The Sky Did Not Fall - International Forum of Sovereign Wealth Funds SIL 2016 Report.pdf · 3 From...

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With the support of

Sovereign Wealth Fundsunder AusteritySovereign Wealth FundAnnual Report 2016

BAFFI CAREFIN Centre for Applied Researchon International Markets, Banking,Finance and Regulation

Sovereign Investment Lab

The Sky Did Not Fall Sovereign Wealth FundAnnual Report 2015

BAFFI CAREFIN Centre for Applied Researchon International Markets, Banking,Finance and Regulation

Sovereign Investment Lab

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Sovereign Investment LabResearch and educational partner of

The Sovereign Investment Lab is a group of researchers brought together inthe Baffi Carefin Centre For Applied Research on International Markets,Banking, Finance and Regulation at Bocconi University. The Lab tracks thetrends of sovereign fund investment activity worldwide and conducts path-breaking research on the rise of the State as an investor in the global economy.Research output aims to meet the highest scientific standards, but also to beaccessible for a variety of stakeholders also outside academia: institutionalinvestors, policymakers, regulators, and the media.

EditorBernardo BortolottiDirector, Sovereign Investment Lab Bocconi Universityand Università degli Studi di Torino

[email protected]

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3 From the Editor

7 Introducing Sovereign Wealth Funds

15 SWF Investment in 2015 Bernardo Bortolotti, Veljko Fotak, Giacomo Loss

15 Activity19 Sectors32 Geography36 Funds40 The Sky Did Not Fall

42 Articles42 Beyond the Petrodollar Put: Future Trends

in Sovereign Wealth Management Massimiliano Castelli, Fabio Scacciavillani

50 Sovereign Fund Selling, Market Volatility and Systemic Risk: Connections and Regulatory Possibilities Paul Rose

61 The Rise of Sovereign Venture FundsDiego Lopez

67 Spotlights on Research

75 Appendix75 Methodology

Contents

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Oil prices have fallen, during 2015, with crude prices closing the year at $35 perbarrel, well below even the most pessimistic estimates. With roughly two-thirds ofSWF assets originating from commodity revenues, this has had an impact on SWFfunding. Yet, the sky is still up there—despite panicked reporting and predictionsof their demise, our report documents that SWF AUM have actually slightlyincreased during the year, albeit at a slower pace than what we have been used to.

SWFs have always engendered strong feelings. Viewed first as foreign invaders in theearly 2000s, to saviors of the Western financial sector in 2008-2010, these large andoften opaque pools of assets have often been misunderstood and feared. The latestnarrative identifies them as a new systemic risk factor, the smoking gun for theunprecedented positive correlation between falling oil prices and declining equity val-uations observed over the past months. Yet, empirical evidence does not bear supportfor this story—while SWFs have been selling assets at a faster pace than we have seenin the past, their sales are still well eclipsed by their new investments. Even more, thetrading activity we document points to sales that are more about rebalancing portfo-lios in a deliberate attempt at capturing long-term illiquidity premia in a world of lowyields, rather than panicked divestments to support domestic budgets.

Yet, we should not conclude that the slowing accumulation of SWF AUM does nothave an impact on global asset prices. Since the most recent financial crises,Western markets have come to rely on a SWF safety net, knowing that a large classof investors was on the prowl for cheap assets. That safety net has now beenremoved, exactly at the time quantitative tightening in the US is sending marketson a roller-coaster ride.

For the funds themselves, these are defining times. Clearly, oil exporting countriesare now faced with conflicting demands on their funds. Domestic budget shortfallslead to the temptation to divest some long-term foreign holdings to provide liquid-ity domestically. On the other side, the diversification mandate of SWFs is nowmore important than ever. With commodity prices more volatile than at any pointover the past decades, economies trying to diversify away from oil—Saudi Arabiaabove all—have incentives to pour more assets into their SWFs, not less. Hence,individual countries must now decide whether the primary mission of their SWFsis short-term stabilization or long-term diversification, laying bare the inner con-tradictions of mandates that are often unclear.

From the Editor

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As we document, most SWFs seems to be emphasizing long-term diversification,rebalancing portfolios towards illiquid assets, with a renewed emphasis on real-estate and a move away from the safe, but low-yield, US markets. So, the sky didnot fall. But, once the next crisis hits, SWFs will pay with their quest for yields withportfolios carrying higher liquidity risk. At that point, we will be hoping that coolheads prevail once more—although we predict, with a high degree of confidence,that the media will be on a new witch hunt, finding some reason to fear the big,bad, opaque, SWFs.

We are glad to present our annual report on SWF investment in 2015. The readerwill find here the usual high quality data and contributions by our distinguishedfellows Massimiliano Castelli, Fabio Scacciavillani, Paul Rose, and Diego Lopez.

Finally, we are glad to announce that the Sovereign Investment Lab has beenrecently recognized “research and educational partner” of the International Forumof SWFs (IFSWF). We are honored and excited by this achievement, a tangible signof our commitment to high-quality research and relevance to our stakeholders’community.

Our main findings for 2015 can be summarized as follows:

• More deals, but smaller on average: in 2015, we observed 22 SWFs completing186 investments with a total publicly reported value of $48 billion. This repre-sents a 40 percent increase in the number of transactions we reported in 2014,but a 30 percent decrease in aggregate investment value. Mega-deals have virtu-ally disappeared. We saw no investments in the “over $4 billion range” in 2015.

• No portfolio disruption: SWFs completed 70 divestments worth in total $22.4billion, implying a net investment value of $25.5 billion in 2015. Contrary toconventional wisdom, we do not find evidence to outright liquidation of SWF’sasset for budgetary needs of oil producing nations.

• Harvesting long-term liquidity premia: with 48 deals worth $27.5 billion, SWFinvestments in real estate, hotel and tourism facilities, infrastructure and utili-ties accounted for 56.9 percent of investment value and 25.8 percent of the num-ber of deals. These assets offer long-term protection from raising interest ratesand are contributing to safer, more diversified portfolios, albeit at the price ofgreater liquidity risk.

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THE SKY DID NOT FALL


5

From the Editor

• Finance comes back, with a twist: we report a 28 acquisitions worth $6.9 billionin the financial sector almost entirely completed in emerging markets, in order togain exposure to the sector’s recovery in countries with higher growth potential.

• Sector reallocation underway: with energy under the radar screen, SWFs aregradually increasing exposure to new sectors. The retail and healthcare industryhave attracted $4.6 and 2.6 billion, respectively, while IT-linked investmentsurged to all time hit of $3.4 billion.

• The rise of Sovereign-Private-Partnerships: in 2015 co-investments with strate-gic, or financial private partners represent 50% of reported deals, and an aggre-gate value of $24.4 billion.

• Foreign investment galore: we report an all-time record allocation to developed,OECD economies, with 71.9% of aggregate investment value allocated to thisgroup of countries. Related, 94% of SWF investments during 2015 has been inforeign markets, a strategy consistent with the mission to preserve nationalwealth by global diversification of investments.

• A geographical rebalancing: with $7.9 billion the USA is still the favorite coun-try, but since 2014 its relative size has declined in favor of Europe, accountingfor 33.8 percent of investments, and particularly of the eurozone, thanks to astrong currency depreciation.

• A remarkable year for Singaporean funds: GIC and Temasek jointly completed76 deals worth $13.2 billion, representing 40 and 27 percent of total deals andvalue, respectively.

Bernardo BortolottiSovereign Investment Lab, Director


7

The term “sovereign wealth fund” has come to beused as a moniker for any state-owned investmentvehicle funded from budget surpluses. In reality, thesovereign investment landscape is populated by aheterogeneous group of funds with distinctive fea-tures reflecting the structural and macroeconomicneeds of individual countries. For example,resource-based economies, such as Chile, Mongolia,or Algeria, choose to establish stabilization funds toprotect their currencies and budgets against excessvolatility of the underlying commodity. Others likeIndia, or Saudi Arabia, keep large surpluses in for-eign exchange reserves due to the volatility of theirincome streams and structural deficits. The Japaneseperceive that providing for their aging population istheir most pressing priority, so they maintain theirwealth in large pension funds. Oil-rich nations inthe Persian Gulf region or Norway invest their oilrevenue surpluses abroad to provide for future gen-erations when their oil reserves will be depleted.Finally, windfall revenue from privatizations, or theneed to boost long-term investment and spur eco-nomic growth lead to special development funds,like those operating in Ireland, Kazakhstan, orMorocco, owning stakes in companies deemedstrategic for the national economy.

Sovereign investment vehicles have thus immenselydiverse objectives and strategies, which in turn arereflected in their asset allocation and investmentchoices. If we examine their portfolios in term oftheir exposure to financial risk, they can be loose-ly grouped into buckets along a spectrum of finan-cial risk from central banks and stabilization funds(which hold the most-liquid and lowest-riskassets), pension and social security funds (also

interested in seeking returns for their beneficiar-ies), to development funds (which have the riskiestand most-illiquid assets).

Sovereign wealth funds are just one type of sovereigninvestment vehicle and can be placed in the middle ofthis spectrum. SWFs have an independent corporateidentity (they are not managed by a central bank orfinance ministry) and invest for commercial returnover the long term. Unlike central banks, stabiliza-tion funds, or public pension funds, SWFs have noexplicit liabilities — i.e., their assets are not routine-ly called on for stabilization or pension contributions— so they can have a greater tolerance for risk andilliquid assets to generate superior returns. As such,these funds have a strategic asset allocation that caninclude equities, bonds, private equity, real estate,infrastructure, hedge funds, exchange-traded funds,futures contracts, commodities, etc., diversified bygeographies and sectors to achieve the desired risk-return profile of the fund. Finally, due to both theneed to diversify revenue streams often too depend-ent on a single commodity (oil, in many cases) and tothe danger of “Dutch disease” by investing largequantities of foreign currency in often small domes-tic economies with poorly developed financial mar-kets, SWFs invest a large portion of their portfoliosabroad, unlike other sovereign investment vehicles.

Introducing Sovereign Wealth Funds

SWFs are just one type of state-owned investment funds, and display unique characteristics


8


Table 1: Sovereign Wealth Funds, Assets Under Management

Country Fund Name Inception Source AUM 2015

Year of Funds (US$bn)

Norway Government Pension Fund – Global£ 1990 Commodity (Oil & Gas) 855.42

UAE-Abu Dhabi Abu Dhabi Investment Authority† 1976 Commodity (Oil & Gas) 773.00

China China Investment Corporation** 2007 Trade Surplus 746.73

Kuwait Kuwait Investment Authority† 1953 Commodity (Oil & Gas) 592.00

Singapore Government of Singapore Investment Corporation† 1981 Trade Surplus 344.00

Qatar Qatar Investment Authority† 2005 Commodity (Oil & Gas) 256.00

China National Social Security Fund† 2000 Trade Surplus 236.00

UAE - Dubai Investment Corporation of Dubai** 2006 Commodity (Oil & Gas) 183.03

Singapore Temasek Holdings£ 1974 Trade Surplus 173.40

Russia National Wealth Fund and Reserve Fund£ 2008 Commodity (Oil & Gas) 123.78

Australia Australian Future Fund£ 2006 Non-Commodity 90.01

Republic of Korea Korea Investment Corporation** 2005 Government-Linked Firms 84.70

Kazakhstan Kazakhstan National Fund† 2000 Commodity (Oil & Gas) 77.00

UAE-Abu Dhabi International Petroleum Investment Companyϭ 1984 Commodity (Oil & Gas) 68.18

UAE-Abu Dhabi Mubadala Development Company PJSC¥ 2002 Commodity (Oil & Gas) 67.10

Libya Libyan Investment Authority† 2006 Commodity (Oil & Gas) 66.00

Brunei Brunei Investment Agency† 1983 Commodity (Oil & Gas) 40.00

Malaysia Khazanah Nasional Berhard¥ 1993 Government-Linked Firms 34.93

Azerbaijan State Oil Fund of Azerbaijan£ 1999 Commodity (Oil & Gas) 34.25

New Zealand New Zealand Superannuation Fund£ 2001 Non-Commodity 20.49

East Timor Timor-Leste Petroleum Fund† 2005 Commodity (Oil & Gas) 16.90

UAE Emirates Investment Authority† 2007 Commodity (Oil & Gas) 15.00

UAE-Abu Dhabi Abu Dhabi Investment Council† 2007 Commodity (Oil & Gas) 15.00

UAE - Dubai Istithmar World* 2003 Government-Linked Firms 11.50

Bahrain Mumtalakat Holding Company£ 2006 Government-Linked Firms 11.14

UAE - Dubai Dubai International Financial Center** 2002 Government-Linked Firms 10.40

Oman State General Reserve Fund* 1980 Commodity (Oil & Gas) 9.15

Ireland Ireland Strategic Investment Fund¥ 2001 Non-Commodity 8.49

Oman Oman Investment Fund† 2006 Commodity (Oil & Gas) 6.00

Angola Fundo Soberano de Angola£ 2012 Commodity (Oil & Gas) 4.88

UAE-Ras Al Khaimah Ras Al Khaimah Investment Authority† 2005 Commodity (Oil) 1.20

Nigeria Future Generations Fund¥ 2012 Commodity (Oil & Gas) 1.07

Vietnam State Capital Investment Corporation¥ 2005 Government-Linked Firms 0.89

Kiribati Revenue Equalization Reserve Fund* 1956 Commodity (Phosphates) 0.52

São Tomé & Principe National Oil Account* 2004 Commodity (Oil & Gas) < 0.01

Total OIL & GAS 3,204.96

TOTAL TRADE SURPLUS 1,500.13

TOTAL OTHER 273.07

TOTAL AUM 4,978.16

£ AUM as of March 31, 2016† Estimate by SWF Institute as of 2 May 2016** AUM as of 31 December 2014ϭ AUM as of 30 June 2015¥ AUM as of December 31, 2015* Sovereign Investment Laboratory estimate of assets under management (AUM). SWFs of Morocco and Palestine have been added to the SIL list in 2015.


9


Against this background, a “Sovereign Wealth Fund”is an investment vehicle that is:

1 Owned directly by a sovereign government2 Managed independently of other state financial

and political institutions3 Does not have predominant explicit current pen-

sion obligations4 Invests in a diverse set of financial asset classes in

pursuit of commercial returns5 Has made a significant proportion of its publicly

reported investments internationally

This is the definition that the Sovereign InvestmentLab uses to identify the funds addressed in the bodyof this report and listed in Table 1 on the left.

The SIL definition of SWF turned out being quiterelevant this year. With the exception of the RussianNational Wealth Fund, the 35 funds included in ourlist weathered the storm quite well, with their capi-tal unscathed, or even increased, in spite of theheadwinds and market turbulences of 2015. Indeed,our rather restrictive requirements on the structuralcharacteristics of the funds identify those funds witha genuine penchant, and suitable governance, forinter-generational savings and long-term wealthaccumulation, which is the qualifying feature of aSWF. We also claim, without scientific pretense, thatthe fund’s resilience is somehow endogenous to itsstructural characteristics. A large, independent, andprofessionally managed SWF will strengthen onecountry’s fiscal policy, allow a better diversificationof its sources of revenues in case of a shock, and totap more successfully (and less costly) financial mar-kets in case of bond issuance. So paradoxically, in

case of a price slump, those countries with a full-fledged SWF are the least likely to divest the fund’sholdings to finance the domestic budget shortfalls.

The landscape of sovereign investment has changed inthe last years as many countries have launched orproposed new funds. We follow closely these develop-ments, as some of these new born sovereign invest-ment funds (SIF) may graduate in the future as fully-fledged SWFs, and enter our radar screens. Table 2tracks the evolution of SWF projects announced since2008, and lists the funds which came in operation,along with the missing requirements to quality forinclusion in SIL’s SWF list.

Some of the most interesting developments in thesovereign investment landscape are taking place inSaudi Arabia. Notably, the national wealth of thecountry is the coffers of the central bank, the SaudiArabia Monetary Agency, in the form of foreign-exchange reserves which have fallen to $635.5 bil-lion at the end of 2015, down 15% from a peak of$746 billion in August 2014, in an effort to main-tain the currency peg to the United States dollar.Also spurred by the crisis, a shift in power is takingplace recently in Riyadh, with the 30-year-olddeputy crown prince Mohammad bin Salmanlaunching the Vision 2030 plan, an ambitiousreform program aiming at weaning the Saudi popu-lation off oil and moving into diversified industries,in the process modernizing a state reliant on subsi-dies and patronage. The main dish of the program isthe stock market floatation of Saudi Aramco, thenational oil energy giant, that could value the busi-ness at as much as $2 trillion, and that would pro-vide the base for a big SWF which would drive the


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Table 2: New Sovereign Investment Funds Launched or Proposed Since January 2008

Country

Australia

Brazil

Canada

Chad

France

Gabon

Georgia

Date fund proposed officiallyDecember2012

June 2008

2014

November2014

2012

February 2012

December2013

Status, as of May, 2016

In September 2014 andDecember 2015, $1.5bnand $ 216ml withdrawn to finance the budget,respectively.

Planned but not yet approved.


BPIFrance has $25.8bn inassets under managementand an established organizational structure.Unlikely to become a SWF.


S

O

P

P

P

I

P

O

P

P

L

P

P

O

P

C

P

O

P

P

A

O

O

O

O

SIL Definition ItemsRationale for Fund, funding source, and discussionWestern Australia Future Fund was lanuched inDecember 2012. The purpose of this fund is to providefor the accumulation of a portion of the revenue from the State’s mineral resources and other moneyfor the benefit of future generations. The fund investsin overseas cash and bonds but not in equities. The AUM are USD 0.72 bn. Brazil established the Fundo Soberano do Brasil (FSB)in 2008 with the purpose to reduce inflationary impactof government spending, minimize real appreciation,and support Brazilian firms’ foreign investment. It wasfunded with $6.1bn initial capital and an additionalgovernment bond issue of $5.9bn.The provinces of British Columbia, NorthwestTerritories, Saskatchewan has set forth proposals to set up their SWFs.On 14 November 2014 the Government of Chadlaunched a call for proposal to support the establishment of a Sovereign Fund for the StrategicInvestment in Chad.BPIFrance was launched in late 2012 by PresidentFrancois Hollande and formed following a merger between CDC Entreprises, the former “sovereignwealth fund” Fonds Strategique d’Investissment, andOSEO. It operates as a public investment bank designed to support small- and medium-sized businesses and provide seed capital to companiesand industries with a high growth potential.Fonds souverain de la République Gabonaise (FSRG),created by the law 005/2012, was established to assist Gabon in developing new industries capableof generating enough revenue to replace oil revenues.The main missions of the FGIS are to contribute to Gabon’s economic development through the activemanagement of the State’s portfolio of investments,including disposal or consolidation of existing Stateinvestments, or stable equity investments in the capitalof companies with strategic importance; to guaranteeGabon’s financial independence and diversify its risksthrough the investment in capital of part of the State’s surplus revenues, especially oil revenues; to encourage investment by domestic or foreign companies in the national economy’s strategic sectors; and to enable equitable distribution of revenues from the exploitation of natural resourcesbetween the generations. The government of Georgia plans to establish 100%state-owned Sovereign Wealth Fund based on thePartnership Fund, created in 2011 to attract investmentsfrom abroad, and focus on co-financing projects in theenergy agriculture, real estate, and industrial sectors.Revenues for the fund will come mainly from dividendsfrom the state-owned rail, oil, electricity and gas businesses and profits of its own investments.Moreover, the Partnership Fund will be integrated intothe Strategic Development Fund and will be a sisterenterprise of the Sovereign Fund. The founders and100% owners of the Strategic Development Fund willbe part of the Sovereign Wealth Fund. According tothe government, the acting structure and functions ofthe Partnership Fund does not comply with the practiceand requirements of the similar types of internationalfunds. Also, the shares of the state own companiesare not protected from entrepreneurial risks.



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Country

Ghana

Hong Kong

India

Iran

Israel

Italy

Kenya

Luxembourg

Date fund proposed officially2010

January 2016

2008

2010

January 2012

2011

2014

April 2015


Both funds have invested infixed income securities. InApril 2014, a debate ignitedabout the use of the fundsto support the domesticeconomy.Planned but not yet approved.

The fund should be operational by 2016

Currently NDFI has reportedvalue of about $35 bn

The fund should be operational by 2017

First investment in May2012, total investment euro 1.3 bn


S

P

P

P

P

I

P

P

P

P

L

P

P

P

P

C

P

P

P

P

A

O

O

O

O

SIL Definition ItemsRationale for Fund, funding source, and discussionIn 2011 the government has launched two funds:Ghana Heritage Fund and the Ghana StabilizationFund with a minimum of 30% of state’s projected oilrevenues to be allocated. Initially funded with$69.2mn, by the end of 2013 the funds managed$450mn.The Government of Hong Kong Special AdministrativeRegion announced the establishment of the FutureFund with effect from January 1, 2016, with a view tosecuring higher investment returns for the fiscal reser-ves. "The Future Fund will be established administrati-vely and will remain an integral part of the fiscal reser-ves. It will have an initial endowment of 219.7 billionHK dollars (28.35 billion US dollars) notionally heldagainst the Land Fund. Thereafter, the governmentmay provide periodic top-ups for the Future Fund," agovernment spokesman said.On October 2015, the Minister of Finance has appro-ved setting up of the National Investment andInfrastructure Fund (NIIF).The National Development Fund of Iran, established in2011, has a dual mandate to serve as a quasi-deve-lopment bank and save oil revenues for future genera-tions. Since 2011, the Oil Stabilization Fund’s manda-te has been to stabilize the budget. After two enormous natural gas fields were proven offIsrael’s coastline, the government proposed a newSWF to be funded from the state’s future gas revenuesinvest in education and health and will help developIsrael’s high-tech export industries. The Israeli CitizensFund was approved by the Parliament on July 2014.Italy launched the Fondo Strategico Italiano with aseed capital of euro 4.4bn. FIS’s purpose is to acquireminority interests in promising, large Italian companies,strengthen infrastructure and strategic sectors for thenational economy. Signed partnerships and JV withQatar Holding, Russian Direct Investment Fund,Kuwait Investment Authority and Korea Investment.After the reorganization of Cdp, the fund changedname in Cdp Equity in 2016.In 2014 the Treasury drafted the National SovereignWealth Fund Bill indicating that dividend income fromState corporations and proceeds from privatisation ofgovernment corporations would build the fund aheadof oil production. The cash was to help set up thefund whose operations were initially set to rely onrevenues from oil that Tullow Oil Plc and Africa Oilexpect to start pumping after seven years. The sove-reign wealth fund will shield the economy from cyclicalchanges in commodity prices, build savings for futuregenerations and be used to invest in infrastructure.The European Investment Fund and and the SociétéNationale de Crédit et d’Investissement (SNCI) haveset up the Luxembourg Future Fund (LFF). This EUR150mn fund to which EIF contributes EUR 30m andSNCI EUR 120mn, will be deployed over a five yearperiod and will focus on innovative European SMEs.LFF aims to stimulate the diversification and sustaina-ble development of the Luxemburgish economy byattracting foreign entrepreneurs and early to laterstage innovative businesses into Luxembourg.


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Country

Mongolia

Morocco

Mozambique

Namibia

Panama

Papua New Guinea

Philippines

Russia

Date fund proposed officiallyJune 2005

November2011

2014

2015

May 2012

February 2012

2013

2011


A draft law on the proposedFuture Heritage Fund wassubmitted by the Presidenton 12 June, 2015.



Launched in May 2014,FAP reported assets worth$ 1,2 bn, primarily investedin fixed income securities.The LNG project has started its first exports in 2014, but the launch of the SWF is still pending.


S

P

P

P

I

P

P

P

L

P

P

P

C

P

P

P

A

O

O

O

SIL Definition ItemsRationale for Fund, funding source, and discussionGovernment announced plans to use proceeds from mining vast newly-discovered mineral deposits to set up SWF with an initial $600mn capitalization,but the struggle against declining mineral revenuesand inflation has slowed down the process. In 2009Parliament established the Human Developent Fund. The Moroccan Fund for Touristic Development (FMDT)was established on November 11th, 2011 by theMoroccan government and supported by the HassanII Fund for Economic and Social Development. As astrategic fund, FMDT is an instrument to mobilizenational and international tourism investment. It hascommitted capital of 15 billion dirhams (1.8 billionUSD). FMDT is capitalized two-thirds by governmentfunds and one-third by the Hassan II Fund (100%owned by the State). By attracting investors and partners, structuring and executing investment transactions, and supporting and managing investments within its portfolio, it will consolidate thefinancing of the Moroccan tourism sector.The creation of the Mozambique Sovereign WealthFund was announced in 2014. As a medium and long-term investment strategy, the establishmentof a SWF is expected to increase the country’s independence on international finance institutions.The creation of the Namibian Sovereign Wealth Fundwas announced in 2015. The Sovereign Wealth Fundcould act as a facilitator of infrastructure financing with the target of a return on invested capital after the construction period. Preservation of fund capital in real terms (inflation based) should be the targetinvestment return.Legislation passed to establish the Fondo de Ahorrode Panamà (FAP), a sovereign wealth and stabilizationfund, to be funded through Panama Canal revenues in excess of 3.5% of GDP. Prime Minister Peter O’Neill announced that one newliquefied natural gas (LNG) project would ultimatelycontribute over $30bn (ten times the country’s GNP)to a new SWF. The SWF bill was quickly approvedunanimously by PNG’s Parliament in February 2012. With an improving fiscal situation, the national government was considering establishing a sovereignwealth fund that it can use for various investments,the profits of which can be tapped for various development projects.The Russian Direct Investment Fund (RDIF) is a $10billion fund established by the Russian government to make equity investments primarily in the Russian economy.In all of its investments, the fund is uniquelymandated to secure co-investment that as a minimummatches its commitment – thus acting as a catalystfor direct investment into Russia. RDIF has investedand committed for this purpose over RUB 760 billion,of which RDIF alone invested RUB 70 billion and overRUB 690 billion came from co-investors, partners andbanks. RDIF also attracted over $27 billion of foreigncapital into the Russian economy through long-termstrategic partnerships. The fund was created in 2011under the leadership of the President and PrimeMinister of the Russian Federation and is managed by a highly qualified team of private equity investmentprofessionals with broad international and Russianexperience.


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Country

Rwanda

Saudi Arabia

Senegal

Syria

Tanzania

Uganda

UnitedKingdom

Zambia

Zimbabwe

Date fund proposed officially2012

2016

December2012

January 2012

September2012

October 2015

December2014

2014

November2013


Operation should start afterthe IPO of Saudi Aramco,planned in 2017.

Announced but not yetestablished or funded.

Expected to be launched in 2015 after the enactmentof a bill by the NationalAssembly.Approved but still not operating.

Announced but not yetestablished or funded.



S

P

P

I

P

P

L

P

P

C

P

P

A

O

O

SIL Definition ItemsRationale for Fund, funding source, and discussionThe Agaciro Development Fund (AgDF), is a sovereignwealth fund launched in 2012 by President PaulKagame. The government will annually be contributingRwf 5 billion (currently $6.7 million) from the nationalbudget towards the sovereign wealth fund.In April 2016, Deputy Crown Prince Mohammad binSalman launched the Vision 2030 plan including SaudiArabia plans to create a new sovereign fund to managepart of its oil wealth and diversify its investments.The Sovereign Fund for Strategic Investment (FONSIS)was created by Law 2012-34, voted on December27, 2012 by the National Assembly of Senegal andpromulgated on December 31, 2012 by the Presidentof the Republic of Senegal Mr. Macky Sall. FONSISwas incorporated on July 29, 2013 as a limited liability investment holding company with a board ofdirectors. Its initial share capital of CFA francs 3 billionis wholly held by the State of Senegal. FONSIS officially launched its operations in October 2013 with the appointment of its CEO.In 2012 Syria's Presidente annouced his willness toestabilish a sovereign wealth fund called the "NationalInvestment Fund". The objective of the fund is to support and stabilize the Syrian financial marketsthrough a long-term investment policy.The Natural Gas Revenue Fund (NGRF) is the propo-sed sovereign wealth fund of Tanzania. It will managethe revenue accrued from the sale of its natural gas.The fund will be managed by the Bank of Tanzania.Earlier 2015, Ugandan President Yoweri Musevenisigned the Public Finance Management Act (PRMA)2015 into law and established a sovereign wealth fund—called the Petroleum Revenue InvestmentReserve—to be managed by the Bank of Uganda.Chancellor of the Exchequer George Osborne confirmed plans for a new sovereign wealth fund for the North of England. The new fund would use taxreceipts from the exploitation of shale gas reserves in the North of England to invest in economic development projects in the region.Zambia plans to establish a sovereign wealth fund tospur investment outside the mining industry of Africa’sbiggest copper producer, President Michael Sata said.The fund will be set up through the IndustrialDevelopment Corp., which will oversee the southernAfrican nation’s state-owned companies. It will focuson stimulating investment in strategic non-miningindustries among others, thereby expanding the country’s investment portfolio and thus creating jobs.In Zimbabwe, the senate on 23 September 2014,passed the Sovereign Wealth Fund of Zimbabwe Bill(H.B. 6A, 2013) that will see the establishment of aZimbabwean SWF. The proposed SWF will be fundedfrom up to a quarter of mining royalties in respect ofgold, diamonds, coal, coal-bed methane gas, nickel,chrome, platinum and such other mineral that may bespecified, mineral dividends and government grants.

(S) Owned directly by a sovereign government(I) Managed independently of other state financial and political institutions(L) Does not have predominant explicit current liabilities(C) Invests in a diverse set of financial asset classes in pursuit of commercial returns(A) Has made a significant proportion of its publicly reported investments abroad

Source: Sovereign Investment Lab


14


reinvigoration of the Saudi economy. A likely desti-nation of this asset base is the Public InvestmentFund (PIF), established in 1971 to finance domesticdevelopment projects, to acquire stakes in state-owned enterprises and in a number of bilateral andPan Arab corporations. While a $2 trillion SWF(more than double the size of largest in operation,Norway’s GPFG) looks definitely a long shot, thenew fund could change the way tens of billions ofdollars are invested and affect some of the world'sleading financial institutions, particularly in theUnited States, where the bulk of Saudi Arabia's for-eign assets are managed.

In a similar vein, the government of Hong Kong inDecember 2015 has announced the establishment ofthe Future Fund with effect with the goal to securehigher investment returns for the fiscal reserves untilthen conservatively managed by the Hong KongMonetary Authority. However, the Future Fund,which starts with an initial endowment of 219.7 bil-lion HK dollars, will most likely enjoy limited inde-pendence and remain tightly controlled by theTreasury.

India has been taking seriously the issue of establish-ing a SWF for a long time. In 2008, a government-appointed panel of experts recommended setting upa SWF to earn higher returns on India’s $300 billionforeign reserves. However, the proposal did not flydue to opposition by India’s central bank. In late2013, the government proposed the floating of anew company — the India Overseas Investment

Corp Ltd (INOIC) — investing in natural resourcesoverseas to create long-term resource security with-out drawing on the forex reserves that will continueto be managed by the Reserve Bank of India. DuringOctober 2015, the investment division of thefinance ministry finally approved setting up of theNational Investment and Infrastructure Fund(NIIF), born to fill the glaring infrastructure gap inpart by attracting foreign investors. The fund, whichis likely to become operational during 2016, willreceive an initial allocation of $300 as seed money,which, in turn, will be used to lend equity/quasi-equity/debt support to commercially viable green-field and brown-field infrastructure projects, includ-ing some stalled ones. The fund is also mandated toprovide equity/quasi-equity support to non-bankingfinance companies and financial institutionsinvolved in infrastructure financing, and to nation-ally important projects in core sectors.

We do not record new entries in the SIL list. Thefunds that became fully operational in 2015, such asthe Luxemburg Future Fund, the NIIF, and theUganda Petroleum Revenue Investment Reserve, donot meet our requirements. While we observe somerecent announcements in Chad, Kenya,Mozambique, Namibia, Tanzania, and Zambia, wenotice also that projects to launch a SWF in SierraLeone, Slovenia, South Africa, and Greenland havebeen kept in cold storage as their governments haveso far failed to either provide funding, or signal aserious commitment to the funds’ long-term devel-opment and survival.


15

Activity In 2015, we observed 22 SWFs completing 186equity investments with a total publicly reportedvalue of $48 billion. This represents a 40 percentincrease in the number of transactions we reportedin 2014 and a 30 percent decrease in investmentvalue. The decline in aggregate investment value iseconomically meaningful: the total value of report-ed investments for 2015 is the lowest since 2010.Indeed, last year’s headwinds severely affected theglobal economy, swaying but not halting sovereigninvestment.

The oil crash certainly wins the prize for the mostimportant event of 2015 affecting SWF investmenttrends. After the initial price shock that started bymid-2014, crude oil continued to slide, reaching his-torical lows by the end of 2015. Prices saw a contin-uing pressure driven both by both supply- anddemand-side shocks. A shift in consumption pat-terns and energy efficiency is affecting demand,while supply has increased both due to the “shalerevolution”, the lifting of sanctions on Iran, andOPEC’s failed attempts to discourage competition.At the time of writing, oil prices have somewhatrecovered — and future markets are currently sug-gesting a moderate increase in prices for 2016 and2017. Nevertheless, a wide consensus is emergingthat the global economy is entering a new age ofexcess supply in hydrocarbon markets.

The new energy price scenario worsened themacroeconomic outlook of producing countriesacross the board. The Gulf Cooperation Council(GCC) predicted fiscal surplus turned into a $162billion deficit in 2016, or 10 percent of the region’s

gross domestic output. Pressed by tighter publicfinance conditions, many countries (notably, SaudiArabia, Qatar, and Oman) launched contrac-tionary fiscal policies of spending cuts (primarilysubsidized energy) and tax increases. However,austerity measures typically undermine politicalconsensus, and therefore some governments optedto issue public debt to soften budget constraints.Across the Middle East, high credit ratings, lowlevels of outstanding debt, and low interest ratesallowed debt issuance in international and domes-tic (primarily sukuk) markets.

Last in the pecking order of fiscal policy tools, gov-ernments tapped sovereign assets, raising revenuesby privatizing firms, using foreign exchangereserves and sovereign wealth funds, broadlydefined. Stabilization, “rainy days” funds explicit-ly designed to isolate the budget from commodityprice volatility provided a first buffer. For example,the Russian Reserve Fund, in the course of 2015,liquidated assets worth more than $20 billion tocover the budget, and, reportedly, it runs the riskof complete exhaustion in a few years if oil pricesremain at the current levels. The drop in revenue

SWF Investment in 2015

Bernardo Bortolotti, SIL, Bocconi University, and Università di TorinoVeljko Fotak, SIL, Bocconi University, and Buffalo UniversityGiacomo Loss, SIL, Bocconi University

Despite the oil crash, SWFs’ equity investment continued, albeit at lower pace, with more, but smaller deals on average


for oil producing countries is revealing that allgovernment funds have a stabilization mandate, ifnot as an explicit primary objective, at least as asecondary goal. In a few cases, cash-constrainedgovernments called in the assets of sovereignwealth fund, i.e. the fund preserving the wealth ofthe nation for future generations over and aboveshort-term stabilization needs. SWFs are indeed theliquidity providers of last resort, as the outrightdivestiture of a portfolio designed with a long hori-zon may entail capital losses. However, during2015, Qatar, a country lacking a full-fledged stabi-lization fund, divested some stakes as part of aportfolio reshuffle driven by oil concerns. Mostnotable were two divestments from constructionfirms, the German Hochtief and the French VinciSA, and property sales in London for an aggregatevalue exceeding $1.5 billion. QIA did not disclose

16

the effect of these sales on fund’s balance sheet, butthey could have a bearing on a difficult yearalready marked by the abysmal losses inVolkswagen and Glencore. Norway is anotherexample of a country with a commodity-based sov-ereign weak fund and without a proper stabiliza-tion fund, but the fiscal rules of its GPFG allowredemptions to absorb negative price shocks. InOctober 2015, the Norwegian governmentannounced that, for the first time, it would with-draw $25.2 billion cash from its sovereign wealthfund to cover budget holes and to stimulategrowth. Algeria exemplifies a different approach,as it has prudently made fiscal stabilization themain goal of its $50 billion Fonds de Regulationdes Recettes, directly managed by the central bank,and has apparently weathered the storm betterthan most of its peers.


Publicly available data for direct SWF equity & real estate deals, joint ventures and capital injections. Source: Sovereign Investment Lab, Bocconi University

Figure 1: Direct SWF Investments Since 2000Value (US$bn)Number

300

250

200

150

100

50

0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

27

1.820

0.5

34

1.3

39

2.1

53

5.7

93

11.5

92

25.2

138

77.7

173

111.7

158

88.2

210

47.6

250

82.6

270

58.4

173

49.3

133

68.6

2015

186

48.0


17


The media is full of reports suggesting that SWFsare dumping assets to meet their budgetary needs,and that this is hurting markets. Estimates and pro-jections abound, but real data are scant. Given therelevance of the issue, this year we have decided totrack both partial and complete direct equity divest-ments by SWFs. We find 70 transactions in 2015involving a sale of a stake by a SWF, for a total of$22.46 billion. Somehow, surprisingly, we find thatless than half of divestments by value (approximate-ly $9 billion) originates from commodity-fundedSWFs; most redemptions, by value, originate fromSingapore and China. Amongst oil-basedeconomies, Kazakhstan pulled significant resourcesout of its SWF.

In terms of sectors, divestments are mostly con-centrated in the financial and real estate segments,which have seen the bulk of SWF activities over theprevious years. Of those, 14 divestments worth$10.2 billion are from financials. A portion of those(5 divestments worth $7.3 billion) are due to theChina Investment Corporation selling stakes indomestic financial institutions. Somehow puzzling,while CIC is selling stakes in domestic financial

institutions, we have seen some large investmentsin the domestic financial sector by its subsidiaryCentral Huijin. One possible interpretation is that ofa lack of coordination between funds that used tooperate independently and that have recently beenintegrated. More likely, it is a sign of China’s gov-ernment using the funds as providers of liquidity forfinancial firms that have been recently partially-pri-vatized, in a deliberate attempt to provide criticaltrading volume and jump-start the development offinancial markets. The remaining divestments fromthe financial sector are due to various funds sellingforeign stakes, presumably in an attempt to diver-sify further their portfolio allocations.

The two funds from Singapore, GIC and Temasek,have sold stakes from 17 firms, for an aggregatevalue exceeding $4.4 billion. In general, the divestments we observe seem toindicate more a tendency to rebalance and diversi-fy portfolios that, over the years, have become over-reliant on financials and real estate, rather than anattempt by SWFs constrained by low commodityprices to divest holdings to create liquidity to sup-port domestic budget deficits.

Did SWFs Sell Off in 2015?

China

Kazakhstan

UK

Singapore

Australia

USA

Germany

Malaysia

France

Others

4.00

1.40

1.21

0.61

0.43

0.450.77

8.01

Source: Sovereign Investment Lab, Bocconi University

3.07

2.51

China

Singapore

Kazakhstan

UAE

Qatar

Malaysia

Oman

Australia

Norway

Others

4.46

1.71

0.49

0.25 0.180.22 0.25

8.19

Figure 2: SWF Disinvestments by Home (a) and Target (b) Country, 2015 (US$bn)

4.00

2.71

(a) (b)


The effect of the oil price shock on SWF behaviourhas thus been significant, but indirect. The low pricescenario is a sea change for producing countries,and they reacted using the entire spectrum of policytools to stabilize their resource-dependenteconomies, including SWFs. Investment flows areadapting to this new regime, where a lower value ofexports reduces the pace of accumulation of foreignexchange reserves, capital allocations to the funds,and ultimately equity investments at home andabroad. The sizable reduction of SWF investmentobserved in 2015 is thus an economic consequenceof the oil shock.

Yet, largely, the reaction by SWFs has been moremuted than most observers had expected. While thevalue of SWF investments has declined, the dealflow has not dried up. Total assets under manage-

18

ment, meanwhile, have actually increased, albeit ata much slower pace than what we have been usedto. In some respect, host countries have shownrestrain by not treating SWFs as pure rainy-dayfunds. While domestic budget smoothing is certain-ly one of the objective of most, if not all, SWFs,another primary function of SWFs is to provide asource of diversified revenues for countries overlydependent on commodity-based income. At thistime of turmoil, all commodity producers are seek-ing ways to diversify their revenue stream — see,for example, the attempts of Saudi Arabia to reduceits dependency on oil exports. Selling off the diver-sified assets managed by a domestic SWF wouldhave the opposite effect, by increasing dependenceon commodities. Tellingly, Saudi Arabia’s plan todiversify income streams includes, amongst otherprovisions, plans to privatize a stake of its national



Figure 3: SWF Investments by Source and the Price of Oil, 2000 - 2015

70

60

50

40

30

20

10

0

120.00

100.00

80.00

60.00

40.00

20.00

0.00

WTI Spot PriceQuarterly Average

Non-Commodity SWFsCommodity SWFs

US

$bn

US

D p

er Barrel

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015


19

oil company Saudi Aramco, and to use the proceedsto establish a new SWF with the mandate to investproceeds to diversify revenue streams. Hence, para-doxically, lower commodity prices in the most oil-dependent economy are leading to an increase inassets under management by a SWF, in contrast tomost predictions.

Interestingly, the new “age of plenty” in commodi-ties markets could have redistributive effectsbetween exporting and importing nations, and dif-ferent implications for commodity as opposed tosurplus, non-commodity SWFs. While low pricesstrain the fiscal position of exporters and theirgrowth prospects, they lower energy costs for coun-tries that are net importers, strengthening the com-petitive position of local businesses. One wouldexpect a boost in exports for large energy consumersespecially amongst emerging countries, leading tosignificant accumulation of reserves, and an increasein the pace of sovereign investment.

Yet, investment flows in 2015 do not support thisview. As Figure 3 shows, commodity and non-com-modity SWFs moved in tandem, both reducing theirequity investments by about 10 per cent relative tothe previous year. Most likely, the ongoing disrup-tion occurring in emerging markets, notably China,where growth continues to decelerate, dwarfed thepositive effect of a reduced energy bill.

In nutshell, 2015 SWF investment data are funda-mentally the outcome of the two big and related fea-tures of the regime often referred to as the “newnormal”: the combination of subdued global eco-nomic growth and low energy prices.

Despite the oil price collapse and adverse economicconditions in emerging countries, the number ofSWF deals surged, even if investment value declined.Consequently, relative to 2014, we report a dramat-ic decrease in the average deal size, reaching $355.3million this year.

Largely, this drop in average deal size is due to thepaucity of “mega-deals”. While 2014 saw severaldeals exceeding $4 billion in size, we document noinvestments in the “over $4 billion” range in 2015.The scarcity of large deals and the drop in averagedeal size might be related to the decline SWF invest-ments in the real estate sector, which traditionallyhas accounted for a large portion of the dealsexceeding $1 billion in value. But it also witnesses ashift towards a more conservative strategy, mitigat-ing investment risks by diversification, co-invest-ments, and careful sectoral allocation.

SectorsCall it an insatiable appetite for safe assets. With 53publicly reported deals worth $27.5 billion, SWFinvestment in real estate, hotels and tourism facili-ties, infrastructure, and utilities accounted for 57 percent of investment value and 28.5 per cent of totalinvestments. As Figure 4 shows, the share of acquisi-tions in safe assets has steadily increased during thelast decade to become the sector of choice. Why isthis asset class the place to be for SWFs in 2015?Cheap valuation in developed economies, the desireto substitute zero-yield sovereign debt with low riskassets, inflation hedging in a QE environment, andsimply portfolio diversification are all contributingfactors, with special reference to real estate.



Exposure to real estate has been a widely researchedtopic recently and most academic studies concludethat adding real estate improves the risk-return profileof a mixed-asset portfolio. Real estate returns are alsoa natural inflation hedge, as rents tend to be linked toinflation. Even if estimates of optimal allocations varystrongly, a consensus is pointing at an optimal alloca-tion around 15 percent of total portfolio value, with apreference afforded to direct ownership of buildings,and non-listed real estate funds, displaying lower cor-relation with returns of equities and bonds. The diver-sification potential of real estate is therefore large, andseveral SWF’s are gradually adjusting their exposureto this asset class. The long-term danger, of course, liesin the lower liquidity of real estate assets — as thenext, inevitable, crisis might yet reveal. But, for now,SWFs are following the herd.

20

Indeed, since the financial crisis, we have observedan increasing interest in real estate by SWFs and lastyear was not an exception. With 31 publicly report-ed deals worth $23.44 billion, real estate represents23 percent of transactions and 39 percent of totalreported investment value in 2014, winning theprize for the most attractive sector for SWFs by bothmeasures of activity. The aggregate value of invest-ments in brick-and-mortar slid significantly relativeto last years’ all-time high, even if we report a 20 percent increase in the number of deals.

The noteworthy features of 2014 real estate deals bySWFs are confirmed also this year: a high concentra-tion of large acquisitions in commercial property indeveloped countries, primarily United Kingdom,USA, and Australia, and declining appetite — with


* Safe Assets category includes Infrastructure & Utilities, Real Estate and Restaurants, Hotels, Motels sectors.


Figure 4: SWF Investments in Safe Assets,* 2006 - 2015

120

100

80

60

400

20

0

2006 2007 2008 2009 2010 2011 2012 2013 2014

Total Safe AssetsInvestmentsOther SWFsInvestments

17.6

25.2

67.9

77.7

96.7

111.7

78.2

88.2

7.6 9.8 15.0 10.0 10.4 17.2 17.3 16.932.9

37.2

47.665.5

82.7

41.1

58.7

32.4

49.335.8

68.7

2015

27.6

20.5

48.1


21

few exceptions — for greenfield projects in emerg-ing economies. The total amounts invested in the USand the United Kingdom markets are $7.3 and $3.6billion, respectively, accounting for more than a halfof the total investment flows in the sector. Vibrantcities with a diversified economy, economic power-houses hosting high growth firms and the most cre-ative entrepreneurs are in high-demand, especiallyfor the hefty returns in the office and commercialproperty segment of the industry. As we will see,Milan and the most attractive Australian big citiesentered the SWFs’ radar screen in 2015.

As in previous years, investment activity is highlyskewed by a few, hyperactive funds. The usual sus-pects, GIC, QIA, and Norway’s GPFG, account for60 per cent of deal value. GIC wins the prize for thelargest real estate investor in 2015, with a twist: whilemaintaining a strong focus on developed economies,GIC also diversified geographically its portfolio byinvesting in some development projects in emergingmarkets. GIC completed the $3.6 billion acquisition— already announced last year — of IndCor, aChicago-based company owning and operating 117million square feet of high-quality industrial proper-ties in key markets in the US, from the private equityfirm Blackstone, closing one of the largest propertydeal in the history of SWF investments. In developedmarkets, GIC partnered with the Exeter Propertygroup for joint investments in logistics properties inkey European distribution hubs. As to emerging mar-kets, GIC reached into India. First, it launched ajoint-venture with DFL Ltd., a premier Indian realestate company, for two home development projectsin Central Delhi. Second, it acquired a 50 per centstake in Tishman Speyer’s WaveRock office project in

Hyderabad, a vibrant new city and a destination ofchoice of global brands, as exemplified by Googlebuilding its largest foreign facility. Finally, GIC part-nered with Brigade in a joint venture for the develop-ment project in Whitehead, one of Bangalore’s majorIT hubs. GIC’s rejuvenated interest towards emergingmarkets is also witnessed by the acquisition of a largestake in Franshion Properties, a developer whose bulkof business is in mainland China.

QIA, after the real estate binge in 2014, scaled downsignificantly its new investments in property to atotal of $4.4 billion, but it maintained its penchantfor trophy properties, snapping a handful of highprofile deals. With an additional investment of $2.8billion, QIA completed the acquisition of CanaryWharf, the East London skyscraper cluster, home ofone of the world’s leading financial districts. In late2014, QIA joined forces with a strategic partner,Brookfield Property Partners, a Canadian fund man-ager, to launch a successful takeover bid ofSongbird, the majority owner of Canary Wharf. In2015, this joint venture squeezed out the remainingshareholders and on April 23 all Songbird shareswere delisted from the London Stock Exchange.With a total amount invested of $10.9 billion, theacquisition of Canary Warf is the largest deal in thehistory of the United Kingdom property market.


Low-yields pushed investment in safe assets, primarily in real estate in developed economies


Thanks to another landmark two-stage buy-out,QIA became the sole proprietor of Porta Nuova,one of the most prestigious city-center, mixed-usedevelopments located in Milan, Italy. In May 2013,QIA, through its wholly-owned subsidiary QatarDiar, acquired a 40 percent interest in the invest-ment funds which own the Porta Nuova develop-ment. In February 2015, QIA increased its partici-pation to 100 percent, after reaching an agreementwith the initial investors that started the develop-ment of the project with an estimated market valueof $2 billion. Last year’s investments were not con-fined to developed markets as QIA also entered ajoint venture with Singapore-based The Ascott, oneof the world's largest international serviced resi-dence owner-operator. The new $600 million fundwill invest with a focus on Europe and Asia-Pacific,expanding presence in key gateways cities.

The Norwegian GPFG, the largest SWF in theworld, started to invest in real estate in 2010, andgradually built up a portfolio of property worth$25 billion in late 2015. In December 2014, theMinistry of Finance announced plans to review itsrules imposing an upper limit of 5 percent, and inlate 2015 Norges Bank recommended to raise thetarget for real estate investments in the GPFG to 10percent. Given the current assets under manage-ment, this would imply a target real estate portfolioof $90 billion, that will be gradually reached bydivesting its fixed income portfolio. GPFG invested$5.3 billion in real estate this year, primarily in theUS and the United Kingdom. In the US, the largestinvestment was a $1.56 billion acquisition of elevenproperties in New York near Hudson Square,Midtown South from Trinity Wall Street Episcopal

22

Church, owning 215 acres in Manhattan since1705, and the acquisition of a 45 percent stake in11 Times Square. GFPG also tapped commercialproperty located in Brannan 888 in San Franciscoin partnership with TIAA-CREF, and in LondonQueensberry House at 39 Old Burlington Street inLondon.

According to recent official statements, CIC is alsochanging strategy, diversifying foreign investmentsaway from stocks and bonds and into assets includ-ing infrastructure and property to fit its long-terminvestment horizon. In 2015, the third-largest fundby assets stepped up direct equity investments inreal estate in advanced economies. CICInternational, the manager of the overseas assets ofthe fund, acquired trophy assets in Australia worth$1.8 billion from Investa, the Morgan Stanley RealEstate investment platform. On the property front,CIC in one swoop has become a major investor inthe Australian office market, buying stakes in ninebuildings across Sydney, Melbourne, and Brisbane.In Europe, CIC launched a winning joint bid withParis based AEW Europe for a portfolio of tenshopping malls in France and Belgium sold by UScommercial real estate group CBRE GlobalInvestors.

Finally, in one of the largest industrial real estatetransactions of the year, a joint venture of ADIA andthe PSP Investments, one of the largest publicCanadian pension investment managers, closed onthe acquisition of a 58 million square foot portfolioof core industrial properties owned and managed byindustrial property specialist Exeter Property Groupfor $3.15 billion.



23

Hotel and tourism facilities have peculiar character-istics, but still share some risk-return properties ofreal estate, so it makes sense to include them in thesame bucket of safe assets. After a quiet 2014, lastdeal flow in hotels resumed strongly, with 12 report-ed acquisitions for a total investment value of $4.5billion. Interestingly, SWF investment in tourismfacilities is frequently a tale of two funds, QIA andADIA, and 2015 was not an exception. In fact, QIAadded to its collection of London luxury hotelsClaridge’s, The Berkeley, and the Connaught fromBarclay brothers, whose exit from the businesscomes after four years of legal wrangles.Constellations Hotels Holding, the specialized armof QIA, in a sequence of bold moves, took controlof Coroin, an Irish based company set up in 2004 tobuy hotel trophy assets with cheap debt, involvingalso Colony Capital, a US investment firm with

strong relations and co-investments with QIA,including the Fairmont Raffles Hotel, and Miramax,the Hollywood film studio. The other specializedQIA’s subsidiary, Katara Hospitality, after inking in2014 the deal for The Saint Regis’ in Rome, markedanother landmark acquisition in the eternal citywith the purchase of the world famous WestinExcelsior. ADIA, a usual heavy spender in luxuryhotels, paid $1.2 billion to acquire a 50 percentstake in Hong Kong Grand Hyatt, RenaissanceHarbour View, and Hyatt Regency Tsim Sha Tsuifrom New World Development, a Hong Kong listedfirm owned by millionaire Cheng Yu-tung, puttingan end to his attempts to arrange an IPO, aborteddue to weak market conditions. Taking advantageof the strong depreciation of the local currency,ADIA snapped another deal in the sector by joiningforces with Brazil’s Iron House Real Estate, owned



Figure 5: Value of SWF Investments by Target Sector, 2006 - 2015 (US$bn)

120

100

80

60

40

20

0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

77.7

25.2

48.0

111.7

88.2

47.6

82.6

58.449.3

68.6

Real Estate

Banking, Insurance, Trading

Infrastructure & Utilities

Restaurants, Hotels, Motels

Retail

Healthcare, Medical Equipment, Pharmaceutical ProductsPersonal & Business Services

Business Equipment

Construction & Construction MaterialsCommunications

Transportation

Other


by the family-owned company Grupo CornelioBrennand, to invest in the first Four Season hotel inthe country, said to open in 2017 in Sao Paolo’s keybusiness district. Finally, after placing to ADIALondon Edition property in 2014 the next yearMarriot International sold to the Abu Dhabi fundthe Miami Beach Edition hotel for $230 million.

In relative terms, 2015 is a record year in infrastruc-ture investment, as SWFs completed 12 sizable dealsworth $6.6 billion. The amount invested in infra-structure increased eleven times with respect to2014, reaching an all-time high. Why have SWFsbecome recently so bullish on infrastructure? Themost convincing answer is that all the largest fundsare progressively broadening their mandate to investin alternative asset classes, shifting allocation fromlow yield (in some case zero or even negative) gov-

24

ernment bonds to safe assets, including infrastruc-ture. A long-term horizon, a high tolerance for illiq-uidity, a preference for stability in cash flow makeSWFs (together with pension funds) the most suit-able investor type for this asset class. Indeed, thecombination of lower expected returns (due tolower systemic risk) and higher dividend growthrates is a clear driver of SWFs’ demand for this assetclass, and of the consequent rise of infrastructureasset valuation.

Infrastructure investment is certainly not risk free,especially in not-listed targets. In addition to con-ventional operational, market and financial risk,SWF would face idiosyncratic political risks (e.g.,changes in government policies, political backlashagainst privatization), regulatory risks (e.g., chang-ing regulatory or PPP legal framework), and man-



Figure 6: SWF Investments by Sector in Domestic and Foreign Markets, 2015

Domestic$2.8 billion

Foreign$45.3 billion

10.9%14.1%

10.1%

10.0%

72.2%

5.6%

2.1%3.9%

1.6%0.2% 5.6% 8.7%

5.7%

4.8%

4.0%1.3%

1.2% 0.9%

1.2%

35.9%

Real Estate

Banking, Insurance, Trading

Infrastructure & Utilities

Retail

Restaurants, Hotels, Motels

Healthcare, Medical Equipment, Pharmaceutical ProductsPersonal & Business Services

Business Equipment

Construction & Construction MaterialsCommunications

Transportation

Other


25


agement and governance risk (e.g., corruption oroutright expropriation). Yet, the most severe risklying in wait is that of low liquidity, especially dur-ing market downturns. These risks matter inexplaining why institutional investors have allocat-ed less than one percent of their portfolio to infra-structure, an asset class valued approximately $20trillion globally.

Another challenge is to find investable projects ofsufficient quality and scale, but in 2015 SWFs foundin Australia a deal cut out for them. A consortiuminvolving the specialized infrastructure arms ofADIA and KIA, Tawreed Investment and WrenHouse Infrastructure, respectively, along with theCanadian Pension Fund CDPQ and local infrastruc-ture management companies, won a bid for a 99-year lease of TransGrid, a large part of New SouthWales electricity network. Reportedly, the race wastight, and the consortium placed a winning bid of$7.44 billion against the Chinese State Grid, theleading contender. The NSW premier Mike Bairdannounced that every dollar raised would be rein-vested in greenfield infrastructure, stretching fromroad, to hospital, schools, and cultural facilities. Weconjecture that we will see more privatization trans-action of this sort, with cash-stripped governmentsselling highly priced concessions to raise revenues tofinance a new cycle of long-term investment proj-ects. SWFs, co-investing with strategic partners andlike-minded investor, will leverage up their financialpower, mitigate political and regulatory risks, andharness stable returns.

A quite similar deal in another hemisphere is the$2.7 billion acquisition of E.ON’s Spanish and

Portuguese integrated energy business by a consor-tium made of the above-mentioned KIA’s WrenHouse and Macquarie. Aiming to cut its debt loadand to rake cash for new investment projects, E.ONretreated from southern Europe, passing the torchto specialized funds lured by the guaranteed cashflows regulated business offer in times of zero-inter-est rates. This acquisition did not satiate KIA’sappetite towards Spanish utilities. In a somewhatrelated move, Wren House teamed up with formerstate monopoly Gas Natural subscribing $550 mil-lion capital increase at Global Power Generation, asubsidiary planning to build generation capacity inLatin America and Asia.

Indeed, emerging market infrastructure is in highdemand, and QIA took the opportunity to build alarge stake in HK Electric Investment, the localpower utility operated by Power Assets Holding,owned by Hong Kong richest man, Li Ka-shing. Inspite of the great deceleration, global investorsincluding SWF are still eyeing investment opportuni-ties in the higher growth spots in Asia.

Since the financial crisis, investments in the financialsector have progressively lost momentum, both inabsolute and relative terms. After last year’s record

Once the white knights of Western financial institutions, SWFs are today heavily investing in banks of emerging economies


low, deal flow in 2015 has reached a plateau. Thetotal reported investment value in the sector is $6.9billion thanks to 28 acquisitions almost entirelycompleted in emerging markets. In relative terms,we observe a slight increase of activity, with anuptick from 10 to 15 percent by value and numberof deals. However, we believe that the overall con-solidation of this trend suggests that a long-playedgame is over. SWFs have ceased being the whiteknights of struggled Western financial institutions,and used their muted allocation to the financial sec-tor to invest in banks of emerging economies, inorder to gain exposure to the sector’s recovery incountries with higher growth potential.

The declining interest towards banks is a revealingfeature of the headwinds affecting the sector. Underthe bail-in regime prevailing in Europe and devel-oped countries, it is much less likely that if bankshares slump, government would be willing to bethe investor of last resort and rescue them again iffresh capital is needed. This is a key differencebetween now and the financial crisis era. Indeed, ifprivate sector involvement is the norm, then SWFsare no longer willing to holding the bag alone, espe-cially at times of tight budget constraints.

In 2015, target countries of choice, notablyTurkey, China, and India, account for 90 percentof investment value, a revealing figure of SWF’sappetite towards the financial sector of emergingcountries. The largest deal of the year, the $2.9 bil-lion acquisition of Turkish Finansbank by QatarNational Bank (QNB) from the National Bank ofGreece warrants attention for its implications onEuropean financial stability. In official statements,

26

QNB, half-owned by QIA, has declared its ambi-tions to become the largest bank by asset in theMiddle East and Africa by 2017, and then a glob-al banking icon by 2030. After snapping asequence of acquisitions in the region, includingSociete Generale’s Egyptian business and pan -African lender Ecobank International, in late 2015QNB launched a successful bid for Finansbank, thefifth largest Turkish bank by assets. National Bankof Greece, required to plug a capital shortfall afterlast ECB stress test, will use the proceeds to payback 2 billion euros of aid it received from Greece’sbank rescue fund by issuing contingent convertiblebonds, saving about 150 million euros annually.The deal ultimately benefits a heavily distressedEuropean institution with a similar effect to anold-style bailout, but the logic of the deal is com-pletely different. By acquiring a foreign subsidiary,Qatari investors are betting on an emerging coun-try, while providing badly needed liquidity to aGreek institution. A win-win solution, and a proofof the stabilization role that sovereign investor arestill playing in testing times.

Another landmark — and with hindsight — contro-versial deal in emerging markets is the sale of 1.1billion new Hong Kong-listed shares of CITIC,China’s largest brokerage house, to a consortium often investors, including KIA, Temasek, GIC, andMalaysia’s Khazanah Nasional Bhd. Pushed by thestock market boom, Chinese brokerages haverushed out glowing results, and attracted investors.A few weeks before the August crash, CITIC placedshares at a 19 percent discount to a large group ofdomestic investors, and to the above-mentionedpool of SWFs, committing a total of $1.3 billion for



27

a combined stake of 3.3 percent. CITIC said that itplanned to use the money “to develop marginfinancing, securities lending, equity and fixedincome derivatives, forex and commodities prod-ucts”, but market disruption that followed took thecompany by surprise. The stock market crash had adramatic impact on the CITIC’s share that lost 40percent of value and as we write looks far awayfrom recovery. Apparently, sophisticated investorssuch as SWFs burned their fingers not differentlyfrom the millions of Chinese small, retail investorswho recently opened their trading accounts.

With slowing GDP growth, shrinking bank profitsdue to bad loans, and a stock slump erasing in a fewmonths $5 trillion, a revival of China InvestmentCorporation (CIC)’s activism in the domestic bank-ing industry is far from surprising. After a quiet

2014, CIC’s domestic arm, Central Huijin, cameback strongly to strengthen all “Big Four” state-owned banks also as a strategy to prop up thedomestic stock markets of “A-shares”. Reportedly,the fund invested $3.8 billion in acquisitions involv-ing the Industrial and Commercial Bank of China(ICBC), the Bank of China, the Agricultural Bank ofChina, the China Construction Bank (CCB), and theChina Everbright Bank. As in 2013, Temasek fol-lowed suit, by raising its stake in ICBC to 10 percentof capital. By amassing stakes worth almost $18 bil-lion in Big Four, Temasek is the biggest foreigninvestor in Chinese banks, a risky strategy that in2015 severely dented its portfolio performance.Central Huijin provided additional support toShenwan Hongyuan, another large domestic assetmanager in doldrums. With this additional round ofacquisition, CIC has further strengthened its posi-



Figure 7: Value of SWF Investments by Target Region, 2006 - 2015 (US$bn)

120

100

80

60

40

20

0

2006 2007 2008 2009 2010 2011 2012 2013 2014

25.2

77.7

111.7

88.2

47.6

82.6

58.4

49.3

68.6

2015

48.0

Europe

Asia-Pacific

MENA

Non-Pacific Asia

Latin America

Sub-Saharan Africa

North America


28


tion of largest shareholder in Chinese banking sys-tem. CIC’s financial investments abroad are limitedthe partnership with the Italian F2i, a private equityfund specialized in infrastructure.

At a broad level, recent SWF investment trends sug-gest that a significant sectoral portfolio reallocationis underway. While — unsurprisingly — not a singledollar is invested in the energy sector and safe assetsgain ground, new sectors enter the radar screen. Thesemiconductor industry has seen a lot of merger andacquisition activity over the past 12 months, as aonce high-growth sector is coming to terms with theneed to boost growth and cut costs. CIC, with itssubsidiary Jian Guang Asset Management, seizedinvestment opportunities in this consolidationprocess by acquiring control of the radio-frequency,power amplifier subsidiary of NXP Semiconductor,

the Dutch chip maker, forced to divest partly itsholding for antitrust reasons after the takeover ofthe US chip manufacturer FreeScale. The number ofChinese buyers participation in IT auctions is stag-gering, and CIC snapped one of its largest deal inthis sector, in the wake of a renewed interest bySWFs of all stripes (see article page 61).

In a similar vein, innovation and on-line shoppingare reshaping the retail industry, and companiesare struggling to cut costs with targeted invest-ments generating economies of scale. This restruc-turing process is attracting interest by SWFs andlike-minded investors. Temasek, a limited partnerof MBK, one of the largest north Asia focused pri-vate equity group, joined forces with two largeCanadian and Korean public pension funds, withMBK acting as the managing partner and investor,


Figure 8: SWF Investments in OECD and Non-OECD Markets, 2006 - 2015 (US$bn)

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

02006 2007 2008 2009 2010 2011 2012 2013 2014

25.2

29.3%

70.7%

77.7

40.2%

59.8%

111.7

34.0%

66.0%

88.2

50.2%

49.8%

47.6

50.0%

50.0%

82.6

47.6%

52.4%

58.4

41.0%

59.0%

49.3 68.6

35.1%45.3%

64.9%54.7%

2015

48.0

28.1%

71.9%

OECD

Non-OECD


29


in a winning bid for Homeplus, Tesco’s Korean dis-count retail chain. The $6.4 billion acquisition willgrant control and allow pushing the needed bigchanges in the Korean retail market, de facto aduopoly with E-Mart. Interestingly, this consor-tium outbid other competitors including Carlyle,which had teamed with GIC. The big SingaporeanSWFs apparently do not hesitate to compete withno holds barred, even if in most cases they operateas partners. In the high end of the retail markets,GIC, Temasek and QIA jointly invested $1.4 bil-lion in Dufry, one of the primary airport retailers,supporting the company in the planned acquisitionof Benetton’s family World Duty Free aimed atforming an industry leader controlling 25 percentof the market. Finally, lured by attractive valua-tions and a weak euro, Infinity Investments, thesubsidiary of ADIA specialized in infrastructureinvestments, joined a consortium led by theGerman insurer Allianz Capital Partners GmbH,and including Borealis Infrastructure Management,and Munich Re asset manager, to acquireAutobahn Tank & Rast, the German service sta-tion chain with $ 3.8 billion bid. The company,which also manages several concession contracts inthe German highway network, is a perfect targetfor long-term shareholder seeking stable and pre-dictable returns.

Demographic transitions, breakthrough innova-tions, and the rise in life expectancy are globalmegatrends shaping today the healthcare industry,and companies are struggling to find new businessopportunities in a rapidly changing environment.Fiscal distress and high debt are curbing social

spending in advanced economies, whereas a risingmiddle class in emerging markets is ready to fill thegap in global demand for healthcare. These transi-tions are triggering a hectic deal-making in the sec-tor which has seen more than $250 billion ofinvestment in 2015, up nearly two-thirds relative toprevious year. In 2015 SWFs have also expandedtheir interest in the sector by completing 14 acqui-sitions worth a total of $2.6 billion, the highestvalue since 2010. Hospitals located in emergingmarkets have been the target of choice. Indeed, thelargest reported deal in the sector is the GIC’sacquisition of 15 percent capital of Rede d’Or SaoLuiz, the largest independent hospital operator inBrazil. The company’s founding Moll family andthe investment bank BTG Pactual sold equal stakefor $1 billion. The positive prospects of the Indianeconomy, and the rising needs for quality privatehealthcare have attracted significant investment bySWFs, completing 6 several sizable deals in hospitaland pharmaceutical companies. GleneaglesDevelopment, a subsidiary of Malaysia’ KazanahNasional Bhd bought Global Hospital, operating achain of five hospitals in main cities. The largestacquisition in India is, however, the joint bid byTemasek and GIC for the block of shares of SunPharmaceutical Industries, one of the largest drug-maker, divested by Japanese Daiichi Sankyo, mak-ing a final exit after the company run into troubleswith US regulators. Temasek’s appetite in health-care did not satiate in emerging economies. Joiningforces with the European private equity fund CVC,the hyperactive Singaporean fund bought a largestake of the fast-growing, Luxemburg-based phar-maceutical company Alvogen.


Over the past year, SWFs have displayed an increas-ing desire and ability to team up and find opportuni-ties for co-investments with other SWFs or otherfinancial investors and through joint-ventures. Thistrend is related to SWFs moving away from expen-sive — and not always effective — external fundmanagement and towards more internal portfoliomanagement. As SWFs attempt to manage a largerportion of their funds in-house, collaboration is away to leverage limited human-resources, to learnfrom their investment partners, and to spread risks.The rationale is very simple: sharing information,generating economies of scale, leverage up controlpower while maintaining portfolio diversification. This trend is gaining momentum. In 2015, co-investments represent almost 50% of the reporteddeals, and they are worth in total $24.4 billion. In the2008-2014 time-span, they accounted on averageonly 22 percent. In the last years, these partnerships have typicallytaken the form of direct equity co-investments inthe same target, epitomized by 2015 high markacquisition of the Swiss-based Dufry AG, one of thelargest airport retailers, by the pooled resources ofQIA, Temasek, and GIC. But the most recent trendsreveal a change in strategy. Rather than teaming upamong themselves, SWF engage in deal makingwith private partners. Last year, 93 percent of co-investments by value

30

have been made in collaboration with a private part-ner, either a strategic partner, or financial institution.Amongst co-investors, strategic partners representthe most sought-for type, due industry know-how,operational capabilities, and track record, qualitiesSWFs in some sectors might be short of. In 2015,examples of this type of SPP are GIC’s alliances withExeter Property in the UK, DFL Ltd and Brigade inIndia, or QIA’s partnership with Brookfields PropertyPartners in real estate, or the ADIA, KIA joint-venturewith local infrastructure companies in the $10 billionacquisition of the Australian New South Wales elec-tricity network.Another frequent type of co-investment involvesinstead a financial institution, such as like-mindedinvestor (typically a pension fund) or a private-equi-ty, venture capital fund. It has become more fre-quent to observe SWF as LPs in private equityfunds to co-invest target companies with otherfinancial investors. For example, Temasek, a limitedpartner of MBK, one of the largest north Asiafocused private equity group, joined forces with twolarge public pension funds to acquire Homeplus,the Korean retailer. SWF investments in IT-relatedindustries are typically executed in partnership withVC funds, as it happened with the $2 billion acqui-sition of Didi Kuaidi, an Über rival prospective uni-corn, by Temasek, and CIC, supported by the localexpertise of Ping Ang Ventures.


The Rise of Sovereign Private Partnerships (SPP)


SWFs or SovereignPartnerStrategic Investor

Financial Institution

Miscellaneous

8.1

1.61

Figure 9: Co-Investment Partner by Deal Value, 2015

5.8

8.88

Figure 10: Distribution of Standalone and Co-Investments by Deal Value, 2008-2015

Standalone InvestmentsCo-Investments

120

100

80

60

40

20

02011

68.1

82.6

2012

24.7

33.7

58.4

2013

16.5

32.7

49.2

2014

19.9

48.8

68.7

2015

24.4

23.6

48.0

14.5

Value(US$bn)

Value(US$bn)


31


GeographyThe geographical breakdown of SWF direct equityinvestments has always shown a strong preferencefor developed economies. Even more, the propor-tion of SWF investments allocated to OECD coun-tries has been steadily growing since 2009. We sawan inversion in this trend in 2014, as the SWFinvestments in OECD countries declined from64.9% of the total deal value in 2013 to 54.7% in2014. This reallocation was due, in part, to a desireto diversify away from North American and, large-ly, to a domestic retreat: SWFs originating fromcommodity-producing economies were investingmore domestically to help revitalize strugglingdomestic markets. In 2015, we see a return to thepre-2014 trend, with allocation to OECD marketincreasing to an all-time record of 71.9 percent.Interestingly, SWF shied away from their domestic

economies, by investing a stellar 94 percent abroad.The increase in the international exposure is note-worthy. In the past, we have often seen SWF calledin to invest at home especially when the nationaleconomy required support, and expanding abroadin “good times”. In 2015, one of the worst years inrecent history for oil producing nations, but alsofor the emerging economies battered by theretrenchment of global trade, SWF changed strate-gy and focused on their long-term mission, i.e. pre-serving national wealth for future generations by aglobal diversification of investments. Even if Chinadid not follow in this wake, the increase in theshare of international investment, which is alsoaffecting emerging markets as targets for portfoliodiversification, is an important trend to keep trackof in the next years.


Figure 11: SWF investments in Domestic and Foreign Markets, 2006 - 2015 (US$bn)

120

100

80

60

40

20

0

2006 2007 2008 2009 2010 2011 2012 2013 2014

Domestic

Foreign

24.9

25.2

77.7

111.7

88.2

47.6

82.6

58.449.3

68.7

51.9

82.953.3

0.2

25.8 28.8 34.9

7.2

28.6

9.1 7.7 12.7

40.3

54.0

49.341.6

55.9

2015

48.0

2.8

45.3


32


At an aggregate value of $16.2 billion for 39 deals,inflows into Europe show a very slight decline fromthe 2014 value of $16.5 billion. Yet, the relative sizeof inflows into Europe has grown, accounting forapproximately one-third (33.77%) of total invest-ments. We saw a more market decline in Asia-Pacific,with aggregate investments of $13.9 billion (relativeto a 2014 total of $18.1 billion), or approximately29% of total investments. The decline was evenmore marked in North America, with investmentsdropping from $14.7 billion in 2014 to $8 billion in2015 (16.63% of total). Yet, it was the MENAregion that showed the steepest decline, with invest-ments virtually disappearing, from an aggregate$12.1 billion in 2014 to approximately $500 millionin 2015. The only region to record an increase wasNon-Pacific Asia, which received $3 billion in invest-ments in 2014 and $6.1 billion in 2015.

Despite the increased reallocation away fromNorth America, the USA is still the favourite coun-try for SWF investments, accounting for $7.86 bil-lion of deal flow. Virtually all of the investments inthe USA were in the real estate sector: if we includeinvestments in hospitality (restaurants, hotels, andmotels), the sector accounted for $7.56 billion ininvestments. The second most popular destinationfor SWF deals in 2015 is China, with $6.17 billion,a country also showing a marked decline in attrac-tiveness relative to previous year. Yet, the lion’sshare of most investments are domestic bailouts inthe financial sector, and most deals are acquisitionsby Singaporean Temasek, and to lesser extent GIC.Indeed, the only significant operations by foreignSWFs are the co-investments by KIA and KazanahNasional Bhd mostly on financials (notably in theasset manager CITIC), but with significant and


Figure 12: SWF Investments by Target Country in 2014 and 2015 (US$bn)

25

20

15

10

5

0

USA

7.86

14.75

China

6.17

8.90

UK

6.16

11.70

Austra

lia

4.99

3.40

Turk

ey

3.33

0.32

India

2.68

0.72

Spain

1.92

0.36

Italy

1.88 2.21

Nether

lands

1.800.98

South K

orea

1.790.92

Germ

any

1.550.24

Brazil

1.452.71

Other

s

6.47

21.44 2015

2014


33


growing allocations to infrastructure and trans-portation.

Within the Asia-Pacific region, the main beneficiaryof last year’s reallocation has been Australia, aneconomy still transitioning from a reliance on themining investment boom for growth to a broaderrange of economic activity. In spite of present diffi-culties, safe assets in Australia remained a veryattractive asset class for SWFs in 2015. Temasek,CIC, KIA, and ADIA, a fund already quite exposedto the country, poured an additional $4.9 billion inacquisitions in real estate and infrastructure.

As already mentioned, the real winner in the geo-graphical re-allocation taking place in 2015 is NonPacific Asia, with a two-fold increase in deal valuesin absolute and relative terms. SWF acquisitions by

SWFs surpassed the $6 billion mark, with an exclu-sive focus on two countries, India and Turkey. With36 completed deals, India wins the prize for themost attractive target country of 2015 by numberof operations. The $2.6 billion raised are not a stel-lar amount, but the broad diversification of invest-ments across sectors is a definite sign of economicvitality. A young population, a slight increase inincome inequality – a promising sign of a risingmiddle class -, and a business friendly, new leaderare contributing factor for an increased attractive-ness of foreign investments. We also report a stag-gering $3 billion year-over-year increase in dealvalue in Turkey, primarily thanks to the QIA acqui-sition of Finansbank. SWFs’ appetite for Turkishassets can be traced back to socio-economic fea-tures, including a young, dynamic population, alarge domestic market, and a strategic location,


Figure 13: Foreign SWF Investments in Europe, 2015

Value (US$bn)

Italy

Spain

Netherlands

Germany

France

Luxembourg

0.74

1.55

1.80

1.92

1.88

Eurozone

UK

Sweden

Switzerland

1.40

0.03

6.168.56

0.67


34


combined with strong infrastructure and muchimproved public services. However, Turkey hasbeen vulnerable to changes in investor sentimentand, together with other emerging markets, hasexperienced significant currency and financial mar-ket volatility during the last years. Only time willtell if this investment trend will gain momentumand consolidate, given the economic and geopoliti-cal challenges the country is facing.

Europe has always been a premier destination forSWFs and last year was not an exception. Europeantargets attracted the largest share of total invest-ment, marking a 10 percent increase with respect toprevious year. The continent continues to attractsignificant cross-border investment, but about lastyear activity also witness a SWFs’ significant shiftin focus across countries. The UK is still the largestmarket, but total deal value cut in a half to $6.1 bil-lion, and its share over total European investmentshrunk from 70 to 37 percent. Interestingly, theEurozone boasts the majority of SWF investmentsin the region by value. Since the announcement inJanuary 2015 of quantitative easing by the ECB,the euro strongly depreciated against all major cur-rencies, and SWFs took advantage of favorableterms of trade by chasing investment opportunities

across the board in the Eurozone. The relativedecline of the UK can also be traced back to thecurrent outlook in (primary London) real estatemarket. Whether a boom or a bubble it is hard tosay, however, London property have added doublethe value of the average in Britain, which in turnoutpaced the USA market since the financial crisis.The fact that the market shrugged off the bubble-burst of 2008 suggests it has strong fundamentals.Yet, with prices at record high, and the acquisitionbinge round the corner, a slowing down of invest-ments in London property is far from surprising,and the fact that in 2015 SWF put $6.1 billion inthis single basket reveal how eager they still are toinvest in this market.

Within the Eurozone, four core countries are underthe spotlight this year: Spain, Italy, the Netherlandsand Germany. Total investments in Spain climbedto $1.9 billion in 2015, a rather spectacularincrease with respect to 2014 thanks to large acqui-sitions in energy infrastructure and utilities. Afterseveral years of efforts, the broad and deep electric-ity market reform is starting to pay off also in termsof attracting foreign investments, and SWFs arefirst in the line when safe infrastructure assets areup for grabs.

After a quite spectacular 2014, Italy has lost somemomentum and reported a slight decline in dealvalue. However, with to $1.9 billion of SWF invest-ments, the country remains the second most impor-tant target of the Eurozone, retaining also a ratherbroad diversification of investments across sectors.Qatar Holding, a subsidiary of QIA, acquired fullcontrol of new business and residential district Porta

In 2015, a weak euro pushed strongly SWF investments

in the eurozone, surpassing the United Kingdom as target area


35


Table 3: SWF Investments of Over US$1 Billion, 2015


Fund Target Target Country Sector Deal Size

Name (Value US$bn)

GIC Pte Ltd IndCor Properties Inc USA Real Estate 3.65

Qatar Investment Authority (QIA) Finansbank AS Turkey Banking, Insurance, Trading 2.95

Qatar Investment Authority (QIA) Coroin Ltd UK Restaurants, Hotels, Motels 2.40

Qatar Investment Authority (QIA) Songbird Estates PLC UK Real Estate 1.94

China Investment Corporation (CIC) Portfolio of office tower assets being

sold by the Investa Property Group Australia Real Estate 1.82

China Investment Corporation (CIC) NXP Semiconductors-RF Business Netherlands Business Equipment 1.80

Temasek Holdings Pte Ltd Homeplus Co. Ltd. South Korea Retail 1.60

Abu Dhabi Investment Authority (ADIA) 58 million square foot portfolio

of industrial properties USA Real Estate 1.58

Government Pension Fund - Global Trinity Wall St-Hudson Sq USA Real Estate 1.56

Kuwait Investment Authority (KIA) E ON Espana SL Spain Infrastructure & Utilities 1.37

Qatar Investment Authority (QIA) Hines Italia SGR SpA-Porta Italy Real Estate 1.30

Abu Dhabi Investment Authority (ADIA) 3 Hong Kong hotels Hong Kong Restaurants, Hotels, Motels 1.20

GIC Pte Ltd Rede D'Or Sao Luiz SA Brazil Healthcare, Medical Equipment,

Pharmaceutical Products 1.01


36


Nuova, after the initial acquisition of a 40 percentstake in 2013. Another noteworthy real estate dealis the sale of iconic Westin Hotel Excelsior in Rometo Katara, a specialized subsidiary of QIA. This yearmarks also the entry of CIC in the Italian marketwith the investment the private equity, infrastruc-ture fund F2i Sgr, a tangible sign of commitment.The Netherlands and Germany are visible thanks tosingle, landmark acquisitions, namely the NXPSemiconductor and Autobahn Tank & Rast wealready commented in the sector analysis. The rest ofEurope did not appear on SWF radar screens in 2015.

Funds2015 was again a remarkable year for the twoSingaporean funds, namely GIC and Temasek,which jointly completed 76 deals worth $13.2 bil-lion, representing 40 and 27 percent of total invest-ments and value, respectively. Last year’s Temasekrecord has been particularly impressive, winningthe prize of the most active fund with 48 complet-ed deals. The year of the country’s 50th anniver-sary of independence, also marked by the passingaway of the founding prime minster, Lee KuanYew, was the most spectacular since the global

Figure 14: Investment Flows from Middle East & North Africa SWFs, 2015

MENA to Europe21 deals, $10.17bn

Within MENA6 deals, $0.53bn

MENA to Sub-Saharan Africa3 deals, $0.53bn

MENA to Pacific Asia9 deals, $6.15bn

MENA to Non-Pacific Asia8 deals, $3.59bn

MENA to Latin America4 deals, $0.46bn

MENA to North America7 deals, $1.81bn



37


financial crisis in terms of investment activities,reflecting optimism about the global economy overthe next few years. The top three sectors for invest-ments during the year were consumer, financialservices, and life sciences and agriculture, broadlyin line with the investment themes characterizingthe current strategy. This year’s investments couldalso be a reflection of the constitutional changepassed on July 2015 making Temasek a bigger con-tributor to the public finances. As of 2017, govern-ment may spend up to half of the expected long-term returns of Temasek’s portfolio, rather than up

to half of the dividends that the Minister forFinance receives from Temasek to make invest-ments in healthcare, human capital and transportinfrastructure in the coming years. This expandedrole of Temasek in fiscal policy may tilt strategiesin favour of more liquid assets and broad diversifi-cation across countries and sectors, already visiblein 2015 activity.

Over the past years, we have become used toreport on QIA’s prominence as one of the mostactive investor in direct equity, and last year was

Figure 15: Investment Flows from Asia-Pacific SWFs, 2015

Asia-Pacific to Europe14 deals, $5.68bn

Asia-Pacific to Sub-Saharan Africa2 deal, $0.31bn

Within Asia-Pacific56 deals, $7.64 bn

Asia-Pacific to Non-Pacific Asia29 deals, $2.35bn

Asia-Pacific to Latin America6 deals, $1.93bn

Asia-Pacific to North America8 deals, $4.07bn

Asia-Pacific to MENA1 deal, $0.0 bn



38


Publicly available data for direct SWF equity & real estate deals, joint ventures

and capital injections. Source: Sovereign Investment Lab, Bocconi University

Figure 16: Value of Investments by Top Spending SWFs, 2015 (US$bn)

50

40

30

20

10

0

12.00

7.74

7.53

5.96

5.70

4.41

2.41

0.180.530.84

0.180.56

Other

Kazakhstan National Fund

Investment Corporation of Dubai

Emirates Investment Authority

Khazanah Nasional Bhd

Government Pension Fund - Global

Kuwait Investment Authority (KIA)

Temasek Holdings Pte Ltd

Abu Dhabi Investment Authority(ADIA)GIC Pte Ltd

China Investment Corporation (CIC)

Qatar Investment Authority (QIA)

not an exception. In 2015, QIA ranked first bydeal value and fourth by number of deals, with 16acquisitions worth $12 billion, with the usual pen-chant for trophy assets in real estate. In September2015, QIA opened a new office in New York.According to a statement by its CEO SheikhAbdullah bin Mohamed bin Saud al-Thani, thismove, an unambiguous sign of confidence in theworld’s largest economy, should allow the fund to

expand internationally and to better manage itsgrowing portfolio. Following the changeoverwhich brought at the helm of the fund royal fami-ly member Sheikh Abdullah bin Mohamed binSaud al Thani, QIA’s management has reviewedshareholdings and reorganized the internal struc-ture by separating domestic and internationalinvestments in different portfolios. QIA’s manage-ment has further pledged to rein in its penchant totrophy assets, but, so far, there seems to be littleevidence of real change.

CIC, the third SWF by assets, boasts also a thirdposition in the 2015 ranking by deals and invest-ment value. Last year’s activity particularly pro-nounced in some core European countries,Australia with a strong focus on the domesticeconomy, battered by the stock market crash andcapital outflows. The fund took recently two stepswhich may be relevant for its future investments,i.e. the launch of CIC Capital, a unit specialized indirect equity investment in less liquid assets,including real estate and infrastructure, and themoving from Toronto to New York of its NorthAmerican headquarters, in order to tap opportuni-ties in the US markets and globally.

Amongst emerging SWFs, Malaysia’s KhazanahNasional Behrad consolidated its position as akey player in Southern Asia. In 2015, the fundentered in the top ten list thanks to 11 sizabledeals for a total of $1 billion primarily focused inthe region. However, the recent launch ofKhazanah Europe Investment Limited based inLondon suggests that the fund’s expansion intothe European continent is part of its larger strat-


39


egy to become more global in scope, leveragingon a strong position in its home region.

The Sky Did Not FallIn last year’s report, we concluded that SWFs wereentering a “new normal” phase, one triggered bylow commodity prices and slowing growth inemerging markets. This year shows that funds are

settling into this new environment with differentlevels of success. The need to provide more domes-tic support, which became evident over the pasttwo years, is leading some funds to more explicitlyclarify their stabilization mandates. Evidence of thistrend are new rules for withdrawals and fiscal sup-port in Norway and Singapore. On the other side,the crisis is laying bare the vulnerabilities of fundsthat are not protected by a strong governance rules— hence the shrinking of the Russian ReserveFund. The Russian experience, incidentally, is pro-viding interesting food for thought: does the accu-mulation of assets into a sovereign wealth fund orstabilization fund insulate not only citizens fromshort-term volatility in commodity prices, but alsoruling parties and individual politicians from mar-ket-induced discipline?

Yet, overall, this year in SWFs is remarkable forwhat did not happen. Oil prices have droppedbelow most commentators’ wildest predictions, yetthe sky did not fall. SWF assets under managementactually increased, albeit at a slower pace. We haveseen evidence of divestments, but most of thoseseem to be more directly caused by a desire to rebal-ance portfolios overly-reliant on the NorthAmerican — and, to a smaller extent, WesternEuropean — financial sectors, rather than by theneed to finance domestic budgets. Further, despitecommentary in the media, there is little evidencethat SWF divestments contributed to poor perform-ance of global equity markets in 2015. Yet, one pos-sible hint at the impact of SWFs lies in the unprece-dented positive correlation between oil prices andstock markets in 2015. While, historically, oil pricesand equity valuations have tended to move in oppo-

Publicly available data for direct SWF equity & real estate deals, joint ventures

and capital injections. Source: Sovereign Investment Lab, Bocconi University

Figure 17: Number of Investments by Top Spending SWFs, 2015

200

180

160

140

120

100

80

60

40

20

0

48

28

25

16

12

11

7

11

44

5

15

Other

Investment Corporation of Dubai

Ireland Strategic Investment Fund

Government Pension Fund -GlobalMubadala Development CompanyPJSCKhazanah Nasional Bhd

Kuwait Investment Authority (KIA)

Abu Dhabi Investment Authority(ADIA)Qatar Investment Authority (QIA)

China Investment Corporation(CIC)GIC Pte Ltd

Temasek Holdings Pte Ltd


40


site directions, we have witnessed a simultaneousdecline in both during 2015 — could SWFs haveacted as conduit by which oil prices have led to anunprecedented impact on equity valuations, asechoed in the media? Back-of-the-envelope compu-tations suggest that is unlikely to be the case, as, forall their growth, SWFs still account for a small frac-tion of worldwide market capitalization. It is, how-ever, an intriguing hypothesis that deserves formalinvestigation over the years to come.

Moving forward, we believe that the shock to SWFportfolios and investment models will be moremodest than what has been widely reported andforecasted over the past months. Partially, that isdue to the paradox laid bare by the Saudi experi-ence. For commodity-based economies, low com-modity prices are, on one side, inducing budgetshortfalls, which tempt politicians to withdrawassets from domestic SWFs. On the other side, lowcommodity prices are a reminder of the dangers ofrelying on undiversified revenue streams and, assuch, of the need of the diversification that SWFsprovide. Hence, Saudi Arabia, in the midst of a dra-matic budget shortfall, has actually been planningto privatize its domestic oil operations and use partof the proceeds to establish a new SWF. Perhaps,ultimately, volatility in energy markets might actu-ally increase SWF assets, as governments scrambleto diversify revenue sources.


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Massimiliano Castelli UBS Global Asset Management and SIL, Bocconi UniversityFabio ScacciavillaniOman Investment Fund and SIL, Bocconi University

The rapid accumulation of foreign exchange (FX)reserves over the last fifteen years has been anuncommon phenomenon from a historical point ofview. Since the early 2000s, sovereign wealth – thesum of reserves held by central banks and assetsmanaged by so-called Sovereign Wealth Funds(SWFs) primarily in emerging countries – but also insome developed countries such as Norway,Singapore or Switzerland– had skyrocketed. Overthe last decade sovereign wealth grew by more than10 per cent per year and by the end of 2014 it hadreached an all-time-high of USD 17.3 trillion.Central banks and SWFs have become one of thelargest and most active segment of the institutionalinvestors’ community and their investment behaviorhas become as relevant for global capital markets asthat of pension and insurance funds.

Such spectacular rise in the assets under manage-ment (AUM) by central banks and SWFs set off pro-found repercussions in global markets. The growingreserves managed by central banks in emerging mar-kets and largely invested into fixed income assetshave – according to a widespread view- contributedto a global savings glut thereby depressing long-term interest rates.

But of course the impact was felt also on the equitymarkets and its magnitude turned out to be much larg-er than widely perceived. One of the most interestinganalyses was written in 2006, by Kevin HarringtonHead of Research at Clarium Capital ManagementLLC: in essence, the investment of windfall export rev-enues was equivalent to a “Petrodollar Put”. “Anytime the markets started to correct, huge petrodollarflows seeking better entry points put a strong bidunderneath the markets, cushioning the decline, andeventually re-igniting the advance […]”.

The Petrodollar Put, according to Harrington, was aderivative more complex than a plain vanillaEuropean option (which gives the right to sell astock at a predetermined strike price on a futuredate). “[…] it is a cross-asset, multidimensionaloption. Bullish equity investors are thus implicitlylong a put option on equity markets but [at the sametime] long a call option on oil prices”. In simplerterms, the value of the Petrodollar Put depends ontwo underlying assets: a global stock market indexand the oil price. When stock markets fall becauseskittish and short term investors dump shares, SWFs– which are driven by long term strategies and mustdeploy their new inflows every month – will be on

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Beyond the Petrodollar Put: Future Trends in Sovereign Wealth Management


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the buyer’s side, thereby holding up valuations. Sucheffect will be all the more powerful the higher theprice of oil (and of commodities in general).

Harrington presciently warned that “Once the incip-ient US housing sector decline becomes seriousenough to destroy the creditworthiness of a substan-tial number of borrowers, the ability of the petrodol-lars to be recycled back into the economy via theconsumer credit channel will certainly be impaired”.

Furthermore, petrodollars and sovereign wealth in gen-eral embody a flow of “real money” by patient longterm investors. In a highly leveraged financial systemtheir impact is magnified, because they supply to mar-ginal borrowers, such as hedge funds, high yield bondsissuers, real estate developers or private equities, addi-tional capital to sustain credit expansion. Stated differ-ently, the petrodollars exert downward pressure on riskpremia, lifting the value of collateral while hedgingagainst crushing losses and bouts of volatility.

The orders of magnitude were already substantial:the Bank for International Settlements estimatedconservatively that in 2005 net oil revenues in oilexporting countries had reached $650 bn. Such fig-ure was much larger than the total net issuance ofemerging market bonds ($116.8 bn in 2005) or netpurchases of US mutual fund shares ($260.3 bn), andwas close to US non-financial business borrowing($611 bn). In the subsequent decade, as we pointedout, they acquired an increasing prominence.

With the plunge in fixed income yields and anaemicgrowth in developed economies, sovereign institutionshave diversified their assets across regions and asset

classes with an increasing share going into equities andemerging assets. The proliferation in the number ofSWFs, and the rapid growth in their AUM boosted theflow of funds into alternative asset classes such as pri-vate equity, real estate and infrastructure.

Lately, SWFs are increasingly collaborating withpension funds and other institutional investors toundertake strategic investments in listed and unlist-ed corporations or major infrastructure projects.

In 2015 Sovereign Wealth Fall by USD 1.3 TrillionIn 2015, the rapid accumulation of sovereign wealthcame to a halt. According to our estimates AUM bycentral banks and SWFs fell by 7.5% or USD 1.3trillion. Much of the 2015's drop is accounted forby FX reserves while the drop in assets managed bySWFs has been muted, also reflecting relativelylower returns on accumulated assets when compareto previous years.

The fall was spurred by two intertwined factors: thedramatic fall in commodity prices and the decline inFX reserves managed by China and a few otheremerging market economies.

The fall in energy prices decimated revenues andannihilated current account surpluses in commodityexporting economies, leading to much smaller con-tributions to reserve funds managed by SWFs andcentral banks or even outright asset sales.

According to the IMF, with oil prices averaging cur-rent levels or slightly higher, Middle Eastern oil-


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exporting economies will managed to barely maintaina balanced current account for the rest of this decade,a dramatic reversal from the massive surpluses experi-enced in the previous decade. Some countries will haveto tap into accumulated wealth in order to fill theirbudgets’ shortfall, as currently being shown by therapid depletion of reserves accumulated by Russia andthe notable drop in Saudi FX reserves. SAMA’sreserves, which had reached an all-time high of almost$750 billion in August of 2014, declined to $610 bnin December 2015 and $576 billion in March 2016.In January, the Norwegian pension fund transferred$781 million dollars to the government -- the firstsuch transfer since the fund’s inception in 1996,according to the country's Ministry of Finance.

The decline in Chinese FX reserves and other emerg-ing markets has been determined by the deteriorationin the economic outlook of these economies, whichtranslated into persistent capital outflows and aweakening of their currencies. Since early 2000s, theaccumulation of FX reserves in emerging marketshas largely been a by-product of their intervention inthe FX markets to keep their currencies competitivein the face of massive capital inflows. In 2015, forthe first time in many years, net capital flows intoemerging markets turned negative as growthprospects in these economies deteriorated (excludingChina, emerging markets are currently growing atslower pace than advanced ones). Their centralbanks were forced to liquidate FX reserves in orderto stem currencies devaluation and avoid a balanceof payments crisis.

The decline in Chinese FX reserves has in fact coin-cided with the downward pressure on the RMB,

which started in mid-2015. The PBOC reservesdropped from a peak of almost $4 tn in 2014 to$3.3 tn in December 2015 and then to $3.2 tn inMarch 2016. The Chinese authorities did not hesi-tate in using their AUM to sustain their currency, asthe IMF was contemplating the inclusion of theRMB in the SDR basket. The internationalizationof the RMB and its inclusion in the elite club ofreserve currencies are strategic policy objectives forthe Chinese authorities and the stability of theRMB was a necessary condition to have afavourable decision by the IMF. The strategyworked out and in fact late last year the RMB waswelcomed in the SDR basket with a share of nearly10 per cent.

Will the Drop in Sovereign Wealth Continue? The future growth in FX reserves and assets man-aged by SWFs will largely depend on the future levelof oil prices and how China and other emergingmarkets will perform over the next few years.

With regards to oil prices, a recovery is very possi-ble as supply – particularly with regards to the mostexpensive oil production such as the shale oil in USis pushed out of the marked. However, a return to alevel of oil prices consistent with large currentaccount surpluses as it was the case until two yearsago appears unlikely. It is true that oil exportingeconomies are consolidating expenditures and raisetaxes to reduce the oil fiscal break-even price.However, given the massive increase in publicexpenditure experienced over the last decade acrossthe Middle East and other commodity exportingeconomies, this fiscal adjustment is unlikely to be

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sufficient to generate sizeable surpluses over thenext few years. In the future, they will need to relyon a combination of debt and assets drawdown tofund their fiscal deficits.

China and other emerging markets are in the middleof a transition from an export-led growth model toone much more reliant on domestic consumption.This transition is going to be a long process and willinevitably lead to a periods of slow growth and inmany cases painful structural reforms. The catchingup of the income per head in emerging economieswith advanced economies is still happening and webelieve it will continue in the future. However, it willbe weaker than in the past two decades and will becharacterised by lower capital inflows in theseeconomies. Furthermore, as China continues on thepath of financial reforms and opening of its capitalaccount, it is very likely that its future will be char-acterised by persistent capital outflows translatinginto a lower or event negative accumulation of FXreserves.

All in all, we believe that over 2015-20 sovereignwealth will grow by about 5 per cent. Most of thisgrowth will be generated by returns rather than newinflows. From this point of view, the ability of theseinstitutions to generate adequate returns willbecome even more important. Given the massiveaccumulation experienced over the last decade, anadequate return could be enough in many GCCeconomies to cover the fiscal gap while leaving theAUM constant. This will undoubtedly be a chal-lenge given the uncertain horizon as monetary poli-cy stabilizes and central banks remove their supportto risky assets.

Will Lower Reserve Accumulation Lead to Higher Long-Term Interest Rates? The savings glut has been a popular theory behindthe historical decline in long-term bond yields. And,as we experience a weakening in the current andcapital accounts of emerging markets, resulting inslower growth or even falling FX reserves, many arearguing for an increase in long-term interest rates ascentral banks sell US and other advancedeconomies' bonds. According to some, this effectwould be so significant as to eventually wipe out theimpact of quantitative easing on long-term interestrates being undertaken in Europe and Japan. Somehave already labelled this new trend as "quantitativetightening".

In reality, the saving glut is only one of many factorsbehind the historical decline in long-term interestrates, and not necessarily the most important one.This is partly proven by the fact that despite thedecline in account balances of emerging economiesover the last two years, long-term investment rateshave continued to fall. Other factors, such as ageingpopulations, falling productivity, falling investmentand banks deleveraging, appear to be playing animportant role as well. Most of these factors arestructural rather cyclical and some of them werealready at play well before the launch of quantita-tive easing. It is, in particular, the combination oflower productivity and lower population growthwhich points to a lowering of the equilibrium inter-est rate: this would be happening regardless ofquantitative easing.

A further important factor which points to a rela-tively low impact of falling FX reserves on long-


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term interest rates in advanced economies concernsthe composition of FX reserves. While it is true thatover the last decade FX reserves have been diversi-fied across a wider range of asset classes andregions, the bulk of the reserves are still invested incash or short-duration government bonds fromadvanced economies: the sale of these holdings bycentral banks is therefore unlikely to impact the farend of the yield curve.

When it comes to the impact on EM interest rates, itis true that each time an emerging market centralbank sells US dollar-denominated holdings for localcurrency, domestic money supply in local currencyshrinks, a problematic effect in the current environ-ment which therefore has been discussed as a bigrisk coming with large-scale sales of FX reserves.However, this "quantitative tightening" effect isprobably much less dramatic than thought and canbe countered with various tools, e.g. a reduction ofthe reserve requirement ratio in the case of the PBoCto keep banking sector liquidity unaffected.

Are Listed Equities Affected by the Drawdown of Sovereign Wealth?Until the sharp drop in oil prices in late 2014, SWF– broadly defined - continued to accumulate assets.Prequin in a June 2015 report estimated that fromDecember 2012 to March 2015 these funds addedalmost one trillion dollar to their assets (in newinflows plus returns on past investments). Barclaysin an October 2015 report remarked that between2010 and 2014 the estimated petrodollar invest-ments into the financial markets exceeded USD2trillion, roughly equal to the Fed’s Quantitative

Easing over the same period and comparable to theUSD3 trillion of additional US household savings.Furthermore Barclays underscored that at the criti-cal juncture in 2012, the boost by petrodollars tothe financial system was circa half a trillion dollar,while the Fed’s balance sheet was slightly declining.

To understand the impact of such shift we need toask “What happens when the Petrodollar Putexpires”? The mechanism starts working in reversewith securities prices under pressure and a rebalanc-ing towards less risky asset classes. So did the plungein oil prices trigger the stock market hiccups sincelast summer and is there a risk of an unravelling ofthe bull market as the bulls run out of money?

So far the outflow has been relatively limited and,more importantly, has involved mostly governmentbonds. It is true that the current account surplusesof the EMEA oil exporters shrank from a peak ofUSD 652 billion in 2011 to USD 342 billion in2014, turning slightly negative in 2015 to an esti-mated –USD 19 billion. Moreover the currentaccount surpluses of emerging markets has shrankfrom USD 681 billion in 2008 to USD 158 billion in2014 and to an estimated deficit of USD 24 billionin 2015.

Nevertheless such U-turn has hit primarily the for-eign reserve assets held by central banks, not somuch the AUM by SWFs. Central bank reserves aretypically held in highly rated government bonds andother high quality fixed income securities, hence thiswithdrawal has been absorbed easily by marketsawash with central bank liquidity (in fact yieldssince 2014 have dropped, in many cases below

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zero). Based on a typical asset allocation structure,we estimate that in 2015 SWFs sold USD 50 billionof equities and central banks sold equities worthUSD 150 billion, which accounts for 0.13% and0.40% of total trading volume (according to theWorld Federation of Exchanges).

Essentially oil exporters are filling the fiscal gap byselling some of the reserve prudently accumulatedduring the good times in central bank (and inTreasury-controlled bank accounts), but are pre-serving the assets managed by SWFs that pursuemore sophisticated (and lucrative) strategies,although the inflow into these funds have dried out.

These figures are corroborated by a report by ABNAmro: between 2010 and the first half of 2014, theassets of SWFs were rising by USD 50 billion permonth (including the effects of fluctuations in assetprices). Afterwards they have been declining by USD5 billion on average per month. The order of mag-nitude is in the ball park of the QE tapering by theFed which over one year declined from USD 85 bil-lion per month to zero over the course of a year.Barclays estimates that incremental annual demandin the region of USD 400 billion was withdrawn asa result of lower oil prices.

In conclusion selling by SWFs and central banks cer-tainly was not the main cause of the equity roller-coaster. However the expiration of the PetrodollarPut paves the way to a new environment in globalcapital markets where a patient class of investorswith a long term investment horizon and the abilityto deploy assets when other investors are forced tosell will play a less pervasive role.

Will Falling FX Reserves Be Bullish or Bearish for the USD? Over the last fifteen years, central banks have notonly increased diversification across asset classes butalso across currencies. Most of the exports receiptsof Asian manufactured good exporters or oil-com-modity exporters are accounted in USD and largecurrent account surplus translated into a growingUSD share in their reserves. Central banks havebeen diversifying USD reserves into other currenciessuch as euro, Australian dollar, Norwegian kroneand a few other secondary reserve currencies inorder to prevent the USD share of total reservesfrom rising too much. Through this recycling ofUSD reserves, in the past, rising FX reserves haveoften been associated with a weakening USD asindeed this has been the case for the greenback formany years before the change in this trend started inthe middle of last year.

The ongoing reversal of accumulated QE-relatedinflows into EM as well as uncertainties about EMgrowth and EM currency weakening coupled withexpectations of raising interest rates in the US arenow pushing EM FX reserves down. Central banksare now selling USD denominated bonds to supporttheir currencies and this translates into a fallingshare of USD assets in their reserves. In terms offlows, therefore, falling FX reserves are often asso-ciated with a rising USD or with a lower demand bycentral banks for non-USD reserves as the previousneed for reserve diversification away from the USDis weakened. We are already seeing some evidencethat waning demand for secondary reserve curren-cies is pushing down e.g. the Australian dollar or theNorwegian krone.


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Will the investment behavior of central banks andSWFs change as a result of the slowdown, or evenreversal, in asset accumulation? Will SWFs eventu-ally reduce their exposure to risky assets as aresult? For instance, by increasing exposure tomore liquid and less volatile asset classes such asfixed income?

This is unlikely to be the case, for several reasons.First of all, while it is true that assets held by SWFsare likely to grow more slowly than in the past,SWFs still sit on large amounts of wealth accumulat-ed during the boom time. For most countries withSWFs, this level of assets is well in excess of whatmight be considered necessary for precautionarymotives (i.e. fiscal stabilization), thus leaving ampleroom for an asset allocation more skewed towardsrisky assets with the potential of providing higherreturns over the medium-to-long term.

Secondly, whilst the era of ultra-low yields mightend with the expected rise in US interest rates, glob-ally, monetary conditions are likely to remain veryloose for a prolonged period of time, and quantita-tive easing in Europe has only just started. While therise in the US interest rates appears more likely inthe second half of 2016, the increase is unlikely tobe very large from an historical perspective and as

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A further implication of the slowing down in FXreserve currency diversification away from the USDas FX reserve fall could be a lower demand for RMBand other EM currencies. Over the last few years wewitnessed a growing demand by CBs for exposure toEM currencies reflecting both economic (i.e. having acurrency composition of FX reserves more in linewith the trade composition of these economies) andinvestment factors (i.e. taking advantage of higherinterest rates in local currency emerging market debtand the secular appreciating trends in their respectivecurrencies). This has been particularly true for theRMB which has been gradually rising to reserve cur-rency status thanks to the growing role as a trade cur-rency and its inclusion in the SDR basket. The unex-pected summer's devaluation has made the invest-ment case for the RMB weaker because the Chineseexchange rate is no longer a one way bet. It will beinteresting to see whether the growing demand forRMB exposure by official institutions will eventuallyweaken as a result of recent events or whether it willremain unaffected should the uncertainty over theRMB exchange rate policy dissipate in the future.

Will the Asset Diversification Trend Among SWFs Continue? Central banks used to invest only in cash, bankdeposits and highly rated government bonds of theUS and a few other advanced economies. Nowadays,it is not unusual for central banks to invest in a widerrange of fixed income asset classes including corpo-rate bonds and emerging market bonds. More recent-ly, central banks have also started to invest in equities,an asset class which was virtually absent in the port-folio of these institutions just a few years back.

In the medium term, SWFs’ assets will grow by about 5 percent, mainly driven by returns, not inflows


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the expansion in the US reaches maturity it is notunlikely that over the medium term US interest rateswill eventually start falling once again. Therefore,the search for yield among SWFs is likely to contin-ue as these institutions try to protect the real valueof their accumulated wealth.

Thirdly, in a scenario of rising interest rates, thelosses experienced on fixed income assets could besubstantial. Assuming a gentle increase in globalinterest rates over the next five years – a mild tight-ening according to historical standards – the returnon global government bonds of advanced economieswill be close to zero or slightly negative over thatperiod. From a portfolio point of view, protection insuch an environment comes from diversificationaway from fixed income assets towards equitiesand, more importantly, illiquid asset classes such asreal estate, private equity and infrastructure.

With regards to SWFs in particular, in an environ-ment characterised by lower inflows or even out-flows should energy prices remain depressed forlong, the return on accumulated wealth can be animportant source of funding for the sponsoringgovernments dealing with rising fiscal deficits.Given the low yield in fixed income and the lowerexpected returns on listed liquidity, SWFs are verylikely to continue relying on illiquid assets classessuch as private equity, real estate and infrastructureto generate adequate returns and on strategic directinvestments to capture above market returns.According to the latest data available on SWFsinvestment included in this report, during 2015SWFs direct investments increased in terms of num-ber of deals but decreased in value. This partly

reflects the funding pressure faced by these institu-tions and partly the uncertainty in global capitalmarkets in terms of future returns on risky assets.However, direct investments, through smaller inscale and with a higher degree of risk diversificationacross regions and markets, are likely to remain animportant pillar in the investment strategy of theseinstitutions

Finally, the changed conditions in the global finan-cial sector, with commercial banks less willing totake long-term risk because of more stringent regu-lations, are opening up new investment opportuni-ties for long-term investors such as SWFs. Forinstance, the infrastructure sector is evolving fastunder the impulse of policy makers eager to attractmore non-public funds into this sector. Given theright conditions, SWFs are likely to embrace theseopportunities by pouring money into real assets,which have the capacity to deliver returns abovethose achievable in public markets, such as fixedincome and equity. SWFs have established them-selves as highly active investors in global capitalmarkets over the last decade; this is unlikely tochange as a result of the slow-down in the growth oftheir assets.

However, should oil price remain at current level fora prolonged period of time SWFs might be forced inthe future to dispose some of their illiquid invest-ments into alt ernative asset classes and direct invest-ments into listed and unlisted securities as politicalpressure from their sponsoring governmentsincrease. This could reduce the future flow of SWFsinvestments into advanced economies which havebeen the major beneficiaries of these investments.


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Paul Rose The Ohio State Universityand SIL, Bocconi University

Sovereign wealth funds (SWF) have largely provento be the gentle giants of the financial markets;they tend to be relatively patient, passive share-holders. In contrast to other activist hedge funds,when SWFs do engage with companies, they tendto work behind the scenes to maximize value forthe long term.

And yet, because they are funds owned by a sover-eign, they often receive significant scrutiny, especial-ly in developed markets, whenever they invest. Todate, most of this scrutiny has occurred on the frontend of investments, as host-country politicians andregulators question the motives of SWF investmentin their markets. In some cases this scrutiny provesto be strict enough to encourage SWFs to look forother opportunities in other markets. As SWFs havecontinued to invest responsibly and regulators havebecome increasingly comfortable with SWF invest-ment, the fear-mongering associated with SWFinvestment has decreased.

Now, however, concerns have arisen not over howSWFs invest, but how they divest. Indeed, somereports seem to attribute depressed stock marketprices and general market volatility to SWF divest-ment. A headline in Barron’s, for example, claimedthat “Selling by sovereign wealth funds is a hugeheadwind for stocks,”1 and a headline for an arti-

cle in the Financial Times declared that “Sovereignwealth funds drive turbulent trading.”2

Undoubtedly withdrawals from some SWFs—par-ticularly Gulf SWFs—have had an impact on themarkets, and particularly on stocks in which SWFstend to overweight in their portfolios, such asstock in financial firms and some consumer goodscompanies. Perhaps the biggest impact has beenfelt by asset managers, which have seen their AUMdeteriorate as SWFs withdraw funds.

But how significant are SWF withdrawals frommarkets? Put in a slightly more pointed way, doSWF withdrawals create systemic risk for the mar-kets? And if they do, what could be done about it?This brief analysis attempts to work towards ananswer to those questions, and in doing so, alsoattempts to provide some perspective on the largerdebate in the appropriate role of SWFs in globalcapital markets.

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Sovereign Fund Selling, Market Volatility and Systemic Risk:Connections and Regulatory Possibilities

1 Chris Dieterich, Selling By Sovereign Wealth Funds is a Huge Headwind

for Stocks, Barron’s (February 1, 2016), available at http://blogs.barrons.com/

focusonfunds/2016/02/01/selling-by-sovereign-wealth-funds-is-a-huge-

headwind-for-stocks/tab/print/

2 Attracta Mooney, Sovereign wealth funds drive turbulent trading, Financial

Times (February 1, 2016), available at http://www.ft.com/intl/cms/s/0/

55470a6c-c68f-11e5-808f-8231cd71622e.html?siteedition=intl#axzz46xPnssFH.


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Oil Prices and Forced SellingAs oil prices have declined dramatically since mid-2014, oil-dependent economies have faced difficultchoices about how to fund normal government func-tions. Saudi Arabia, for example, withdrew some $70billion from the markets to help fund its economy.

To make things more difficult for oil-dependenteconomies, stock market movements may positivelycorrelate with the oil markets. Ben Bernanke notes,for example, that the S&P 500 and the West Texasspot crude price show a positive 0.39 correlation,and correlate even more strongly, to 0.48, when iso-lating demand-related changes in oil prices.3 So, asoil prices drop lower, sovereign funds that must cashout tend to be selling into a lower market.

The argument that SWFs can create volatility infinancial markets is apparent just from the size ofassets under management alone. The SovereignInvestment Lab (SIL) estimates that SWFs holdroughly 4.7 trillion in assets, while BostonConsulting Group estimates that the global value ofall professionally managed assets was around $74trillion. If asset managers owning 6.4% of a marketdecide to divest, certainly the markets would beimpacted. In perhaps the most extensive and sophis-ticated analysis of SWF asset sales, JP Morgan’sNikolaos Panigirtzoglou estimates that in 2015, oil-producing countries (though not specifically theirSWFs) sold approximately $90 billion of govern-ment bonds, $50 billion of public equities, $7 billion

of corporate bonds, and $15 billion of cash instru-ments.4 For 2016, he estimates that oil producingcountries will sell $100 billion of governmentbonds, $27 billion of public equities, $8 billion ofcorporate bonds and $16 billion of cash instru-ments, and thus that “SWF selling of equities for theremainder of the year will be a fraction of the equi-ties they sold last year or earlier this year.”

Some SWF sponsor countries have deep pockets (espe-cially relative to their GDP), and for most oil-linkedSWFs, some continued selling should be expected.

Despite legitimate concerns about market volatility, afew caveats help to temper concern over forced sell-ing by SWFs. First, not all SWFs are commodity-funded SWFs, and the economies to which these non-commodity SWFs are linked typically are not depend-ent on oil revenues for their governmental budgets.Of the 35 SWFs listed in SIL’s 2014 Sovereign WealthFund Annual Report, 19 are not oil and gas-fundedSWFs.5 In terms of assets under management, oil andgas funded SWFs manage about $3.1 trillion, whileother types of funds manage about $1.6 trillion.Further, low oil prices have not forced every countrythat has created an oil- or gas-funded SWF to drainassets from its SWF in order to support the nationalbudget; Norway, for example, which manages over$850 billion out of the $3.1 trillion managed by oil

3 Ben S. Bernanke, The relationship between stocks and oil prices, Ben Bernanke’s

Blog, Brookings (February 19, 2016), available at http://www.brookings.edu/blogs/

ben-bernanke/posts/2016/02/19-stocks-and-oil-prices.

4 Nikolaos Panigirtzoglou et al., Flows & Liquidity: Chasing Performance,

JP Morgan Global Asset Allocation report (April 22, 2016).

5 Sovereign Investment Lab, Towards a New Normal: Sovereign Wealth Fund

Annual Report 2014, available at https://www.unibocconi.it/wps/wcm/

connect/83cfaeaa-d5fd-4021-8021-15104503a863/SIL_Report _2015.pdf

?MOD=AJPERES.


53

and gas-linked funds, has specifically stated that it“has not been participating in the selling,” and does-n’t foresee changing its strategy.6

A second and related point is that SWFs (and theirexternal managers) are sophisticated market actors.Even when some SWFs are forced to sell, they will,for their own benefit, attempt to do so in an orderlyfashion that minimizes negative price impact. Theywill likely also tend to sell relatively liquid assets,again to minimize price impacts, and will probablyavoid selling less liquid alternative investments.7 Andwhile many governments are under pressure fromdeeply lower oil prices, a fire sale is not the only way(and is perhaps the worst way) of filling budget gaps.Other governments under strain have resorted to thedebt markets to help support the budget, such as

Abu Dhabi’s sale of $5 billion in sovereign bondsand Qatar’s planned sale of $5 billion in bonds.

Third, observers of SWF investment trends will notethat the withdrawal of funds from assets managersdoes not necessarily imply that the SWFs are cash-ing out of the market entirely, but may representSWFs either shifting funds to other, more productiveasset classes, or, as is increasingly the case, with-

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SWF asset values were derived from the Sovereign Wealth Center, “Fund Profiles”, available at http://www.sovereignwealthcenter.com/fund-profiles.html.

Abu Dhabi data from the Brookings Institution (2014). All other GDP data from the CIA World Factbook (2016).

Figure 18: Assets of Select SWFs as Percentage of GDP (PPP)

UAE - Abu Dhabi

Norway

Kuwait

Qatar

Libya

Oman

Azerbaijan

Kazakhstan

Russia

518.1

242.5

205

79

71

8.8

19.7

17.9

3.6

6 Mikael Holter & Saleha Mohsin, Norway Wealth Fund Isn't Joining Global Stock

Selloff, CEO Says, Bloomberg (March 9, 2016), available at

http://www.bloomberg.com/news/articles/2016-03-09/norway-wealth-fund-

gains-39-billion-in-2015-as-stocks-recover.

7 Many SWFs are increasingly divesting from private equity funds and hedge

funds, but this may not be the result of forced selling as much as poor returns

from private funds or planned disintermediation by SWFs.


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drawing funds from asset managers and redeployingthe funds through their own internal managementteams, often in the same markets in which the assetmanagers were investing. In such a case there maybe some short-term effects from the withdrawals,but any long-term harm is restricted to the particu-lar asset manager, who now no longer enjoys theSWF’s asset management fees. Overall, the redeploy-ment through in-house teams does not create sys-temic risks to the financial markets, and may evenalleviate some risk by deconcentrating investments.

Fourth, a focus on sovereign wealth fund sell-offs as asource of systemic risk and market volatility is at onceover-inclusive and under-inclusive. It is over-inclusivebecause, as noted above, many sovereign wealth fundssponsor governments are not facing oil and gas-relat-ed budget shortfalls, and are not under significantpressure to sell assets. Even those governments withbudget shortfalls may find other ways to fill the gapthan through a distressed sale. The focus on SWF assetsales is under-inclusive because it ignores the fact thatmany other large, government or government-spon-sored entities may also be selling significant amountsof assets, and a focus on SWFs as the sole or even pri-mary culprit distorts the true picture. Central bankreserves, which control roughly double the assets heldby SWFs, have increasingly invested in equities inrecent years.8 Because central banks are secretiveabout their market activities—more so than SWFs,whose activity has been the subject of considerablymore press scrutiny—it is difficult to estimate theextent of their equity holdings. Truman notes, asreported by the Financial Times, that “[r]eforms areurgently needed to enhance the domestic and interna-tional transparency and accountability for this activi-

ty – in the interests of a better-functioning world econ-omy.”9 If there is a systemic risk to SWF asset sales,that risk is also present with central bank asset sales.

Furthermore, other market factors present a far morecompelling case for market turbulence than SWFs.Even though the amount of funds being withdrawnfrom the markets is significant—such as the tens ofbillions of dollars’ worth of assets sold by SaudiArabia’s Sama in 2015—the amount of funds flow-ing through the markets on any given day is tremen-dous; average daily equities trading volume for theNYSE Group alone amounted to a daily average ofover $45 billion over the first quarter of 2016.10

While SWF selling may create localized turbulencefor particular assets,11 it is difficult to imagine themas a primary driver for global volatility and systemicrisk when so many other factors have deeper andwider impacts on the market. Aside from generalmarket concerns, such as slowing growth in China orthe impact of a Brexit, other market factors haveproven to have very important effects on market tur-bulence. Significantly, algorithmic trading has had a

8 Ralph Atkins, Central banks shift into shares as low rates hit revenues, Financial

Times (June 15, 2014), available at http://www.ft.com/intl/cms/s/0/

d9dfad02-f462-11e3-a143-00144feabdc0.html?siteedition=intl#axzz34ktExR6g.

Oil–dependent countries hold reserves of slightly less than $2 trillion. See

Country Comparison: Reserve of Foreign Exchange and Gold, CIA World

Factbook, available at https://www.cia.gov/library/publications/the-world-factbook/

rankorder/2188rank.html.

9 Id., citing The Official Monetary and Financial Institutions Forum’s 2014 Global

Public Investor survey.

10 New York Stock Exchange, Daily NYSE Group Volume in NYSE Listed, 2016,

available at http://www.nyxdata.com/nysedata/asp/factbook/

viewer_edition.asp?mode=table&key=3141&category=3.


pronounced impact on markets in recent years.Boehmer, Fong and Wu’s 2015 analysis of the effectof algorithmic trading on global markets, for exam-ple, concludes that, consistently across the 42 mar-kets in their sample, algorithmic trading improvesliquidity, improves price discovery, but also increasesvolatility.12 The study also finds that algorithmictrading has systematically negative effects on the liq-uidity of small or low-priced stocks, and that it has agreater volatility effect on those stocks.

While it is clear that SWFs are significant marketplayers, and will likely increase in their importanceto the markets over the coming years, it is not clearthat SWF selling has had a significant, negativeimpact on asset markets. Absent specific evidence ofthe harm that SWF selling has caused, the specula-tion thus far seems to be based less on fact than ondecade-old fears of SWFs as shadowy, unpredictableforces. In the next section, however, we will assumefor the sake of argument that SWFs are, or at leastcould be, significant contributors to systemic risk incapital markets. If SWFs do present such risks, whatcan be done about it?

Possibilities for RegulationUnilateral RegulationThe use of the word “sovereign” in the label “sov-ereign wealth fund” reflects a crucial legal and polit-ical reality: SWFs are owned by sovereign politicalentities, which practically means that they are notregulated in the same way that a domestic fund oreven a foreign private fund might be regulated by ahost country. In some cases SWFs face heightenedscrutiny, such as when they invest in assets that mayimplicate the strategic or national security interestsof the host country. For example, US law requiresthat the Committee on Foreign Investment in theUnited States (CFIUS) investigate certain invest-ments in US assets by state-controlled entities,including SWFs. On the other hand, SWFs do notseem to be held to the same securities law disclosurestandards as private funds. Under US law, any insti-tutional investment manager exercising investmentdiscretion over $100 million or more in Section13(f) securities—generally, equity securities thattrade on a US exchange, certain equity options andwarrants, shares of closed-end investment compa-nies, and certain convertible debt securities—mustreport its holdings on Form 13F with the Securitiesand Exchange Commission (SEC). Some SWFs domake such filings; for instance, Norges Bank, thebeneficial owner of securities managed by Norway’sGovernment Pension Fund-Global, reported over$200 billion in 13(f) securities investments as of theend of 2015. Other SWFs do not appear to havemade the required disclosures, however. Forinstance, China Investment Corporation (CIC) lastfiled a Form 13F as of the end of 2009, at whichtime it reported nearly $10 billion in 13(f) securities;it is hard to imagine that CIC reduced its holdings in

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11 Admittedly, this can be a serious problem in many markets; although there is

significant trading volume in asset markets—and more markets in which to

trade, thanks to peer-to-peer trading networks—the decrease in the use

of market makers and specialists on exchanges like the NYSE have reduced

liquidity in the markets, making some markets more volatile. See, e.g., Gavin

Jackson, Why market volatility is growing more intense, Financial Times

(September 14, 2015), available at http://www.ft.com/intl/cms/s/0/

8b88b8a0-5ace-11e5-9846-de406ccb37f2.html#axzz3n2iiaQny.

12 Ekkehart Boehmer, Kingsley Fong & Julie Wu, International Evidence on

Algorithmic Trading, AFA 2013 San Diego Meetings Paper. available at

http://ssrn.com/abstract=2022034.

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subsequent years below $100 million in 13(f) secu-rities. Other SWFs also appear to not be in compli-ance with 13(f). It is unlikely that a non-sovereignentity could decline to provide this informationwithout subjecting itself to an enforcement actionby the SEC. However, sovereign funds are differentin this respect, reflecting a difficulty with using stan-dard enforcement procedures against sovereign enti-ties generally.

As a threshold question, one might reasonably askwhether SWF trading activity—outside of clearly ille-gal activity or activity that threatens the national secu-rity of another sovereign—could be regulated at all.Under international law, state immunity protects sov-ereign political entities from suits in the courts of otherstates. There are, however, numerous exceptions tothis rule, particularly as it applies to sovereigns oper-ating in commercial spheres. Bassan notes that SWFslie in an indeterminate place in the law—are they morelike state-owned enterprises, which typically do notenjoy state immunity?13 Or, are they more like centralbanks, which generally do enjoy state immunity? Theanswer, he suggests, depends on several factors,including the SWF’s legal structure, governance andaccountability, the purposes of the SWF itself, how theSWF is financed, whether its investments are commer-cial in nature, and the purposes of SWF assets.

If we assume, for purposes of argument, that an SWFis found to be operating in a commercial manner suchthat regulating it as one would regulate a privateactor is appropriate, we must then consider whether

SWF asset sales would be in violation of any applica-ble law. The answer to this question is usually quitesimple: absent any explicit agreement to hold thesecurities for a time (such as a lock-up agreement,which is often used to prevent insiders and venturecapitalists from selling their shares for a period oftime following an initial public offering of stock), inmost established markets an investor is generally freeto sell its assets in the time and manner of its choos-ing.14 In the cases in which SWFs have sold assets tohelp fill a gap in its sovereign sponsor’s budget, therehas been no suggestion that any SWF has engaged inany market manipulation during its sales; it is in theSWFs’ interests to sell only what they must as delib-erately and carefully as possible. From a legal per-spective, in the absence of any evidence of marketmanipulation, SWF selling behavior is no differentfrom (and no more actionable, from an enforcementperspective, than) asset sales by other fund managerswho face redemptions from their investors.

Even where there exists no illegal action by a marketparticipant, however, market regulators can stoptrading in a market in the event of unusual activity.For example, the New York Stock Exchange’s Rule80B allows the exchange to halt trading in all stocksin the event of extraordinary market volatility. Withrespect to a single stock, a security exchange may calla trading halt or a delay; this sometimes occursaround the time a company releases highly material

13 Fabio Bassan, THE LAW OF SOVEREIGN WEALTH FUNDS (Edward Elgar,

2011), pp 89-115.

14 A prominent exception to this general practice is China’s 2015 attempt to curb

trading to limit losses in Chinese stock markets. See Ye Xie and Belinda Cao,

China Bans Stock Sales by Major Shareholders for Six Months (July 8, 2015),

available at http://www.bloomberg.com/news/articles/2015-07-08/

china-bans-stock-sales-by-major-shareholders-for-six-months.


information, or if there is a significant imbalancebetween buy and sell orders. Also, securities regula-tors may suspend trading in a security if there is aparticular problem with disclosure by the issuer of asecurity. Regulators might also suspend tradingbecause of questionable trading activity. The SEC,for example, may suspend trading if there are ques-tions about “trading in the stock, including tradingby insiders, potential market manipulation, and theability to clear and settle transactions in the stock.”15

There is no evidence that SWFs have been associatedwith any trading curbs, halts or suspensions.

Regulation through Multilateral TreatiesAlthough as yet there has been no justification for aunilateral action by a host state against a SWF forselling activity—any SWFs which have been sellingare generally entitled to do so, and seem to have beendoing so, in the same manner as a private marketparticipant would—some might argue that becauseSWFs might own a large amount of shares in anygiven company, there still exists the possibility that aSWF divestment could create significant downwardpressure on a particular asset’s value. Although theseeffects may not justify a trading curb, halt or suspen-sion, in the aggregate SWF selling by many SWFsacross many assets could create the general market“headwinds” feared by market observers. Becausethis could (again, arguably) heighten volatility in themarkets and generally depress prices across markets,perhaps a broad, multilateral approach could beconsidered. There are two possibilities for multilat-

eral regulation: first, SWF investment activity couldbe regulated through “hard law,” such as by amend-ing the existing WTO framework. Second, theycould be, and already are, as discussed below, self-regulated through multilateral “soft law” standards,such as the Santiago Principles.

As it currently stands, the World TradeOrganization (WTO) regime does not serve as a reli-able regulatory instrument for SWF investments.Most importantly, the WTO regulates general issuesof trade, and is not well-suited to regulating sys-temic risks created by SWF portfolio investments.While the General Agreement on Trade in Services(GATS) possibly covers SWF transactions—although perhaps only in cases in which the SWFcontrols the company16—GATS would be of lesshelp in regulating portfolio investments, whichmake up the bulk of SWF investments in establishedmarkets. However, GATS could be amended toinclude more specific provisions on SWF investmentactivity, as Subramanian and Mattoo have argued.17

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16 Under Art.I.2(c), GATS applies, inter alia, when there is a supply of a service

through “commercial presence in the territory of any other Member.”

A commercial presence is defined in Art, XXVIII(d)(i) “any type of business

or professional establishment, including through ... the constitution, acquisition

or maintenance of a juridical person.” A “juridical person” includes an entity

“owned or controlled by” persons or entities in the Member state; “controlled”

is defined as having “the power to name a majority of its directors or otherwise

to legally direct its actions.” Arts. XXVIII(m)(ii), XXVIII(n)(i). For a thorough discussion

of the application of the WTO regime, see Bassan, supra note 14, at 55-62.

17 Aaditya Mattoo & Arvind Subramanian, Currency Undervaluation and Sovereign

Wealth Funds: A New Role for the World Trade Organization, Peterson Institute

for International Economics Working Paper 08-2 (January 2008), available at

https://piie.com/sites/default/files/publications/wp/wp08-2.pdf.

15 United States Securities & Exchange Commission, Investor Bulletin: Trading

Suspensions, available at http://www.sec.gov/investor/alerts/

tradingsuspensions.pdf.


They suggest that GATS could include provisionsrelating to SWF objectives and investment strategy,corporate governance, transparency, and behavior,which would create binding obligations out of manyof the voluntary principles set out in the SantiagoPrinciples.

Even if SWFs were to be regulated through theWTO, it is unlikely that the particular concerns cre-ated by recent SWF sales would be addressed. It isdifficult to imagine any investor, and particularly asovereign investor facing a budget crisis, agreeing tolimit its own liquidity without compensation. Sucha limitation would also violate the spirit of theWTO, which was created in part to reduce barriersto the free flow of goods and capital.

SWFs were regulated to some extent in the recentlynegotiated Trans-Pacific Partnership (TPP) treaty.18

The focus of the relevant TPP provisions, however,is on the discipline of state-owned enterprises thatare controlled by an SWF (as opposed to portfoliocompanies in which the SWF may be invested, butdoes not control).19 The focus of the TPP, then, is toregulate competitive distortions that may be causedby state-owned enterprises, rather than regulate sys-temic risk from SWF portfolio investment.

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A softer form of multilateral regulation, theSantiago Principles, was created specifically to man-age the particular concerns created by SWF invest-ment. Some of the Generally Accepted Principlesand Practices (GAPP) of the Santiago Principlesrelate to market activity, including:

GAPP 4: There should be clear and publicly dis-closed policies, rules, procedures, or arrange-ments in relation to the SWF’s general approachto funding, withdrawal, and spending operations;GAPP 4.2. Subprinciple: The general approachto withdrawals from the SWF and spending onbehalf of the government should be publicly dis-closed; GAPP 15: SWF operations and activities in hostcountries should be conducted in compliance withall applicable regulatory and disclosure require-ments of the countries in which they operate;GAPP 17: Relevant financial information regard-ing the SWF should be publicly disclosed todemonstrate its economic and financial orienta-tion, so as to contribute to stability in interna-tional financial markets and enhance trust inrecipient countries.

None of the GAPPs require SWFs to lock up theirassets or specifically limit market impacts associatedwith their investment activity, although they do sug-gest that SWFs disclose their withdrawal policies—referring to withdrawals by the sovereign from theSWF, not to withdrawals by the SWF in the marketsin which it has invested—and relevant financial dataand act in compliance with host country laws.Although many SWFs are not very transparent withrespect to their withdrawal policies, selling activities


18 The signatories to the treaty include Australia, Brunei, Canada, Chile, Japan,

Malaysia, Mexico, New Zealand, Peru, United States, Singapore, Vietnam.

See Office of the United States Trade Representative, The Trans-Pacific

Partnership, available at https://ustr.gov/tpp/.

19 See, e.g., Edward C. Miller, U.S. Clarifies Treatment of Sovereign Wealth Fund

Investment In TPP, Trans-Pacific Partnership News (October 2, 2012), available

at https://tppnews.wordpress.com/2012/10/02/

u-s-clarifies-treatment-of-sovereign-wealth-fund-investment-in-tpp/.


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by SWFs sponsored by oil-dependent countriesshould come as no surprise to the market. Indeed,many SWFs were purposely created to stabilizecommodity-dependent economies.

A potential amendment to the Santiago Principlescould suggest that SWF investment activities shouldbe conducted so as to limit negative market impacts.For the same reasons noted with respect to WTOregulation, it is unlikely that SWFs would go furtherthan this. As with the WTO itself, stricter regulationthat sought to limit liquidity for SWFs would seemto go against the spirit of the Santiago Principles,which were designed to encourage SWFs to act andbe treated like other financially-focused investors.SWFs are in many ways ideal investors. As theSantiago Principles note, many SWFs, by the natureof their mandate, “take a long-term view in theirinvestments and ride out business cycles [bringing]important diversity to the global financial markets,which can be extremely beneficial, particularly dur-ing periods of financial turmoil or macroeconomicstress.”20 To label SWFs as major contributors tomarket volatility is to ignore the fact that mostSWFs are not selling, and contribute to stability assteady, long-term investors.

Regulation through Bi-lateral Investment TreatiesA final possibility is to use bi-lateral investmenttreaties (BIT) to help manage the risk associatedwith sovereign investment. Such investment treaties

are essentially contracts between two countries. Iftreaties are used as contracts, one can imagine thatan important term of a contract involving SWFswould be to regulate capital inflows and outflows.Inflows, as we have already noted, are already high-ly regulated by many host countries. In the UnitedStates, for example, the CFIUS process regulatesinvestments in US assets—particularly assets thatrelate to US national security—by scrutinizinginvestments in which a foreign entity, including aSWF, may exercise control over a domestic entity.

SWFs have not been the subject of BITs, but there isno reason why they could not.21 A BIT could, in the-ory, provide a clear mechanism for allocating riskassociated with not just investments in a country butdivestments from a country as well.

BITs, as contracts between countries (and particu-larly regarding the risks associated with SWFs to thehost country and the risks that are designed to bemitigated by the SWF in the sponsor country), willbe necessarily incomplete. As Choi, Gulati andPosner argue, “[b]ecause governments cannot com-mit themselves to comply with contracts, we assumethat there is reputational cost from defaulting.”22

Using sovereign debt contracts as an example of

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21 See, e.g., David G. Fromm, Regime Changer? Sovereign Wealth Funds and the

International Investment System, available at http://fletcher.tufts.edu/~/media/

Fletcher/Microsites/swfi/pdfs/2012/Fromm%20Paper_FINAL.pdf.

22 Choi, Stephen J. and Gulati, G. Mitu and Posner, Eric A., Political Risk and

Sovereign Debt Contracts (November 21, 2011). University of Chicago Institute

for Law & Economics Olin Research Paper No. 583; U of Chicago, Public Law

Working Paper No. 370. Available at SSRN: http://ssrn.com/abstract=1962788

or http://dx.doi.org/10.2139/ssrn.1962788.

20 The International Working Group of Sovereign Wealth Funds, Sovereign Wealth

Funds: Generally Accepted Principles and Practices "Santiago Principles"

(October 2008), available at http://www.iwg-swf.org/pubs/eng/

santiagoprinciples.pdf.



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inter-country and investor-country contracts, theynote that “[i]nvestors and countries design sovereigndebt contracts so as to increase the cost for thecountry of defaulting in the good state and minimizethe cost to creditors from default in the bad state.”23

Just as a good sovereign debt helps to effectivelyallocate risk, a well-crafted bi-lateral investmenttreatyBIT could help reduce risks from SWF invest-ment. As with any contract, sufficient considerationmust be offered in order to induce the parties tobind themselves. In the case of the SWF, such con-sideration might include preferential, fast-trackreview of SWF investment by host country regula-tors. For the host country, the SWF might consent tocertain commitments regarding investment durationand withdrawal procedures. No SWF would consentto “Hotel California” risk—where host countriesreceive, but SWFs can never leave—but they may bewilling to limit the rate at which they withdrawinvestments from that particular market.

A difficulty presented by using BITs to mitigate suchrisks is that no sovereign is going to bind itself whenserious political risks are at stake. So, for example,the 2012 US Model BIT already states that

“Nothing in this Treaty shall be construed ... torequire a Party to furnish or allow access to anyinformation the disclosure of which it determines tobe contrary to its essential security interests; or ... topreclude a Party from applying measures that it con-siders necessary for the fulfillment of its obligations

with respect to the maintenance or restoration ofinternational peace or security, or the protection ofits own essential security interests.”24

While a BIT may be able to help govern asset salesin periods of stress, it will be less useful in times ofsevere crisis, when a country is facing seriousdomestic risks if it does not shore up its finances.

ConclusionIt is well documented that some sovereign fundssponsored by oil-dependent countries have engagedin significant selling over the past two years. Whatis less certain is whether this has any significanteffect on market volatility and systemic risk. Buteven if we assume there are significant effects, thereare few regulatory options that could minimize anyrisk or market volatility from SWF divestmentother than protectionist responses to SWF invest-ment. Put simply, most cures would be worse thanthe disease.

Of the options described in this article, the mostlikely to be implemented is a GAPP in an updatedSantiago Principles (which are due to be revisited, asmarkets and governance principles evolve) thatadvises funds to consideration of volatility, marketrisk and other market effects that may arise fromsovereign investment and divestment. A more ambi-tious response would be a bi-lateral investmenttreaty between a host country and a SWF sponsorcountry. The advantage of such a treaty is that itshould provide a benefit to the SWF—such asfavored regulatory treatment—in exchange for therelative illiquidity the SWF would accept.

23 Id.

24 http://www.state.gov/documents/organization/188371.pdf.


1 http://www.pwc.com/gx/en/issues/megatrends.html

2 http://techcrunch.com/unicorn-leaderboard/

Diego Lopez PwCand SIL, Bocconi University

The corporate atmosphere of RocketSpace’s officesin Central San Francisco is exhilarating. The $5bn+incubator prides itself with having hosted 13 com-panies that have reached a valuation of $1 billion–commonly known as Unicorns, including Uber andSpotify. But this not the only digital businesses accel-erator in sunny California.

Technological breakthroughs, defined as one ofPwC’s five global megatrends,1 are changing theworld. Leaving social media aside, a number of digi-tal companies have disrupted the most traditionalindustries: Amazon.com and Alibaba (Retail), Airbnb(Hospitality), Yelp (Restaurants), YouTube (Media),Uber (Transportation), PayPal (FinTech) and TeslaMotors (Automotive), to name a few. These areamong the fastest growing companies in history andeveryone fights to imitate them, or to invest in them.

Silicon Valley is a self-reinforcing ecosystem of inno-vation and it continues to be the “place to be” whenit comes to start-ups. There are over 400,000 high-tech workers based in the Bay Area, who leverage itsworld-class academic and R&D resources. Oftoday’s 158 Unicorns, 100 are headquartered in theUS, and most of these, in the Valley.2 There are talksabout parallel “Silicons” in Tel Aviv, Dublin,

Bangalore and Beijing, but the reality is that most ofthe Venture Capital (VC) fundraising still passesthrough California.

At the same time, institutional investors continue toseek alpha and adapt to the “new normal” of lowerinterest rates and dividend yields. Sovereign Wealthand Pension Funds are a heterogeneous breed ofinvestors, with very different investment and riskprofiles, maturities and targeted returns. Severalfunds have already started investing in a number ofsectors within Private Equities, in search for diversi-fication and higher returns, but only a handful ofthem are ready to invest in venture capital and digi-tal start-ups. No other asset class and sector is ableto offer returns over 20% at the moment.

At the end of 2012, Singapore’s GIC bought along-side Hong Kong’s HKMA the 92% of an officetower in San Francisco City Centre from NipponLife Insurance and Hines for $860 million. GIC hadopened its offices in the Bay Area long before that,and knew that more investors would come. A yearlater, they were welcoming a new tenant into 101California St. – Khazanah Americas, who has themandate of helping the Malaysian fund “to betterevaluate investment opportunities in the innovationand technology sectors”. Temasek has gone a stepfurther by creating a Venture Capital arm, VertexVentures, with investment managers in Palo Alto,

The Rise of Sovereign Venture Funds

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their maturity. GIC, Khazanah (through KhazanahAmericas Inc.) and Temasek (through Vertex) havenow over 50 professionals based in San Francisco,who understand the digital drivers and have closerelationships with the main players. Others Fundshave formed specialized Venture Capital teamswithin their Private Equity departments back home,with a different investment-risk profile and targets,and sometimes, a separate allocation.

As it is normally the case with new or unknowngrounds, Sovereign Investors have started investingin start-ups by leveraging the knowledge and foot-


Bangalore, Tel Aviv, Beijing and Taiwan, besidesSingapore. The next SWF could be Kazakhstan’sSamruk-Kazyna, who plans to open a California-based subsidiary, Samruk Innovation.3

The human capital continues to be determinantthough, and one key concerns of investors enteringinto Venture Capital is the ability of investmentmanagers, whether in-house or external, to identifythe opportunities and manage the start-ups through

3 http://en.tengrinews.kz/companies/Samruk-Kazyna-mulls-opening-subsidiary-

in-Silicon-Valley-259813/

Table 4: SWF Investments in IT-linked Sectors of Over US$100 million, 2008 - 2015


Parent Entity Name Target Target Year Deal Size

Name Country (US$mn)

China Investment Corporation (CIC) NXP Semiconductors-RF Business Netherlands 2015 $1,800.00

GIC Pte Ltd BMC Software Inc USA 2013 $1,677.53

Mubadala Development Company PJSC IBM's Microelectronics Business USA 2014 $1,500.00

Temasek Holdings Pte Ltd AsiaInfo.Linkage Inc China 2014 $437.42

Temasek Holdings Pte Ltd Alibaba Group Holding Ltd China 2011 $400.00

GIC Pte Ltd iParadigms LLC USA 2014 $376.00

GIC Pte Ltd Kronos Inc USA 2014 $375,00

Qatar Investment Authority (QIA) Samsung Electronics Co. Ltd South Korea 2013 $300.00

Qatar Investment Authority (QIA) BlackBerry Ltd Canada 2013 $200.00

GIC Pte Ltd Genpact Limited India 2012 $150.00

New Zealand Superannuation Fund Datacom Group Ltd New Zealand 2013 $142.00

Temasek Holdings Pte Ltd Dianping Holdings Ltd China 2015 $141.67

Mubadala Development Company PJSC Advanced Micro Devices Inc USA 2009 $125.00

China Investment Corporation (CIC) Grabtaxi Holdings Pte Ltd Singapore 2015 $116.67

Temasek Holdings Pte Ltd Cloudary Corp China 2013 $110.00

GIC Pte Ltd KKBox Inc Taiwan 2014 $104.00


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print of specialized General Partners (GPs) with acontrasted track record, that can filter the opportu-nities on the ground, and give enough guarantee tothe Limited Partner. Some of the leading VentureCapital firms of the Bay Area include SequoiaCapital (early investor in Yahoo, Apple and PayPal),Kleiner Perkins, Caulfield & Byer, also known asKPCB (early investors in Amazon, Google andGenentech) and Benchmark (early investors in eBay,Twitter and Yelp).

Some of the major institutional investors have usedthese three VC firms often to get their feet into PaloAlto. Abu Dhabi Investment Council (ADIC) hasreportedly co-invested with Sequoia Capital in fewstart-ups including Whatsapp and MongoDB, whileKPCB has partnered with Abu Dhabi InvestmentAuthority (ADIA), Alberta Investment ManagementCorporation (AIMCo) and Qatar InvestmentAuthority (QIA) in different funding rounds. Mostof the investors entering VC do not have the scale todo so on their own.

Temasek however, seems to be flying alone. TheSingaporean company has acted as Lead Investor inthe financing rounds of seven Unicorns, amongmany other digital investments. These have general-ly been late rounds (Series D to G), right before IPOor acquisition, and with slightly lesser risk, but wewould not be surprised to see them moving to earli-er rounds (Series A to C) in the next few years, asthey specialize and continue to leverage VertexVentures’ platform. GIC is also comfortable in thisspace, and has led some financing rounds like theSeries E of Square, which went into market at $3.6billion in Nov 2015.4

The most active Sovereign Wealth Funds betting oninnovation and technology – also known asSovereign Venture Funds as coined by JavierSantiso5 – are those of Singapore or Malaysia, butthey are not the only ones. In September 2012,China Investment Corporation (CIC) fundedAlibaba’s share buyback from Yahoo!, along withTemasek and CITIC Capital among others. The esti-mated stake of CIC in Alibaba was $2 billion.6

During 2015, the Chinese SWF also participated inthe late investment round of two start-ups, DidiKuadi and GrabTaxi, the smartphone apps hailingtaxis in China and Singapore respectively.

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4 https://www.crunchbase.com/organization/square#/entity

5 Forthcoming, Cambridge University Press. Javier Santiso is the Head

of IE’s SWLab

6 http://www.ibtimes.co.uk/alibaba-com-group-ecommerce-share-buy-back-

345228

Source: Sovereign Investment Lab, Bocconi University

18%

13%

7%

4%

Figure 19: Distribution of IT-linked Investment Value by SWFs

3%3%

2%

50%

Temasek

GIC

CIC

QIA

Khazanah

NPRF

Alaska

Others


Middle Eastern Funds are also bullish on technolo-gy – QIA has been one of the several investors inUber, after injecting an estimated $1.2 billion in theSeries E financing. The American Unicorn is cur-rently valued at $51 billion after 14 rounds of fund-ing and is arguably the world’s largest non-listedstart-up. Its Middle Eastern version, Careem, hasalso been successful in raising funds fromSovereigns, after the Kuwait Investment Authority(KIA) contributed with $10 million in the Series Cfunding round led by Dubai-based private equityfirm Abraaj Group. Other ME SWF investing intoVC include Oman’s State General Reserve Fund(SGRF), ADIA, ADIC, Mubadala and InternationalPetroleum Investment Corporation (IPIC), who

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invested through its subsidiary Aabar into TeslaMotors before its IPO.

Beyond South East Asia and the Middle East, NewZealand Superannuation Fund (NZ Super), hasinvested over $200 million in two energy-relatedinvestments – through the “Innovation Alliance”established with ADIA and AIMCo, and in a cleantechnology business called View. Alaska PermanentFund, who has traditionally been a Private Equityplayer with a third of its funds allocated to the alter-native portfolio, has invested c.$200 million in threedigital healthcare business in the past two years.Lastly, the Ireland Strategic Investment Fund (ISIF)manages a portfolio of over $500 million in com-



Figure 20: SWF Investments in IT-linked Sectors, 2008 - 2015

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

0

35

30

25

20

15

10

5

02008

Number of Deals

2009 2010

82.89326.69

2,465.53

2,960.85

125.0014.69

2011 2012 2013 2014 2015

Value(US$mn)

615.48

3,399.73


65

ArticlesArticles

mitments to Venture Capital funds, both domesti-cally (“Silicon Docks”) and internationally7.

The Internet of Things (IoT) is everywhere, and VCinvestments may involve a number of industry sec-tors, from e-commerce to education and healthcare,generally with a strong technological component.One of the hottest areas during the past two yearshas been FinTech, i.e. companies linking financialservices and payments with technology. BesidesSquare, a number of incipient payment technologieslike Ardyen and Funding Circle have been funded byinstitutional investors in the last year. We would notbe surprised to see them financing of others bitcoinsor cryptocurrency exchange businesses8 in the nextfew years.

All in all, Sovereigns have deployed c. $10 billion in93 technological investments in VC and Start-Ups –63% of it during the last two years, according todata from Sovereign Investment Lab.

This is not an industry exempt of question marksthough, and many analysts question the momentumof the digital sector – including concerns overexpected down rounds for several Unicorns during2016. The number of the $1bn+ start-ups has dou-bled in the last year and a half, and its abundance isa worrying similarity to the dot.com bubble,although experts insist in the decrease in IPOs(which was the ultimate trigger of the burst backthen) and in the revenue creation of many digitalcompanies these days. Valuations are a very subjec-

tive art when it comes to Venture Capital, and mul-tiples are certainly at the high end, but the partnerson the ground assure they have learned the lesson,and put the right structures in place to make suretheir Limited Partners do get their money back evenin case of default.

In the meanwhile, the base of investors continues toevolve, and analysts expect new ways of financingincluding Corporate Development, Crowdfunding,Syndicates, Super Angels and Co-InvestorNetworks. Most importantly, some institutionalinvestors are growing a “fear of missing out” thedigital train.

Sovereigns focusing on technology have a number ofoptions, from fund investing to direct and co-invest-ment, across all stages of venture, growth and buy-out capital. The first signs of 2016 continue to bepositive, and we expect to see a number of Investorsexploring these grounds in the next couple of years,as they diversify their Private Equities portfolio andincrease their exposure into the digital sector.

7 http://www.nprf.ie/Publications/2015/ISIFEventPresentation.pdf

8 http://www.strategy-business.com/article/A-Strategists-Guide-to-Blockchain


SWFs are finally considered a distinct type of institutional investor,inspiring a flourishing research and a vibrant debate amongst practitioners and policymakers


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In this section, we attempt to collect the most interesting studies pertaining SWFs that have been published(or that have made public) in 2015 and at the beginning of 2016. Our selection is by design limited, with the goal of identifying a roadmap to the most debated topics and the most influential works.

lower than the 5% abnormal return documented forstock purchases by comparable privately ownedfinancial investors in recent studies, indicating a“sovereign wealth fund discount.” We conclude bysummarizing the lessons of SWF research and point-ing out unresolved issues.

Bader Alhashel. 2015. “Sovereign Wealth Funds: Aliterature review”. Journal of Economics andBusiness 78 (2015) 1–13This paper reviews the research on the $6.65 trilliondollar Sovereign Wealth Funds (SWF). The litera-ture, which has only appeared in the last few years,focuses for the most part on the investment behav-ior of SWFs, especially in light of calls for the regu-lation of these financial entities. The literatureexhibits strong support for the idea that the motivesof SWFs are economic, rather than political, as theiropponents would claim. There appears to be con-flicting evidence as to whether SWFs increase value.

Locknie Hsu. 2015. “Sovereign Wealth Funds:Investors in search of an identity in the twenty-firstcentury”. International Review of Law 2015:swf.6.Sovereign Wealth Funds (SWFs), as they have cometo be known, are a hybrid type of foreign investor.They invest beyond their own borders with an aim tomaximize returns as a foreign investor is expected to.At the same time, they are closely associated withgovernments, by ownership, source of funding,and/or investment objectives. Even as within thisgroup, individual SWFs take various forms and mayhave divergent investment priorities and riskapproaches. There is not even a universal definition

General Perspective

William L. Megginson, Veljko Fotak. 2015. “Rise ofthe Fiduciary State: a Survey of Sovereign WealthFund Research”. Journal of Economic SurveysVolume 29, Issue 4, September 2015, Pages 733–778We survey the literature documenting the rise of sov-ereign wealth funds (SWFs), which, with assetsunder management of over $5.4 trillion at year-end2014, are a major force in global finance. Researchpapers have analyzed the evolution of SWFs fromstabilization funds to stand-alone wealth manage-ment funds; we both survey this research and showthat more than 25 countries have launched or pro-posed new SWFs since January 2008. The mostsalient and controversial feature of SWFs is that theyare state-owned; we survey the existing literature onstate ownership and discuss what this predicts aboutthe efficiency and beneficence of government controlof SWF assets. We discuss the documented impor-tance of SWF funding sources (oil sales revenues ver-sus excess reserves from export earnings) and surveythe normative literature describing how SWFs shouldallocate funds. We then summarize the empirical lit-erature studying how SWFs actually do allocatefunds—across asset classes, geographically, andacross industries. We document that most SWF equi-ty investments in publicly traded firms involve cross-border purchases of sizeable minority stakes (medianaround 20%) in target firms, with a strong prefer-ence for investments in the financial sector. Next, weassess empirical studies examining the impact ofSWF stock investments on target firm financial andoperating performance, and find universal supportfor a positive announcement period stock priceincrease of 1–3%. This, however, is significantly

Spotlights on research


of SWFs. As a result, they are often not viewed as typ-ical foreign investors. The association of a SWF witha foreign government has raised various issues such asnational security, trade protectionism and national-ism in the recipient countries. At the same time, dueto the government ownership of some SWFs, theymay fall into the group of business entities known asstate-owned enterprises (SOEs). Given that SOEs arehighly influential in some states, some recipient stateshave sought to subject SOEs to greater disciplines,such as in ensuring competition law and transparen-cy principles apply to them, in order to level the play-ing field for other enterprises. Such disciplines havebegun to appear in trade and investment treaties, andare coupled with the usual broad definitions of"investor" in such treaties. It is perhaps too early tostate that there is a trend of greater legal and cross-border scrutiny over SOEs, and along with them,SWFs, in treaties. The Trans-Pacific PartnershipAgreement that is under negotiation is an example ofa potentially game-changing treaty which could affectSWFs qua SOEs. The challenge for SWFs is to carvea distinct identity in the twenty-first century, as moretreaties that impose binding requirements arise. Thisarticle examines some recent developments, howSWFs may need to forge a unique identity and chal-lenges of recipient states in balancing investmentopenness and the above concerns.

Asset Allocation and Investment Strategy

Samuele Murtinu, Vittoria Giada Scalera. 2016.“Sovereign Wealth Funds’ InternationalizationStrategies: The Use of Investment Vehicles”. Journal

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of International Management, Forthcoming.In this work, we study the strategies driving cross-border sovereign wealth fund (SWF) investmentsworldwide. In particular, we investigate how SWFsinternationalize their activities, studying whetherthe use of investment vehicles as signal of passiveinvestment approach to access foreign markets isinfluenced by SWF- and deal-specific characteris-tics and the presence of bilateral trade agreementsbetween the SWF’s and the target country. We usea new dataset on SWF investments, whose size iscomparable with the datasets used in the mostpopular SWF studies. Our probit and multinomiallogit estimates show that fund opacity, fund politi-cization, strategic industry targets, and majorityownership choices lead to a more likely use of vehi-cles, while bilateral trade agreements negativelyaffect such investment strategy. When we disentan-gle the different types of vehicles and their geo-graphical location, we find that fund opacityincreases the likelihood to use SWF-controlledvehicles, while fund politicization, strategic indus-try targets, and majority ownership choicesincrease the likelihood to use a corporate vehicle.While, bilateral trade agreements reduce the use ofcorporate vehicles. As to the geographic locationof the vehicle, politicized foreign SWFs are morelikely to invest through vehicles located in thirdcountries. Instead, targeting strategic industriesleads to invest in vehicles located in the targetcountry. Our results control for SWFs’ strategicgoals, SWF experience (reliance on external man-agers or advisors, fund size), type of fundingsources, crisis period, deal-specific effects, andlegal and institutional differences across countriesand over time.



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Snorre Lindset, Knut Anton Mork. 2016. “Investingit, spending it: Interactions between Spending andInvestment Decisions with a Sovereign WealthFund”. Working Paper No. 1/2016 Department ofEconomics NTNU.The emergence of sizeable Sovereign Wealth Funds(SWF) in recent years has raised important ques-tions of how such funds should be managed andhow the proceeds should be spent. This paper takesa fresh look at these issues in view of modernfinance literature. The most important finding isthat investment management and spending decisionsshould not be separated because the preferred wayof spending carries implications for the investmentstrategy. This result becomes particularly apparent ifthe SWF, like Norway’s GPFG, is intended tofinance a smooth stream of government spending,which we model as saving and investment withinternal habit formation. The desire for backwardas well as forward smoothing has implications forboth portfolio rebalancing and overall risk taking,both of which should be limited. We furthermorefind that short-run smoothing raises the long-termvariability of spending because short-run smoothingaffects the fund’s principal value. The paper alsostudies the effects of time-varying risk-free rates andfinds that optimal spending should respond to suchvariations, though only partially. Lastly, we pointout that a spending rule based on the fund’s annuityvalue should adjust the normal rate of return forrisk. For the case of the Norwegian GPFG, the riskadjustment could reduce the optimal annual drawon the fund by an amount corresponding to as muchas 3% of mainland GDP. However, a rule based onpreferences among generations may be equallyrational as a rule based on the annuity value.

John Hassler, Per Krusell, Abdulaziz Shifa, DanielSpiro. 2015. “Sovereign wealth funds and spendingconstraints in resource rich developing countries –the case of Uganda”.A large increase in government spending followingresource discoveries often entails political risks, inef-ficient investments and increased volatility. Settingup a sovereign wealth fund with a clear spendingconstraint may decrease these risks. On the otherhand, in a developing economy with limited accessto international borrowing, such a spending con-straint may lower welfare by reducing domestic cap-ital accumulation and hindering consumptionincreases for the currently poor. These two contra-dicting considerations pose a dilemma for policymakers in deciding whether to set up a sovereignwealth fund. Using Uganda’s recent oil discovery asa case study, this paper presents a quantitativemacroeconomic analysis and examines the potentialloss of constraining spending through a sovereignwealth fund with a simple spending rule. We findthat the loss is relatively low suggesting that such aspending structure seems well warranted.

Mark Mietzner, Dirk Schiereck, Denis Schweize.2015. “The role of sovereign wealth funds as activistor passive fund managers”. Journal of AssetManagement (2015) 16, 303–315.Sovereign wealth funds (SWF) have attracted a lot ofmedia attention with recent investments in publiclylisted companies. Repeatedly, concerns have beenraised, such as the fear of industrial espionage orgeopolitical threats. We analyze whether SWF man-agers acquire stakes in foreign publicly listed firms(1) to play an active role that would support con-



cerns or (2) passively select investments to increasethe portfolio diversification, for instance. We findthat SWF target firms are more profitable, pay high-er dividends and have a higher financial stabilitythan their industry peers. This is in line with SWFmanagers passively seeking for further portfoliodiversification in foreign public equity markets. Wecannot find an improvement in operating or marketperformance after the engagement of SWF. Overall,our results indicate strong evidence that SWF man-agers primarily act as passive investors instead ofpursuing activism strategies like private equity funds.

Financial Markets and SWFs

Bernardo Bortolotti, Veljko Fotak, William M.Megginson. 2015.”The Sovereign Wealth FundDiscount: Evidence from Public Equity Investments”.The Review of Financial Studies (2015).Thanks to their long investment horizons, ability toacquire large stakes, and lack of explicit liabilities,Sovereign Wealth Funds (SWFs) have the potential toincrease firm value by being the ideal monitoringshareholders. Yet, SWFs might function as conduitsof political objectives inconsistent with shareholderwealth maximization. We find that announcement-period abnormal returns of SWF equity investmentsin publicly traded firms are positive, but lower thanthose of comparable private investments, indicativeof a “SWF discount.” Further, SWF investment tar-gets suffer from a decline in return on assets and salesgrowth over the following three years. Our results arerobust to adjustments for target and deal characteris-tics and are not driven by SWF target selection crite-

70

ria. Larger discounts are associated with SWFs takingseats on boards of directors and with greater stakesacquired by SWFs under strict government control,supporting the hypothesis that political influence neg-atively affects firm value and performance.

Ton van den Bremer, Frederick van der Ploeg,Samuel Wills. 2016. “The Elephant In The Ground:Managing Oil And Sovereign Wealth”. EuropeanEconomic Review 82 (2016) 113–131.One of the most important developments in interna-tional finance and resource economics in the pasttwenty years is the rapid and widespread emergenceof the $6 trillion sovereign wealth fund industry. Oilexporters typically ignore below-ground assetswhen allocating these funds, and ignore above-ground assets when extracting oil. We present a uni-fied stylized framework for considering both.Subsoil oil should alter a fund’s portfolio throughadditional leverage and hedging. First-best spendingshould be a share of total wealth, and any unhedge-able volatility must be managed by precautionarysavings. If oil prices are pro-cyclical, oil should beextracted faster than the Hotelling rule to generate arisk premium on oil wealth. Finally, we discuss howour analysis could improve the management ofNorway’s fund in practice.

Narjess Boubakri, Jean-Claude Cosset, JocelynGrira. 2016. “Sovereign wealth funds targets selec-tion: A comparison with pension funds”. Journal ofInternational Financial Markets, Institutions &Money 42 (2016) 60–76.This paper investigates the determinants of sover-



71

eign wealth funds’ (SWFs) decisions to invest inpublicly traded firms in comparison to pensionfunds. Using a sample of 344 firms targeted bySWFs over the 1991–2011 period and a controlsample of 663 firms targeted by pension funds, wefind that SWFs, in comparison to pension funds, aremore likely to invest in firms operating in strategicindustries as defined by Fama and French (1997)(financial sector, natural resources, mining, trans-portation, telecommunication and utilities) and incountries with sustainable economic growth andweak legal and institutional environment. Our find-ings are robust to disproportional size of someSWFs, their financing sources, their transparencylevel and acquisition activities during the recentfinancial crisis.

Transparency, Legal and Political Issues

Di Wanga, Quan Lib. 2016. “Democracy, Veto Player,and Institutionalization of Sovereign Wealth Funds”.International Interactions: Empirical and TheoreticalResearch in International Relations Volume 42, Issue3, 2016.Sovereign Wealth Funds (SWFs) have becomeimportant and controversial in global economy. Weanalyze why some SWFs have more encompassingand clearly specified governance rules than others.We argue that SWF institutionalization is structural-ly rooted in a country’s regime type and number ofveto players in public policymaking. Democracypromotes SWF institutionalization by its need forstrong rule of law, voters trying to constrain oppor-tunistic behaviors of politicians, and the free flow of

information. In contrast, the number of veto playershas a curvilinear effect. When the number of vetoplayers is very small, institutionalization is too rigid,constraining, and not preferred; when the numberof veto players is moderate, it is optimal for vetoplayers to manage their conflict over SWF gover-nance in a more routine and institutionalized fash-ion; and when the number of veto players growsabove a threshold, it becomes too costly to coordi-nate and produce mutually agreeable institutionalrules. Our empirical analysis of 46 SWFs in 30countries from 2007 to 2009 provides robust con-firming evidence. SWF governance is more institu-tionalized and transparent in democracies and incountries with four veto players. Our research hasimportant theoretical and policy implications for theongoing debate over SWF.

Edwin M. Truman. 2015. “Sovereign Wealth FundSpecial Issue Guest Foreword from Edwin M.Truman”. International Review of Law: Vol. 2015,Special Issue on Sovereign Wealth Funds, 1. Sovereign Wealth Funds (SWFs) burst on the inter-national financial scene a decade ago. At the time,there was not a full consensus on how SWFsshould be defined and the term SWF was not yetfully attached to them, despite the fact that theyhad been around for more than 50 years. Theirnumber and their assets (foreign and domestic)under management were growing rapidly. Thatspectacular growth was projected to continue,which it did not, but their strong growth in num-ber and assets has continued along with a host ofassociated issues. SWFs are fascinating toresearchers and practitioners precisely because



they raise so many interesting and important issuesof public policy, attracting experts and pontifica-tors with a range of specializations and promotinga healthy amount of intellectual cross-fertilization.Economists and financial experts study and writeabout SWFs while invading the turf of the politicalscientists and lawyers. Political scientists, includingspecialists in public administration and interna-tional relations, study and write about SWFs whileinvading the turf of the economists and lawyers.Lawyers with a wide range of expertise study andwrite about them while invading the domains ofpolitical scientists and economists. This specialissue of International Review of Law falls into thethird category. It is an excellent example of thebreadth of legal and public policy issues raised bySWFs. A SWF is special because, unlike most otherforms of asset management, the owner of the fundis the government on behalf of its citizens. As aresult, the managers of the SWF have special fidu-ciary responsibilities, and the operations of theSWF are subject to a high degree of scrutiny athome and abroad, the latter in connection withnational security and other potential concerns.Because SWFs are governmental entities, their gov-ernance receives special attention, again, at homeand abroad. This has led to self-governance initia-tives like the Santiago Principles, which wereinspired at least in part by my SWF scoreboard.SWFs also involve a wide range of public policyissues ranging from their tax treatment to theircoverage in trade agreements, bilateral and multi-lateral. Attention also focuses on SWF objectivesand associated investment strategies. Topicsinclude the extent to which SWFs should pursueshort-term stabilization strategies or longer-term

72

development strategies onshore or offshore. Thisissue of International Review of Law touches onmost of these SWF topics and many more. Itshould prove to be informative reading for anyoneinterested in being brought up to date on a rangeof legal aspects of SWFs, including the inevitableinterdisciplinary overlap.

Georges Kratsas, Jon Truby. 2015. “RegulatingSovereign Wealth Funds to Avoid InvestmentProtectionism”. Journal of Financial Regulation,2015, 00, 1–40.Chinese and Emirati purchases of US companieshave collapsed because of suspicions that theirSovereign Wealth Fund (SWF) status is a disguise forpolitical ambitions. SWFs have grown in size andnumber, drawing the attention of many governmentofficials because of their non-transparent nature andexpansionary investment policies. Their govern-ment-controlled status and non-transparent naturehave raised fears among governments of politicalrather than economic investment motivations. SWFsmay use their economic influence to obtain criticalinformation, transfer jobs abroad, or compromisethe operation of strategically important companies.Such concerns have led to proposals for nationalmeasures to regulate investments of foreign SWFswith a view to controlling their economic and secu-rity impact. This article questions whether the exis-tence of SWFs justifies the adoption a particular setof national or international foreign investment reg-ulations. It offers an assessment of competing mod-els from the viewpoint of theory, costs, and imple-mentation. It also examines the alternative model ofinternational self-regulation.



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Larry Catà Backer. 2015. “International FinancialInstitutions (IFIs) and Sovereign Wealth Funds(SWFs) as instruments to combat corruption andenhance fiscal discipline in Developing States”.International Review of Law 2015:swf.5.Especially since the start of the second decade ofthe twenty-first century, once more we have seenmore focused interest in the use of SWFs by homestates-less as a means of projecting sovereign finan-cial power outwards and more as a means of inter-nal financial management, and development. Whatmakes this interesting from the perspective of SWFdevelopment is the role of International FinancialInstitutions (IFIs) in SWF development. This articletakes a first look at the way in which IFIs have alsobegun to use SWFs in their interactions, with aemphasis on developing states. A review of somerecent efforts to establish SWFs with a stabilizationor development focus suggests the way in whichthese funds now may better serve the project of fis-cal and governance internationalization, and thedevelopment of global policy coherence around thefiscal ideologies of IFIs, rather than as an instru-ment of national policy. Part II briefly sketches theIFI's interest in and approach to SWFs as a part oftheir investment, capacity building and rule of lawtoolkits. Part III then reviews the manifestation ofthis approach in the development of SWFs in anumber of developing states. The article suggestsways in which stabilization and development SWFsmay better serve financial globalization than theparticular interest of states establishing them pre-cisely by transposing global standards of fiscal andgovernance behavior into the internal workings ofstates. In this sense, development and stabilizationSWFs serve as an instrument of globalization from

the top down (through IFI policy operationaliza-tion) perhaps as effectively as SWFs that seek toproject national financial power through privatemarket investments abroad. But it also creates thepossibility of divergence in SWF character as theconsequences of the use of SWFs as governancedevices may produce substantial deviation fromthe traditional organizational parameters of SWFsas instruments of macroeconomic policy.

Afshin Mehrpouya. 2015. “Instituting a transna-tional accountability regime: The case of SovereignWealth Funds and ‘‘GAPP’’”. Accounting,Organizations and Society 44 (2015) 15–36.This paper analyses the development of a transna-tional accountability regime, – the GenerallyAccepted Principles and Practices (GAPP), intro-duced in 2008 for sovereign wealth funds.Facilitated by the International Monetary Fund, theregime aimed to improve the transparency, gover-nance and accountability of these government-owned investment funds that originate primarilyfrom the Middle East and Asia. I focus here on thestruggles leading to the establishment of the bound-aries of the GAPP accountability regime by diagnos-ing the accountability problem, determining theproviders and the imagined users of the accountsand defining the appropriate course of action. I thenanalyse the struggles involved in negotiating theprocess and technologies used to establish theaccountability relationship including the role ofstandards in accounting, audit and risk manage-ment, as well as transparency and compliance pres-sures. In each case I identify the different ideas ortemplates that emerged during the negotiations and



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how consensus was achieved through careful steer-ing by a core coalition comprising the US Treasuryand the largest, most legitimate funds. I highlightthe need to go beyond typical fault lines in debatessurrounding the origins of global governanceregimes (e.g. local vs. global, western vs. non-west-ern, core vs. peripheral) by focusing on emergingcoalitions of local/global and western/non-westernactors that increasingly drive such regimes. I showhow the disproportionate representation of financialactors in such coalitions leads to less attention toquestions of public accountability, and insteadfocusing such regimes on financial accountability. Ifurther elaborate on the implications of the fall-backto transparency in transnational accountabilityregimes as a last resort and the types of resistanceemerging against it.



MethodologyOur data research methodology focuses on two mainobjectives: comprehensiveness of research and accu-racy of information. To ensure comprehensiveness,we survey multiple sources, primarily relying onestablished business and financial databases butemploying also press releases, published news, fundannual reports and many other data sources. Toensure accuracy, we follow a strict process for cap-turing deal information and we establish a clear hier-archy of sources, based on our estimate of reliability:

1 Financial transaction databases: Bloomberg,Thomson One, Zephyr (we have also usedDatamonitor and Dealogic in the past).

2 Database for target firm information:DataStream.

3 Sovereign Fund disclosures, including annualreports, press releases and other informationcontained on their websites.

4 Target and vendor company disclosures: pressreleases and other information contained on theirwebsites.

5 Regulatory disclosures: stock exchange filings forpublicly listed companies; Regulators; SEC 13Dand 13G Filings; Land Registries; CompetitionCommissions, and Bond/IPO prospectuses etc.

6 Service provider disclosures: such as lawyers,investment banks, and project financers workingwith the SWFs.

7 Information aggregators: LexisNexis andFactiva. Those include news reported bynewswires (Dow Jones, Reuters, Business Wire,Associated Press and others) and national newsagencies (KUNA, Xinhua, WAM etc.) numerouswell-regarded selected newspapers (e.g. The WallStreet Journal, Financial Times, New YorkTimes), and their regional equivalents (e.g.Economic Times, China Daily, The National),and the local trade press.

8 Other websites, including Zawya.com, GoogleFinance, Yahoo! Finance, AME Info, BBC Newsand others. Most of the deals are amassed andconsolidated from the financial transaction data-bases, while the other sources are mostly used forcorroboration where necessary. At least one high-quality source is captured for each data point,and, where possible, multiple sources are identi-fied. News items from information aggregatorssuch as LexisNexis are carefully examined toascertain the reliability of the original source.

Appendix

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