Information for you: the Growing Importance of Sovereign Wealth Funds (SWFs)

As executives and the boards of publicly-held and privately-owned corporations, asset managers (including hedge funds and contract asset managers), financial analysts and researchers, public sector agencies, and other seek out sources of capital, the world’s Sovereign Wealth Funds (SWFs) have moved from relative obscurity to the front pages of leading business publications.

The Abu Dhabi Investment Authority invested USD $7.6 billion in Citi in November 2007, creating splashed headlines in major print media.  General Electric, the USA’s largest industrial company, struck an $8 billion investment deal with the SWF of Abu Dhabi – Mubadala Development Company.  GE and Mubadala will invest $4 billion each in equity over three years – creating an $8 billion commercial finance fund based in the Middle East.  The Fund will become a major GE stockholder buying shares on the open market (likely being among he top 10 holders of GE common).

The recent Davos gathering of world business, government media, academic and other thought leaders, SWFs very much a topic of discussion.

Sovereign Wealth Funds have arrived as major capital markets players. This is the “rise of state capitalism,” The Economist authoritative editors proclaimed in September 2008.

McKinsey Global Institute projected SWF assets to dramatically rise – the Asian funds’ combined assets stood at USD$4.6 trillion at the end of 2008 and could grow to $7.7 trillion by 2013 – or perhaps as much as $12.2 trillion if the world economy recovers short-term.

The SWFs, estimated the US Treasury Department early in 2008 – before the global markets crashed – held about USD$3 trillion in assets.  Private sector analysts project this to rise to $10 trillion and as much as $15 trillion by 2015 – rivaling the total equity investments in the United States of America alone.

The Peterson Institute, a private think tank, describes SWFs this way:  “…SWF is a descriptive term for a separate pool of government-owned or government-controlled financial assets [that includes international assets].  SWFs take many forms and are designed to achieve a variety of economic and financial objectives…”  Peterson’s Edwin Truman, a SWF expert, establishes the total assets of SWFs at $5.3 trillion (April 2008).

There are an estimated 50 to 60 investment pools that could be called SWFs.   These state-owned entities manage money internally and retain external asset managers to guide investments.  The range of transparency of SWF operations range from secretive to fully transparent and open. 

Some are activist investors – Norway’s government pension fund regularly divests companies whose policies and behaviors are objectionable to the fund managers.  The largest exclusion was Wal-Mart Stores, over child labor violations in the developing world.

Even with this going on, in the investment community, awareness of SWFs still is not very broad – the Peterson Institute reports that of 1,000 financial market survey respondents, only 6 in 100 (6 percent) had seen or heard anything about SWFs recently (February 2008).  And, in the USA, half thought that investments by foreign governments have a negative effect on the domestic economy; 55% thought that SWF investments had a negative effect on national security.

We bring you top line information on SWFs in “SWF Matters,” the publicly available portion of our work in monitoring SWFs – because matters related to SWFs are critical, and because Sovereign Wealth Funds are mattering more in the global capital markets and among debt and equity issuers. This is an expanding segment of The Institute’s work; check regularly for updates and expansion of the section

The Governance & Accountability Institute’s “INSIGHTS-edge” resources focus attention on the world’s SWFs, select sovereign pension funds, and related market players (such as asset managers and investment banks). 

 Click here for more information on INSIGHTS-edge.