This note considers sovereign wealth funds (SWFs) and
sovereign investment, larger - and for some more threatening
- than hedge funds and private equity.
It covers -
- points of entry to the literature on sovereign wealth
funds (including natural resource funds)
- transparency, instability, corruption and other issues
- disinvestment by SWFs and disasters such as KIO's
- the shape of the Australian sovereign wealth fund
- funds in Kuwait, Norway, Alaska, Abu Dhabi, China,
New Zealand and other locations
- indicators of what some funds own, from Australian
skyscrapers and Optus to coal mines and retailers
- data on the size and growth of sovereign funds
supplements discussion elsewhere on this site regarding
private equity, hedge
funds, investment and
the digital economy.
National and provincial governments have traditionally
acquired and owned assets in other jurisdictions - eg
embassies and legations in other countries - for administrative
purposes rather than to generate revenue.
However, the past 50 years has seen some governments invest
'offshore' on a commercial basis, typically because the
domestic economy was too small - and frequently too unsophisticated
- for substantial investment or because a ruling family
and associates feared regime change.
Most of that investment has been funded by natural resources,
eg exploration licences, extraction licences, taxes on
oil/gas or mining companies and even revenue from state
owned enterprises (SOEs)
- particularly after nationalisation.
'Petro-resources' (oil and gas) have attracted most attention,
particularly after successive 'oil shocks' accompanied
by anxieties that Gulf states would buy enterprises ranging
from Krupp and Fiat to Citigroup and CBS. However investment
has included money from copper, tin, coal, phosphates
and cocoa - involving states in Africa, Latin America
and the Pacific
rather than merely those in the Middle East.
Some investment offshore by governments in emerging economies
has been powered by tax revenue, by profits from domestic
SOEs (often operating on a monopoly basis) and even by
domestic or international borrowings (some governments
having access to capital at lower costs than commercial
competitors). That investment has often been made by diverse
SOEs - a notable example is Singapore's Temasek
- that are justified as vehicles for nation building and
may benefit from restrictions on offshore investment by
The preceding paragraphs encompass what has been broadly
described as sovereign wealth investment (or sovereign
wealth funds), often characterised as an attribute of
emerging economies and involving bodies such as the Kuwait
Investment Authority, Dubai International Capital and
Abu Dhabi Investment Authority.
However, anxieties in advanced economies regarding a changing
tax base through an ageing population (or opportunistic
responses to criticism regarding privatisation)
have led some governments to establish sovereign funds
as government-owned counterparts of private equity funds.
Those funds are expected to generate substantial revenue
from domestic (even international) investment on an ongoing
basis, with receipts serving public purposes such as paying
for hospitals, research and a public pension scheme (an
integenerational transfer). They have been established,
with varying success, in countries such as Australia,
New Zealand, France and Ireland.
Sovereign wealth funds (SWF) have attracted attention
because of -
size of the figures (eg estimates that the Abu Dhabi
Investment Authority has over US$250 billion under management
and that collectively the funds have US$2.5 trillion
that particular funds will buy the "commanding
heights" of a nation's economy or increase instability
in the international financial system
that the operation of funds lacks transparency
disagreement about how money should be invested (onshore
v offshore, on a purely commercial basis or on 'social
that funds are partnering with hedge funds and private
equity, thereby underpinning speculation and job destruction
through irresponsible asset stripping by 'locusts'
were in vogue in late 2007. In December 2008, following
substantial losses through the Subprime
Crash, the Economist sniffed that
sovereign-wealth funds were going to buy up the world.
Then they were heroically going to rescue the banking
system. Now they are in hiding, counting their massive
losses and wondering where all their money went.
the very best scary monsters they will, however, be back.
types of funds
Definitions of sovereign wealth investment vary, a variation
exploited by some entities that seek to defer criticism
on the basis that they are enterprises (supposedly good)
rather than investors (bad).
Observers have often distinguished between formal funds
- often with a private equity fund structure and at an
arm's length from the government - and direct investment
by a nation's central bank, by finance ministry or by
the nation's ruler. In practice that distinction is artificial.
Some observers have suggested that sovereign investment
should be categorised as follows, reflecting the source
of capital and investment strategies -
private equity funds
The differentiation is often tendentious; in practice
it is probably most valuable to consider each fund (or
each nation/province, particularly as some jurisdictions
have multiple funds) on an instance by instance basis.
Resource stabilisation funds
For some observers resource stabilization funds (RSFs)
- aka Natural Resource Funds (NRFs) - are the 'classic'
sovereign funds, emerging in the early 1950s and flowering
in the 1970s. They have been used by resource exporters
to balance fluctuating revenue from oil or other commodity
sales, to insulate a national economy (with capital outflows
for example expected to reduce appreciation of the nation's
currency) and even to support commodity prices.
Such funds are typically more conservative in their asset
allocation than other funds, for example concentrating
on bonds rather than shares and avoiding 'alternative
investment' such as hedge funds or art.
Management may be undertaken by the central bank or by
an autonomous investment authority.
Examples are Russia's petro stabilization fund, Kazakhstan's
national fund and Kuwait's General Reserve Fund (GRF).
Sovereign wealth funds
Other observers have referred to 'pure' sovereign wealth
funds, which typically invest through a portfolio of equities,
property and bonds, taking only small equity stakes in
major enterprises and avoiding management control. They
may also invest through private equity and hedge funds.
Most appear to rely on external specialists for day to
day fund management, with supervision by a government
authority, the central bank or finance ministry.
Examples are Norway's Government Pension Fund (the formal
Oil Fund), Australia's Future Fund, Singapore's Government
Investment Corporation (GIC), the Kuwait Investment Authority
(KIA) and Abu Dhabi Investment Authority (ADIA).
Sovereign private equity funds
They have been distinguished from 'sovereign private equity
funds', entities that are wholly or predominantly state-owned
but in contrast to the 'pure' funds seek management stakes
(eg 20% or more of an enterprise's shares rather than
2 or 3%). They may rely on leverage, make hostile bids
and aim for high returns. They thus adopt a private
equity ethos. Some may operate as arms of state investment
agencies alongside pure funds.
Examples are the Qatar Investment Authority, Abu Dhabi's
Mudabala and Istithmar in Dubai.
State owned enterprises
The fuzziness of categorisation is evident in considering
SOEs, which include conglomerates such as Singapore's
Temasek and Dubai World (some of which have portfolio
investment units alongside financial, service and industrial
arms), acquisition vehicles such as Abu Dhabi's TAQA and
state owned financial institutions or resource extraction/processing
businesses that increasingly are pursuing foreign direct
investment (FDI) opportunities for commercial and/or political
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