Checklist Description
This checklist highlights some of the biggest players among global sovereign wealth funds.
Definition
Though Sovereign Wealth Funds (SWFs) have been around in various forms for decades, the leading players have risen to a new level of prominence over recent years. In particular, since the onset of the global credit crunch, several leading SWFs have taken full advantage of their massive level of liquidity to secure major stakes in financial services companies in urgent need of capital injections.
Middle Eastern and Asian nations benefiting from natural resources or mass manufacturing account for the overwhelming majority of the leading global SWFs, though Russia and several US states such as Alaska also operate sizable funds. The 10 leading global players are as follows:
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Abu Dhabi Investment Authority (ADIA). Established by the United Arab Emirates in 1976, ADIA is by far the world’s biggest SWF, with assets estimated at $875 billion.1 As much as 75% of ADIA’s assets are thought to be administered by external fund managers. With a spread of investments among industrial and financial firms in the Middle East, ADIA caught the headlines in 2007 with a $7.5 billion investment in US banking giant Citigroup.
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Norwegian Government Pension Fund. Norway’s decision to invest the proceeds of its North Sea oil and gas operations into this $300+ billion1 pension fund in 1990 has created one of the world’s biggest SWFs. It is the most transparent, having created a panel of experts to ensure that the 7,000 companies in which the fund invests meet its strict ethical criteria. Following the advice of this panel, the fund famously de-invested in Wal-Mart, citing concerns over the retail giant’s labor rights record in developing economies.
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Government of Singapore Investment Corporation (GIC). Thought to be among the world’s five biggest SWFs, the investment management unit of the Singaporean government is believed to manage assets of around $330 billion.1 Established in 1981, GIC prefers to keep a relatively low profile, despite delivering average investment returns of nearly 10% per annum in dollar terms since 1982. GIC holds major stakes in Swiss bank UBS and US energy firm AEI.
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China Investment Corporation (CIC). With its origins in the investment business of China’s central bank, CIC was established in its present form as recently as 2007. CIC oversees the investment of China’s foreign exchange reserves, estimated to be in the region of $200 billion.1 CIC lifted its stake in fund management group Blackstone to 12.5% in 2008, and it has also recently expanded its other interests in financial services, holding a 9.9% stake in Morgan Stanley.
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SAMA Foreign Holdings. With assets believed to be in the region of $300 billion,1 this Saudi Arabian SWF is generally regarded as one of the least transparent of the major global funds of its kind. Presently outsourcing equity to professional asset managers, SAMA (Saudi Arabian Monetary Agency) could soon be overshadowed by a new SWF planned by the Saudis to manage some of their enormous oil-derived wealth.
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China Development Bank (CDB). Established in 1994, CDB has combined domestic infrastructure investments (such as the controversial Three Gorges Dam) with overseas interests, acquiring stakes in banks such as the UK’s Barclays. CDB is thought to hold assets worth around $225 billion.1
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Kuwait Investment Authority. Run by the Kuwait Investment Office, the country’s investment arm, which traces its roots back to the early 1960s, it holds assets worth around $250 billion.1 10% of Kuwait’s annual oil revenues are channeled into the fund, which invests globally across a range of asset classes.
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Temasek. The Singapore state-run investment fund was established in 1974, with assets recently estimated at around $160 billion.1 In common with many of its peers, Temasek has been active in the global financial sector, acquiring stakes in institutions such as Merrill Lynch, Standard Chartered, and Barclays.
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Russia National Welfare and Oil Stabilization Funds. Dating from around 2004, the Oil Stabilization Fund has invested exclusively in foreign government bonds. In early 2008 the Fund was split into two: The Reserve Fund is thought to hold assets of around $162 billion,1 while the National Welfare fund, Russia’s official SWF with assets estimated at $125 billion,1 absorbs some of the proceeds from the country’s energy industry.
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Investment Corporation of Dubai. Formed in 2006, the Investment Corporation of Dubai is thought to have assets of at least $13 billion,1 including its subsidiaries Dubai International Capital (DIC) and Dubai World. As well as a high-profile stake in HSBC, the group also holds investments in electronics giant Sony and automobile manufacturer DaimlerChrysler.
Advantages
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SWFs’ stated aim of investing for the long term can lend stability to the shareholder bases of the companies in which they invest.
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These funds have been a valuable source of large-scale investment for some companies in need of capital as the credit crunch has deepened.
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Many SWFs aim to secure nonvoting shares in their target companies, helping to alleviate concerns in some countries over foreign ownership of key assets.
Disadvantages
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The lack of transparency associated with SWFs can create concerns over the motives behind some investments.
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Some proposed SWF investments can meet with political or regulatory resistance, on protectionist or national interest grounds. A noted example occurred when Dubai World’s acquisition of P&O prompted US politicians to insist that the acquirer would dispose of several major P&O-owned US ports.
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Concerns have been raised over some SWFs’ commitment to upholding high regulatory standards.
Action Checklist
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A commitment to the adoption of best practice principles proposed by the IMF can help SWFs to overcome some concerns over issues such as their motives, governance, and transparency.
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Governments should ensure that their national SWFs manage their investments to the economic benefit of their citizens.
Dos and Don’ts
Do
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SWFs should be sensitive to local concerns over their investment objectives when striking overseas deals.
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In situations where SWFs seek an active, controlling stake in a company, SWFs can overcome their lack of perceived expertise in some sectors by employing acknowledged industry experts to run their acquired businesses more efficiently.
Don’t
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Don’t view SWFs as an automatic source of funding for Western financial institutions which find themselves in difficulty.
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Don’t allow the funds to ignore the value of effective communications and improved investment transparency and disclosure.
Notes
1 Asset size estimates taken from Norton Rose’s June 2008 report, “Sovereign wealth funds and the global private equity landscape survey” (available on www.nortonrose.com) and The Times (London), December 27, 2007.
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