Sovereign
Wealth Funds
and
U.S. Policy
Frantz Price, Jr.
ITRN 701-008
Contents
1) Overview of Sovereign Wealth Funds (SWFs)
2) Current Role of SWFs in US and Global Economy
3) Overall Concerns
4) Policy Proposal
What Are Sovereign Wealth Funds?
•
Four main types of sovereign wealth investment vehicles:
1) Sovereign Wealth Funds (SWFs)
2) International Reserves
3) Public Pension Funds
4) State-Owned Enterprises
•
Like the other forms, SWFs are owned and managed by national governments.
•
In contrast however, SWFs have traditionally had the capacity and mandate
from their national governments to take on riskier investments with a higher
rate of return.
•
Run purely to increase the wealth of the state, not to pay off any specific debt.
SWF Overview
• SWFs currently
manage close to $5
trillion in assets, with
that number expected
to grow to over $12
trillion by 2015.
• Growth due to rapid
rise in commodity
prices, large trade
surpluses in emerging
economies, and
surging foreign
exchange reserves.
SWF Overview
• Two types of SWFs:
1.
Commodities Based
•
2.
Oil producing countries in the Middle East, Norway
Foreign Exchange Oriented Funds
•
Strong export-led economies that have developed vast foreign exchange
reserves, are investing that wealth through SWFs (i.e., China, Singapore)
• First SWF, Kuwait Investment Authority, created in 1953 to invest country’s oil revenues.
• Since 2005 at least 17 new SWFs have been created, including the China Investment
Corporation (“CIC”), which was launched in 2007 to manage a portion of China’s
enormous foreign exchange reserves.
• CIC, Temasek Holdings of Singapore and the Government of Singapore Investment
Corporation, represent alternative model of SWFs built on mercantile power and huge
export-led growth rather than vast oil reserves of petroleum.
SWF Breakdown
Source: SWF Institute, 2010
Largest SWFs (Total Assets)
Source: SWF Institute, 2010
SWF Funding and
Investment
Top Countries for SWF Direct Investment Inflows 2005 to 2011 (US$ billion)
Source: SWF Institute, 2010
SWF Governance
• SWFs increasingly managed by western-trained experts.
• ADIA’s CIO for Private Equity, Chief Economist and Chief Risk
Officer are all American educated Wall Street veterans.
• The Korean Investment Corporation has an American CIO
who has emphasized his intention to diversify their portfolio.
• SWFs are generally run like pension funds, looking to
preserve capital and maximize returns.
• Most of the private equity investments made by SWFs
are actually intermediated through large private equity
firms (KKR, Blackstone, etc.)
US Policy/Legal Concerns
“A lack of transparency that characterizes many SWFs
undermines the theory of efficient markets at the heart of
our economic system. In addition, …government ownedentities may have interests that will take precedence over
profit maximization. Just as the United States has
geopolitical interests in addition to financial ones, so do
other countries. …Why should we assume that other nations
are driven purely by financial interests when we are not?”
- Former US Senator Evan Bayh
US Policy/Legal Concerns
• Greatest US Congressional and policy concerns over
SWFs have focused on:
1. the lack of transparency within SWF governance and
investment portfolios, and
2. the potential use of SWF capital for strategic
geopolitical (i.e., non-commercial) purposes, with
possible national security consequences.
Transparency
• No international regulations or disclosure requirements re: size
of SWFs, their investment strategies, or portfolio composition.
• With the lack of transparency, difficult to assess whether SWFs
are pursuing strategic, non-commercial investment strategies,
or are engaging in mismanagement/corruption.
• The Peterson Institute of International Economics (IIE) and the
SWF Institute (the Linaburg-Maduell Transparency Index)
created indexes quantifying SWF transparency and
accountability. Both found that the largest funds (i.e., owned by
the UAE, Qatar, Kuwait, and China) scored poorly.
Geopolitical Concerns
• Significant concern over SWF investment motivated by noncommercial, geopolitical considerations.
• US policy makers worry that countries will use SWFs to support
“state capitalism,” employing government-controlled assets to
secure strategic stakes in areas like telecom, natural resource
extraction, and financial services.
• Recent examples illustrating US political sensitivity include
China’s global investments in mining, minerals and energy
assets, and DP World’s bid to takeover operations of 6 US ports.
SWF Reform Measures /
Santiago Principles
• “Santiago Principles” for SWF transparency/disclosure were
formally adopted in October 2008 by 24 nations and many of
the world’s leading SWFs.
• Key points include commitments to increase transparency,
adopt best practices for risk management, and keep decisionmaking more independent from sponsoring governments.
• Slowly, the Santiago Principles have begun to take hold:
• In 2010, the CIC filed a voluntary report with the SEC.
• The Singapore Government Investment Corporation and the ADIA
also recently published their first annual reports.
Recent SWF Investment in
the US
• The financial sector has been the biggest target for SWF investment in the US.
• However, heavy investment in that sector meant heavy losses; SWFs are
looking to further diversify investments as a consequence.
Top Sectors for SWF Direct Investment Inflows into
the US from 2005 to 2011 (US $billion)
Source: SWF Institute, 2010
Recent SWF Investment in US
Banks/Investment Funds
BANK/INVESTMENT FIRM
DATE
Blackstone
5/2007
CIC/China
$3.0 billion
Apollo Management
7/2007
Abu Dhabi Investment
Authority (ADIA)
9% stake in Apollo
Carlyle Group
9/2007
Mubadala (Abu Dhabi)
$1.35 billion
11/2007
ADIA
$7.5 billion
1/2007
Kuwait Investment Authority
$3.0 billion
1/2008
Government of Singapore
Investment Corporation (GIC)
$6.88 billion
12/2007
CIC
$5.0 billion
12/2007
Temasek (Singapore)
$4.4 billion
1/2008
Kuwait Investment Authority
$2.0 billion
1/2008
Korean Investment Corporation $2.0 billion
2/2008
Temasek
$0.6 billion
7/2008
Temasek
$0.9 billion
Citigroup
Morgan Stanley
Merrill Lynch
SWF
VALUE OF INVESTMENT
Source: Bolton, Patrick, Samama, Frederic, and Stiglitz, Joseph. Sovereign Wealth Funds and Long-Term Investing. Columbia University Press,
November 2011.
Policy Proposal –
Infrastructure Investment
• It would benefit US policy makers on the
federal, state and local level to encourage
SWF investment into infrastructure.
• The public sector is facing drastic capital
shortages; the aggregate public debt is
about 94% of GDP.
• Since the 1980’s, less than 2% of our GDP
has been allocated to infrastructure, versus
5-7% in other parts of the developed world.
• As recently as 2009, outages and
disturbances to our power grid were costing
the US economy up to $180 billion per year.
• ¼ of our bridges are considered structurally
deficient or functionally obsolete.
US Infrastructure Spending
• The US ranks No.
16 in world
infrastructure
spending, falling
from No. 6 in
2007-2008.
• According to
Reuters, “the
quality of
American roads is
on par with those
of Malaysia.”
Infrastructure Investment
• Traditionally, the financing of infrastructure programs falls
on state and local government through issuance of
municipal debt.
• Recently, as states/municipalities have struggled with
budget deficits, those historical sources of state/local capital
formation have dried up.
• As an alternative to that model, state/local governments
have been exploring greater public – private partnerships in
order to attract investment.
Infrastructure Investment
• SWFs have expressed increased public interest in taking on minority stakes in
infrastructure investment vehicles. As an asset class, infrastructure investment is
appealing because of low risk and predictable returns.
• Many private infrastructure funds already exist, pooling money from investors including
SWFs. A broader range of investment models could be created to balance needs of
SWFs with political need to limit foreign control and ownership of US infrastructure
investments.
• This limits the role of individual investors to minority shareholder without rights of
operational control, creating a buffer between municipalities and SWFs, and protecting
against the politics of a SWF investing directly in sensitive infrastructure (DP World, etc.).
• SWFs are not generally built to take on operational control; they are investment funds
that look to collect returns rather concern themselves with management of assets.
• Obama has proposed this nationally (“Infrastructure Bank”), but the same could be
accomplished on a state/local level. Such an investment pool could invest with private
infrastructure funds, make direct investments or partner with operating companies.
Infrastructure Investment
• A March 2011 Brookings study encouraged US policy makers
to become more open to foreign investors (including SWFs),
and consider offering tax breaks and loan guarantees as
incentives to get SWFs to invest in U.S. infrastructure.
• Some distrust still remains, both on the US side and with SWFs
wary of our regulatory/political environment (i.e., CIC’s first
foreign office opened in Canada rather than the US).
• To build greater trust, a regular dialogue should take place
between SWFs and US political entities.
Infrastructure Investment
• Default Risk to SWFs?
• From June 2011 Fitch Ratings study:
• The long term nature and essential public necessity of
infrastructure assets create a “potential annuity value for investors
that cannot be matched by the corporate sector.”
• “Although projects’ default risks may vary case by case, there is
little likelihood of winding down a national airport, a state highway
or a municipal water system.”
• SWFs have the desire to invest and the US has a clear
need for a capital infusion to rebuild our infrastructure.
Questions?
Sources
1.
Bolton, Patrick, Samama, Frederic, and Stiglitz, Joseph. Sovereign Wealth Funds and Long-Term
Investing. Columbia University Press, November 2011.
http://www.cup.columbia.edu/media/7190/bolton-sovereign-wealth-funds.pdf.
2.
Clinton, Hillary Rodham. “Remarks at the G20 Ministerial.” U.S. Department of State, February 19, 2012.
http://www.state.gov/secretary/rm/2012/02/184623.htm.
3.
Ferguson, Niall. “We’re All State Capitalists Now.” Foreign Policy, February 9, 2012.
http://www.foreignpolicy.com/articles/2012/02/09/we_re_all_state_capitalists_now?page=full.
4.
Fotak, Veljko and Megginson, William. “Are SWFs Welcome Now?” Vale Columbia Center on Sustainable
International Investment, No. 9, July 21, 2009.
http://www.vcc.columbia.edu/pubs/documents/FotakandMegginson-Final.pdf.
5.
“Funding the Future.” Columbia Business School: Ideas at Work, January 31, 2012.
http://www4.gsb.columbia.edu/ideasatwork/feature/7322021.
6.
International Working Group of Sovereign Wealth Funds. “Santiago Principles.” October 2008.
http://www.iwg-swf.org/pubs/eng/santiagoprinciples.pdf.
7.
Jackson, James K. “Foreign Investment, CFIUS, and Homeland Security: An Overview.” Congressional
Research Service, March 30, 2011. http://www.fas.org/sgp/crs/homesec/RS22863.pdf.
8.
Kornbluh, Karen. “Remarks of the US Ambassador to the OECD.” October 16, 2011.
http://usoecd.usmission.gov/swf.html.
Sources (cont.)
9.
Laing, Keith. “Obama Pushes for Infrastructure Bank Proposal After Debt Deal.” The Hill, July 11, 2011.
http://thehill.com/blogs/transportation-report/highways-bridges-and-roads/170681-obama-pushes-for-infrastructure-bankproposal-after-debt-deal.
10.
Martin, Michael F. “China’s Sovereign Wealth Fund: Developments and Policy Implications.” Congressional Research Service,
September 23, 2010. http://www.fas.org/sgp/crs/row/R41441.pdf.
11.
Nandakumar, S. “Debt Capital Markets & Infrastructure Investment.” Fitch Ratings, June 19, 2011.
http://www.fitchratings.lk/download-article-135.pdf.
12.
“Sovereign Wealth Funds.” New York Times, December 7, 2009.
http://topics.nytimes.com/top/reference/timestopics/subjects/s/sovereign_wealth_funds/index.html.
13.
SWF Institute. http://www.swfinstitute.org/.
14.
Teslick, Lee Hudson. “Sovereign Wealth Funds.” Council on Foreign Relations, January 28, 2009. http://www.cfr.org/internationalfinance/sovereign-wealth-funds/p15251#p10.
15.
“The Largest Sovereign Wealth Funds by Assets Under Management.” Sovereign Wealth Funds News, September 16, 2011.
http://www.sovereignwealthfundsnews.com/ranking.php.
16.
Weiss, Martin A. “Sovereign Wealth Funds: Background and Policy Issues for Congress.” Congressional Research Service,
September 3, 2008. http://fpc.state.gov/documents/organization/110750.pdf.
17.
West, Darrell M., et al. “Rebuilding America: The Role of Foreign Capital and Global Public Investors.” Brookings Institute, March
11, 2011.
http://www.brookings.edu/~/media/Files/rc/papers/2011/0311_sovereign_wealth_funds/0311_sovereign_wealth_funds.pdf.