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Source: NCB Capital

Sovereign Wealth Funds … a year on

The Great Oil Boom of the early 21st century saw the emergence of a number of government funds seeking to channel the extraordinary windfall into investments. These Sovereign Wealth (SWFs) Funds were by no means a new phenomenon; nevertheless, a sudden increase in their numbers, assets, and range of activities brought them into limelight in an unprecedented way. The result was a clash between investment cultures with many Western governments, the media, and the general public criticizing the funds for opaqueness and a politicized agenda. Attitudes began to change with the onset of the credit crunch, which quickly revealed capital constraints at some leading Western financial institutions. The funds were in many cases allowed to provide capital, but their willingness to continue to do this has since then been challenged by the severity of the crisis and the losses incurred on their earlier investments. The way forward is likely to be much more gradual and low-profile, under the circumstances.

Although the first SWF — the Kuwait Investment Authority (KIA) — was set up as far ago as in 1953, subsequently followed by the gradual emergence of other comparable institutions, it was only during this decade that these funds came to the fore as investors of truly global importance. The emotions they generated in the West were reminiscent of the dismay triggered by the recycling of petrodollars in the ‘70s and ‘80s and the fears over Japan’s ascendancy in the ‘80s. Some deals were blocked on political grounds, typically after considerable public debate, while the media fueled fears that SWFs would refuse to play by the standard rules of corporate governance and might disadvantage minority shareholders. In some cases, strategic considerations played a role and amplified the debate. There were widespread calls for formal regulation of sovereign foreign investors, especially in the US, Germany, France, and Italy. The International Monetary Fund put in place the ‘Generally Accepted Principles and Practices’ or Santiago Principles, which were adopted by a number of major SWFs. This represents an important step toward institutionalizing corporate governance norms in a way that addresses key concerns from the pre-crisis period. Some funds took similar steps unilaterally or through agreements with individual governments.

Beyond the media circus, however, there was a quiet recognition of that fact over half a century of SWF activity had yielded no examples of SWF investments being detrimental to the recipient country because of attempts to use political leverage. Indeed, SWFs had only seldom been active investors with major stakes. At the same time, many governments were well aware of the benefits associated with the stable and long-term nature of sovereign foreign investments, boosted by the fact that SWFs tend to be exceptionally sound investors, typically with no commercial liabilities. As a result, the SWFs are likely to face less pressure than most private investors to reduce the size or increase the liquidity of their investments. These more positive attitudes quickly came to the fore after the onset of the credit crunch when the troubles of many leading Western companies, especially in the financial sector, forced them to seek capital injections where they could find them. Many of them now welcomed private sector solutions or foreign capital over the constraints that would have come with domestic government funding. As a result, SWFs came to the rescue of US and European financial institutions by purchasing around USD60bn of new equity in early 2008.

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