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New Sovereign Wealth Fund Trends

April 18, 2017

Sovereign wealth funds (SWFs) can generally be classified into two major types: those used primarily for fiscal stabilization purposes (i.e., “rainy day” funds), and those used as savings funds to assist with long-term infrastructure projects for the country.

There has been an increasing number of sovereign wealth funds being created in the latter category. This trend is noticeable in countries encumbered by large amounts of debt as a means to stimulate economic growth. These types of SWFs are often funded by governments transferring their stakes in large companies into the fund, which would then attract foreign co-investors. This is much different from more conventional SWFs, which are typically funded through natural resources and exports. 

Sovereign Wealth Fund Trends Across Countries

We have previously blogged about the proposed new sovereign wealth fund in India, which would be focused on the augmenting resources and attracting foreign investment. More examples of similar uses of SWFs include:

Turkey
The Turkish government recently transferred its holdings in the country’s largest bank as well as holdings in a state-owned phone company into a newly created sovereign wealth fund. The fund was created to finance large infrastructure projects and was approved by Turkish parliament in August 2016. 

The fund will ultimately use proceeds from sales of assets to finance large-scale infrastructure projects like roads, railroads, seaports, and airports. Turkey’s Sovereign Wealth Fund Chairman Mehmet Bostan says that the goals include not only asset transfers to the fund, but the creation of new value as well. The fund may also be looking to enter into more agreements similar to the Memorandum of Understanding signed between Turkey’s SWF and Russian Direct Investment Fund. 

Funds in Africa 
Nigeria’s sovereign wealth fund, worth $1.5 billion, is starting to shift its focus from external to domestic investment. The Nigeria Sovereign Investment Authority (NSIA) currently devotes 40% of its capital into global assets with a horizon of greater than 20 years. However, they also allocate an additional 40% of assets into domestic projects. Sectors such as agriculture, highways, and power receive priority. 

Similarly, Angola’s sovereign wealth fund recently announced its intention to invest $180 million in a deep-sea port. The fund’s portfolio has a private-equity logic to it that also includes business hotels and farmland. 

New Caledonia
A panel of experts appointed by the French government has recommended the creation of a sovereign wealth fund in New Caledonia. Such a fund would help to diversify its economy, which is heavily reliant on nickel. The fund would help to offset the impact of weaker nickel prices and provide stability in the event of nickel reserve depletion. Nickel prices have been falling since mid-2014, causing more reliance on subsidies from France. 

Risks and Concerns

A main advantage of creating an SWF is that it can increase the amount of networks and contacts, and can allow for more global communication and interaction. 

On the other hand, the strategy of using of sovereign wealth funds as vehicles for economic stimulus is not without its risks. Some potential pitfalls and points of criticism in this regard include:

  • Outright corruption: With some fund models, normal budgetary procedures may not be fully applicable, which can allow for ways of circumventing normal oversight and scrutiny of projects
  • Difficulties in assessing performance: Infrastructure projects can boost economic growth, but it can be difficult for this to be directly reflected in a fund’s balance sheet; also, funds might not publish returns benchmarks, which can make it difficult to determine whether investments are profitable
  • Misallocation: Funds collected for specific purposes can sometimes be used to finance more pressing issues rather than the key infrastructure projects they were intended for

Also, giving states more hands-on roles in the economy requires credibility from the government; this may be an issue where government credibility is shaky, especially on account of political corruption. 

Thus, it is apparent that transparent management of sovereign wealth funds will be one of the most important concerns as more and more developing economies begin to utilize such vehicles. Clearly defined investment strategies can also help to prevent misallocation of funds and can help to establish clear goals for funds. 

The focus on domestic development and infrastructure projects carries with it a whole host of new regulatory factors and legal issues to consider, especially in the areas of transparency and accountability. If you have any questions or concerns regarding the key role of large institutional investors, contact us today at Kessler Topaz. Our sophisticated client base is comprised of over 200 institutional investors, and includes sovereign wealth funds, hedge funds, investment advisors, and other large investors in the U.S. and around the world.