Monitor SWF Report Final

Assessing the Risks
THE BEHAVIORS OF SOVEREIGN WEALTH

FUNDS IN THE GLOBAL ECONOMY
William Miracky Davis Dyer Drosten Fisher Tony Goldner Loic Lagarde Vicente Piedrahita
June 2008
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Assessing the Risks
THE BEHAVIORS OF SOVEREIGN WEALTH
FUNDS IN THE GLOBAL ECONOMY
Executive Summary .......................................................... 2
Introduction ........................................................................ 6
The Storm over SWFs ......................................................10
SWFs and the Global Financial System ....................... 20
SWF Behavior: The Evidence of Public Transactions ...32
Categorizing SWFs by Behavior ................................... 48
Scenarios for the Next Five Years .................................54
Implications, Conclusions, and Questions ................... 62
Appendix .......................................................................... 75
PROFILES OF SELECTED SWFs .................................................... 75
SOURCES AND BIBLIOGRAPHY ................................................... 86
ENDNOTES ............................................................................. 87
Appendix Summary
Executive
Most attempts to
define it focus on basic
characteristics such as
ownership, governance,
funding sources,
investment strategy, and
purposes or uses.
ASSESSING THE RISKS 3
Executive Summary
THE RECENT, RAPID RISE of sovereign wealth funds (SWFs) has ignited
controversy in many parts of the world. In OECD countries, many observers worry
that SWFs could be instruments of state policy posing as investment vehicles. On the
other side, representatives of nations with SWFs protest that their motives are purely
financial and that they wish to participate responsibly in the global financial system.
Although SWFs have been the subject of much public attention and recent research
reports, most commentary and analysis considers the funds at an aggregated level
and reaches similar observations and conclusions: that SWFs are targeting invest-
ments in OECD countries; that they wish to invest in politically sensitive sectors; that
they prefer to acquire minority stakes; and that they are moving from conservative to
higher-risk investments.
Although SWFs have
In our view, such conclusions — and the current debate been the subject of much
itself — are not well informed by perspective on the actual public attention and recent
behaviors of SWFs. Accordingly, Monitor Group launched research reports, most
an investigation into the funds, focusing on their behaviors commentary and analysis
and the responses of major constituencies around them. considers the funds at an
aggregated level.
This report is based on analysis of more than 1,100 pub-
licly-reported SWF equity transactions between 1975 and March 2008, representing
approximately $250 billion in value. Monitor researchers also interviewed a cross-
section of fund managers, policy makers, investment professionals, and expert
commentators and analysts.
WALL STREET, NEW YORK CITY

Last year, funds from Asia and the Gulf
were active investors in U.S. equities.
© MONITOR COMPANY GROUP, L.P. 2008

4 ASSESSING THE RISKS
Executive Summary
How does the conventional wisdom stack up in light of the facts? Not well. Rath-
er than a narrow focus on the OECD, SWFs show a keen interest in domestic
and emerging markets. Rather than posing a potential threat to national security,
SWFs avoid sensitive sectors and industries. And rather than only acquiring minor-
ity shares, SWFs often take controlling stakes in their
Rather than only acquiring deals. One commonly-held belief appears to be true:
minority shares, SWFs SWFs are in fact moving increasingly towards higher-
often take controlling risk investments.
stakes in their deals.
This report is aimed at three main audiences: the funds
themselves, financial institutions, and policymakers in
government. We aim to provide each with specific, targeted information to allow
them better to understand concerns about SWFs and make better decisions.
The main findings are:
• SWFs invest heavily in domestic and emerging markets. A majority of SWF investments
by value occur in OECD markets, although the proportion is magnified by recent
large investments during the credit crunch of 2007-2008. More than half of all
transactions by number have occurred in domestic and emerging markets.
• Recent SWF investments in U.S. and European financial services firms are atypical and
opportunistic, reflecting the credit crunch of 2007-2008. Most SWF investments have
occurred in financial services, real estate, and industrial companies, with most
publicity focused on financial services. Controlling for the effects of the recent
credit crunch, the apparent appetite for investment in this sector drops markedly,
though it remains significant.
• SWFs do not appear to be investing for political motives. Some funds are making strate-
gic investments to hasten economic development in their home country, but they
do not appear to be active in ways that threaten the economic or national security
of foreign countries where they invest.

Executive Summary
• SWFs are willing to take controlling stakes in companies. In contrast to prevailing views,
since 2000, SWFs have acquired controlling stakes in half of their transactions
for which stake data are available. By far most of these deals occurred in emerg-
ing markets and in sectors not generally deemed politically sensitive.
• SWFs are taking more financial risk with their investments. Most SWFs are adjusting
their portfolios to combine conservative and relatively liquid asset classes, such
as government bonds, with higher-risk, illiquid assets such as equities, real estate,
and alternative instruments.
• Each fund has a distinctive investment pattern. Attempts to categorize SWFs by age,
size, region, purpose, form of their sovereign government owners, or stage of
economic development of their home country obscure important differences
between them.
• These funds can be grouped along two dimensions of risk: financial risk and sovereign own-
ership risk (the risk posed by the sovereign government owner to other nations
in which its SWF may invest). At present, the behaviors of the funds indicate
moderate levels on these risk dimensions. The worst fears of concerned observ-
ers have not materialized and there is no evidence that they will.
• While helpful along a number of dimensions, increased transparency of SWFs will not mitigate
concerns about politically-motivated investing. Greater transparency will facilitate a better
understanding of SWF financial objectives and performance and help inform the
markets, but it will not put to rest the underlying political concerns in some nations
about investments made by funds owned by particular foreign governments.
• Coordinated, multilateral regulation of SWFs is unlikely. Based on scenario analysis,

it is probable that the evolution of the funds and their reception in global
markets will continue in ways already apparent, peacefully and in piecemeal
fashion. It is unlikely that SWF activity will aggravate international tensions
leading to a political backlash.

Introduction
Introduction
SOVEREIGN WEALTH FUNDS (SWFs) are increasingly visible and active in

global financial markets. In 2007, the funds invested $92 billion in publicly-recorded
equity transactions, compared with just $3 billion in 2000. This trend appears to be
accelerating. SWF investments during the first quarter of
2008 ($58 billion) surpassed their combined total for the In 2007, the funds
years 2000–2005 (approximately $50 billion). invested $92 billion in
publicly-recorded equity
The recent, rapid rise of SWFs has drawn attention and transactions, compared
triggered controversy around the world, surfacing fre- with just $3 billion in 2000.
quently in public inquiries, discussion, and the media.1 In
OECD countries, the loudest voices are critical, concerned that SWFs will pur-
sue the political objectives of their sovereign government owners. Critics ask: are
SWFs instruments of state policy posing as investment funds? Are they a threat to
national security? Are they a sign of a shifting balance of economic and financial
power from the OECD to emerging nations? Do they portend a new economic
model of state capitalism?
On the other side, among nations with SWFs, supporters of the funds protest that
their motives are purely financial. They want to increase national wealth to address
domestic social and economic priorities as well as to participate responsibly in the
global financial system.
It is too early to say whether SWFs constitute a threat to the existing world order
or signify a new order to come. There is a pressing need, however, to understand
SWFs better. Most current commentary focuses on the funds at an aggregated level
MAP OF ANCIENT BABYLONIA, CA. 550 BC.

Historically, the Middle East and Asia have been leading global
centers of trade and investment.

Introduction
and does not penetrate into their actual behaviors, which are the best available indi-
cators of likely future intentions and actions in global financial markets.
Late in 2007, Monitor Group formed a research team to investigate SWFs. We

started from the proposition that investment activity provides a window into the in-
tentions and behaviors of the funds. We reviewed public information about SWFs
and their transactions and interviewed more than
What we see challenges twenty representatives of constituencies involved. In
some widespread beliefs partnership with Grail Research (a unit of Monitor
about SWFs while qualifying Group), we also built a database of more than 1,100
and confirming others. publicly-recorded SWF transactions between 1975 and
March 2008.
Our data likely represent the tip of the iceberg, since most fund activity is private and
unreported. That said, we can only comment on what we see, and what we see chal-
lenges some widespread beliefs about SWFs while qualifying and confirming others:
• SWFs invest heavily in domestic and emerging markets. Although

their foreign transactions by value are concentrated in OECD
countries, opportunistic transactions during the credit crunch of
2007–2008 account for a significant portion of this activity. When
measured by number of deals, a majority occur in domestic and
emerging markets;
• Most SWFs appear to be purely financial investors, though a few,

such as those based in Singapore and several in the UAE, have pur-
sued transactions to accelerate economic development in their home
country. The vast majority of SWF investment has avoided sectors
in which foreign government ownership may seem threatening to
national security in the recipient country;
• Contrary to the conventional wisdom that SWFs are passive inves-

tors that do not seek control of companies in which they acquire
stakes, half of the transactions since 2000 where we have stake data

Introduction
(211 of 420) identified in our database involve the purchase of equity

stakes higher than 50 percent. However, controlling-stake deals in
sensitive sectors in OECD countries account for only 2 percent of
these by number and 4 percent by value;
• SWFs are becoming more aggressive investors, seeking higher

risk-adjusted returns in equities and other financial instruments
and asset classes;
• The current debate about whether to increase transparency of SWFs

will, if successful, result in better understanding of the financial char-
acteristics of the funds, but will not allay the political concerns of
some governments about receiving SWF investments originating in
particular foreign nations.
This report presents our key findings. It is aimed at three main audiences: the funds
themselves, financial institutions, and policymakers in government. We aim to pro-
vide each with specific, targeted information to allow them better to understand
concerns about SWFs and make better decisions. It is organized in six sections fol-
lowing this introduction:
• An overview of the SWF phenomenon, including a discussion of the

essential features and behaviors of the funds;
• An overview of the impact of SWFs on the global financial system,
including the major constituencies affected by their rise and activity;
• An examination of SWF behavior based on the evidence of 1,181
equity transactions involving SWFs between 1975 and 2008;
• A discussion of the financial and nonfinancial risks posed by SWFs
and a mapping of particular funds according to these factors;
• Near-term scenarios for the continuing evolution of SWFs and the
global financial system;
• Conclusions and implications for the major constituencies involved
with SWFs.

The Storm over SWFs
SOVEREIGN WEALTH FUNDS 11
The Storm over SWFs
CURIOUSLY, GIVEN ALL THE BUZZ, there is no generally accepted

definition of a sovereign wealth fund. Most attempts at definition focus on basic
characteristics such as ownership, governance, funding sources, investment strat-
egy, and purposes or uses. From there, commentators have compiled lists of funds
that more or less fit the selected characteristics.2 The resulting lists typically include
between 20 and 40 funds but feature oddities such as funds
owned by governments that are not sovereign, at least one This lack of clarity
fund that claims to be owned privately,3 funds long ago ac- prompts another
cepted without controversy by the international community, look at the essential
and funds that do little foreign investing. characteristics of SWFs.
This lack of clarity prompts another look at the essential characteristics of SWFs.
The criteria presented here constitute a distinctive set based on potential behaviors
of concern in the current discussion. For our purposes, a SWF is a government
investment vehicle that meets three criteria:4
• It is owned by a sovereign government (because of the concern

that funds may act as instruments of national policy);
• It is managed separately from funds administered by the sovereign

government’s central bank, ministry of finance, or treasury (because
if it isn’t, then other constituencies need not consider it as some-
thing different from the traditional financial agencies of state);
• It invests in a portfolio of financial assets of different classes and

risk profiles, including bonds, stocks, property, and alternative in-
struments, with a significant portion of assets under management
SAND STORM IN WESTERN AUSTRALIA

Controversy over large, rapidly growing pools of investment
capital owned by governments—especially governments of emerging
nations and rising geopolitical powers—continues to mount.

12 SOVEREIGN WEALTH FUNDS
The Storm over SWFs
invested in higher-risk asset classes in foreign countries (because

of the concern about the combination of higher appetite for fi-
nancial risk and investing outside the home country — no one
cares if a fund invests exclusively in government bonds, nor
should anyone care if a fund is invested purely domestically).
These criteria not only describe many funds that have sprung into existence in the
past decade, but also enable the reclassification of older government investment
vehicles that were previously categorized as special funds (such as for economic
stabilization or to offset the depletion of natural resource endowments), govern-
ment holding companies or investment companies, and even a few pension funds
that have become more willing to pursue higher risk-adjusted returns and foreign
investments. The criteria also enable us to filter existing lists of SWFs and remove
funds that do not fit. The result is our list in Table 1, with funds highlighted in bold
of particular interest because we have been able to track at least some of their pub-
lic investment transactions.5
Table 1: Sovereign Wealth Funds as of December 2007

ASSETS UNDER
MANAGEMENT FOUNDING
COUNTRY FUND NAME (USD BN) DATE
UAE Abu Dhabi Investment Authority 875 1976
Singapore Government of Singapore Investment 330 1981
Corporation
Norway Government Pension Fund - Global 322 1990
Kuwait Kuwait Investment Authority 250 1953
China China Investment Company Ltd. 200 2007
Russia Stabilization Fund of the Russian 127 2003
Federation
Singapore Temasek Holdings 108 1974
Australia Future Fund 50 2004
Sources: Deutsche Bank Research; Peterson Institute for International Economics; Monitor Group.
Note: Bold type denotes funds included in the Monitor SWF Transaction Database

SOVEREIGN WEALTH FUNDS 13
The Storm over SWFs
ASSETS UNDER
MANAGEMENT FOUNDING
COUNTRY FUND NAME (USD BN) DATE
Libya Reserve Fund 50 NA
Qatar Qatar Investment Authority 40 2005
Brunei Brunei Investment Agency 35 1983
Ireland National Pensions Reserve Fund 29 2001
Algeria Reserve Fund 25 NA
South Korea Korea Investment Corporation 20 2006
Malaysia Khazanah Nasional BHD 18 1993
Kazakhstan Kazakhstan National Fund 18 2000
Taiwan Taiwan National Stabilization Fund 15 2000
Iran Foreign Exchange Reserve Fund 15 1999
UAE Istithmar 12 2003
Nigeria Excess Crude Account 11 2004
UAE Mubadala Development Company 10 2002
New Zealand New Zealand Superannuation Fund 10 2003
Oman State General Stabilization Fund 8.2 1980
Chile Economic and Social Stabilization Fund 6 2007
Botswana Pula Fund 4.7 1993
Norway Government Petroleum Insurance Fund 2.6 1986
Azerbaijan State Oil Fund 1.5 1999
East Timor Timor-Leste Petroleum Fund 1.2 2005
Venezuela Investment Fund for Macroeconomic 0.8 1998
Stabilization
Kiribati Revenue Equalization Reserve Fund 0.6 1956
Chile Chile Pension Reserves Fund 0.6 2007
Uganda Poverty Action Fund 0.4 1998
Papua New Mineral Resources Stabilization Fund 0.2 1974
Guinea
Mauritania National Fund for Hydrocarbon Reserves NA 2006
UAE Dubai International Financial Centre NA 2006
Investments
Angola Reserve Fund for Oil NA 2007
Sources: Deutsche Bank Research; Peterson Institute for International Economics; Monitor Group.
Note: Bold type denotes funds included in the Monitor SWF Transaction Database

The Storm over SWFs
We think of SWFs as part of a continuum of sovereign government investment

vehicles that runs along a spectrum of financial risk from central banks as the most
conservative and risk-averse, to traditional pension funds, to special government
funds, to SWFs, and finally to state-owned enterprises, which are the least liquid and
highest-risk investments.6 (See Figure 1.)
Among SWFs, there also is a continuum along the spectrum of financial risk, from
those with a conservative investment philosophy like a pension fund, to those that
behave more like a university endowment with investments in equities, to those
more aggressive still and willing to invest significantly in alternative asset classes
such as real estate, private equity, or hedge funds. Many
Many SWFs also SWFs also delegate large portions of their portfolios
delegate large portions of to external financial managers.7
their portfolios to external
financial managers.

The Storm over SWFs
Figure 1: Continuum of Government Investment Vehicles
SOVEREIGN FUNDS
Official Reserves/ Pension Domestic Sovereign State Owned

Central Bank Funds Sovereign Funds Wealth Funds Enterprises
External assets for Investment Investment vehicles Investment Companies

directly financing vehicles to meet to encourage vehicles funded where the state
international government’s domestic economic by foreign has significant
payment future pension development exchange assets control
imbalances obligations
Funded and Managed May make
Highly liquid, Funded and denominated in separately from investments in
often OECD denominated in local currency official reserves foreign assets
government local currency
Typically have a
bonds
higher tolerance
for risk
EXAMPLES
Federal Reserve (US) Government Khazanah Nasional ADIA, Mubadala CNOOC (China)
Bank of England (UK) Pension Fund (Malaysia) (Abu Dhabi) Gazprom (Russia)
(Norway) Temasek, GIC
SAMA (Saudi Arabia) SABIC
GIC (Singapore) (Singapore) (Saudi Arabia)
Istithmar, DIFC
(Dubai)
CIC (China)
SAMA (Saudi Arabia)
Source: Adapted from Kimmitt (2008).
At present, 36 funds, originating in 30 nations, meet our criteria for SWFs. About half
of the funds were established in the last decade, with two-thirds of these since 2003.
As highlighted in Figure 2, SWFs have emerged in several waves over the past half
century. The oldest (in Kuwait and what is now Kiribati) were set up in the 1950s to
manage surplus foreign reserves and offset the eventual decline of natural resource
endowments. These funds initially were conservative investors. Although Kuwait In-
vestment Authority (KIA) has long held foreign equities — it has owned a stake in
Daimler since 1972 — it has not been notably active in this asset class, typically par-
ticipating in only one or two publicly-reported equity transactions per year.

The Storm over SWFs
Figure 2: Founding Dates of Major SWFs

1953 1956 1974 1976 1980 1981 1983 1986 1990 1993 1998 1999
Temasek Brunei Investment Investment

Kuwait Holdings, State Agency, Brunei Fund for
Investment Singapore General Government Macroeconomic
Authority, Stabilization Pension Fund– Stabilization,
Mineral Global, Norway
Kuwait Resources Fund, Oman Venezuela
Stabilization Poverty Action
Government
Fund, Papua Government Fund, Uganda
Petroleum
New Guinea of Singapore Insurance Fund,
Investment Norway
Corporation, Foreign
Revenue Singapore Khazanah Exchange
Equalization Nasional, Reserve Fund,
Reserve Fund, Abu Dhabi Malaysia Iran
Kiribati Investment State Oil Fund,
Authority, Pula Fund,
Botswana Azerbaijan
Abu Dhabi
Poverty Action
Fund, Uganda
Source: Deutsche Bank; Standard Chartered
Another wave in the 1970s and 1980s reflected a spike in energy prices and the rise
of the Asian tiger economies. Large funds were established in these decades in
Abu Dhabi (the first of several in the UAE), Norway (which later converted into
a pension fund), and Singapore (Temasek Holdings [1974] and Government In-
vestment Corporation [GIC, 1981]). Another wave in the 1990s brought smaller
funds in Asia, Africa, and the Middle East.
The major wave, starting in 2000, has led to the formation of nearly 20 funds,
most of which are funded by capital inflows based either on high energy prices
(especially in the Middle East but also in Russia) or continued large trade surpluses
(e.g., in China). Thus the most recent group includes not only funds originating in
small, wealthy nations but also in major geopolitical powers — circumstances that
heighten concerns about the potential misuse of SWFs.

The Storm over SWFs
2000 2001 2002 2003 2004 2005 2006 2007
National Korean Investment

Australian
Pensions Reserve Corp, Korea
Government
Fund, Ireland
Timor Leste Future Fund, National Fund for
Mubadala Petroleum Australia Hydrocarbon
Taiwan National Reserves,
Stabilization Development Fund, Excess Crude
Company, East Timor Account, Nigeria Mauritania
Fund, Taiwan
Abu Dhabi Dubai International
Kazakhstan Qatar
Financial Center
National Fund, Investment
Investments, Dubai
Kazakhstan New Zealand Superannuation Authority, Qatar
Fund, New Zealand
Istithmar, Dubai
Stabilization Fund of the China Investment Company, China
Russian Federation, Russia Economic and Social Stabilization
Fund, Chile
Pension Reserves Fund, Chile
Reserve Fund for Oil, Angola
Today, the biggest concentrations of SWFs by dollar volume are in the Middle East
and East Asia. Many of the newer funds are inspired by the examples of KIA,
ADIA, Temasek, and GIC and resemble university endowments in their investment
behavior. They are wealth management vehicles that seek high risk-adjusted returns
and are willing to invest across a range of asset classes and prospect actively around
the world for attractive opportunities.
Treated as a distinct investor group, SWFs are relatively small compared with
other global financial asset classes such as pension funds, mutual funds, in-
surance funds, and bank assets. However, as individual institutions, SWFs are
large and growing fast.8 They range in size from a few hundred million dollars
under management to seven with portfolios valued at more than $100 billion.
As points of reference, the largest are much bigger than private equity funds
(Carlyle Group, one of the biggest in the United States, has some $80 billion
under management) and comparable to the biggest pension funds in the OECD

The Storm over SWFs
(California Public Employees’ Retirement System — CalPERS, one of the larg-

est U.S. pension funds, manages about $250 billion).
Today, estimates peg the aggregate value of SWFs as between $1.9 trillion and $2.9
trillion, with the limited transparency of many funds and definitional issues account-
ing for the range. Based on bullish forecasts of continuing high oil prices and trade
surpluses in the Far East, it could comfortably surpass $10 trillion by middle of the
next decade.9 This growth is equally impressive in relative terms. Today, SWFs ac-
count for less than two percent of global financial assets, but the total could surpass
5 percent by 2015. By any measure, SWFs are big enough to cause ripples in the
global financial system, and they are likely to become significantly bigger as more
nations establish funds and nations that already have them set up more.
Unsurprisingly, the combination of sovereign ownership, large size and impressive

growth prospects, appetite for risk, and lack of transparency constitutes a perfect
storm for political controversy. Much of the controversy originates in the fact that
most new SWFs come from emerging countries outside the OECD. This raises the
possibility of new alignments in global affairs between the established powers that
became dominant after World War II versus those now emerging.
The combination of Given all the publicity about SWFs and investiga-
sovereign ownership, large tions of them, it is striking how little we know about
size and impressive growth them. What we do know is that though each fund has
prospects, appetite for risk, unique characteristics, in combination they are large
and lack of transparency and growing, and that more new funds are likely to
constitutes a perfect storm appear in the near term.
for political controversy.

The Storm over SWFs
U.S. SENATOR HILLARY RODHAM CLINTON FRENCH PRESIDENT NICOLAS SARKOZY:
“…when you have private investors who “I believe...in globalization but I don’t
are basically disciplined by the market, accept that certain sovereign wealth
that’s a different kind of investment than funds can buy anything here and our
if you have sovereign wealth funds that own capitalists can’t buy anything in their
are basically an arm of a government. countries. I demand reciprocity before we
There are different strategic and national open Europe’s barriers.”11
interests at work there.”10

SWFs and the
Global Financial System
SWFs and the Global Financial System
SWFS ARE BECOMING IMPORTANT ACTORS in the global financial

system, which is already adapting to their presence. It may be helpful to consider
the impact of SWFs in terms of the major constituencies involved: 1) the funds
themselves; 2) their sovereign owners; 3) recipient countries for SWF investments;
4) multilateral regulatory and oversight institutions; 5) other financial institutions;
and 6) companies that receive SWF investments. Based on our analysis and inter-
views with representatives across these groups, each has interests and concerns
that will have to be weighed and balanced for a stable equilibrium to be reached.
Currently, there is tension between several of these constituencies over issues such
as transparency and regulation of SWFs. (See Figure 3 for a summary of these in-
terests and concerns.)
1. The SWFs
Although each SWF is distinctive, with a particular history and mandate, some com-
monalities of interest and concern span the funds. SWFs like to portray themselves
as similar to large, privately-owned funds or to older public investment vehicles
such as pension funds. That is, they aspire to make money and grow, to have access
to the best deals, talent, and ideas, wherever these occur, and to compete without
disadvantage against other suppliers of financial capital. They seek to preserve their
autonomy, and like their privacy. Most wish to maintain a low profile, avoiding po-
litical controversies and calls for increased transparency or regulation. Jesse Wang,
the chief risk officer of China’s CIC, for example, claims that his fund is similar to
other foreign public pension funds or college pension funds, adopting a diversified,
long-term and passive investment strategy.12
SKYLINE OF SHANGHAI, CHINA

Shanghai’s dynamism reflects the strength of the Chinese economy,
which could soon host the world’s first trillion-dollar SWF.

Age and sophistication of individual SWFs are important variables influencing their
concerns. New funds from countries still integrating into the global economy, such
as Libya or the central Asian republics, tend to be concerned with basic questions
about the best way to govern and organize themselves while catching up as mature,
sophisticated investors. Older and widely represented SWFs such as KIA, ADIA,
and Temasek serve as models to younger, less estab-
Older and widely lished funds. Given their experience and institutional
represented SWFs such as maturity, the “old hands” among SWFs are concerned
KIA, ADIA, and Temasek about performance, market positioning, and managing
serve as models to younger, external constituencies.
less established funds.
YOUSEF AL OTAIBA, DIRECTOR OF INTERNATIONAL AFFAIRS, ABU DHABI:
“It is important to be absolutely clear that the Abu Dhabi government has never and will
never use its investment organizations or individual investments as a foreign policy tool.”13

Figure 3: Constituencies, Interests and Concerns about SWFs

Interests Interests
• Capture benefits of this • Welcome responsible
form of investing foreign investors
(diversification, higher • Protect vital economic and
returns, flexibility) national security assets Interests
• Increase long-term • Ensure reciprocity in trade, • Maintain free flow of
national wealth investing capital globally
• Increase influence in • Preserve level playing
global financial affairs Concerns field for all investors
• Monitoring SWFs owned by unfriendly
• Increase clout in global
governments • Preserve systemic stability
financial system
• Limiting potential for nonfinancial
Concerns behaviors Concerns
• Avoiding regulation, • Fearing SWFs may be Trojan horses • Monitoring funds that
calls for increased • Monitoring funds that are not transparent are not transparent
transparency • Limiting potential for
• In OECD countries, fearing potential loss
• Avoiding protectionist of economic and political power nonfinancial behaviors
backlash that might • Guarding against
hurt broader trade corruption
interests
Recipient • Protecting against
Country poor risk management
Governments
Multilateral
Sovereign Regulatory and
Government Oversight
Owners Institutions
SWFs
Other Companies
Financial Considering
Institutions SWF
Investments
Interests
• Preserve equal access to Interests
Interests opportunities and talent
worldwide • Gain access to foreign sources
• Enact desire to work with SWFs of capital
as partners, co-investors, clients • Achieve and sustain highest level
of professionalism • Welcome long-term passive
• Maintain open access to all investors
SWFs • Preserve autonomy
• Gain access to opportunities in
• Maintain access to opportunities • Maintain low profile new geographies
in new geographies
Concerns
Concerns Concerns
• Avoiding regulation, calls for
• Fearing that SWFs will have increased transparency • Avoiding potential PR
unfair advantages (lower cost firestorms
• Avoiding political firestorms
of capital, privileged access when investing abroad • Preserving freedom to operate
to information and deal flow) in certain countries or sectors
• Worrying about effect on • Minimizing foreign political
market dynamics (asset interference in decision making
pricing, risk premiums)

2. Sovereign Government Owners
The interests of the sovereign government owners of SWFs begin with capturing
the benefits of this form of investment as compared to other government invest-
ment vehicles. SWFs enable nations to diversify their wealth beyond traditional
economic assets. SWFs also hold the promise of achieving high risk-adjusted
financial returns over time. Greater national wealth means more resources to ap-
ply to national priorities as well as a buffer against short-term economic shocks
and a resource to apply to long-term challenges. Finally, greater national wealth
elevates the standing of a nation in foreign affairs and strengthens its voice in
multilateral institutions.
Anything that might jeopardize these benefits is a source of concern. Sovereign gov-
ernment owners want outsiders to welcome the funds as responsible financial actors.
Thus most governments have set up their SWFs to be administered by authorities
independent of traditional central government agencies and managed according to
professional investment standards, though most also so far have resisted calls for
increased transparency. Meanwhile, the sovereign government owners, like the man-
FORMER SINGAPORE PRIME MINISTER GAO XIQING, PRESIDENT OF CIC, ON CALLS

LEE KWAN YEW FOR INCREASING TRANSPARENCY OF SWFS
“ We are passive investors, if we are ca- “ Why do you need a law like that? That
pable, we would be running a merger or law will only hurt feelings. It’s — it’s not
an acquisition. But we are not, we haven’t economic. It doesn’t make sense. Politi-
got that vast talent pool so we say, look, cally it’s stupid.”15
I’ll join you, you make the money for me
and I’ll just watch you and see how you
do it, and I’ll be learning over time.”14

agers of their funds, are often concerned with some basic questions: Whether to set
up a single fund or a family of funds; how to apply best practices in governance,
administration, and risk management; how to provide prudent political oversight
without creating a perception of political interference; how to exploit foreign invest-
ment opportunities without igniting cross-border political controversies.
Some sovereign government owners believe that calling for increased scrutiny
of SWF investment is inherently unfair. One senior official commented, “For
decades, the West has told us that we had to open our borders. We let Western
multinationals into our economy, and they have been running the show. But
now, when we try and do the same thing, we are told it poses a ‘security risk.’
It’s just hypocritical.”
3. Recipient Country Governments
In countries that receive SWF investments, much discussion focuses on the political
risks of doing so. On the one hand, it is in the recipient country’s interest that for-
eigners view it as open for business and that its companies
have access to foreign sources of capital when available on Some sovereign
attractive terms. In the long term, interlocking, cross-bor- government owners
der economic interests contribute to international peace believe that calling
and stability. As Robert Kimmitt, U.S. Deputy Secretary of for increased scrutiny
Treasury puts it, “Sovereign wealth funds have been around of SWF investment is
since the 1950s and thus far their track record is very strong inherently unfair.
and positive. They are patient long-term investors and we
have no evidence that any of their decisions have been made for political and not
commercial reasons.”16 As if to confirm the point, in March 2008 the U.S. Depart-
ment of the Treasury reached a voluntary agreement with SWFs based in Abu
Dhabi and Singapore in which the funds pledged to invest for purely financial rea-
sons when considering opportunities in the United States.

On the other hand, permitting foreign states to acquire even partial ownership
of domestic companies raises fears that such investments will be abused — as
a cover for espionage (political or industrial) or as an instrument of the sover-
eign government owner’s geo-strategic interests. In
Unfortunately, debate in the United States and Europe, there is nervousness
the recipient countries about the rise of nations outside the “club” that has
pays much less attention dominated international finance since World War II
to the benefits of SWF and the potential corresponding loss of power and
investments and the influence, especially to new actors who may not share
constructive role that a common set of beliefs and values about interna-
SWFs can play. tional trade and investment.
The increased appetite for risk of some of these funds causes some concern, espe-
cially when the investment comes from influential countries like China. The funds
sometimes feed the concern by using colorful language. “We mainly do farming,
but occasionally we go hunting,” says CIC’s Jesse Wang, adding, “we don’t rule out
the possibility of making a few other investments if good opportunities come up.”
Wang’s boss continues the analogy, noting of CIC’s $5 billion investment in Morgan
Stanley, “If there is a big fat rabbit, we will shoot it.”17
Unfortunately, debate in the recipient countries pays much less attention to the
benefits of SWF investments and the constructive role that SWFs can play. Their
investments normally are made by experienced investment managers, often in part-
nership with local financial firms and institutions, and outside of sensitive economic
sectors. During the credit crunch of 2007-2008, SWFs have provided needed li-
quidity to the global financial system. By investing in the United States and other
OECD nations, SWFs are preserving jobs and tax revenues and enabling struggling
companies to regain their footing.

4. Multilateral Regulatory and Oversight Institutions
Multinational regulatory and oversight institutions such as the IMF and World Bank
are interested in the global free flow of capital according to rules that are equitable
for all parties, including banks, insurance funds, pension funds, hedge funds, private
equity firms, and SWFs.
SWFs pose concern to this constituency as they have the potential to tilt the playing
field. State-owned funds may have a lower cost of capital than private sector com-
petitors, or they may have access to asymmetric information and intelligence, perhaps
through other state agencies. These concerns have raised the notion that new rules
will need to be written specifically for SWFs to define standards of transparency, set
controls around investments they can make, and include sanctions against violators.
At present, several initiatives affecting SWF activity are under consideration. Led by
the United States and France, the G7 is pressuring the World Bank, the IMF, and
the OECD to draft a new code of conduct for SWFs. Independently, the World
Bank and IMF are collaborating with SWFs to develop a voluntary code of conduct
by later in 2008. The OECD, meanwhile, is working on best practices for recipient
countries, with a draft document ready for review by the fall of 2008.18
SIMON JOHNSON, DIRECTOR OF RESEARCH, IMF
“What should the IMF do about this situation? There’s certainly no need for dramatic
action. For one thing, the situation involves sensitive issues of national sovereignty. For
another, at their current level of $3 trillion, sovereign funds aren’t a pressing issue. But as
the level creeps closer to $10 trillion — although even $10 trillion isn’t a huge amount of
money — the phenomenon will likely attract greater attention.”19

5. Other Financial Institutions
Other financial institutions — financial services firms, various types of funds, and
private institutional investors — view the rise of SWFs through the lens of their
own interest. SWFs may be competitors, but also potential partners, co-investors,
or clients. Indeed, other financial institutions view
As potential partners or SWFs primarily as a source of opportunity rather
co-investors, other financial than a threat.
institutions are keen to
learn more about SWFs, The concerns of this constituency reflect the multiple
how they think and where roles SWFs can play. As competitors, other financial
they are looking to invest. institutions worry that SWFs have unfair advantages re-
sulting from their state ownership. The growing size of
the SWFs is another concern. The dynamics of supply and demand suggests that a
flood of new money may drive up asset prices and drive down risk premiums. The
small size of SWFs relative to other financial asset classes in the global economy
mitigates this effect, though it may be pronounced in some geographies and sectors.
Some representatives of this constituency believe that management talent is lacking in
some newer SWFs and thus could result in mistakes that reverberate through financial
markets. Over time, this concern will diminish as more SWFs become more sophis-
ticated and experienced investors — but that prospect also raises its own competitive
concerns, as there will be intensifying rivalry for talent and deal flow.
As potential partners or co-investors, other financial institutions are keen to learn

more about SWFs, how they think and where they are looking to invest, by sector,
geography, and level of economic development. “In the future,” says David Ru-
benstein, founder of the Carlyle Group, “sovereign wealth funds and private equity
firms are likely to pursue large investment opportunities through joint ventures.”20
Finally, other financial institutions are eager to provide management services, re-
search and analytical support, joint prospecting for deals, and consulting advice to

the SWFs. Several large financial services firms in the United States and Europe
have already established client relationship management teams focused on SWFs.
6. Companies Considering Investments by SWFs
Companies considering investments by SWFs likewise have multiple interests that

could be aligned with the funds — or at odds with them. Management generally
welcomes long-term, passive investors who are unlikely to become involved in cor-
porate strategy or to disinvest. As Howard Socol, CEO of Barney’s, put it after
Dubai’s Istithmar acquired the company in 2007, “This transaction further enhanc-
es our ability to develop our brand and grow our business.”21 Having a SWF as an
investor may also be advantageous in entering some foreign markets, either in terms
of facilitating access or smoothing regulatory approval and shortening delays.
Each of these interests has a flip side, however. Other owners with shorter invest-
ment horizons may have a different view and prefer co-owners willing to set and
enforce high standards for management performance. It also is conceivable that
SWF investment in a company may handicap market entry in countries with dif-
ficult relations with the sovereign government owner.
Further, a stake held by a SWF may restrict a company’s opportunities to attract

investment from certain countries or types of investors. It may also inhibit plans to
enter certain politically sensitive sectors or complicate a company’s ability to grow
via mergers and acquisitions. Finally, companies recognize the public relations risks
and implications of a stake held by a foreign owner, whether a SWF or other gov-
ernment investment vehicle.
7. Summarizing the Interests and Concerns
Figure 4 summarizes and portrays the major concerns of the constituencies about
SWFs. This matrix has two axes. The first is the fund’s attitude towards financial

risk. This varies from a conservative investment posture, similar to central banks
and pension funds, to an aggressive posture, similar to some university endow-
ments and private equity firms. The second is the degree of sovereign ownership
risk, that is, the risk posed by the sovereign government owner to other nations in
which its SWF may invest.
Below, we discuss how to measure these dimensions of risk, but for now consider
the implications of the matrix. Historically, most government investment vehicles
could be placed on the left side of the matrix, often in the lower left quadrant. They
took little financial risk, holding their foreign exchange reserves in government
bonds of OECD countries. Historically, funds established before the late 1990s
were from smaller nations with relatively little influence in global affairs. As a result,
they tended to have a low level of sovereign ownership risk. However, as major
geopolitical powers such as China and Russia establish SWFs, sovereign ownership
risk may become an increasing concern to traditional Western powers.
Figure 4: Potential SWF Migration Paths
1
SOVEREIGN OWNERSHIP RISK
4
Traditional Government
Investment Vehicle Profile
3
1
2
0
1 2 3 4 5 6 7
FINANCIAL RISK

The rise of SWFs raises possibilities of several migration paths away from this
traditional situation. Funds from nations which are low on the axis of sovereign
ownership risk, but increase the financial risk they are willing to bear, move to
the lower right quadrant. This is the current situation of many SWFs, includ-
ing most newer ones, which are active investors in foreign equities. Four of the
constituencies — the SWFs, their sovereign government owners, other financial
institutions, and companies considering SWF investments — generally welcome
this movement, though it is not without dangers and surprises, as the govern-
ment of Iceland discovered in 2006 when a state-owned
Norwegian fund shorted its bonds to realize a short-term To date, debate on the
financial gain. Zone 2 at the lower right corner of the
22 underlying situation
matrix indicates this potential hot spot. and dynamics has been
based on anecdotes and
A second potential situation involves a sharp increase in speculation.
financial risk by a SWF from a country with high sovereign
ownership risk. This places the SWF into the upper right quadrant. Much of the
recent debate and policy maker concern implicitly reflects this concern, with worst-
case fears embodied in Zone 1 in the upper right corner. Should SWFs migrate into
this quadrant, either directly from the lower left or in stages via the lower right, they
will risk escalating international tension and triggering more restrictive and interna-
tionally coordinated regulatory responses.
This matrix raises several important questions about where particular SWFs cur-
rently reside and the direction in which they may be moving. To date, debate on the
underlying situation and dynamics has been based on anecdotes and speculation.
More detailed investigation of SWF behavior based on publicly-available data sheds
light on these important issues and, by doing so, informs the ongoing discussion
about how best to accommodate SWFs in global financial markets.

SWF Behavior:
The Evidence of Public Transactions
SWF Behavior: The Evidence of Public Transactions
LIKE OTHERS WHO HAVE COMMENTED on the emergence of SWFs,

we have been hindered by the limited availability of public information about them.
In the absence of more verifiable public data, the debate over SWFs will remain
heated and calls for their regulation will inevitably continue.
While some funds, such as those of Singapore and Norway, provide considerable
transparency into their holdings, comparable information for SWFs based in many
other nations is not publicly available. We do not know the logic behind their asset
allocation decisions, nor do we have a full picture of the assets in their portfolios.
(See theMost
Appendix for investment
attempts to allocation of selected SWFs.) What we do have is
public
define information
it focus about certain transactions carried out by SWFs. Such deals are
on basic
often reported in financial
characteristics suchindustry
as databases, in the media,
and occasionally
ownership, on the websites of the SWFs and the com-
governance, In the absence of more
panies in which they have purchased stakes. verifiable public data, the
funding sources,
debate over SWFs will
investment strategy, and remain heated and calls
In an effort to contribute fresh insights and perspectives on
purposes or uses.
the debate, we worked with our partner Grail Research to for their regulation will
comb through publicly-available sources on SWF activity. inevitably continue.
Given the limited transparency of many funds and spotty
reporting of SWF transactions, we chose to focus our research on direct investment
in equities and real estate. We collected data on 1,181 sovereign wealth fund transac-
tions involving 25 funds from 1975 through March 2008.23
To understand SWF behavior better, it was necessary to filter the data in sever-
al ways. At the outset, we decided to exclude Norway’s GPFG from our search
ICEBERG, ILILUSSAT GREENLAND

The visible portion of SWF investment is relatively small
when compared to their total size but it provides the best
insight into their intentions and behaviors.

because the particular nature of its holdings — more than 3,000 transactions in-
volving stakes of 5 percent or less in companies — would overwhelm our sample.
Second, we focused on funds owned by sovereign governments only and excluded
those owned by sub-national governments such as provinces or U.S. states. As not-
ed earlier, we made an exception for funds based in Abu Dhabi and Dubai because
we believe that the emirates within the UAE federation possess decision rights
comparable to those of a sovereign authority. Thirdly, we attempted to be rigorous
in applying a consistent definition of a SWF, leaving out those investment vehicles
such as Dubai International Capital and Central Huijin Investment Corp, which
did not fit our definition.24 Finally, we filtered by date, selecting for detailed analysis
deals between 2000 and March 2008.
We were left with 17 funds, After applying these screens, we were left with 17
with a total of 785 deals, funds, with a total of 785 deals, and some $250 billion
and some $250 billion of of investments in equities and real estate.25 The bulk
investments in equities of the deals originated in two regions, the Middle East
and real estate. and Asia.26
In sum, our research picked up the largest and most public SWF transactions over
an eight-year period and sheds much needed light on actual SWF investment be-
havior. Although our data inform only a portion of total SWF activity, it permits
deeper and more contextualized exploration of many claims and counter-claims
made about SWFs. Our data also provide insight into the different investment strat-
egies carried out by particular SWFs.
Conventional Wisdom: How Does It Stack Up?
Much current discussion of SWFs relies on a small number of highly-publicized

investments, and controversial cases such as the 2005 bid by Dubai Ports World27
for the U.S. port operations of the British company P&O, or the 2007–2008 at-

tempt by China’s Huawei Technologies to purchase a stake in 3Com. These cases

did not involve SWFs but are held to illustrate the potential dangers of investments
by funds owned by foreign governments.
Our data show that SWFs
The public discussion of SWFs makes many assertions. do not act as a group
SWFs are focused on the OECD; invest in politically sen- and there are significant
sitive sectors; prefer to acquire minority stakes and are differences in investment
moving from conservative to higher-risk investments. strategy between funds
that make it difficult to
How does the conventional wisdom stack up in light of the generalize about them.
facts? Not well. Rather than a narrow focus on the OECD,
SWFs have shown a keen interest in emerging markets. Rather than investing in po-
tentially sensitive sectors, SWFs have avoided sensitive sectors and industries. And
rather than only acquiring minority stakes, SWFs have taken controlling stakes in
half the deals for which we have stake data.
However, we did find one area where the commonly held beliefs seem to be
based in reality: SWFs do indeed appear to be moving increasingly towards
higher-risk investments.
1. Geography: SWFs Do Not Focus Exclusively on OECD Markets
The publicity surrounding the large financial services deals in the past two years
contributes to the perception that SWFs are, and will continue to be, focused on
OECD markets. Some analysts suggest that SWFs will prefer highly liquid markets
as they diversify across asset classes, with the implication that the majority of their
investments will remain in the United States and other OECD countries.28
Our data show that SWFs do not act as a group and there are significant differences
in investment strategy between funds that make it difficult to generalize about them.

The deal activity of large players such as ADIA (Abu Dhabi), KIA (Kuwait), CIC
(China), and GIC (Singapore) indicates a focus on OECD markets and perhaps
validates the argument that SWFs prefer OECD markets. For these funds, OECD
investments make up 80 percent or more of their publicly disclosed transactions by
value, with the United States being the main destination.29
Other funds, however, have taken a different approach. Singapore’s Temasek, one
of the most sophisticated funds, has 60 percent of its publicly disclosed investments
by value outside the OECD. The majority of these
The Dubai fund Istithmar, non-OECD deals are either domestic (45 percent of
for example, has invested non-OECD deal value), focused on China (37 percent),
some $6 billion outside of or in neighboring economies like Thailand (6 percent)
the OECD, a significant and Indonesia (5 percent).
share of the $21 billion
it has invested since its Temasek’s willingness to diversify geographically re-
founding in 2003. flects its experience and understanding of regional
economies. Other SWFs appear to be pursuing attrac-
tive deals wherever they occur. The Dubai fund Istithmar, for example, has invested
some $6 billion outside of the OECD, a significant share of the $21 billion it has
invested since its founding in 2003. Istithmar has focused primarily on real estate,
including significant tourism-based property assets such as the Victoria & Alfred
Waterfront in South Africa.
In sum, the deal data present a mixed picture of the geography of investment (see
Figure 5). On the one hand, measured by number of transactions, only a third of
SWF deals have occurred in OECD countries, though by value these deals represent
61 percent of the total. This suggests that SWFs are keen to invest in non-OECD
countries, but that they place smaller sums at risk in such transactions. This may
be due to a perception of greater country political risk when investing outside the
OECD or to the larger size of deal opportunities — bigger companies in which

to invest — there. This pattern may change in the future if risk-adjusted returns
improve in emerging markets or OECD countries adopt regulations deemed re-
strictive by sovereign government owners.
Figure 5: Geographical Destination of SWF Investments: OECD, BRIC, and Non-OECD
Number of Deals by Region Value of Deals by Region

(785 deals) ($250 bn)
BRIC
BRIC
14%
19% OECD
31% Non-OECD
(excluding BRIC)
25% OECD
Non-OECD 61%
(excluding BRIC)
50%
Source: Monitor SWF Transaction Database
It is important to note that most SWFs invest significant amounts in their home
countries, typically in small tranches. Several large funds including Khazanah Na-
sional BHD in Malaysia invest primarily at home. Across our sample, domestic
transactions represent one-third of the deals by number and 15 percent by value.
The following maps (Figure 6 and Figure 7) illustrate the flow of SWF investments
from particular regions. Since 2000, funds based in the Middle East and North
Africa (MENA) invested some $100 billion and carried out 205 deals. The bulk of
this investment, $72 billion, has gone to North America
and Europe. However, fewer than half the deals by number Since 2000, funds based in
the Middle East and North
occurred in North America and Europe, with the majority
Africa (MENA) invested
elsewhere. 69 deals representing $19 billion in value were
some $100 billion and
made in the MENA region.
carried out 205 deals.

Figure 6: Publicly available data for MENA SWF equity deals, 2000-Q1 2008
MENA to
Europe: $31 bn
(61 deals)
MENA to MENA to
North America: Asia Pacific:
$41 bn (32 deals) within MENA $4 bn (25 deals)
$19 bn
MENA to (69 deals)
South America:
(3 deals)
MENA to
Sub-Saharan Africa:
$6 bn (15 deals)
Over the same period, Asian SWFs invested $150 billion and carried out 573 deals.
These funds invest more heavily in their home region than do the MENA funds.
Half of total investment, $75 billion, and over 80 percent by number took place in
Asia. Europe and North America accounted for most remaining investment, with
$74 billion and 94 deals.
2. Sectors: SWFs Avoid Sensitive Sectors and Industries
Many concerns about SWFs stem from the perception that they wish to invest
in sectors of strategic importance to their sovereign government owners, driven
by motives that are not necessarily or primarily financial. Some funds do seek to
acquire intellectual property, technology, and capabilities to help upgrade their do-
mestic economy. Whether recipient country governments perceive such investing

Figure 7: Publicly available data for Asia/Pacific SWF equity & real estate deals, 2000-Q1 2008
Asia-Pacific to
Europe: $46 bn
(52 deals)
Asia-Pacific to
North America:
$29 bn (42 deals)
within
Asia-Pacific
$75 bn
Asia-Pacific to (473deals)
Asia-Pacific to MENA:
Central/South America: (3 deals)
(3 deals)
as an economic, competitive, or national security threat, however, depends on their

own assessments and objectives.
Our database sheds light on the sector preferences of SWFs. As seen in Figure
8, in terms of value, nearly half the investments involved financial services, with
a further 19 percent in real estate and 11 percent in energy and utilities. In terms
of number of deals, activity is more evenly distributed, with a quarter in financial
services, 18 percent in real estate, 15 percent in industrials, 10 percent in IT and 10
percent in consumer goods.
The disproportionate emphasis on financial services — 22 percent of transactions

by number and 46 percent by value — reflects both strategy and opportunism. As
we shall see, there are good reasons for SWFs to invest in this sector and interest

spans both OECD markets (66 percent by value) and emerging markets (34 percent
by value). Note that the total value of transactions in this sector as well as the share
in the OECD are skewed by the recent large investments in U.S. and European
banks and financial institutions during 2007-2008.30
Financial services appeals to SWFs for many reasons. First, banks and financial
institutions are attractive investment targets for global investors generally. Notwith-
standing recent market concerns about exposure to the global credit crisis, banks
are well-regulated assets perceived to be marquee in-
The disproportionate emphasis vestments for balanced portfolios, providing investors
on financial services — 22 percent with stable risk-adjusted return opportunities.
of transactions by number and 46
percent by value — reflects both Second, many funds investing in this sector are par-
strategy and opportunism. ticipating in businesses they know well. Singapore and
Dubai serve as global financial hubs and their leaders
are familiar with the world’s leading financial institutions. Unsurprisingly, SWFs from
those economies have strong relationships with global financial institutions — draw-
ing on their products and services and, in some cases, recruiting away their talent.
Figure 8: Summary of SWF Transactions in Sectors by Number and Value
NUMBER OF DEALS BY SECTOR (785 DEALS) VALUE OF DEALS BY SECTOR ($250 BN)
Other 3% Other 8%
Transport 4%
Healthcare 4% Healthcare 2%
Telecom 2%
Telecom 6%
Financials
22% Energy
Energy 11%
8% IT 1% Financials
46%
IT Real Estate Industrials
10% 18% Consumer
3% 8%
Industrials Real Estate
15% 19%
Consumer
10%

Third, investing in financial institutions provides younger SWFs with opportunities

to buy preferential access into a pipeline of high quality investment opportunities
more broadly and leverage the industry, product, and deal-making expertise that
resides in those financial institutions. This has been highlighted by recent SWF in-
vestments in private equity and hedge fund players like Blackstone, Carlyle Group,
J.C. Flowers, Och-Ziff, and GLG Partners. Such investments also enable SWFs to
access skills and experience that are particularly relevant to countries seeking to
establish themselves as global financial hubs. Dubai’s DIFC, for example, has ac-
quired stakes in stock exchanges in the United Kingdom, Sweden, and France. In
addition to financial returns, DIFC is able to access skills and knowledge to boost
Dubai’s competitive position as a regional financial center.
Fourth, the current global credit crisis and its impact on financial services stock
prices has created an opportunity for SWFs to secure stakes on attractive terms
in brand-name global stocks. While the recent wave of opportunistic buying of
financial services stocks has heightened political concerns about SWF motivations,
in our view, these fears are overblown. The deals have involved small minority
stakes and were made without any certainty that the credit crisis has bottomed out,
reinforcing SWF claims that they are investing for the long term. Without sug-
gesting that SWFs have been investing for altruistic reasons, it is also worth noting
these transactions have helped to buttress the global bank-
ing system at a time of considerable market anxiety about Investments in transportation,
the breadth and depth of the credit crisis. defense and aerospace, and
high technology make up less
Close relationships with leading financial institutions also than one percent of the value
help SWFs enhance their own portfolio management strat- of deals in our database.
egies and risk management procedures. This is particularly
important for newer SWFs. Exposure to banking industry best practice, particularly
in relation to risk management, can play an important role in strengthening the op-
erational integrity of SWFs as financial entities. It also aids their integration into the

regulatory and oversight protocols critical to the efficient and transparent operation
of national and global financial markets.
Beyond financial services, the transaction database does not lend compelling sup-
port to the notion that SWFs target politically-sensitive industries. Investments in
transportation, defense and aerospace, and high technology make up less than one
percent of the value of deals in our database.
Individual SWFs, however, are making strategic investments in industries that some
other nations may regard as strategic and sensitive:
• Temasek has made significant investments in ports and shipping com-

panies in Asia, but it is likely that this preference reflects knowledge
of, and comfort with, investments in these assets as a result of Singa-
pore’s position as the world’s largest port for container shipping.
• Investments in energy account for approximately 11 percent of

transaction value, the majority of these originating among Asian
and Middle Eastern funds.31 As with the Singaporean investments
in shipping, these investments can be seen as an outgrowth of
already strong local sectors.
• Telecommunications accounts for only two percent of the value

in our transaction database. The Singaporean funds are leading
investors in part because they seek to build a strategic presence in
this industry in Southeast Asia.32
• The Abu Dhabi fund Mubadala has targeted high technology

and aviation-related services as important to the emirate’s long-
term future.

3. Ownership and Control: SWFs Take Majority Stakes, at Home

and Abroad
Several commentators suggest that SWFs are unlikely to take controlling stakes in
foreign corporations. One frequently cited explanation is that SWFs lack sufficient
skilled professional investment personnel or the expertise to represent their inter-
ests in the boardroom.
Information in the Monitor SWF Transaction Database, however, suggests a different

picture. As indicated in Figure 9, for deals where we have stake data, half of equity
transactions involve controlling stakes. However, inside OECD countries, these con-
trolling-stake deals are not made in sensitive sectors such as IT,
telecommunications, energy and utilities, transportation, and The Abu Dhabi fund
aerospace. Indeed, controlling-stake deals in sensitive sectors Mubadala has targeted
in OECD countries account for 2 percent by number and 4 high technology and
percent by value. Controlling-stake deals are much more com- aviation-related services as
mon in emerging and domestic markets. Singapore’s Temasek important to the emirate’s
Holdings, for example, has acquired controlling interests in long-term future.
many companies in Southeast Asia. Examples of controlling-
stake deals in OECD countries include Dubai’s DIFC, which bought the U.K. software
firm SmartStream Technologies; Istithmar, which purchased the upscale U.S. retailer
Barneys New York; and QIA, which acquired the U.K. healthcare firm Four Seasons.
These examples suggest willingness to buy controlling stakes in relatively uncontro-

versial sectors such as consumer products and services and industrials, as opposed
to in politically sensitive sectors inside OECD countries. Indeed, while more than
20 percent of the transactions in the consumer and industrial sectors resulted in a
SWF owning a controlling stake, that result occurred in fewer than 20 percent of
transactions in IT (17 percent), telecommunications (13 percent), transportation and
aerospace (1 percent) or infrastructure and government (1 percent).

CASE STUDIES: in U.S. semiconductor company Advanced

AMD/MUBADALA AND 3COM/HUWAEI Micro Devices (AMD).
Attempts by organizations linked to foreign The deal provoked little controversy, and
governments to acquire shares in strategical- went through relatively unnoticed. How
ly important U.S. companies would set off did this happen?
a political firestorm, or so we believe. This
certainly was the case in the controversy Mubadala tried to keep a low profile,
over the acquisition of P&O’s U.S. hold- keeping its stake under 10 percent and not
ings by Dubai Ports World. And political seeking a seat on the AMD board. It also
tensions also seem to have been behind the paid close attention to the U.S. domestic
Chinese National Offshore Oil Corporation political process, sounding out key sena-
(CNOOC)’s decision to withdraw its bid for tors and congressmen informally as part of
the U.S. oil company Unocal. a larger diplomatic effort by the UAE. It
cannot have hurt that, as a result of the deal,
Political tensions also seem to have been AMD is reportedly more likely to consider
behind the decision by 3Com, a U.S. building a new chip fabrication facility in
network equipment maker, to postpone Malta, New York.
selling a minority stake in the company to
China’s Huwaei Technologies. CFIUS, the And, according to press reports, it is
U.S. government body that reviews foreign precisely this lack of attention to domestic
acquisition of American companies, inti- U.S. politics that scuppered the 3Com deal.
mated that national security concerns may Rather than quietly lobbying and influenc-
block the deal. ing, Huwaei, and their U.S. partners Bain
Capital, appeared to assume that any politi-
So it would appear that organizations cal concerns would not be a deal-breaker.
linked to governments in China or the
Middle East would have great difficulty The lesson appears clear. If you want to
buying stakes in strategic companies. But in make an acquisition in a strategic company
December 2007, Mubadala, a government in the United States, check informally first
investment company from Abu Dhabi, in- for political concerns. Oh, and increasing
vested $622 million for an 8 percent stake the likelihood of building new factories in
the United States doesn’t appear to hurt.

Figure 9: Stake Acquired by SWFs across all deals and foreign deals
ALL DEALS FOREIGN DEALS ONLY

<5% Stake <5% Stake
5% 7%
5-9% Stake
8% 5-9% Stake
10%
50-100% Stake 50-100% Stake

50% 10-50% Stake 43%
37% 10-50% Stake
40%
Further insight into the appetite for controlling stakes can be seen when consider-
ing geography. In OECD markets, over 50 percent of services and real estate but
only 4 percent of financial services transactions resulted in controlling stakes. Apart
from Temasek, which made four controlling investments in energy and utilities
(one in Australia, two in South Korea and one in the United Kingdom), we have
not seen evidence of other SWFs taking controlling stakes in sectors that could be
considered politically sensitive.
4. Asset Allocation: SWFs Are Investing in Higher-Risk

Asset Classes
Only a few SWFs disclose the composition of their portfolios by asset class, and those
that do often list these classes in broad categories such as bonds, equities, and “other.”
As a result, it is difficult to estimate the relative share of publicly-traded equities in a
given fund’s portfolio or how the fund’s investment philosophy may be evolving.

There is clear evidence in our database that SWF appetite for equities has increased
notably since 2000 (see Figure 10). Before then, only a few older funds such as Temas-
ek actively made significant direct investments. Since then, some 17 have done so. Nor
is the appetite for higher-risk asset classes confined to stocks: several funds also invest
in real estate and some have recently participated in leveraged private equity deals.
Evidence of growing SWF interest in equities is reinforced by the funds’ investments

in financial institutions such as U.S. and European banks and private equity firms.
These moves give SWFs increased exposure to deal opportunities, including through
debt-financed capital structures designed and funded by investment bank and private
equity partners. While these types of investments are no doubt attractive because of
the superior returns they have often generated, they raise legitimate concerns given the
role leveraged investment vehicles have played in the 2007-2008 global credit crisis.
Figure 10: SWF Transactions by Number and Value since 2000 33
150 146
Number 137
129
Value ($bn)
120
90 92
90
63 60 58
60 53
47 49
42
28
30
6 8
3 4 3
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 (Q1)

CASE STUDIES: Founded in 2005, QIA appears to have an

BARNEY’S/ISTITHMAR AND aggressive mandate for overseas invest-
SAINSBURY’S/QIA ment. In the fall of 2006, QIA bid $18
Much reporting about SWFs, especially billion for Thames Water, a U.K. utilities
those from the Middle East, portrays them company, but ultimately lost to Macquarie,
as on a petrodollar-fueled rampage to an Australian bank. In September 2007,
acquire assets in OECD countries. And if QIA began to explore a $20 billion bid to
those assets are premium brands, so much acquire Sainsbury’s.
the better. QIA progressed with due diligence through
The recent acquisition of Barney’s of New October, finding that the cost of the deal
York, an upscale U.S. fashion retailer, by was higher than originally thought, by
Istithmar, an investment arm of the Dubai some $1 billion. Finally, in November QIA
government, certainly fits this story. In withdrew its offer, though it maintains a
June 2007, Istithmar bid $825 million for minority stake. One person involved in the
Barney’s. While the deal was being finalized, bid said “Qatar’s reputation as a credible
Fast Retailing, a Japanese retail group, sub- investor of international assets has been se-
mitted an unsolicited bid for $900 million. riously damaged and it will be a while before
another British public company enters into
Fighting back, Istithmar raised its bid to exclusive negotiations with them again. We
$940 million, which was ultimately ac- used to think private equity’s behavior could
cepted. David Jackson, CEO of Istithmar, be low, but what Qatar has done is lower
stated “We still see value in the price that we than a snake’s belly.”35
ultimately paid. We are comfortable that the
price we paid will yield attractive returns.”34 In the end, both aggressive bidding and
indecision point to one factor — inexpe-
So Gulf-based SWFs will pay any price rience. It remains to be seen whether the
to snap up western brands, right? Wrong. younger SWFs will learn from their mis-
The Qatar Investment Authority (QIA)’s takes. But one thing is certain: they will be
aborted bid for Sainsbury’s, a U.K. super- major players in the financial markets for
market chain, tells a different story. many years to come.

Categorizing
Appendix
SWFs by Behavior
Most attempts to
funding sources,
purposes or uses.
Categorizing SWFs by Behaviour
SEVERAL TIMES IN THIS REPORT we have noted the difficulties of

generalizing about SWFs as a class. That said, there have been several attempts to
segment them according to different variables. In a recent report, analysts at an
investment bank, for example, positioned the 20-largest SWFs on a 2x2 matrix of
investment objective (passive to strategic) and transparency (low to high).36 The
resulting image makes the point that individual SWFs differ markedly from each
other on these dimensions and that several (in the UAE, Qatar, and China) pos-
sess the worrying combination of being strategic investors
with low transparency. The implication is that such funds A highly transparent fund
should be watched carefully for signs of politically-moti- from a country viewed as
vated investing. a strategic rival is no less
worrisome because it is
Such analysis addresses the common concern among re- transparent.
cipient country governments and multilateral regulatory
and oversight institutions about the potential abuse of SWFs by their sovereign
government owners. In our view, however, this analytical framework is prob-
lematic for several reasons. First, the report did not provide descriptions of the
underlying research, metrics, or methodologies. Given the lack of transparency
of many funds, how can one know based on the data presented whether they
are passive or strategic investors? Second, transparency applies to the fund, but
as we’ve argued here, the real issue for some external constituencies is the un-
derlying objective and behavior of the sovereign government owner. For these
constituencies, a highly transparent fund from a country viewed as a strategic rival
is no less worrisome because it is transparent.
SKYLINE OF DUBAI, UNITED ARAB EMIRATES

Fuelled by massive capital inflows, Dubai is using its SWFs in a
bid to become one of the world’s leading financial centers.

As noted in Section 3, a better way to understand the motivations of SWFs is

to examine actual behavior as revealed by their appetite for financial risk and the
behavior of their sovereign government owner as a member of the international
community. The resulting dimensions of financial risk
A better way to understand and sovereign ownership risk can be measured.
the motivations of SWFs is
to examine actual behavior To estimate financial risk we relied on public in-
as revealed by their appetite formation about the funds and the Monitor SWF
for financial risk and the Transaction Database. We graded each fund on four
behavior of their sovereign dimensions on a 0-3 scale (0 being conservative and
government owner. 3 very aggressive):
• Appetite for equity deals. A heavy reliance on equity deals shows a

strong desire to invest in riskier portfolios than traditional govern-
ment management of surplus reserves via central banks.
• Appetite for controlling stakes. An appetite for acquiring control-

ling stakes indicates objectives closer to private equity firms than
to traditional pension funds.
• Appetite for real estate deals. Real estate investments are less liq-
uid than other asset classes such as bonds and treasury bills.
• Appetite for foreign, especially non-OECD deals. Trading foreign

stocks or real estate, especially in non-OECD countries, reveals a
more aggressive investment behavior.
Each dimension is equally weighted to generate a 12 point-scale index of financial risk.
Measuring sovereign ownership risk posed a comparable though different challenge.

The Peterson Institute for International Economics has published an embryonic
transparency ranking for prominent SWFs.37 As we have argued, however, greater

transparency is helpful but will not address the underlying concerns about SWFs
among many constituencies. Allaying these concerns is best done by combining
information about transparency with additional information about the behavior of
sovereign government owners.
The index of sovereign ownership risk is a 7-point-scale composite that captures

both dimensions. The fund’s actual behavior is factored in by using the Peterson
Institute index. The risk represented by the sovereign government owner is calcu-
lated using a combination of Transparency International’s Corruption Index and
various World Economic Forum indices selected specifically because they indicate
the concerns that animate the SWF debate — for example, access to know-how and
respect for intellectual property rights; divergences in governance practices, e.g.
level of corruption, efficiency and effectiveness of the legal system; and openness
of markets, e.g. rules on FDI and prevalence of trade barriers.
Although transparency seems to generate the most attention, recent cases that
made headlines such as Dubai Ports World or 3Com emphasize that the national
provenance of an investment matters more than its type or
structure. To reflect this point of contention, the index of Recent cases that made
sovereign ownership risk weights the ratings of the sover- headlines such as Dubai
eign government owner more heavily than the fund itself. Ports World or 3Com
emphasize that the
The resulting matrix appears in Figure 11. The size of the national provenance of an
bubbles indicates the amount of funds under management. investment matters more
In the bottom left quadrant are SWFs from Norway and than its type or structure.
New Zealand. These funds have a low appetite for financial
risk, and both originate in countries with low levels of sovereign ownership risk.
The Gulf and Singaporean funds are all at a similar level regarding sovereign own-
ership risk . However, these funds differ greatly from their counterparts Norway
and New Zealand in their appetites for Financial Risk. ADIA, KIA and GIC are

more similar to university endowments, in that they accept more risk than some
pension funds, but are on the whole relatively conservative investors. The greatest
difference in terms of investment philosophy is shown by Temasek, Mubadala and
Istithmar. Given their tendencies to take controlling stakes in individual companies,
they at times behave more like private equity investors.
Figure 11: Selected SWFs and the Dimensions of Risk
5
Central Huijin Investment Company
SOVEREIGN OWNERSHIP RISK
4 ADIA
KIA Qatar Investment Istithmar

3 KIC Authority
Mubadala
GIC
Kazanah
2 Temasek
Holdings
NZ Superannuation Fund
1 Norway Pension Fund
0
1 2 3 4 5 6 7 8 9 10
FINANCIAL RISK
On the dimension of sovereign ownership risk, the most interesting case is Chi-
na, which here is represented by Central Hujin Investment Company, a fund that
invests primarily in China (its new parent fund CIC was formed too recently to pro-
vide a meaningful track record in our database). China elicits more concerns about
internal governance and intellectual property protection than any other country
with SWFs. Its attitude towards financial risk appears to be evolving and reflective
of a conservative investment posture but also one exhibiting a growing appetite for
risk in the form of private equity deals.38
Today, the bulk of SWF value is in the middle of this chart, in funds with moder-
ate sovereign ownership and financial risk. The potential for this mass to migrate
towards the top right quadrant commands attention in every debate. Yet we be-
lieve the potential horizontal migration outward along the index of financial risk

is the more likely trajectory for most SWFs in the short to medium term and that
exposure to undue financial risk is a greater concern than politically-motivated
investing. The 2006 incident noted above involving the Norwegian fund and the
Icelandic government illustrates the point. Managers of the Norwegian fund an-
ticipated the market by playing short on debt securities of the then-booming
Icelandic bank. Although such trading is routine for so-
phisticated investors, complaints ensuing from the prime China elicits more concerns
minister of Iceland indicate that even prudent financial about internal governance
investing carries political dangers. and intellectual property
protection than any other
country with SWFs.

Scenarios for
the Next Five Years
Illustration by Julia Frenkle

Scenarios for the Next Five Years
IN ATTEMPTING TO SKETCH THE LANDSCAPE in which SWFs will

participate in future global financial markets, we distinguish between observable
trends and critical uncertainties. We believe that three key trends will play out over
the next five years.
1. SWFs will become fixtures in global financial markets and more funds will be
established in the short to medium term, either by states establishing their first
fund or those with existing funds adding more.
2. SWF appetite for higher risk-adjusted returns has increased in recent years and
will continue to do so.
3. Legislators and policy makers in major capitals will, for better or worse, con-
tinue to push for some form of regulatory response to the increasing promi-
nence of SWFs.
Two critical uncertainties, however, will play vital roles in defining the future partici-
pation of SWFs in global financial markets. Perhaps more importantly, they could
have potentially significant spill-over implications for national economies and cor-
porations as recipients of investment capital, as well as for other providers of capital
and financial market intermediaries, including pension fund managers, private eq-
uity firms, hedge funds and investment banks. These critical uncertainties are:
1. The extent to which SWFs pursue financial ends as opposed to geo-strategic

ends sought by their sovereign government owners; and
2. The extent to which regulations affecting SWF activities occurs at the nation-
state level or is coordinated globally.

Combining these two critical uncertainties generates four possible futures for SWFs
in the year 2013 (see Figure 12 and Figure 13).
Figure 12: Four Scenarios for SWFs in 2013
Coordinated Multilateral
Regulatory Response
FROM HUNTERS MACHIAVELLI’S

TO FARMERS NEW TOY
Purely Financially Geo-Strategically
Motivated Motivated
LIFE ROGUES
GOES ON RUN WILD
Fragmented National
Regulatory Response
Financial vs. Geo-Strategic Motivation
SWFs are becoming more aggressive investors, moving away from their traditional
investments in currency reserves and bonds into higher-risk asset classes, including
equities in OECD and emerging markets. Like other financial investors, SWFs are
using more sophisticated investment strategies to secure higher returns. We expect
this trend to continue in the future.
Our analysis of SWF deals indicates that national governments are not using these
funds as tools of foreign policy. While some SWF investments, such as those in
U.S. and European financial services companies, have been criticized as politically
motivated, we see no evidence to confirm such a view. Rather, these investments
appear to be motivated by financial interest in the prospect of gain and/or ensuring
the stability of the financial system. Some funds, such as Mubadala in Abu Dhabi,
have a clear mandate to invest to develop their domestic economy. But its activities
are far from meddling in the internal affairs of other countries.

Once it makes an investment in a foreign company, a SWF has “bought in” to the
existing system, and has a clear financial interest in playing by the rules. This makes
it difficult, though not impossible, to imagine a sovereign government leader at-
tempting to use a SWF to achieve foreign policy goals.
What might inspire a SWF to invest for political motives? First, a serious dislocation
of interest among two or more of the major global powers — the United States,
China, Russia and the European Union — preventing all of them from coming
together in extreme circumstances to deal with what would clearly be a common
threat to their individual national interests;
Second, a widespread mutiny in the multilateral trading system and a breakdown in

the normal channels of diplomacy and dispute resolution.
Meanwhile, the severity of the threat also would depend

Once it makes an
on the aggressiveness and sophistication of a fund’s in-
investment in a foreign
vestment strategy and the relative size of its investment company, a SWF has
positions in global markets. Some possible futures are set “bought in” to the existing
out in Figure 13. system, and has a clear
financial interest in playing
Another scenario, less debated but more likely, is that a by the rules.
SWF could introduce an unacceptable degree of financial
risk into another country’s markets through an overly aggressive investment strat-
egy. The collapse of Long-Term Capital Management in 1998 and the recent crisis
at Bear Stearns, show the risks of investing in complex financial instruments and
excessive use of leverage. The possibility for nations and multilateral institutions to
consider, in this case, is that of a sovereign hedge fund, highly leveraged, that bets
wrongly and collapses.

Figure 13: Possible Future Scenarios for SWFs

Coordinated Multilateral Regulatory Response
FROM HUNTERS TO FARMERS MACHIAVELLI’S NEW TOY

As a result of global guidelines being successfully While the global regulatory mechanisms successfully
negotiated in early 2009 by a special multilateral negotiated in 2009 initially appeared to have achieved
conference hosted by the IMF and co-chaired by senior their goal of enhancing transparency of SWF intent and
Chinese, European, and American officials, much of the investment activity, the April 2010 Financial Times
anxiety surrounding SWF investments has died down. exposé of a major country’s manipulation of global
As a consequence the number of SWFs has doubled – commodity markets through one of its SWFs came as a
some from new states and some from states with rude awakening to those who had believed in the
multiple funds - as has the total dollar value of assets possibility that the funds would be purely financial
under their management. Annual IMF auditing of SWF actors firewalled from the geo-strategic agenda of their
disclosure statements has provided both recipient political masters. By employing a complex web of
governments and other market participants with a holding companies, foreign intelligence assets, and
high degree of confidence in the transparency of SWF hedge fund traders in offshore banking centers in the
intent and market activity. As they did during the Atlantic and Pacific, the country’s“Sovereign Hedge
2007-08 global credit crisis, SWFs have continued to Fund” had managed by January 2012 to extract profits
play a valuable role in providing global markets with estimated at $100-125 billion from the short selling of
liquidity and have done so in a manner consistent with oil futures. Despite pressure from OECD nations to
their financial self interest in achieving attractive long strengthen global oversight mechanisms and introduce
run returns. retaliatory sanctions for states found in breach of global
rules, such efforts have been systematically frustrated
Purely Financially Motivated
Geo-Strategically Motivated
and it is now widely considered in official policy and
intelligence circles that other states routinely use their
SWFs to engage in manipulation of currency and
commodity markets.
LIFE GOES ON ROGUES RUN WILD

Sovereign Wealth Funds are allowed to participate as Bitter and angry after the imposition of U.S. sanctions,
global investors and while no evidence has emerged to an oil-producing country’s president vowed to send the
suggest that they are anything other than driven by U.S. economy back into recession by using his nation’s
financial self interest, recipient governments continue Sovereign Hedge Fund to provoke volatility on Wall
to receive foreign SWF funds cautiously. Consistent with Street. Having secured long term oil and gas contracts
the 1990s failure to negotiate a Multilateral Investment with other customers, the president has calculated that
Agreement, efforts by the OECD, IMF, and World Bank in the country can absorb the pain of U.S. countermeasures
2008 to develop global standards for SWF disclosure and such as further economic sanctions.
investment approval failed to gain traction.
Consequently, governments have relied instead on
national powers to legislate and regulate. Most OECD
countries as well as many others in Asia, Africa and Latin
America have passed SWF-inspired amendments to
national foreign investment rules that typically require
additional review and due diligence of proposed
investments in strategic sectors of the economy by
foreign government-owned investment vehicles.
Fragmented National Regulatory Response
Another possibility is the emergence of a world in which SWFs are used as ancil-
lary tools by national political leaders in the competition among states to secure
long-term access to natural resources and perhaps export markets. In this Machia-
vellian world, it is not hard to imagine a pattern of behavior emerging in which

SWF states clandestinely use the power of insider information gained through for-
eign intelligence assets to arbitrage currency, commodity and futures markets. This
would be the financial markets equivalent of espionage — undertaken by everyone
despite globally-accepted norms to the contrary and toler-
ated by everyone unless and until these activities become Irrespective of the merits
so obvious and egregious as to demand public rebuke and of SWF-specific regulatory
international sanction. measures, some form of
regulatory action by policy
In this future scenario, private sector investors would be makers and legislators is
the biggest losers because of the disadvantage resulting likely in the next two or
from the information asymmetries created by state-funded three years.
foreign intelligence operations. Consequently, widespread
market perception of such a world existing could have damaging consequences
for the broader operation of an efficient global financial market. In such a context,
SWFs might be perceived by private sector market participants 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 mar-
ket volatility and suboptimal asset pricing.
Globally Coordinated vs. Fragmented Regulatory Response
While the debate continues over whether SWFs present any real cause for concern,
political leaders and legislators in OECD capitals from Berlin and Bangkok to Wash-
ington and Canberra are already calling for a review of regulations applying to global
investment vehicles owned by foreign governments. We believe that, irrespective of
the merits of SWF-specific regulatory measures, some form of regulatory action by
policy makers and legislators is likely in the next two or three years.
Three basic models for possible regulatory response have emerged from the ongo-
ing debate:

1. Voluntary improvements in transparency of objective and investments on the

part of the SWFs themselves;
2. Imposition of national regulations in the form of SWF-specific modifications

to existing foreign investment laws and review procedures;
3. The development of global regulatory standards and mechanisms by one of the

existing inter-governmental organizations with existing oversight for the efficient
conduct of global financial markets. These organizations include the International
Monetary Fund, the World Bank and the Financial Stability Forum.
In our view, to the extent that SWF-specific regulatory measures are considered
necessary, a global approach to regulation and oversight is the preferred approach.
The global nature of the investment footprint of SWFs, and indeed other large
globally-minded investors, calls for the harmonization of national investment rules.
Among other things, global regulatory standards for investment would help to
enhance information flows and market signalling for all investors. Global standards
would also help to mitigate the risk of unduly discriminatory treatment of state-
owned investors vis-a-vis private investors and would help minimize the transaction
costs on the cross-border flow of capital.
Nevertheless, a global solution to SWF concerns is unlikely to emerge. As witnessed by

the failed attempt in the 1990s to negotiate a Multilateral Investment Agreement (MIA),
little consensus exists on foreign investment rules among OECD nations, let alone the
broader international community. Ownership limits, review, approval and appeal pro-
cedures and, perhaps most contentious of all, the definitional boundaries of “national
interest” and “national security” are all hotly contested.
Second, little consensus has emerged in the early months of 2008 about which in-
ter-governmental organization is most appropriate to provide oversight of SWFs.
The IMF, OECD, World Bank and Financial Stability Forum are all involved in
the ongoing investigation of possible multilateral regulatory measures, yet none of
these bodies possesses clear jurisdictional authority to oversee and enforce stan-
dards relating to government-owned investment vehicles including SWFs.

This highlights a third and potentially stronger barrier to the search for a multilat-
eral response: most SWF states do not have a seat at the top table of many of these
inter-governmental organizations. One of the least articulated aspects of the ongo-
ing SWF debate is the fact that their rapid emergence highlights, far sooner than
many expected, the unrepresentative nature of many of the
world’s transnational and multilateral organizations today. It Most SWF states do
is difficult to see why SWF states would sign on to any new not have a seat at
SWF-specific regulations if they had not been granted an ac- the top table of many
tive voice in designing and promulgating the new rules of the inter-governmental
organizations.
game for global investment.
We also see little likelihood of an effective voluntary scheme emerging, despite

the pressure on SWFs to develop and adopt a code of conduct encompassing en-
hanced disclosure practices. First, many SWF states do not currently see it in their
best interest to take the lead on this issue of transparency, not least because most of
the concern being expressed in OECD capitals is explicitly or implicitly directed to
Chinese, Russian and Middle Eastern SWFs. Second, at a practical level, no obvious
mechanism exists for the managers of SWFs to collaborate in drafting a voluntary
code of conduct. Finally, even if some form of limited voluntary transparency
standards did emerge among SWFs, we doubt it would alleviate the real underlying
concerns of Western policy makers. Suspicions about the accuracy and complete-
ness of any voluntarily disclosed information would remain.
The Most Likely Scenario
Given the difficulty of coordinating a multilateral regulatory response, we believe

this is unlikely to happen. And given the current investment profile of the major
SWFs and the care they take to avoid sensitive sectors in the OECD, we also be-
lieve it is unlikely that SWFs will begin to invest for geo-strategic reasons. The most
likely future in our opinion is “Life Goes On,” in which SWFs continue to evolve
as financial investors in a relatively unregulated global system.

Implications,
Appendix
Conclusions, and Questions
Most attempts to
funding sources,
purposes or uses.
Implications, Conclusions, and Questions
THE KEY CONSTITUENCIES in the global financial system obviously can

influence which scenario plays out. Here are the implications for each of these ac-
tors, as well as actions for them to consider — or avoid — in shaping the evolution
of the global financial system in ways that address their interests and concerns.
For SWFs
Managers of newer SWFs would do well to learn from their counterparts at older,
successful funds like Singapore’s GIC and Temasek, Norway’s GPFG, and Abu
Dhabi’s ADIA. Namely, SWFs will benefit from:
• Distancing themselves organizationally and administratively from

their sovereign government owners to reinforce perceptions of
independence and autonomy;39
• Demonstrating to other constituencies that their funds are man-

aged by respected professional investment managers;
• Having in place risk management systems commen-

surate with their growing appetite for higher-risk asset When making foreign
portfolios; and investments, SWFs
would be wise to avoid
• Building and disclosing a track record illustrating pursuit
sensitive sectors or iconic
of financial goals. national companies and
When making foreign investments, SWFs would be wise continue to act as long-
to avoid sensitive sectors or iconic national companies and term, passive investors.
MANDARIN ORIENTAL HOTEL, NEW YORK CITY

In December 2006, Istithmar, a Dubai-based SWF, purchased the
Mandarin Oriental Hotel in New York for $594 million.

continue to act as long-term, passive investors with relatively small equity stakes in
target companies. Exceptions are possible but should be managed carefully because
funds that stray from the proven path face significant risks.
Managers of SWFs that score high on the dimensions of sovereign ownership risk
and financial risk face particular challenges. Leadership and organizational capa-
bilities in corporate diplomacy — gaining a richer, more nuanced understanding of
constituencies affected by particular investments as well as tactics and techniques
for dealing with their concerns (see sidebar) — are distinguishing features among
the most successful funds in their foreign investments.
For Sovereign Government Owners
SWFs offer an unparalleled opportunity to their sovereign government owners to help

increase prosperity. Nevertheless, the ultimate test for national governments will be not
how much money they accumulate in the SWF itself, but
SWFs offer an how the proceeds from SWF investments are productive-
unparalleled opportunity ly reinvested back into the domestic economy.
to their sovereign
government owners to There is a genuine risk that the income stream from
help increase prosperity. SWF investments globally can cushion political lead-
ers from the difficult and politically dangerous task of
pursuing structural economic and social reforms at home. In this sense, proceeds
from SWFs that are distributed to citizens in the form of cash or welfare transfers
may yield undisciplined and uncompetitive economies in the future. This has long-
term implications not only for citizens of the sovereign government owner but also
for other constituencies and the global economy as a whole.
Another risk to sovereign government owners is failing to recognize the impact of

their policies and behaviors on how other constituencies view their SWFs. As we’ve

A NOTE ON CORPORATE DIPLOMACY Corporate diplomacy is the communi-

cation and engagement with external
In today’s world, it can be difficult to
stakeholders based on insightful situ-
discern between opportunities and
ational awareness of the political,
threats or to identify the true bases
economic, geo-strategic and social
of power and influence. The best
contexts within which specific com-
analysis and the most compelling busi-
mercial activity is undertaken. Effective
ness case — an investment in a new
corporate diplomacy helps to identify
geography, a cross-border merger or
and pursue significant opportunities, an-
acquisition, a new advertising cam-
ticipate and manage potential problems,
paign targeted at unfamiliar customers,
avoid embarrassing false starts, and
an effort to preserve a proprietary
escape or minimize crises. It requires a
advantage — can result in nothing if the
systemic management approach across a
proposed activity sparks criticism and
range of corporate functions and activi-
controversy from stakeholder groups
ties - from the gathering and synthesis
who feel impacted. Billions of dollars
of situational intelligence, to the for-
in corporate valuations and personal
mulation and execution of stakeholder
reputations can be at risk. Capabilities
engagement strategies and the training
and skills in corporate diplomacy are be-
and development of corporate leaders
coming essential to success, particularly
within the organization to undertake
for organizations like SWFs and their
these activities and represent the organi-
investment banking advisers routinely
zation’s interests on a global stage.
engaged in cross-border activities and
managing a global investment footprint.

noted, providing greater transparency of SWF objectives and investment activity

is a positive step toward giving other participants in global financial markets bet-
ter information but it will not eliminate political concerns. Neither transparency
of SWF intent or activity nor the democratic credentials of the parent state will
guarantee favorable reception to a SWF investment in a foreign country. The driver
of acceptance will be the track record of observable behavior by the SWF’s sover-
eign government owner in international affairs more broadly.
This last point bears emphasis. SWFs of countries perceived as aggressive or ir-
responsible global citizens will be suspect. In broad terms, we expect that SWFs
from nations that support or fail to confront groups engaged in terrorism, drug
smuggling, or money laundering will continue to get a cool reception in foreign
markets. Similarly, funds based in countries that get low marks for protectionism,
corruption, transparency, and inefficient or politicized
Neither transparency of SWF legal and regulatory systems also will be suspect.
intent or activity nor the
democratic credentials of the Even so, much is in the eye of the beholder. Many
parent state will guarantee OECD states have sought to link global trade and in-
favorable reception to a SWF vestment rules to state behavior such as protection
investment in a foreign country. of human rights, the natural environment, and intel-
lectual property. As witnessed by recent pressure on
U.S. and European corporations and fund managers to divest shares in companies
with commercial activities in Sudan, SWFs seeking access to OECD markets can
expect increasing scrutiny at the foreign investment screening stage around their
parent government’s commitment to social, political, and cultural values cherished
in OECD countries.
Other countries, however, place significantly less importance on adherence to such

standards. As Professor Steven Weber and others have pointed out, trade and in-
vestment flows continue to grow between the emerging economies, with many of

them possessing the most lucrative greenfield natural resources and high-growth
investment opportunities in global markets today. Herein lies the rub for OECD
policy makers who have become accustomed to presiding over the most attrac-
tive investment markets while alleging the moral superiority
of progressive liberal values. This world may be vanishing. SWFs from emerging
In Weber et al’s “World Without the West,” SWFs from market nations may simply
emerging market nations may simply sidestep investment sidestep investment
opportunities in OECD markets because of the political opportunities in OECD
friction and transaction costs involved and focus their at- markets because of the
tention instead on comparably-attractive opportunities in political friction.
markets less likely to attract political and regulatory scru-
tiny. This confluence of high-growth investment opportunities with lesser concern
for social and cultural norms defined by Western liberal democracies is a new phe-
nomenon in global affairs, one with potentially profound implications.40
For Recipient Country Governments
National security remains an area of acute concern to all governments considering

foreign investment proposals, especially when originating with foreign government-
owned investment vehicles. Nevertheless, recent public statements by politicians
highlight a range of other concerns among recipient nations. French President
Nicholas Sarkozy has expressed concerns about an uneven playing field emerging in
global cross-border investment. And the German government is reportedly setting
up its own version of the Committee on Foreign Investments in the United States
(CFIUS), in part in response to the public debate over SWFs.41
As highlighted by these responses, the debate so far has lacked a clarity of purpose
and little evidence of any analytical grounding — conditions that do not bode well
for a level-headed assessment of the risks and the drafting of appropriate and ef-
fective monitoring and oversight mechanisms.

We share the view that foreign direct investment is beneficial both for national
economies and international relations. Thus it is not in any nation’s interest to raise
impermeable barriers to inward SWF investments. In general, investments by SWFs
should be treated on equal terms as other sources of financing and subject to the
same oversight and regulations. Additional scrutiny and review should be reserved
for transactions likely to impinge on clearly demarcated national security interests.
Greater transparency in SWF reporting should be encouraged better to inform
market participants. Finally, as with other constituencies, recipient country govern-
ments may use the matrix of sovereign ownership risk and financial risk to inform
thinking about particular SWF investments.
For Multilateral Regulatory and Oversight Institutions
To date, SWFs have demonstrated themselves to be responsible long-term investors

and contributors to the welfare of the global financial system. Any changes to exist-
ing multilateral or transnational regulatory frameworks should take care to preserve
the benefits SWFs offer and avoid penalizing them for
SWFs should enjoy no irresponsible behavior that has yet to materialize.
financial advantages over
private investors based It is in the interests of all constituencies that SWFs not
on sovereign government only be treated like other classes of investors but also
ownership. be watched closely for signs of inappropriate influ-
ence on their investment behavior by political leaders
in their home country. SWFs should enjoy no financial advantages over private
investors based on sovereign government ownership.
Increased transparency of SWFs would make the tasks of regulation and oversight
easier — though as noted repeatedly in this report — would not remove all SWF
investments from suspicion or regulation. In our view, common and effective stan-
dards of transparency for SWFs are desirable, whether established voluntarily by
the SWFs or instituted by multilateral regulatory organizations.

For Other Financial Institutions
SWFs clearly pose both threats and opportunities to other financial institutions.
Once again, the matrix of sovereign ownership risk and financial risk may provide
a useful guide for other parties in weighing how investments by a particular SWF
in a given country may be perceived. As competitors to SWFs, other financial in-
stitutions may glean insights into the likelihood that a SWF will seriously pursue
a certain transaction or the reactions that may be generated in local markets. Un-
derstanding where and how SWFs prefer to invest is highly valuable competitive
intelligence that could support pre-emptive moves or positioning as an alternative,
less controversial supplier of capital.
As potential investment partners, other financial institutions may be able to

influence the choices and terms under which a SWF undertakes investments
abroad. Once again, understanding of SWF motives and behaviors is valuable
intelligence for those seeking to help a SWF realize its goals and objectives.
At the same time, other financial institutions with complementary knowledge
in such areas as local funding alternatives and corporate diplomacy can render
significant service to SWFs.
For Companies Considering Investments by SWFs
Boards of directors and top executives of companies in which SWFs may invest
can also benefit from understanding the motives and behaviors of SWFs and the
risks they pose. The appearance of new suppliers with vast capital resources obvi-
ously is inviting, especially because these suppliers appear to be patient, long-term
investors who are not likely to interfere in governance or management. Clearly a
company evaluating an investment from a SWF should test these appearances and
consider circumstances under which they might change.

Accepting an infusion of capital from a SWF need not be controversial if managed

well — that is, by first acknowledging, then addressing the concerns of corporate
stakeholders, including the media, as well as of other constituencies in the global
financial system.
Final Observations and Questions
The current debate over SWFs risks polarizing proponents and opponents into
separate and isolated camps. It may be more productive to step back and view the
debate as the opening conversation of a larger discussion among nations about the
role of emerging nations in the global financial system.
That SWFs, like private equity firms and hedge funds, remain largely opaque
and unregulated highlights the inability of international regulatory authorities
to keep pace with innovation and adaptation in the global financial system. It
also highlights the increasingly problematic divide between the states that write
the rules on how the global financial system should operate and provide the
systems administration function for it, versus the states that focus their atten-
tion on how to maximise risk-adjusted returns within the existing rule set. In
this light, the rise of SWFs signifies an important change in the global financial
system, one that increasingly pushes the boundaries
The rise of SWFs signifies of acceptable state behavior as understood by pre-
an important change in the vailing conventions.
global financial system.
Emerging nations clearly believe that they also have
the right to write the rules. Speaking recently, Yang Jie-
chi, the Chinese Foreign Minister, said “It’s in everyone’s interest to make good use
of sovereign funds in line with international financial rules. But of course, the rules
of games should be set up by all involved.”42

As the new cash-rich emerging market states test the prevailing conventions pre-
sided over by the victors of World War II, challenges lie ahead in revising the
rules on global investment market behavior. While issues have been raised in recent
years about the merits of closer regulation of private equity and hedge funds, it is
clear that the government-owned nature of SWFs complicates any attempt to limit
regulation purely to preserving the stability of the global
financial system — an objective around which all states and The government-
financial market participants have a collective interest. owned nature of SWFs
complicates any attempt
Meanwhile, SWFs have important implications for the to limit regulation purely to
evolving role of the nation state in the global economy. preserving the stability of
Some experts have suggested that the funds portend a the global financial system.
comeback for the state, offsetting trends toward smaller
central governments. We do not find such arguments plausible. A few prominent
exceptions notwithstanding, national governments are ceding responsibility for
economic production to private enterprise while focusing on policy-setting and reg-
ulatory agendas. This transition occurs in many forms and at varying rates, from full
privatization (as in electricity grids and airports in many OECD economies), to the
outsourcing of management and operating responsibility for government-owned
assets (as occurs in the oil and gas industry). This process is neither fast nor easy
due to politically-sensitive employment impacts. Despite the challenges, emerging
market economies with traditions of strong state involvement in economic produc-
tion, including China and India, continue to recognize the superior performance of
private commercial actors.
On the other hand, SWFs do represent a reassertion of the state in the global
economy. The proliferation of funds is one of several indicators highlighting the
determination of many states to preserve ownership rights over sources of national
wealth, typically in the form of resource endowments (such as oil) or the accumu-

lated cash proceeds from the prior sale of those commodities. In this regard, SWFs
are an outcome of other strategic choices made by national political leaders.
First, controlling access to natural resources matters more than it ever has. The
emergence of massive new consumers of energy such as China and India has
prompted resource-rich states to pay greater attention to the management of the
future value of their resources. Although states such as Russia and Venezuela have
made a strategic choice to re-nationalize ownership and control of their energy
resources, other states have demonstrated increasing
Many states view SWFs as savvy in negotiations with multinational corporations
opportunities to become over access rights.
more vocal and active in
global economic affairs. Second, there are minimal barriers to entry in wealth
management and, buoyed by the rapid accumulation
of excess foreign reserves, many states view SWFs as opportunities to become
more vocal and active in global economic affairs.
In sum, the rise of SWFs and the reassertion of the state in global economic affairs
pose five key questions for policy makers and regulators:
1. What are the potential risks of SWFs for which regulation is the solution? While
prudent risk management needs to rely on the application of the precaution-
ary principle, much of the SWF debate so far has been characterized by “what
if ” speculation that, as our database of SWF transactions shows, is not well
grounded in the reality of fund behaviors to date.
2. Which fund-related entities should regulation cover? Note two key points. First, non-
discriminatory regulation is important to the efficient and effective function-
ing of global financial markets. Do the risks at the core of concerns about
SWFs relate only to these funds or also to other types of government-owned
global investment vehicles and/or privately-owned global investment vehicles
such as private equity and hedge funds?

Second, regulatory responses need to be developed with a holistic view

of the global investment system in mind. If SWF-specific regulations
are introduced they will increase the transaction costs (financial and po-
litical) for SWFs and perhaps increase barriers to investment in some
sectors deemed to be of national security importance. While this may
thwart unwanted direct investment by SWFs, it may also motivate them
to adopt investment strategies with lower transaction costs and lower
barriers to entry. These might include adopting a “fund of funds” ap-
proach in which SWF money is managed by third parties in markets that
remain less regulated.
3. Which multilateral authority is the most appropriate to oversee SWFs? The regu-
latory architecture of the global financial system is still largely configured
to oversee market participants that dominated international finance in
the twentieth century: central banks, commercial banks, insurance com-
panies, mutual funds, and pension funds. Despite the debate in recent
years, little progress has been made on how to accommodate the emer-
gence of significant new types of asset managers such as private equity
firms, hedge funds, and now SWFs.
This lack of clarity is perhaps best highlighted by the fact that national
governments, regional bodies such as the EU and international bodies
such as the IMF and the World Bank are each independently crafting
recommendations in relation to SWF regulation.
4. What specific measures are both appropriate and practical to implement? Financial
market evolution and innovation dramatically outpaces the regulatory
reactions of the international community. Would specific measures be
enforceable or would they need to rely on voluntary compliance?

5. Perhaps most important, which nations will get to participate in negotiations over
regulation and oversight of SWFs and under what terms? In the near term, ex-
isting multilateral institutions seeking oversight of SWFs are listening to
nations that are not members or traditionally involved in decision mak-
ing. Sooner or later, this will change, and whether the change proceeds
smoothly or as the result of struggle and conflict is a key question for the
world in the years ahead.

Appendix
Appendix
PROFILES OF SELECTED SWFs
Asia
China Investment Corporation (CHINA)
Government Investment Corporation (SINGAPORE)
Temasek Holdings (SINGAPORE)
Middle East
Abu Dhabi Investment Authority (ABU DHABI, UAE)
Dubai International Financial Center Investments (DUBAI, UAE)
Istithmar World (DUBAI, UAE)
Kuwait Investment Authority (KUWAIT)
Mubadala Development Corporation (ABU DHABI, UAE)
Qatar Investment Authority (QATAR)
Europe
Government Pension Fund Global (NORWAY)

Appendix
China Investment Corporation CHINA
KEY INFORMATION
• Investment arm of the Chinese Government ASSET ALLOCATION
• Launched in September 2007
N/A
• CIC’s mandate is to invest a portion of China’s
foreign currency reserves
• Key People: DEALS, 2000-Q1 2008
(9 DEALS, $34BN)
» Chairman: Lou Jiwei
Energy and
» General Manager: Gao Xiqing Utilities 3%
» Chairman of the Board of Supervisors: Hu
Huaibang
OBJECTIVE AND STRATEGY

• According to Li Yong, China’s Vice Minister of Financials
97%
Finance, CIC’s investment strategy is:
» 1/3 of capital is to purchase Central Huijin
Investment Co., owner of China’s major state-
owned commercial banks
» Another 1/3 would be used to replenish the RECENT DEALS
capital of the Agricultural Bank of China and • JC Flowers + Co
China Development Bank (February 2008, $4bn)
» The remaining 1/3 would be invested in global
• Morgan Stanley
financial markets
(December 2007, $5bn, 9.9 percent stake)
• Investment in global financial markets is to be
• BG Group
gradual and CIC would not invest in overseas
(September 2007, $250m, 0.46 percent stake)
airlines, telecommunications or oil companies
• Blackstone Group
(May 2007, $3bn)
ORGANIZATION CHART
N/A

Appendix
Government of Singapore
Investment Corporation SINGAPORE
KEY INFORMATION ASSET ALLOCATION

BY CLASS, JULY 2006
• Headquartered in Singapore, and established
in 1981, GIC is an investment arm of the
Singaporean Government Others*
20%
• It has some $330bn of assets
• Key People: Bonds
Equity
50%
» Chairman: Lee Kwan Yew (Minister Mentor, 30%
Singapore)
» Deputy Chairman: Lee Hsien Loong (Prime
Minister of Singapore)
» Executive Director: Tony Tang Kem Yam
OBJECTIVE AND STRATEGY DEALS, 2000-Q1 2008

(74 DEALS, $56BN)
• GIC’s objectives are: Other
Infrastructure
» To preserve and enhance the international 14% 2%
purchasing power of Singapore’s reserves, by
achieving a real rate of return over and above
the G3 inflation rate over a long-term horizon.
» For medium-term performance monitoring, Real
Estate Financials
to outperform an appropriate composite of 38% 46%
recognised market indices, through optimal
allocation among and within asset classes.
ORGANIZATION CHART
Government of
RECENT DEALS
Singapore
• UBS (February 2008, $14.4bn, 10 percent stake)
GIC
• Citigroup (January 2008, $6.8bn, 4 percent stake)
• Merrill Lynch Financial Center (July 2007, $953m)
Asset Real Estate Special • British Airports Authority (May 2006, $2.5bn)
Management Investments
• Associated British Ports Holdings
(March 2006, $5.1bn)

Appendix
Temasek Holdings SINGAPORE

• Headquartered in Singapore, Temasek is an BY SECTOR, 2005-2007
investment arm of the Singaporean government Other
Energy 6%
• It was established in 1974, and currently has Infrastructure 6%
some 300 employees 6%
• Key People: Real Estate

» Chairman: S Dhanabalan 9% Financial
» Deputy Chairman: Kwa Chong Seng Services
Transport 38%
» Executive Director: Simon Israel 12%
» CEO: Ho Ching (Wife of the Prime Minister Telecoms
of Singapore) 23%

• Temasek’s investment strategy is to: DEALS, 2000-Q1 2008
(393 DEALS, $52BN)
» Buy shares of foreign businesses to
earn dividends Other 10%
» Buy foreign banks as an investment vehicle to Telecom 6%

raise funds in the respective country IT 4%
» Its main investments are in finance, Energy and
telecommunications, media, IT, transport, Utilities
12%
real estate, construction, engineering,
Financials
pharmaceuticals and airlines sectors 50%
Industrials
• 75 percent of Temasek’s investments are 12%
in Singapore Consumer 6%
ORGANIZATION CHART
Government of
Singapore
RECENT DEALS
Temasek
• Merrill Lynch
Executive
Office (December 2007, $4.4bn, 9.5 percent stake)
• TXU Australia (July 2007, $3.7bn, 100 percent)
Strategic Strategic
Development Asia Development ASEAN • Barclays (July 2007, $3bn, 2.1 percent)
Strategic Capital Resources • Bank of China (March 2007, $1.5bn, 5 percent
Development Global Management
stake)
Fund Private
Management Equity • Standard Chartered PLC
(2006, $4bn, 11.5 percent stake)

Appendix
Abu Dhabi Investment

Authority ABU DHABI, UAE

• Headquartered in Abu Dhabi, Abu Dhabi FUND ALLOCATION BY ASSET TYPE, 2006
Investment Authority (ADIA) is an investment Other Alternative
Real Estate Investments
vehicle of the Abu Dhabi Government 5–8% 5–10%
• It was established in 1976 by Sheikh Zayed bin
Sultan al Nayhan, and its size is estimated
at $875bn Private Equity
5–10%
• Key People:
» Chairman: Sheikh Khalifa Bin Zayed Al Nahyan Fixed
Income Equities
» Managing Director: Sheikh Ahmad Bin Zayed 20–25% 50–60%
Al Nahyan
» CEO: Hareb Al Darmaki
» CFO: Salem Rashed Al Muhanadi

DEALS, 2000-Q1 2008
• ADIA’s mandate is to accumulate wealth for future (15 DEALS, $16BN)
generations in Abu Dhabi
• ADIA invests in various asset classes:
Energy
» Equities » Real Estate and
» Fixed income » Alternative assets (PE, hedge funds) Utilities
35%
• Around 70-80 percent of ADIA’s portfolio is
managed by external fund managers Financials
59%
• Generally tries to keep equity stakes below 4.5 Real Estate
percent to avoid disclosure 6%
• ADIA is separating into two organizations; ADIA

and ADIC
RECENT DEALS
ORGANIZATION CHART
• Citigroup
Government of
Abu Dhabi (November 2007, $7.5bn, 4.9 percent stake)
Abu Dhabi • PrimeWest Energy of Canada
Investment
Council (September 2007, $5bn)
• MediaSet SpA
Abu Dhabi
Investment
Abu Dhabi
Investment
(August 2007, $220m, 2 percent stake)
Authority (ADIA) Company
• Suez Cement Company
(January 2007, 7.6 percent stake)
Corporate
Finance and
Asset
Investment
Private Real • Sturegallerian
Management Equity Estate
Banking (May 2006, $580m, 100 percent stake)

Appendix
Dubai International Financial

Center Investments DUBAI, UAE

• Headquartered in Dubai, Dubai International N/A
Financial Center (DIFC) Investments is one of the
arms of the Dubai International Financial Center, a
financial hub funded by the Dubai government DEALS, 2000-Q1 2008
• It was established in April 2006, and employs (11 DEALS, $9BN)
15 people IT 4%
Industrial
• Key People: 3%
» Chairman: Omar Mohammed bin Suleiman
» Managing Director: Beshir Barazi
OBJECTIVE AND STRATEGY Financials 93%
• DIFC Investments is charged with making

investments to support the development of Dubai
as a global financial center
• Other responsibilities include the management of RECENT DEALS
subsidiaries, and managing strategic alliances
• OMX AB
• Recent investments seem to indicate DIFC
(February 2008, $4.7bn, 98.4 percent stake)
Investments intends to build up a portfolio in
global stock exchanges • London Stock Exchange
» This is assumed to be with the aim of (August 2007, $1.6bn, 28 percent stake)
developing the capability of the Dubai • Deutsche Bank
Stock Exchange (May 2007, $1.8bn, 2.2 percent stake)
• Euronext of France
ORGANIZATION CHART (February 2007, April 06, $370m, 3.48 percent stake)
Government
of Dubai
Dubai International
Financial Center
Dubai
DIFC DIFC International Four Other
Authority Investments Financial Regulatory
Exchange Bodies

Appendix
Istithmar World DUBAI, UAE
ASSET ALLOCATION
KEY INFORMATION N/A
• Headquartered in Dubai, Istithmar World is a
member of Dubai World, a holding company DEALS, 2000-Q1 2008
owned by the Dubai government (63 DEALS, $21BN)
• Established in October 2002, employs 35 people Financials 6%
Other 4%
and its size is estimated at $12bn
• Key People:
» Chairman: Sultan Ahmad Bin Sulayem Consumer
17%
» Vice-Chairman: Adel Abdul Aziz al Shirawi
» CEO: David Jackson
Real Estate
73%
• Istithmar’s mandate is to obtain superior
financial returns through global investment
• Private equity investment is in 3 main sectors:
» Consumer (Retail, Healthcare, Media &
Entertainment) RECENT DEALS
» Financial Services (Private Banking/Asset • Barneys New York
Management, Investment Banking, Islamic (June 2007, $942m, 100 percent stake)
Financial Services, Insurance)
» Industrial (Logistics & Transportation, • Time Warner
Utilities & Energy, Manufacturing, (February 2007, $2bn, 2.39 percent stake)
Construction, Aerospace) • Standard Chartered
• It also invests in equities and joint ventures (October 2006, $1bn, 2.7 percent stake)
• Loehmann’s Holdings (May 2006, $300m)
ORGANIZATION CHART
Government • 280 Park Avenue
of Dubai
(April 2006, $1.2bn, 100 percent stake)
Dubai World
(Holding
Company)
DP World Some 50
Istithmar Limitless Associated
(formerly Dubai World LLC
Port Authority) Companies
Istithmar
Istithmar World Istithmar
World Capital Ventures World
(Private Equity) (Venture Capital) Aviation

Appendix
Kuwait Investment Authority KUWAIT
KEY INFORMATION
• Headquartered in Kuwait City, the Kuwait ASSET ALLOCATION
Investment Authority (KIA) is the investment arm BY CLASS, NOVEMBER 2007
of the government of Kuwait Real Estate,
Private Equity and
• Established in 1953 as the Kuwait Investment Hedge Funds
Board, and became the KIA in 1982 6%
• Employs 270 people, and size estimated at $250 bn
Bonds
• Key People: 15%
» Chairman: Mustafa Al Shemali
» Managing Director: Bader al Saad Cash 22%
Equity 57%

• KIA’s mandate is to provide an alternative stream
of public finance to oil reserves
• Strategic sectors include:
DEALS, 2000-Q1 2008
» Equities » Real Estate (13 DEALS, $13BN)
» Bonds
Kuwait Investment Authority
• In 2006, it reduced its investments in US from 85
percent to 70 percent of its total asset value
» The focus shifted to higher-yield bonds, Chinese
Energy & Utilities
buildings and Asian PE funds 71%
• Their major targets are regions with high Real Estate
economic growth and low levels of institutional 7%
investment Financials
22%
ORGANIZATION CHART
Government
of Kuwait
RECENT DEALS
Kuwait Investment • Halkbank (May 2007, $209m, 2.7%)
Authority
• Industrial Bank of China
Kuwait
Investment General (April 2007, $720m)
Office Reserve Fund
• Cevahir Shopping Center
Marketable Alternative (November 2006, $750m, 100 percent stake)
Securities Investments
• Merrill Lynch (June 2005, $2bn)
Operations

Appendix
Mubadala Development
Corporation (ABU DHABI, UAE)

N/A
• Headquartered in Abu Dhabi, Mubadala
Development Company is an investment vehicle
of the Abu Dhabi Government DEALS, 2000-Q1 2008
• It was established in October 2002 as a Public (34 DEALS, $20BN)
Joint Stock Company, and employs 250 people Transport and
Aerospace 10%
• Key People:
» Chairman: Sheikh Mohammed, Crown Prince of
Abu Dhabi
Energy &
» CEO: Khaldoun Khalifa Ahmad Al Mubarak Industrials Utilities
44% 30%
» CFO: Carlos Obeid
» COO: Waleed Al Mokarrab Al Muhairi
OBJECTIVE AND STRATEGY Consumer 7%
• Mubadala’s mandate is to invest in a way that will Other Real Estate

3% 6%
benefit the economy of Abu Dhabi
• Strategic sectors include:
» Energy » Utilities RECENT DEALS
» Real Estate » Basic Industries • Advanced Micro Devices
• Mubadala is also assumed to have the mandate (November 2007, $622m, 8.1 percent stake)
to build up the aviation and aerospace sector • Ferrari (June 2007, $137m, 5 percent stake)
within Abu Dhabi
• Piaggio Aero of Italy (April 2006, 35 percent stake)
ORGANIZATION CHART • SR Technics of Switzerland
Government of (March 2006, $1.3bn, 40 percent stake)
Abu Dhabi
• Carlyle Group
Mubadala (July 2005, $1.35bn, 7.5 percent stake)
Finance & Corporate Operations

Affairs Group Group
Aerospace &
Acquisitions Technology
Energy &
Industry Healthcare
Infrastructure & Properties

Services Development

Appendix
Qatar Investment Authority QATAR
KEY INFORMATION
ASSET ALLOCATION
• Headquartered in Qatar, Qatar Investment N/A
Authority (QIA) is the international investment
arm of the Government of Qatar
• It was established in 2005, employs 92 people DEALS, 2000-Q1 2008
and its size is estimated at $40 billion (22 DEALS, $12BN)
• Previously known as the Supreme Council for

Economic Affairs and Investment
Financials Real
• Key People: Estate 24%
38%
» Chairman & CEO: Tamim Bin Hamad Al Thani
» Vice-Chairman: Hamad Bin Jassem Bin Jabr Al Other 3%
Healthcare
Thani, Deputy Prime Minister
27%
» Head of PE: Ken Shen Infra and
Government
8%
• QIA’s mandate is to invest in a way that diversifies
the economy of Qatar away from energy
• Strategic sectors include: RECENT DEALS
» Real Estate • Credit Suisse (February 2008)
» Private Equity • London Stock Exchange
» Investment Funds (September 2007, 20 percent stake)
• Also invests in strategic sectors within Qatar • Chelsea Barracks, UK (June 2007, $1.9bn)
• Was involved in an abortive bid in 2007 to buy • OMX of Sweden (April 2007, 14 percent stake)
Sainsbury’s, a British supermarket chain, for
• Four Seasons Healthcare
$21 billion
(September 2006, $2.6bn, 100 percent stake)
ORGANIZATION CHART
Government of
Qatar
Qatar Investment
Authority
Qatar Delta
Holdings Commercial Delta Two Delta Three
LLC Properties

Appendix
Government Pension Fund - Global NORWAY

PERCENTAGE OF INVESTMENTS BY VALUE, 2007
• Headquartered in Oslo, the Government Pension
Fund — Global (GFPG) was set up
in 1990
Equity
• The fund is run by Norges Bank Investment Portfolio 45%
Management, but makes extensive use of
external fund managers
Fixed Income
• Key People: Portfolio 55%
» Governor, Norges Bank: Svein Gjedrem
» Deputy Governor, Norges Bank: Jan Qvigstad
» Executive Director, NBIM: Yngve Slyngstad

• The objective of the GFPG is to create a future DEALS, 2000-Q1 2008
strategic stream of income to replace income
from natural resources N/A
• The ‘strategic benchmark portfolio’ is:

» Fixed income instruments (60 percent RECENT DEALS
share) — Europe (60 percent), America/Africa
(35 percent) and Asia/Oceania (5 percent) N/A
» Equities (40 percent share) — Europe (50
percent), America/Africa (35 percent) and
Asia/Oceania (15 percent)
• The fund has interest in over 3,000 equities,
1,000 fixed income securities and 2,000 foreign
exchange reserves as of Dec 31, 2006.
ORGANIZATION CHART
Government
of Norway
Norges Bank
Staff and
Monetary Financial Investment Group
Policy Stability Management Services

Appendix
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Appendix
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powers — The Management of GCC Official Foreign Assets,” RGE Monitor,
December 2007.
Truman, Edwin M., “A Blueprint for Sovereign Wealth Fund Best Practices,”
Peterson Institute for International Economics, April 2008.
“A Scoreboard for Sovereign Wealth Funds,” Peterson Institute for Interna-

tional Economics, October 19, 2007.
“Sovereign Wealth Funds: The Need for Greater Transparency and Ac-
countability,” Peterson Institute for International Economics, August 2007.
Weber, Steven, Naazneed Barma, and Ely Ratner,” A World Without the West,”
The National Interest, July-August 2007.
www.swfinstitute.org
www.swfradar.com
Endnotes
1
Two websites that provide frequent news updates and commentary are: www.swfradar.com and www.swfinstitute.org.
See Sources and Bibliography for additional references.
2
See, for example, Truman (August 2007), Deutsche Bank Research (2007), and Lyons (2007).
3
Dubai International Capital (DIC) appears on some lists of SWFs but its managers insist that it is based on the private
wealth of the ruling emir. Dubai has two other SWFs that qualify: Istithmar and Dubai International Financial Centre.
See also, Setser and Ziemba, December 2007.
4
Most descriptions of SWFs include a point about their funding sources, noting that these consist heavily of surplus
foreign exchange reserves derived either from commodity sales (especially oil and gas) or trade surpluses. In our view,
the source of funding provides little insight into the behaviors of the funds, though of course it explains why so many
funds have been founded since 2000 and why, given current trade patterns and projections of energy prices, existing
SWFs may grow much larger and more SWFs may yet appear.
5
Two points about the list in Table 1. First, it is not exhaustive. We began by aggregating lists published in the literature
and did not look for additional funds except as new funds were created and announced. Further research undoubtedly
will result in changes to the list. For example, state pension funds of The Netherlands and Canada invest in alternative
asset classes and foreign equities and may qualify. Second, SWFs are moving targets. New funds or older funds that alter
their behaviors to fit our criteria may show up on future lists; alternatively, some existing SWFs may disappear if their
ownership or behaviors change.
6
Kimmitt, (2008). Even so, some definitional problems remain. The Saudi Arabian Monetary Authority is a central bank
that invests some of its portfolio of foreign reserves like a SWF. See Setser and Ziemba , December 2007.
7
According to a recent study, more than 40 percent of SWF assets are managed by third parties. See http://www.pion-
line.com/apps/pbcs.dll/article?AID=/20080307/DAILY/762550071.
8
Information in this paragraph and the next is drawn from Morgan Stanley Research Global (Stephen Jen), Deutsche
Bank Research, Standard Chartered (Gerard Lyons); Citigroup Global Banking; McKinsey Global Institute, and Merrill
Lynch Global Economics.
9
Jen, “How Big?”
10
Interview with Bloomberg television, January 16, 2008.

Appendix
11
Reuters, “Sarkozy attacks wealth funds on eve of Mid East trip,” January 12, 2008.
12
“CIC Dispels Fund Concerns,” The Standard, March 10, 2008.
13
“Our Sovereign Wealth Plans,” Wall Street Journal, March 19, 2008.
14
Speech to the Global Competitiveness Forum, Riyadh, Saudi Arabia, January 22, 2008.
15
Interview with “60 Minutes,” April 6, 2008.
16
“Kimmitt: Sovereign funds a positive force to date,” Reuters, March 11, 2008.
17
“China’s CIC on the Prowl for Direct Stakes,” Reuters, March 3, 2008.
18
Badian and Harrington, January 2008; Ziemba, November 2007.
19
Johnson, “The Rise of Sovereign Wealth Funds.”
20
Presentation, Munich, February 27, 2008.
21
AME Info, June 23, 2007.
22
“Briefing: Sovereign-wealth Funds,” The Economist, January 19, 2008.
23
ADIA; Alaska ; Alberta Heritage; Australia Future; Azerbaijan; BIA; Central Huijin; CIC; DIC; DIFC; GIC; Hong Kong; Iran;
Ireland; Istithmar; Kazakhstan; Kaznanah BHD; KIC; KIA; Libya; Mubadala; New Mexico; New Zealand; QIA; Temasek.
24
DIC is privately owned by the ruler of Dubai and, as of 2007, Central Huijin is now a part of CIC. Historically, Central Huijin
rarely invested outside of China.
25
ADIA; Azerbaijan; BIA; CIC; DIFC; GIC; Iran; Ireland; Istithmar; Kaznanah BHD; KIC; KIA; Libya; Mubadala; New
Zealand; QIA; Temasek.
26
Singapore’s Temasek Holdings accounts for a significant share of the Asian deals. To control for its effect, we tested our
conclusions by checking them with and without Temasek included. We are confident that the conclusions reported here are
sound. It is worth noting, moreover, that Temasek is one of the most highly regarded SWFs and is a model for younger funds.
Thus its behavior is important to note.
27
Dubai Ports World is a government-owned operating company that is part of a larger group, including the SWF Istithmar
28
Jen, “Sovereign Wealth Funds.”
29
We suspect there may be a bias built into the data given a higher likelihood of disclosing OECD transactions.
30
SWFs invested about $93 billion in financial institutions during 2007-2008, as compared with about $23 billion between
2000 and 2006.
31
ADIA, CIC, GIC, Istithmar, Libya, Mubadala, New Zealand, Temasek.
32
The most notable deal, Temasek’s 2006 investment in the large Thai company Shin Corporation, sparked controversy
because the seller was the family of then-Prime Minister Thaksin Shinawatra. Shinawatra was already a controversial
figure in Thailand and later was ousted in a coup. The new government accused him of corruption, citing the Shin
transaction among other evidence.
33
The database includes data on a further 18 deals for which we do not have an exact year, but which are from funds formed
since 2000.
34
“Istithmar Says Price Paid to Acquire Barney’s is not Hish,” Gulf News, August 13, 2007
35
“Standing of Qatar Laid Low Following Surprise Exit,” Financial Times, November 6, 2007
36
Lyons (2007). A very similar matrix appears on the SWF Institute website: http://www.swfinstitute.org/research/strat-
egytransparency.php.
37
Truman, “Scoreboard .” In April 2008, Truman updated and expanded the transparency data. See Truman, “Blueprint.” After
we completed our analysis, another scorecard of SWF transparency, the Linaburg-Maduell Transparency Index, became avail-
able at www.swfinstitute.org/research/transparencyindex.php
38
China’s attitude toward financial risk may be changing, and it may not extend its investment in Blackstone beyond four years.
See a March 2008 report from XFN-Asia: http://www.hemscott.com/news/latest-news/item.do?newsId=61518964236066.
39
As proof that this can be done, consider that Ho Ching, head of Temasek Holdings, a widely respected fund, is
married to Lee Hsien Loong, the prime minister and finance minister of Singapore (and son of Lee Kwan Yew, the
longtime prime minister).
40
Steven Weber, Naazneed Barma, and Ely Ratner,” A World Without the West,” The National Interest, July-August 2007.
41
“Threat to German Action on Foreign Investors,” Financial Times, March 7, 2008.
42
“Rules of Game for Sovereign Wealth Fund Should Be Made by All,” Xinhua, March 12, 2008

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Assessing the Risks

THE BEHAVIORS OF SOVEREIGN WEALTH

FOR MORE INFORMATION PLEASE CONTACT:

Executive Summary .......................................................... 2

The Storm over SWFs ......................................................10

SWFs and the Global Financial System ....................... 20

SWF Behavior: The Evidence of Public Transactions ...32

Categorizing SWFs by Behavior ................................... 48

Scenarios for the Next Five Years .................................54

Implications, Conclusions, and Questions ................... 62

SOURCES AND BIBLIOGRAPHY ................................................... 86

WALL STREET, NEW YORK CITY

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The main ﬁndings are:

© MONITOR COMPANY GROUP, L.P. 2008

• Coordinated, multilateral regulation of SWFs is unlikely. Based on scenario analysis,

© MONITOR COMPANY GROUP, L.P. 2008

SOVEREIGN WEALTH FUNDS (SWFs) are increasingly visible and active in

MAP OF ANCIENT BABYLONIA, CA. 550 BC.

© MONITOR COMPANY GROUP, L.P. 2008

Late in 2007, Monitor Group formed a research team to investigate SWFs. We

• SWFs invest heavily in domestic and emerging markets. Although

• Most SWFs appear to be purely financial investors, though a few,

• Contrary to the conventional wisdom that SWFs are passive inves-

© MONITOR COMPANY GROUP, L.P. 2008

(211 of 420) identified in our database involve the purchase of equity

• SWFs are becoming more aggressive investors, seeking higher

• The current debate about whether to increase transparency of SWFs

• An overview of the SWF phenomenon, including a discussion of the

© MONITOR COMPANY GROUP, L.P. 2008

CURIOUSLY, GIVEN ALL THE BUZZ, there is no generally accepted

• It is owned by a sovereign government (because of the concern

• It is managed separately from funds administered by the sovereign

• It invests in a portfolio of financial assets of different classes and

SAND STORM IN WESTERN AUSTRALIA

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invested in higher-risk asset classes in foreign countries (because

Table 1: Sovereign Wealth Funds as of December 2007

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We think of SWFs as part of a continuum of sovereign government investment

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Figure 1: Continuum of Government Investment Vehicles

Official Reserves/ Pension Domestic Sovereign State Owned

External assets for Investment Investment vehicles Investment Companies

Source: Adapted from Kimmitt (2008).

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Figure 2: Founding Dates of Major SWFs

Temasek Brunei Investment Investment

Source: Deutsche Bank; Standard Chartered

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2000 2001 2002 2003 2004 2005 2006 2007

National Korean Investment

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(California Public Employees’ Retirement System — CalPERS, one of the larg-

Unsurprisingly, the combination of sovereign ownership, large size and impressive

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U.S. SENATOR HILLARY RODHAM CLINTON FRENCH PRESIDENT NICOLAS SARKOZY:

© MONITOR COMPANY GROUP, L.P. 2008

SWFS ARE BECOMING IMPORTANT ACTORS in the global financial

SKYLINE OF SHANGHAI, CHINA

© MONITOR COMPANY GROUP, L.P. 2008

YOUSEF AL OTAIBA, DIRECTOR OF INTERNATIONAL AFFAIRS, ABU DHABI: