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sovereign wealth fund

Page history last edited by Brian D Butler 15 years, 2 months ago

 

Sovereign Wealth Funds

Nature and Purpose

 

SWFs are typically created when governments have budgetary surpluses and have little or no international debt. This excess liquidity is not always possible or desirable to hold as money or to channel it into consumption immediately. This is especially the case when a nation depends on raw material exports like oil, copper or diamonds. To reduce the volatility of government revenues, counter the boom-bust cycles' adverse effect on government spending and the national economy or build up savings for future generations, SWFs may be created. One example of such a fund is The Government Pension Fund of Norway.

 

Other reasons for creating SWFs may be economical, or strategic, such as war chests for uncertain times. For example, the Kuwait Investment Authority during the Gulf war managed excess reserves above the level needed for currency reserves (although many central banks do that now). The Government of Singapore Investment Corporation is partially the expression of a desire to create an international financial center. The Korean Investment Corporation has since been similarly managed.

 

 

 

Table of Contents:


 

see also:  Petrodollars

 

 

 

 

List of Sovereign Wealth Funds

 

 

 

Criticisms

 

 

The major concern is that the governments that own or control these funds may mismanage the wealth, pursue political or economic power objectives when making SWF investments, or come into conflict with governments of countries in which they are investing.

In the world of finance, these guys are scary.  Think about all of the money that leaves the USA as they purchase oil.  All of those "petro dollars" have to go somewhere, and many of them have been stockpiled in massive "sovereign wealth funds" in the middle east.  The same thing has happened with China and all of the billions of US dollars that we send over there to import chinese made goods.  Singapore,and others...they have all built up massive "war chests" of capital that is waiting to be deployed.   

 

There are several reasons why the growth of sovereign wealth funds is attracting close attention.

 

  • First, as this asset pool continues to grow in size and importance, so does its potential impact on various asset markets.
  • Second, and relatedly, some critics worry that foreign investment by sovereign wealth funds raises national security concerns because the purpose of the investment might be to secure control of strategically-important industries for political rather than financial gain. These concerns have led the EU to consider whether to allow its members to use "golden shares" to block certain foreign acquisitions.[5] In the U.S., these concerns are addressed by the Exon-Florio Amendment to the Omnibus Trade and Competitiveness Act of 1988, Pub. L. No. 100-418, § 5021, 102 Stat. 1107, 1426 (codified as amended at 50 U.S.C. app. § 2170 (2000)), as administered by the Committee on Foreign Investment in the United States (CFIUS).
  • Third, sovereign wealth funds are not nearly as homogeneous as central banks or public pension funds. However they do have a number of interesting and unique characteristics in common. These make them a distinct and potentially valuable tool for achieving certain public policy and macroeconomic goals.
  • Fourth, are central bank reserve managers - at least those among them who have accumulated massive foreign exchange reserves in recent years - starting to act more like sovereign wealth managers? What precisely is the difference between the two, and how can we expect them to develop and relate to one another in the future?

 

 

 

 

 

Coming Regulations 

 

Sovereign-wealth funds have become a major focus in what seems to be a new movement for regulation in the private-equity industry. SWFs currently manage about $2.5 trillion in funds, but this is expected to triple in the next few years. These funds have invested more than $25 billion in investment banks in the past few months. These figures make some investors exceedingly nervous about the influence these funds hold in the economy, and many are calling for U.S. policymakers to make a move. But it was Australia that was the first country to formally express anxiety about this so-called risk. The country has released principles they would like to implement as a way to compel SWFs to be more transparent and predictable in their investment strategies and motivations.

 

Self Regulation - Santiago Principles:

 

http://www.iwg-swf.org/pubs/gapplist.htm

 

 

Investors stay away from investments with SWF backing

 

As sovereign-wealth funds infiltrate the private-equity sector, some institutional investors may be limited in placing their money. A bill proposed in California would make it illegal for CalPERS and CalSTRS to invest in any fund that has SWF backing. One of the problems, the bill states, is that the lack of transparency in SFWs, allowing countries that violate basic human rights to contribute capital.

 

Calif. bill to restrict SWF investments

To restrict investments in "non-friendly" countries, California has proposed a new law that would seek to prevent the California Public Employees' Retirement System and the California State Teachers' Retirement System from investing in private-equity firms wholly or partially owned by sovereign-wealth funds. The Wall Street Journal/DowJones LBO Wire (2/25)

 

Regulators seek transparency in SWF investments

The EU and the U.S. have expressed that more transparency in investments by sovereign-wealth funds is necessary. Regulators are suggesting a voluntary code of conduct to reduce the threat of funds' gaining political clout. The Wall Street Journal

 

 

 

Outsourcing of SWF managment

 

Economists are estimating that SWFs will outsource about $200 billion to fund managers per year for the next five years. Analysts estimate that sovereign-wealth funds have roughly $2.9 trillion in assets and that the numbers will only continue to rise as countries such as Japan and Russia launch new vehicles. Financial News (03/11)

 

 

 

Islamic Banking and SWF's

 

In the Gulf States (GCC) (wikipedia) have been very active recently in setting up sovereign wealth funds  (SWF's).  One interesting thing to note is that in many of these countries, there is also a tradition of Islamic banking, where there are religious rules limiting banks ability to charge or earn interest.   But, with this heritage of Islamic banking, I find strange is that amid the recent credit crisis of 2007-08, we saw many of these SWFs come to the US and purchase large equity positions in Western Banking institutions such as CITI Bank.  Is this a conflict of interest with their Islamic banking cultural heritage?  If the banks are doing it just for the additional potential return on investment, then you might argue "yes".  I'm not an expert on Islamic banking by any stretch of the imagination,  but, to me these investments seem to be more "strategic" in their nature (i.e. interest is not the primary goal).  Perhaps in light of this realization, the western regulators may be right in worry about the intentions of these (less-than-transparent) massive funds in control of the Gulf States. 

On the other hand;

 

 

For Africa:  project finance and bonds financed by Islamic finance from the Gulf States may be just what the doctor ordered.    This matches up Africas desperate need for infrastructure investment, and their desperate lack of funds.  Mix this with the fact that Islamic finance has rules about the requirement to back up loans with physical assets, this might be a perfect match (and a good outlet for excess Gulf investments and sovereign wealth funds).  Examples:  invest in tourism, hotels, roads, airports, etc.  See more in our discussion on Islamic finance

 

In defence of SWF's:

 

Are sovereign wealth funds of middle-east countries really any different in function / form than pension companies run by western governments?

 

A substantial proportion, but not all, of SWF assets of industrial countries are in government pension funds. Such funds may be legally distinguished from nonpension sovereign wealth funds, but as long as governments have some role in choosing their managements, at a minimum, they raise the same issues of motivation and accountability as do nonpension sovereign wealth funds regardless of their specific objectives, mandates, or sources of funding, which could be used as well to distinguish among nonpension sovereign wealth funds.

 

Based on this definition of SWFs (to include western pension funds), ; Industrial countries hold more than 40 percent of SWF international assets and about two-thirds of $8 trillion in total SWF assets. The United States leads with at least $800 billion in SWF international assets (second only to the United Arab Emirates). It is followed by Norway with more than $400 billion and the Netherlands and Japan with close to $300 billion. Tiny New Zealand's Superannuation Fund holds about $8 billion.

 

Global (capital) recycling:

 

sovereign wealth funds are not net providers of capital to western financial markets. For the most part, they are merely recyclers of global financial flows. In this respect, they do not differ from central banks and other government-controlled entities or from private-sector investors. The only issues are where they invest, how wisely those investments are made, and how accountable the investors are for their decisions.

 

read more from :  http://www.petersoninstitute.org/publications/opeds/oped.cfm?ResearchID=989

 

 

Opportunity for entrepreneurs

 

Ok, but forget the doom and gloom of what negative things could happen if they decided to start spending that money, and consider all of the investments and projects that could be financed if you could convince those money managers to put some of that capital to work on your project.   That is exactly what is happening as entrepreneurs and established businessmen parade their project proposals to these funds.  Here is an interesting article about green business models that are getting funded.  ("guess who's building a green city")

 

 

 

 

relations with Private Equity

 

As the buyout industry has slowed down, the media is turning its attention to sovereign-wealth funds, whose recent bailouts of major investment banks have been splashed across the headlines like a celebrity's stint in rehab. These funds have also made several substantial, high-profile investments in private-equity funds, and total assets under management could more than triple by 2010. Is this the precursor to major change in private equity? Next week, Broadgate Private Equity SmartBrief will take a closer look at what the emergence of sovereign-wealth funds means to the industry.

 

 

 

News

 

Sovereign-wealth funds: The major players

An overview of the largest funds in Abu Dhabi, Norway, Singapore, Kuwait and China. Financial Times (1/24)

 

Sovereign-wealth funds' rankings

The United Arab Emirates manages more than $1 trillion in several sovereign-wealth funds. The following link ranks the largest funds by assets under management as well as the market share by country. SWF Institute

 

Global distribution of sovereign-wealth funds

More than 20 countries have established Sovereign Wealth Funds, and many more have expressed interest in setting one up. The map at the bottom of this page shows how this wealth is distributed. Deutsche Bank Research (09/10)

 

Are SWFs a selling signal?

Sovereign-wealth funds currently hold more than $2 trillion under management and have, so far, cultivated $60 billion in funds for banks struggling with the housing bust. But agendas other than pure profit and governmental control of investments may be cause for concern. Reuters (01/23)

 

Japan's SWFs

Japan is ready to create its first sovereign-wealth fund with the colossal supply of foreign reserves the country holds. The new vehicle would initially focus on domestic stock and perhaps help boost the country's struggling economy. Reuters (01/26) 

 

 

Concern for SWFs

As prominent private-equity groups such as Blackstone, Apollo and Carlyle sell stakes to sovereign-wealth funds, industry experts expect this trend to escalate, but how will this power shift impact the industry's other LPs? Pensions & Investments (12/24)

 

 

 

Freedom for state funds?

Free traders have long said that political freedom abroad can spring from expanded trade. But can sovereign-wealth funds bring the same results for democracy? Nine of the 10 largest state-owned investment funds are arms of countries lacking full democratic rights. Wall Street Journal (02/11)

 

 

Russia's SWF to buy Japanese securities

Russia's sovereign-wealth fund has revealed plans to buy into Japanese government bonds and stocks. Russia's finance minister has until October 2008 to design an infrastructure for the new investment plans. Reuters (02/10)

 

 

 

 

 

China's investment in Blackstone shows how government investors are flourishing at the heart of the financial system

 

 

May 24th 2007

Satoshi Kambayashi
 

WITH $1.2 trillion in foreign-exchange reserves and the pool growing by more than $1 billion every day, China casts a giant's shadow over the global financial markets, even if it has mostly used the money to pile up American Treasury bonds. The announcement on May 21st that it would invest $3 billion of its reserves in Blackstone, a New York-based private-equity firm soon to issue shares, shows that it is prepared to barge into murky private markets as well as liquid public ones. It is not the only inscrutable country to be cosying up to the inscrutable private-equity industry. Around the world, a secretive society is emerging of governments flush with foreign assets, some of them petrodollars, that are increasingly calling the shots in international finance. The Blackstone deal is likely to stir others to invest their money even farther away from prying eyes than they do already.

 

Like China, whose proposed Blackstone stake is part of $300 billion that the government plans to set aside this year for investment purposes, dozens of countries have set up what are now commonly referred to as sovereign-wealth funds. They manage money drawn from reserves, natural-resource payments and the like. China is chiefly concerned to diversify its foreign reserves, but other sovereign-wealth funds own national, as well as international, assets.

 

The top 12 each have anything from $20 billion to hundreds of billions of dollars to invest (see table). Recently, Japan, Russia and India have reportedly been considering setting up funds along similar lines. Some estimates put the size of the funds at $2.5 trillion by the end of this year (in contrast, hedge funds are thought to have a mere $1.6 trillion), with another $450 billion in transfers from reserves being added annually. Including capital appreciation, the amount could swell to $12 trillion by 2015.

 

 

To the extent governments have traditionally held investment assets, it was to protect domestic currencies and banks from crisis. Since the funds were for emergencies, they were of a type that could be liquidated easily—initially the holdings were in precious metals, lately they have been in dollars. The idea of building up an endowment to replace shrinking natural resources did not exist.

 

That process may have started inadvertently in 1956 when the British administration of the Gilbert Islands in Micronesia put a levy on the export of phosphates—bird manure—used in fertiliser. The manure has long since been depleted. However, a once-tiny set-aside of money has become the Kiribati Revenue Equalisation Reserve Fund, a $520m investment portfolio that has grown to about nine times the tiny atoll's GDP.

 

A similar approach is now common among oil-producing countries, which, it is estimated, account for two-thirds of the assets in these sovereign-wealth funds, and are keen to diversify their national revenues, aware that their wealth is being pumped away. They have typically invested along similar lines to central banks, holding bonds, dollars and bank deposits. Temasek, a Singaporean entity created in 1974 to pool state-owned investments, started to change the mindset. It subsequently evolved into an even more complex investment vehicle. The heady combination of state-control, success and secrecy, entranced other governments.

 

Recently, central bankers have also begun wondering whether they have a fiduciary duty to make higher returns from the public wealth under their supervision, which could mean placing at least some part of foreign-exchange reserves in high-yielding, if less liquid, investments. In Asia this question has become increasingly pertinent in the past two years, as reserves have mushroomed.

 

The result has been a torrent of money into a finite pool of assets. There is no precedent for such fortunes suddenly to find their way into global financial markets, and they help explain the waterfall of liquidity that has driven up the value of risky (and less risky) assets of all descriptions around the world. The world's entire supply of shares is $55 trillion, and bonds account for a similar amount. Sovereign-wealth funds could soon become the most important buyers of such assets, and many others besides. If so, the world will witness the intriguing spectacle of its largest private companies being owned by governments whose belief in capitalism is often partial.

 

The last time governments were this involved in sinking money into private assets, the process tended to be called nationalisation. Now the funds are invested both abroad and domestically. A new term will have to be coined: internationalisation, perhaps.

 

Northern light

 

Of the biggest sovereign funds, only Norway's provides anything close to transparency. Each year it discloses its investment portfolios and returns. Without such a window on their investments, it is hard to fathom the interests of other funds—how they vote on shareholder motions, for example. There are likely to be questions about strategic objectives, too. What will they care about most? Economic returns, political objectives, securing strategic resources? It will be hard to tell.

 

Andrew Rozanov, of State Street Bank, argues that the lack of well-defined obligations and the ability to retain funds indefinitely while not having to reveal results is an investment advantage. The funds can harvest the benefits of volatility and illiquidity unavailable to the risk averse. It would not be surprising if some did particularly well. On the other hand, the same factors that could lead to higher returns could also lead to corruption and untoward political intervention.

 

But the kind of assets the funds invest in—big ones—can generate frictions even when run properly. Temasek has been embroiled in controversy in Thailand after it bought Shin Corp, one of the country's telecoms companies, from Thaksin Shinawatra, the country's deposed prime minister. China is no stranger to such tensions. In an event that still rankles, CNOOC, the state-controlled oil company, was blocked in America, supposedly on national-security grounds from acquiring Unocal, an oil company. It is quite possible that by purchasing a non-voting interest in Blackstone, China will be able to bypass the restrictions that might prevent it doing Unocal-style deals in Europe and America.

 

By choosing a private-equity firm, China will also be able to invest directly in a partner that, notwithstanding its forthcoming share offering, can keep many of its operations out of the public eye. But this is where the ironies of the deal are most apparent. “Crony capitalism? It is a marriage made in heaven—a partnership that does not want investors to ask questions with a country whose firms do not want investors to ask questions. I worry about the serious conflicts of interest this generates. More generally, government entities shouldn't be in the business of investing in private firms,” opines Raghuram Rajan, of the University of Chicago's Graduate School of Business.

 

Moreover, it is widely believed that by having China as a partner, Blackstone will receive preferential access to China's market (as well as providing China with experience it clearly covets on how to set up its own domestic private-equity industry). This is an advantage for Blackstone, and for its shareholders, China included, particularly so when other private-equity firms complain that the impediments to operating in China are growing.

 

However, providing an economic incentive to a lucky few, even if that includes the government itself, impedes China's broader need to create a fair and transparent financial market for all participants. That is what would produce the most efficient market for capital.

 

China still has vast holdings of state assets, and its embryonic stockmarket is bubbling over—if anything it needs more publicly traded companies. Like other countries with sovereign-wealth funds, it would appear to need more expertise in selling companies that it owns, rather than learning how to buy the ones it does not.

 

read more...

 

 

 

 

Country Fund Assets $Billion Inception 'Origin Approx wealth per citizen
Abu Dhabi ADIA Abu Dhabi Investment Authority $ 1,300[1] 1976 Oil $1,529,000
Singapore GIC Government of Singapore Investment Corporation $ 330 1981 Non-commodity $100,000
Norway GPF The Government Pension Fund of Norway $ 315 1990 Oil $71,000
Saudi Arabia Various $ 300 na Oil $15,000
Kuwait KIA Kuwait Investment Authority $ 250 1953 Oil $250,000
China CIC China Investment Corporation $ 200 28/9 2007 Non-commodity $151
Russia SFRF Stabilization Fund of the Russian Federation $ 158[2] 1/1 2004 Oil $1,180
Singapore Temasek Holdings $ 115 1974 Non-commodity $30,300
Australia FFMA Australian Government Future Fund $ 61[3] 2004 Non-commodity $2,900
Qatar QIA Qatar Investment Authority $ 50[4] 2000 Oil $250,000
US (Alaska) APFC Alaska Permanent Fund $ 40.1 1976 Oil $61,000
Libya - $ 40 2007 Oil $7,200
Brunei BIA Brunei Investment Agency $ 30 1983 Oil $90,100
South Korea KIC Korea Investment Corporation $ 20 2005 Non-commodity $417
Malaysia KN Khazanah Nasional $ 18.3 1993 Non-commodity $658
Kazakhstan KNF Kazakhstan National Fund $ 17.8 2000 Oil $1170
Canada AIM Alberta Heritage Fund $ 16.6 1976 Oil $4,800
Taiwan NSF National Stabilisation Fund $ 15 2000 Non-commodity $652
Iran OSF Oil Stabilisation Fund $ 12.9 1999 Oil $174

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 No reality for India's SWF

India's plans to create its own SWF may be thwarted because of political disputes and instability of its foreign-capital inflows. However, industry leaders suggest that India may be successful if it targets energy assets abroad. The Wall Street Journal (03/10)

 

 

 

 

More news

 

At The World Economic Forum's 2007 annual meeting last January in Davos, Switzerland, private equity was coming off a record 2006 and showed no signs of slowing -- it almost seemed like there was no limit to fund and deal size. Politicians and media across the world had started to take a keen interest in private equity. See the press release on the key panel discussion on sovereign-wealth funds. The full panel is available on YouTube.  But just as policymakers fastened their attention on the industry, private equity faded into the background and a group of new players emerged into the spotlight. This year the hot topic in Davos was sovereign-wealth funds.  The bottom line is that whether sovereign-wealth funds are buying stakes in private-equity firms, investing as LPs or bailing out major U.S. brands in financial distress, one thing is clear: SWFs are here to stay. Morgan Stanley predicts that the total size of the SWFs could quintuple from an estimated $2.50 trillion today to about $12 trillion in 2015. They will surpass the world's official foreign-currency reserves by 2011.

 

 

 

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page director: Brian D. Butler

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