's Zain said his country's fund -- whose most prominent holding is a 30 percent stake in the Formula One auto racing company McLaren Racing -- will stay away from "industries that can create tension," and that it hopes to put out its first annual report this year.

But even Norway's fund, which is considered among the world's most transparent and publishes a full list of its investments once a year, said there are limits to what sovereign wealth funds should be expected to reveal.

"There may be very real and valid business reasons why you wouldn't want to be totally transparent about everything," said Martin Skancke, director general of the asset management department of Norway's Finance Ministry, which oversees Norway's $322 billion investment fund.

Saad recognizes that to achieve his goal of being able to invest freely all over the world, it's important to convince other countries that sovereign wealth funds are not a threat. That campaign, he said, begins with Washington.

"There is a real risk to global capital flow if they tighten on sovereign wealth funds. And it's a risk when it comes from the capital of capitalists," Saad said. "When you are the leader, the pioneer of bylaws, the largest economy in the world . . . if you even start to think of these things, it is a risk in itself."