An analysis of publicly-reported equity market transactions involving sovereign wealth funds since January 2000 by the Monitor Group, a consultancy firm, found that investments in transportation, defence and aerospace and high technology made up less than one per cent of the value of deals tracked.
While half of the publicly-acknowledged transactions since 2000 resulted in majority-stake acquisitions, most of these deals occurred in domestic and emerging markets and in sectors such as consumer products and services and industrials not generally considered politically sensitive.
Observing that sovereign wealth fund investments in US and European banks had aroused suspicion, the report, Assessing the Risks: The Behaviours of Sovereign Wealth Funds in the Global Economy, said that such transactions have been driven by financial rather than political objectives.
It is argued that once a sovereign wealth fund invests in a foreign company, it has “bought in to the existing system” and therefore has a clear financial interest in playing by the rules. This makes it difficult, though not impossible, to imagine a sovereign government leader attempting to use a sovereign wealth fund to achieve foreign policy goals.
The report noted that sovereign wealth funds are taking on greater financial risk by investing less in government bonds and more in higher-risk asset classes such as OECD and emerging market equities, real estate and alternative investments. This beckons the possibility that a sovereign wealth fund could introduce an unacceptable level of financial risk into another country’s markets through an overly aggressive investment strategy. The spectre is raised of a highly-leveraged sovereign hedge fund betting the wrong way and collapsing.
A number of scenarios are summoned to show how sovereign wealth funds could abuse their financial clout in the future. For instance, in a battle to secure long-term access to natural resources and export markets, it is suggested that sovereign wealth fund states could secretly use the power of insider information gained through foreign intelligence assets to arbitrage currency, commodity and futures markets.
In such a scenario, said the report, “SWFs might be perceived as ‘market-makers’, thereby creating incentives for private equity fund managers, hedge fund traders and day traders to try to ‘front-run’ SWF investment activity, thereby creating market volatility and sub-optimal asset pricing”.
Despite the scare stories, the report maintained it was more likely that sovereign wealth funds would continue to invest for financial gain. Some countries would start regulating sovereign wealth funds, while some funds would voluntarily adopt codes of conduct designed to allay concerns about politically-motivated investing.
Monitor Group investigated data on 1181 sovereign wealth funds transactions involving 25 funds from 1975 to March 2008. Filters were applied to the data leaving 17 funds with a total of 785 deals and $251bn (€161bn) of investments made between 2000 and 2008. The bulk of these transactions originated in the Middle East and Asia.
