June 22, 2007

About the low cost of equity and the need of Chinese “sovereign” walls

Sir, John Plender in “An unseen risk in sovereign wealth funds” (from China) June 22, mention that they might lead us “from unusually low interest rates to the conundrum of an artificially low cost of equity capital”. It sounds correct but then when later reading, that same day and just four pages away, “One door opens…” by Francesco Guerrera and James Politi that describes Blackstone’s core business as “buying companies and assets, loading them up with debt and selling them for a profit; and Ben White’s “A banking flotilla offers safe passage” that indicates a proposed Blackstone valuation of “about 26 times last year’s pro-forma economic net income, Plender’s risk prediction becomes more a reporting of facts. Also, given that China’s willingness to keep on continuing financing the market will have an impact on interest rates one cannot help but to think of how to adapt the corporate concept such as a “Chinese wall” which separates traders with conflicts of interest to a sovereign environment.