Many of the state-owned SWFs, such as the Kuwait Investment Authority, have in fact been in existence for half a century or more. However, the spotlight has only really been focused on these funds in the past two or three years. This is primarily due to the abundance of super liquidity arising from the spike in the price of commodities, most notably oil (up from $10 (£5) a barrel in 1990 to $100 (£50) or so now) but also the steady decline in the dollar, which has had a marked impact on the fortunes of China and other east Asian countries.
On the defensive
According to Morgan Stanley, ADIA controlled around $875m (£434m) in assets at the end of 2007. As of the beginning of this year, estimates put the total assets controlled by SWFs worldwide at nearly $3trn (£1.5trn); by contrast, the total amount managed by hedge funds globally was estimated at $1.5trn (£743bn). Furthermore, the assets controlled by SWFs are set to increase, with some commentators estimating that SWFs will control $10trn (£5trn) in five years’ time.
The concerns expressed about these investments relate to the fact that whereas state funds were historically used purely as an economic tool to protect domestic currencies from crisis and other ‘defensive’ measures, SWFs now have wide investment powers that permit them more or less to invest in anything they want and therefore concerns centre on whether resource-rich countries’ governments will use their investments as a means of wielding power or implementing their foreign policy. Add to the mix an opaque ownership structure and a propensity towards secrecy (both in terms of what investments are being made and the rationale for them) and you have the background for the calls for increased transparency.
Investments across the world are facing much closer scrutiny. After the recent acquisition by Chinese state-owned aluminium giant Chinalco of a 12% interest in London-listed Rio Tinto, Australia showed itself to be the first nation prepared to take steps to control the activities of SWFs by outlining a series of principles aimed at increasing transparency and ensuring that government-owned groups will have to demonstrate that the operations of the SWF are independent of the foreign government and its funding and governance.
With the European Union’s recent announcement of a set of principles for transparency, predictability and accountability, the groundswell for a code of practice to be adopted is growing. Unless the SWFs start to address the widespread concerns by voluntarily agreeing to become more transparent about the investments they are making and the rationale behind them then it seems likely that countries will increasingly take the matter into their own hands by creating specific legislation which might have the effect of curbing investments by SWFs.
Each country adopts a different protectionist stance. In the
For some (such as the Norwegian fund, which is generally regarded as the model of transparency and accountability) it will be business as usual, whereas for the more recently set-up funds (such as the Russian and Chinese, which are often cited as being the least transparent) the challenges will be greater. The Dubai-based SWFs have for some time understood the need to pave the way in a new market by winning hearts and minds. Many of the so-called SWFs, particularly in
- making acquisitions in a variety of sectors, many of them not deserving of the degree of scrutiny or having the degree of sensitivity as, say defence or infrastructure;
- competing with other asset classes like private equity for deals;
- financing their acquisitions with debt to get leverage and thereby maximising the returns on their equity;
- holding and realising their investments as any sensible fund manager would; and
- pursuing investment returns rather than acting as an arm of the State acting out foreign policy for the Government or the sovereign.
The counter argument is that it is not just one-way traffic and that the deals being done (in the financial institutions sector, for example) are paving the way for Western businesses to enter new markets, such as
Nick Bryans is managing partner at Ashurst in
