With the huge amount of capital that Sovereign wealth funds (SWFs) command, their role is becoming increasingly important both in the global financial economy and across a wide variety of industries.
Bloomberg recently reported that, such now is the sway SWFs hold, they are part of a group of investors telling financial managers that they want capital from older investment funds released before committing to future fundraisers.
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Perhaps the most high-profile SWF at present is Saudi Arabia’s Public Investment Fund (PIF), the investments of which are central to the Saudi Vision 2030 diversification plan. A host of sporting investments in recent years – including in motor racing’s prestigious Formula 1 series, English soccer’s top-tier Newcastle United and the startup LIV Golf tour – have seen it accused of sportswashing. However, despite overseeing assets worth nearly $800bn, per the Sovereign Wealth Fund Institute (SWFI), the PIF is by no means the largest SWF.
That honour sits with the Norway Government Pension Fund Global, which the SWFI says holds total assets of almost $1.5trn. It is followed by the China Investment Corporation with $1.2trn and State Administration of Foreign Exchange (SAFE) Investment Company, the Hong Kong branch of the Chinese sovereign wealth fund, with just over $1trn.
SWFs in the global economy
Of how SWFs function and why they are significant, particularly in emerging markets, Glenn Barklie, head of FDI services at GlobalData, explains: “Typically, these SWFs amass a wealth of capital which can be used to diversify a country’s sectoral focus to (further) protect and grow its economy. Think of Middle East SWFs amassing wealth through oil and gas exports and using the wealth to build their renewable energy markets.
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“In emerging markets, foreign SWFs can provide crucial infrastructure projects to help drive forward an economy and open opportunities that may not be otherwise possible.”
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By GlobalDataElaborating on this, Chris Demetriou, co-founder of accounting and tax firm Archimedia Accounts, posits that SWFs can be an influential and transformative force, providing important sources of capital, especially since the 2008 financial crisis.
“From stabilizing banks during the financial crisis to shaping the future of entire industries, sovereign wealth funds have grown from relative obscurity to emerge as true titans of global finance,” says Demetriou. “As the largest investment vehicles in the world, with trillions under management, SWFs such as China’s CIC or Norway’s Oil Fund could soon exert more influence than many nations. Their expanding impacts raise intriguing questions for observers today.”
Malcolm Ferrante, who leads the Investment Migration Unit at financial services provider CSB Group, tracking capital flows in the global economy, also cites the stabilizing impact of SWFs on financial markets.
“The rise of SWFs is really just a reflection of the rising economic strength of the nations they represent,” he explains. “By investing strategically, those countries are planning for security and prosperity long term. That makes their perspectives important to consider in shaping policies that will impact global financial systems now and in the future.”
Of how businesses are affected, Demetriou says: “In the business world, SWF investments are now a regular occurrence rather than a rarity. Whether it is Mubadala in tech companies or GIC in real estate assets, their deep pockets and long-term horizons make them valued partners. However, some economic observers also see potential risks if SWFs come to dominate certain sectors or pursue non-commercial goals.”
