By John Authers, Investment Editor

The private equity put is no more. Now we must rely on the sovereign wealth fund put.

A put option confers the right to sell a stock for a fixed price: it is protection against a fall in the market. Traders talked about the “private equity put” during the bull market in credit. It was so easy for private equity funds to finance buy-outs that they came to be regarded as virtual put options. If companies were doing badly, that just made them likelier candidates to be taken out.

The credit implosion ended this. Private equity will carry on, but not as an insurance policy for the market.

The sovereign wealth put is different. Government funds from Asia and the Middle East, fuelled with dollars produced by high energy and commodity prices, have spotted a bargain in the financial sector.

Politicians in the US and Europe might once have been opposed: now they are happy for petrodollars to shore up critical financial institutions.

UBS’s sale of a 9 per cent stake to the Government of Singapore Investment Corporation, and Citigroup’s sale of 4.9 per cent to the Abu Dhabi Investment Authority, are only the most recent examples.

The sovereign wealth put acts on the areas of the market that matter most. Stocks have for months been rising and falling in line with sentiment towards the financial sector.

The Citigroup deal was the catalyst for the rally that saw the S&P 500 gain more than 7 per cent before Tuesday’s Federal Reserve announcement.

But the sovereign wealth put is different; it applies only to the larger stocks, not to the small and mid-cap names that did well out of private equity. Hence the underperformance of smaller companies this year.

And buyers seem only interested in true bargains. This put may yet help the market draw a line under the credit crisis: it cannot be relied on to propel a new bull market.

http://www.ft.com/cms/s/0/33ab960e-a814-11dc-9485-0000779fd2ac.html

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