We also pointed to the flow of foreign money into private equity
firms Carlyle Group ($1.35 billon from Abu Dhabi) and Blackstone
Group ($3 billion from China) and banks such as Barclays (a 3.1
percent ownership stake by China).
The article also reported that Credit Suisse data showed
continued flows of money into alternative investments like hedge
funds at a speed that will far exceed the growth rate traditional
asset management.
Hedge Fund Research of Chicago research reported that an
astounding $144.5 billion flowed into hedge funds in the first eight
months of this year.
So what is the great attraction for foreign investors to U.S.
private-equity investments? After all, there are relatively higher
growth rates abroad, the U.S. economy is looking decidedly weak, and
our stock market appears shaky.
Well, I believe there are five reasons, most good, but one that
is decidedly risky for America over the long-term.
First and foremost, America looks cheap!
The hundreds of billions of dollars earned from our massive trade
deficits by foreign governments, corporations, and even individuals
abroad are looking for a home.
At current low dollar levels and considering the risk of a wave
of competitive currency devaluations by other countries, many
investors may feel it is too late to speculate against the
greenback. If so, why not use the surplus dollars to buy American
assets at historic lows?
[Editor's Note: A
Bubble on the Verge of Bursting. Act Now.]
Second, foreign investors must be wondering why they should
invest in U.S. Treasuries when a weak dollar may add to existing
inflationary pressures and erode the return on fixed-income
securities.
Third, prestigious American institutional investors, such as
Harvard (see the December 2006 issue of the Financial Intelligence
Report) and Yale, have achieved stellar returns by blending
“alternative” investments with their more conventional asset
classes. Why not follow suit?
Fourth, as the name suggests, private equity is “private” — very
private, when compared with investments in publicly traded
companies, which are subjected to a far higher standard of public
disclosure, reporting, and government oversight.
Many major international money managers feel that “privacy” is a
most important aspect of investment.
One big advantage of this relatively small amount of
foreign-sourced private equity is that it is likely to be far less
“hot” than investments in Treasuries, which can be liquidated and
taken out of dollars in a matter of hours.
Finally, there is the question of penetration. This is the one
issue of foreign-funded hedge fund investment that gives me cause
for concern.
A major investor, committing billions of dollars to U.S.
Treasuries or public stocks, can be assured of a fond welcome but
little chance of getting a privileged insight into the future
intentions of either the U.S. government or of a U.S. corporation.
In both cases, such information would have to be in the public
domain. But private companies are different.
Investors in private companies are in a position to look far into
the affairs of the companies in which they invest without any public
oversight or knowledge.
The prying eyes of foreigners can see into corporate research in
areas such as advanced technology, including nanotechnology,
bio-tech, even defense.
[Editor's Note: 99
Stocks to Dump Now. 10 to Buy.]
This penetration can also affect the crucial areas of creativity
and brain power. In the future, this could make us more vulnerable
to the tempting away of key individuals to work in the vital
industries of our strategic competitors.
In a world of massive patent piracy, increased risk of pandemics,
and of a nuclear confrontation, I believe the question of foreign
penetration of U.S. trade, bio-tech, and defense secrets represents
a relatively new type of national corporate risk.
This is particularly true now that much research — once almost
the exclusive preserve of our secretive government research agencies
— has been outsourced to the private sector.
Of course, we have no one to blame but ourselves.
We have all either voted for or failed to vote against our
governments. Indeed, the majority that has failed to vote at all is
probably most to blame.
Our past governments, from both parties, have preferred to
devalue the hard-earned dollars in our pockets in order to keep
alive the hedonistic notion that “spend, spend, spend” is OK — an
idea that attracts votes.
I feel it is high time that we Americans were told the true
implications of this approach and that we began to realize the great
costs of our dollar’s devaluation.
I welcome the free flow of capital and trade. But massive foreign
investment in U.S. private equity is largely a one-way-street and
could well add an important and subtly different dimension to both
industrial and military espionage.
Editor's
Notes:
