If the first half of 2007 marked the height of the private equity boom, the second half might unveil a new era: the rise of the sovereign wealth funds. On Friday, Dec 21, Merrill Lynch was in late-stage talks with Singapore's investment fund, Temasek, for a $5 billion cash infusion, according to reports.

Shares of Merrill Lynch jumped 1.9%, or $1.04, to $55.54 at the close. Many financial stocks were up several percentage points on Friday, including Morgan Stanley which gained 5.8%, or $3.00, to $54.37, and BlackRock which gained 5.4%, or $10.99, to $216.15. Wall Street, as a whole, had a rare day in positive territory, the Dow Jones industrial average was up 1.6%, or $205.01, to 13,450.65.

If the deal closes, the embattled firm will be in good company. Many of Wall Street's power houses, including Citigroup, Morgan Stanley and UBS have become over-night bedfellows with Asian and Middle Eastern investment funds. In total, this trio has accepted roughly $24 billion. Although the rapid devaluation of mortgage-backed securities has rocked the global markets with an epidemic of risk aversion, these cash-flushed sovereign wealth funds see the downturn as a possible buying opportunity.

According to the Wall Street Journal, Merrill Lynch is close to finalizing the deal. The unnamed source cited in the report said the fund's board has given preliminary approval, but specific terms of the deal, including pricing, timing and regulatory issues still need to be hammered out. There is also speculation that if the deal falls through, Merrill Lynch may hash out a deal with other government funds. A Merrill Lynch spokesperson declined comment.

On Friday, Wachovia analyst Douglas Sipkin, said Merrill Lynch will still need more cash to become a more competitive force on the market. “We suspect Merrill Lynch's current capital position is adequate from a regulatory standpoint but, similar to Bear Stearns and Morgan Stanley, its position is likely not sufficient from an industry competitive standpoint without a deal,” he said.

Temasek has the cash reserves to complete the deal. According to the group's website, the fund manages over $100 billion, with most of that money concentrated in Asia. Since the investment firm was founded in 1974, it has averaged an 18% annual return rate for shareholders. The Merrill Lynch deal could help Temasek diversify its holdings outside of Singapore. Indeed, the Singapore government, which also controls the Government Investment Corporation (GIC), has already shown its deep interest in large financial brokerages. In November, the GIC agreed to pump $9.8 billion into UBS.

GIC may be just warming up, the firm has $330 billion in assets under management.

Merrill Lynch may be hard-pressed to find a white knight fast. In October, the firm revealed that it had more than $8 billion in write-downs in the third quarter. Those write-downs forced the firm to record a loss of $2.3 billion, or $2.82 per share, from $3.0 billion, or $3.50 per share, a year ago. Analysts had expected a loss of 45 cents per share.

With many analysts predicting that the firm will suffer at least $4 billion in additional write-downs for the fourth quarter, Merrill Lynch needs to shore up its capital, or, shore up its capital by selling off assets. A $5 billion cash infusion could give the firm some much-needed breathing room.

The deal would also be the company's first coup under the newly minted Chief Executive Officer, John Thain. Known as a Mr.Fix-It on Wall Street, Thain took the top job, after the disgraced former-CEO, Stanley O'Neal stepped down.

Thomson Financial contributed to this report.

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