Checklist Description
This checklist provides an overview of what Sovereign Wealth Funds aim to achieve from their investments and some of the methods they employ to deliver on their objectives.
Definition
Sovereign Wealth Funds’ (SWFs) investment decisions are typically made with one of two goals in mind: Either the funds are seeking an attractive rate of return in purely economic terms, or they are hoping to generate strategic benefits for their country. In the former case, SWFs regularly describe themselves as passive investors in that they do not seek to influence or control the companies they invest in, sometimes preferring to avoid holding voting shares at all. In contrast to typical private equity investors, SWFs are also frequently happy to put their faith in existing company management, rather than aiming to parachute their own executives onto the board. When a SWF invests in a company for strategic benefits, commonly in sectors such as financial services or leisure, the objective is usually to gain insights into the management’s operational expertise with a long-term view of helping to develop or grow a related industry in the fund’s own country.
While many SWFs may emphasize that their investment strategies tend to be longer term and more “hands off” than the average private equity investor, there are signs that some SWFs are prepared to work more closely with these more active investors to help achieve their investment goals. For example, Abu Dhabi-based Mubadala’s 2007 purchase of a 7.5% stake in Carlyle, and news that China Investment Corporation (CIC) had raised its stake in Blackstone to around 12.5% in late 2008, raised the prospect of further cooperation between SWFs and private equity groups.
Though many SWFs have demonstrated their willingness to hold a geographically diverse spread of assets, few have historically provided much insight into the precise investment strategies they employ to achieve their stated objectives. However, Norway’s GPF-G Fund (Government Pension Fund—Global), the world’s second-largest SWF (after the Abu Dhabi Investment Authority), is the notable exception, providing regular updates on its holdings and demonstrating a high level of commitment to ethical investing. Nevertheless, the SWFs’ general perceived lack of investment transparency and doubts over their commitment to high standards of corporate governance standards have done little to help the image of SWFs. Though political pressure is growing in some jurisdictions for greater standards of transparency and improved disclosure from SWFs with the potential to acquire assets of significant national importance or prestige, there is evidence that many SWFs would prefer to work within more loosely worded “best practice” investment frameworks. In October 2008, the International Working Group of Sovereign Wealth Funds presented a proposed set of principles guiding the operations of SWFs to the International Monetary Fund’s (IMF) policy-focused International Monetary and Financial Committee. Both the IMF and the Organisation for Economic Co-operation and Development (OECD) are set to present their own proposals in reports due in 2009.
Advantages
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The long-term and “hands-off” nature of investments by SWFs can make them attractive shareholders for some companies.
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SWFs have been a particularly valuable source of immediate capital injections into financial institutions whose balance sheets have been in urgent need of strengthening.
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High levels of investable cash give SWFs the ability to capitalize on opportunities generated by market swings, with the meaning SWFs can be a stabilizing influence during times of market volatility.
Disadvantages
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Doubts persist in some quarters over the motives behind some SWFs investments, particularly those made for long-term strategic reasons.
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Political concerns are frequently raised over the prospect of key national resources falling under the control of secretive overseas investors, particularly in view of most SWFs’ poor disclosure standards.
Action Checklist
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By moving towards the adoption of best practice guidelines to be proposed by the IMF and the OECD, it should be possible to alleviate some concerns over the lack of transparency and disclosure of most SWFs.
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By taking non-voting shares only, SWFs can help to overcome objections over the motivation for some of their more politically sensitive investments.
Dos and Don’ts
Do
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Recognize the increasing scope for private equity and SWF investors to cooperate on investment projects.
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Appreciate that the generally poor level of transparency of SWFs does little to alleviate concerns over their motives when making overseas investments.
Don’t
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Don’t be afraid of improved disclosure; follow the example of Norway’s pension SWF.
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Don’t overlook the role of SWFs, as cash-rich, long-term investors, in helping to stabilize volatile markets and recapitalize struggling companies.
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