After the collapse of Lehman brothers in America and the subsequent instability in the U.K. banking sector, many of the country’s institutions were forced to seek government assistance in the form of bailout loans from the bank of England. Barclays chose however to defy its investors in this motion and instead opted to seek investment through other channels. The £7bn required to keep the bank solvent was eventually obtained from foreign sources, most notably from investors in Abu Dhabi and Qatar. Two Qatari investment funds contributed £2.3bn of the required capital whilst another £3.5bn was provided by Sheikh Mansour Bin Zayed Al Nahyan, a member of the Abu Dhabi royal family, and controller of the International Petroleum Investment Company. This sale of stock left Middle East investors owning around a third of Barclays.
Stakeholders including legal & General Investment management and Aviva Investors led a revolt at the decision which they criticised as being both dilutive and expensive. In return for avoiding UK government assistance the bank was forced to pay a 14% dividend in comparison to the 12% offered by the Bank of England. The stakes sold are also similar to the preference shares purchased by the Government in that they allow the Middle East investors the right to buy shares in the Bank at the fixed price of 197.775p at any time in the next five years.
The investment by these sovereign wealth funds has caused considerable concern to domestic clients who see such a large stake as threatening to the institution’s independence. The reality of these concerns was established in January of this year as the bank continued to struggle financially. In serious need of further capital injection Barclays was forced to consider the option of government assistance. However, due to a clause written into the Middle East investment deal this would have comprised the bank’s ownership. The capital investment was made on the terms that the clients would have to wait a full seven months to receive their shares, convertible at 153.276p. If at any time during this period the bank raised further capital at a lower share price the Qatari and Abu Dhabi partners were entitled to claim their shares at the same base price. In late January when Barclays share price stood at around 66%, if it was to accept government investment it would have had to return its £7bn investment for the same price, equivalent to around 55% of the business, effectively a controlling share. This clause was written into the agreement to protect the Middle East investors from having their stake diluted. However, little consideration was made to protecting the bank from further financial instability. This raises an interesting dilemma with investment deals, particularly the increasing tide coming from foreign funds. Is the responsibility of the institution primarily to its domestic clients and customers or instead to its primary benefactors, whether they be foreign or domestic? The financial crisis has revealed some of the problems emergent from seeking such large single investments especially from foreign sources.
On the 2nd June Khadem al-Qubaisi of the Abu Dhabi sovereign fund announced that he would be selling mandatory convertible notes equivalent to £1.3bn in shares, prompting a 13.5% slump in the share price. The decision was taken due to a need to focus on their core oil and gas business. Even as the conditions in the banking sector improve it is clear that institutions are increasingly susceptible to the whims of foreign investors.