SEIU Campaign Aims at Sovereign Wealth Funds, Private Equity Firms; Secrecy Jeopardizes National Security

AMERICA FOR SALE?
Foreign Governments’ Links to Secretive Buyout Firms Raise Potential National Security Concerns, Says New Public Awareness Campaign
Ads calling for increased federal oversight to run in six states

WASHINGTON, DC – Potential national security concerns are being raised over the growing links between foreign governments and secretive private equity buyout firms in a major new public awareness campaign being launched today. The campaign, sponsored by one of the nation’s largest unions, SEIU (Service Employees International Union), calls for stronger federal oversight of arrangements where foreign government-controlled investment funds, known as “sovereign wealth funds (SWFs),” buy into private firms that own or invest in American companies responsible for defense, energy, and homeland security.

Driven by rising oil prices and the falling dollar, foreign countries, many of them flush with oil profits, are buying into the U.S. economy, purchasing stakes in leading American companies, and increasingly, private equity. In the last two years, foreign government funds have bought ownership stakes in the Carlyle Group, the Blackstone Group, and Apollo Management. Industry estimates of SWF commitments to private equity funds vary from $120 to $150 billion – or about 10 percent of all global capital available to private equity.

“Our financial system has opened the door to virtually unregulated foreign ownership of American assets,” said Stephen Lerner, Director of SEIU’s Private Equity Project. “When foreign governments do business with buyout firms, they can hide behind a veil of secrecy that often leaves Americans in the dark. When it comes to our national security, Americans have the right to know more about the exact nature of foreign involvement and the motives behind these arrangements.”

The SEIU campaign will include television, radio, online, print, and outdoor ads in six states and inside the beltway. The effort begins today with a television ad running on national cable news networks. SEIU has been a leading advocate for more transparency and disclosure by buyout firms, whose size and influence in the economy has grown exponentially in recent years.

Last fall, the Mubadala Development sovereign wealth fund of the Government of Abu Dhabi paid $1.35 billion for a 7.5% ownership stake in the Carlyle Group. Carlyle, with more than $82 billion in assets under management, owns or has announced plans to buy dozens of companies that do work in defense, homeland security, energy and other sensitive areas. Those companies include Booz-Allen Hamilton1, with $1.2 billion in defense contracts in 2007, and Kinder Morgan which as of 2006 owned or operated 26,000 miles of pipelines. According to government sources, thousands of federal contracts – worth an estimated total of $4.8 billion - were awarded between 2000 and 2006 to companies in The Carlyle Group’s investment portfolio as of June 2007. Details about Carlyle/AbuDhabi portfolio companies are available in an online backgrounder.

While notoriously secretive about the details of its business, Carlyle has been open about its efforts to assist SWFs with investments that involve sensitive matters, including national security. Carlyle co-founder David Rubenstein noted this year that sovereign wealth funds, because of their foreign status, cannot do some transactions and that he believed private equity firms could smooth the way. In May, the Wall Street Journal reported, “Mr. Rubenstein said Carlyle's network of relationships in Washington can help Chinese companies looking to enter the U.S. market when officials are wary of Chinese investments in industries deemed related to national security.”
SEIU Recommendations for Improving Transparency, Oversight

In a report released last month, “Sovereign Wealth Funds and Private Equity: Increased Access, Decreased Transparency,” SEIU outlined issues that arise when opaque SWFs link up with secretive buyout firms. “Current U.S. rules exempting private equity from many disclosure requirements coupled with gaps in laws concerning foreign ownership have inadvertently left a door open for virtually unregulated foreign ownership of American assets,” according to the report, which included the following recommendations:

1. The beneficial ownership structure of the general partnership/management company and/or limited partnerships controlling funds must be disclosed—particularly if their portfolio companies contract for the U.S. government
2. Mandatory CFIUS investigation of proposed deals involving private equity buyout firms and SWFs
3. New SEC rules concerning Regulation D should be rescinded to protect basic investment reporting requirements
4. Representatives of a sovereign wealth fund, including private equity advisers, fund managers, or others acting on its behalf, must register under the Foreign Agents Registration Act.

More Background for Reporters

Polling has shown a majority of Americans think foreign government investments will hurt national security:

* A February 2008 poll of 1,000 registered voters nationwide, conducted by the business advisory firm Public Strategies, Inc., found that 55% of those questioned think sovereign-wealth fund investments will hurt national security, and 49% said the investments will have a negative effect on the U.S. economy.
* The poll found nearly three in four voters — 72% — believe foreign governments don't reveal enough about their investment portfolios and majorities of American voters oppose foreign governments investing in a wide range of U.S. industries, including high-tech, financial services firms, oil and gas companies and port facilities.

Business and political leaders have raised concerns about the implications of sovereign wealth fund investments:

* “They are making investments that they probably think are O.K. but not spectacular. There has to be a political objective over and above the rate of return…You don’t need to appoint two directors to a board to have influence when you own 10 percent of the company.”

-- Felix Rohatyn, New York Times, Jan. 22, 2008
* "I am concerned if these ... sovereign wealth funds are motivated by more than just market considerations, and that's obviously a possibility."

-- Sen. Barack Obama, Reuters, Feb. 7, 2008
* “While foreign governments may invest money in our country to make a profit, they may also do so in order to further their foreign policy ambitions, to acquire national security assets, or to purchase a stake in strategic industries.”

-- Sen. Jim Webb, Press Release, Jan. 17, 2008

Footnotes

1 - The Carlyle takeover of Booz-Allen Hamilton, announced in May 2008, is expected to close later this year.