Sovereign Wealth Funds and the Global Private Equity Landscape survey

Publication | June 2008


The liquidity crisis in the global financial community has been a constituent part in pushing sovereign wealth funds into a glare of publicity. Recent high profile investments made by sovereign wealth funds into leading US and European banks and some of the larger global private equity funds has generated discussion, courted controversy and raised hopes within
the global investment community.

Commentators have expressed concerns about the transparency of sovereign wealth funds, their investment strategies, their size and whether their investments may be affected by political objectives. At the same time, concerns have been raised about the potential for protectionist restrictions being imposed on sovereign wealth fund investment, which could in turn restrict the international flow of investment capital.

Norton Rose LLP, together with the Emerging Markets Private Equity Association (EMPEA) have conducted a survey to canvass opinion from sovereign wealth funds and also from the private equity industry, financial institutions and corporates. The survey was also undertaken to support an enhanced understanding of the role of sovereign wealth fund operations in the private equity landscape.

Executive Summary

The survey results show that sovereign wealth funds (SWFs) are generally regarded as long term, commercial investors who are becoming increasingly important sources of finance for established and emerging markets alike. Their role alongside private equity investors is generally seen as complimentary rather than competitive. There are, however, some areas of concern for respondents, who included both SWF and non-SWFs, and there are some key differences between responses from the two groups.

A summary of key findings from the survey results is as follows:

  • A majority of SWFs regarded the “highest economic return” as their most important investment criterion; non-SWF respondents were divided as to whether SWFs are primarily driven by returns.
  • A clear majority of all respondents saw SWFs as long term, largely passive investors.
  • A majority of all respondents believed SWFs would increasingly co-invest with private equity firms.
  • A majority of SWFs believed they had similar risk profiles to private equity.
  • SWFs were expected to invest extensively across the globe in the next 12 months, and especially in North America and emerging markets.
  • SWFs were expected to invest most heavily in three sectors in the next 12 months: financial services, infrastructure and energy.
  • Half of all respondents said the impact of the “credit crunch” would be the most important factor in determining the number of deals executed in the next 12 months.
  • More than 80 per cent of non-SWF respondents believed there was a need for SWFs to disclose more information, though a majority thought this should be voluntary.
  • SWFs indicated they would not necessarily be deterred from investing by the imposition of disclosure requirements.
  • A majority of all respondents said the lack of transparency rules would result in governments restricting SWF investments.


The debate heats up

The International Monetary Fund (IMF) and International Financial Services London estimate that sovereign wealth funds (SWFs) now manage assets worth as much as $3.3 trillion and this figure could rise to $10 trillion by 2015. More and more countries, currently without established SWFs, notably Brazil, Japan, India, Saudi Arabia and Thailand, are considering setting up or are in the process of establishing funds of their own. Already, on a global scale, SWFs are estimated to have more investment resources at their disposal than both private equity funds and hedge funds combined.

With their perceived growing influence, concerns have focused on SWFs apparent lack of transparency, an issue that is prompting action by regulators. The IMF and the European Union are working on new codes of practice for SWFs which, the authorities hope, will be voluntarily accepted by the SWFs and avert the threat of protectionist legislation which has been mooted by some countries. Meanwhile the US Treasury has been working with Abu Dhabi and Singapore SWFs to adopt a code of best practice for their funds.

Some SWFs, such as the Kuwait Investment Authority (KIA), have objected strongly to attempts to establish a code of best practice for SWFs. The KIA said that codes of conduct were attempts to “place handcuffs on SWFs.” China Investment Corporation (CIC) has also commented that sovereign wealth funds are not being treated fairly, and Dubai World has said that EU attempts to force transparency on SWFs would have the potential for making the continent less attractive for investment.

Definition and background

Amid all these recent developments, however, it is worth remembering that SWFs are not new: they have been an accepted part of the financial services landscape for many years and rarely ran into controversy in the past. While there is no easy “off the shelf definition” of SWFs as former Sir John Gieve, deputy governor of the Bank of England, pointed out in a recent speech at a sovereign wealth management conference, a useful description is “a government investment vehicle that manages foreign assets with a higher risk tolerance and expected returns than for central bank foreign currency reserves.”

SWFs are pools of assets owned and managed directly or indirectly by governments. The funds are set up to diversify and improve the return on foreign exchange reserves or commodity (typically oil) revenue, and sometimes to shield the domestic economy from fluctuations in commodity prices. As such most invest in foreign assets. Kuwait established the first SWF in 1953 and a number of other countries, especially from oil producing regions, followed suit in the 1970s and 80s. The Abu Dhabi Investment Authority, now considered the largest SWF, was formed in 1976, the Brunei Investment Agency in 1983, while Singapore’s two large funds, Temasek and the Government Investment Corporation (GIC), were set up in 1974 and 1981 respectively. The significant Norwegian fund, Government Pension Fund – Global, was created in 1990.

In the last few years, however, there has been a marked increase in the number of SWFs, with China and Russia joining the fray to form what has been dubbed the “Super Seven” biggest funds. This group consists of the two new entrants along with Abu Dhabi, Norway, Kuwait and Singapore’s two funds. There are now approximately 40 recognised SWFs globally.

A table compiled in October 2007 by the influential Peterson Institute in Washington D.C., ranking SWFs according to their transparency and accountability, placed most of the Super Seven in the bottom half of the table. Norway’s fund, however, which is often held out as a model of transparency, was ranked second and Singapore’s Temasek was also in the top half. The Sovereign Wealth Fund Institute’s Linaberg-Maduell Transparency Index, which is regularly updated, reveals a broadly similar picture. The views of governments, regulators and economic think tanks, at least as publicly expressed, all suggest that SWFs will be under increasing pressure to clarify their investment strategies and objectives.

The positive effects of SWFs

Despite such concerns, many important public figures and institutions have welcomed the positive aspects of SWFs, seeing them simply as financial rather than as political vehicles. “It is not difficult to identify positive effects on the world’s capital markets,” Sir John Gieve said in his speech. “Sovereign wealth funds have long investment horizons and generally have no commercial liabilities. Therefore, in periods of market stress they are likely to face less pressure than most private investors to reduce the size or increase the liquidity of their investments. They are well placed to play a contrarian role and help to stabilise markets by investing in times of stress.” He also pointed out that they had to be seen in the context of the bigger picture, which was that SWFs account for only about 2 per cent of the total size of global equity and bond markets.

The Organisation for Economic Co-operation and Development (OECD) has also urged an open attitude. In a recent report it said that “sovereign wealth funds bring benefits to home and host countries” and that, while member states had a right to safeguard their national security, this should not be used as “a general escape clause from their commitments to open investment policies.” Similarly, in the US a senior Federal Reserve official recently argued that SWFs were helping to “buttress the financial strength of US financial institutions and better position these institutions to weather the current financial turmoil.” Joaquin Almunia, European Commissioner for Economic and Monetary Policies said in a recent statement: “The EU will not take a defensive approach to sovereign wealth funds. They represent a major source of investment for the European economy and we recognise the benefits they bring and will continue to bring to global financial markets. Europe is not about to step back from its commitment to provide an open environment for investment.”

Purpose and approach of the survey

Among private equity firms, meanwhile, there is a growing view that SWFs can sit comfortably alongside them, perhaps as investors in their funds or as co-investors in deals. Against this background of public debate, Norton Rose and EMPEA set out to gauge opinion among SWFs, the private equity industry, financial institutions and corporates about the issues raised by the activities of sovereign wealth funds. We asked them about investment strategies and criteria, including SWFs’ attitude to risk, the key drivers of their investments, their differences from, and their relationship with, private equity, as well as their geographical and sector focus, and in particular their interest in emerging markets. We also questioned them about transparency and the calls for codes of conduct. Questions were tailored to two distinct market groups, firstly the SWFs themselves and secondly non-SWFs (predominantly private equity funds, financial institutions and large corporates) so a distinction could be drawn between the two groups in relation to responses received.


Norton Rose LLP surveyed 113 respondents (comprised of sovereign wealth funds and investors, private equity managers and funds, financial institutions and corporate entities) in March and April 2008 to gather and summarise the views of those closest to the sovereign wealth fund market. The survey was conducted online and respondents were given the option to remain anonymous.

Survey results

Investment criteria and drivers

Most SWFs  have historically revealed little about their investment strategies and as a result it is perhaps not surprising that our non-SWF respondents were divided on certain questions. In particular non-SWFs were divided on whether SWFs are most interested in returns, or in the strategic benefits of the assets in which they invest. This contravenes the view of SWFs, who claim to be primarily focused on economic performance. Overall it did seem that SWFs were viewed simply as commercial organisations and as long term, even passive investors, and certainly not as a threat, political or otherwise.

When asked to identify the most important investment criterion for these funds, a substantial proportion (35.5 per cent) of all respondents gave the simple answer of “the highest economic return.” A larger group (36.4 per cent), however, opted for the more complex answer of “potential strategic benefit/investment for relevant wealth fund jurisdiction.” The Middle East based SWFs, in particular, have in written responses given the impression that their investments are intended to help develop the skills needed for their newer industries such as financial services and tourism. It is easy to see therefore from the responses received why such investments are regarded by some as “strategic.” A further group of respondents, 20 per cent, said it was the desire for a “premium brand” or “market credibility.”


The variation in these results suggests SWFs may need to communicate their strategies more clearly with the investment community.

There was more of a consensus on the long term nature of SWF investments. When all respondents were asked what they regarded as the most important driver for institutions, funds or companies as investee entities seeking SWF investment a substantial portion (43 per cent) of respondents overall said that it was “longer term investment”. A further 20 per cent cited “more passive investment strategy/minimum imposed controls.”


Long-term investor

When asked about the comparative approach of SWFs and private equity firms in relation to the term of their investments 71 per cent of SWF respondents said they regarded themselves as longer term investors than private equity firms, almost exactly the same percentage as all non-SWF respondents when they were asked directly if they thought SWF investments were longer term than traditional private equity investments. When asked to explain their answer to this question, typical views included observations that SWFs had longer “time horizons” and that they were not engaged in “active management.” Another said, “Sovereign wealth funds are investing their surplus resources to store value and to provide future returns when needed more critically than now.”


The relationship with private equity

There was also general agreement on the question of working closely with private equity. Around 70 per cent of non-SWF respondents overall believed that SWFs would increasingly co-invest with private equity funds in some way. The largest proportion (over 40 per cent) thought it would be through co-investment in deals, while the others believed SWFs would either invest in private equity managers or their funds. Respondents would perhaps have been influenced by recent high profile deals such as CIC’s decision to take a stake in Blackstone and Mubadala’s investment in Carlyle.


SWF respondents concurred with the majority, with none answering that they would operate independently from private equity. Such answers are consistent with the publicly held views of private equity organisations, notably EMPEA and the British Venture Capital Association, that SWFs are operating on a basis of friendly co-operation with their members and in some cases are even joining them.

This compatibility was underlined by answers to another question. Some 72 per cent of all respondents believed that it was the SWFs’ long term investment strategy, and consequent lack of exit pressure, in their approach to private equity investing that made them especially attractive to both investee companies and to private equity funds. Their financial capacity was pointed to as a critical element by 48 per cent.


Risk aversion

There was much less agreement on the question of SWFs’ attitudes to risk. This again, perhaps, suggests that the SWFs may need to communicate or demonstrate their investment strategies to the investment community in this regard. Some 41 per cent of non-SWF respondents saw the funds as more risk averse than private equity, while 36 per cent saw them as less risk averse and 23 per cent judged they had a similar risk profile. Of the SWF respondents a majority (71 per cent) believed they had a similar risk profile to private equity.

It is perhaps easy to see how such a spread of responses could have arisen. The recent investments in large US and European banks, namely Citigroup, Merrill Lynch, Morgan Stanley and UBS, have come at an interesting time. Such investments can be seen as safe in that they are considered robust and established businesses and maintain sizeable balance sheets, but on the other hand the credit crunch might make them look vulnerable and more volatile investments particularly in the short term.


Geographical focus and emerging markets

SWFs are expected to maintain a wide geographical focus in their investments. North America and Western Europe were forecast to be among the most attractive regions for them in the next 12 months. Over a third of respondents singled out the US as the likely top destination for SWF funds, influenced perhaps by the recent investments in the banking sector, while nearly a quarter identified Western Europe as the leading region. Significant numbers also pointed to China as a leading potential destination.

Emerging markets in general, especially Asia and the Middle East, were also thought likely to be prominent. A high proportion both of respondents overall (around 56 per cent) and most SWF replies (over 70 per cent) believed that more than 25 per cent of total investments made by the sovereign funds would be made in emerging markets over the next 12 months.

An initiative by the International Finance Corporation could encourage this trend further. Some initial discussions have considered how SWFs could provide capital for a “super fund” for investments in Africa. The IFC said that SWFs may welcome an opportunity to invest at arm’s length.


This likely flow of fun ds into emerging markets has been identified as an important trend by financial services analysts. A report by Morgan Stanley said that SWFs would target “best-in-class cash generative players”, especially banks and financial services companies with exposure to Asia and emerging markets.

Sector focus

The financial services sector indeed is an important area for some of the larger SWFs. Temasek has, according to the Morgan Stanley report, 38 per cent of its portfolio invested in financial services. "The strategic angle of partnering with players who can develop domestic capital markets is also critical. Moreover valuations and the need by some financial institutions to raise fresh equity is creating a new range of opportunities," the report commented.

Respondents concurred that financial services would likely draw the most investment from SWFs over the next 12 months. Nearly half of non-SWF respondents agreed it would be the leading sector for SWF investment.

The other focus areas are forecast to be infrastructure, which most respondents agreed would be one of the top sectors, and energy, especially oil and gas. SWF respondents also agreed these sectors would attract most investment.

Transparency and disclosure

Transparency is now the most contentious issue facing SWFs. More than 80 per cent of respondents overall said they believed there was a need for more information from SWFs. Nearly half said it should take the form of a voluntary code of best practice while a third said a formal, multi-jurisdictional system enforceable by law should be considered.


This mood is in line with recent moves towards introducing disclosure requirements for private equity and hedge funds, so perhaps SWFs are not being singled out, especially in the UK. The Hedge Fund Working Group under Sir Andrew Large has published a report this year on voluntary standards for hedge funds, and Sir David Walker headed a working group which issued disclosure guidelines for private equity firms last year.

A majority (63 per cent) of non-SWF respondents accepted that the imposition of disclosure requirements would discourage investment by SWFs. But SWFs themselves were not so sure, with some 71 per cent saying it would depend on the nature of those requirements.


In a separate question addressed to all respondents according to 60.6 per cent of respondents, the lack of transparency rules are likely to result in governments restricting investments by the funds. This suggests that more disclosure would help to ward off protectionist moves.


The future

The question of transparency will need to be confronted soon, although our respondents were divided on the question of how the issue would be resolved. Nearly 44 per cent thought SWFs would not accept a voluntary code of conduct in the next 12 months, while 28 per cent thought they would. Appendix 1 to this survey shows a timeline for proposal guidelines/codes of conduct for SWFs that have been under consideration by certain institutions.

Responses in this survey indicated that not all SWFs will be deterred from investing by codes of conduct. The debate about transparency needs to be seen in the context of other, stronger imperatives. When asked for the most influential factor determining the number of deals over the next 12 months, few SWF respondents (14 per cent) cited transparency requirements. The deeper global “credit crunch” was seen as more important, with nearly half of respondents overall citing it as the most influential factor. Indeed regulators and markets around the world acknowledge that SWFs will have an important role in alleviating the effects of the liquidity crisis.

SWFs themselves have shown they are willing to take on such a role. CIC, for instance, a $200 billion fund, recently announced it was allocating a larger proportion of its funds for overseas investment, raising the amount by over 30 per cent to $90 billion. CIC invested in both Blackstone and in Morgan Stanley last year, and the potential for a fruitful relationship with private equity was underlined when it expressed an interest in investing further in private equity managers.

While the taking of majority stakes in Western companies will be difficult to foresee for both regulatory and strategic reasons, there are precedents for SWFs taking control. Temasek, for example, and Malaysia’s Khazanah both acquired banks in Indonesia following the Asian financial crisis in the late 1990s.

In summary, with the amount of investment monies at their disposal, SWFs are developing into increasingly important investors across the globe. This survey shows that the private equity industy, financial institutions and corporates, despite some concerns about SWF transparency, generally welcome them as they are recognised as commercial, not political, organisations which have an active and influential role to play in the modern investment community.

Appendix 1: Timeline for SWF proposed guidelines/codes of conduct

A number of different bodies or institutions have been engaged in considering SWF investment practices and whether there needs to be a formulation of guiding principles or a code of conduct to support an open investment environment. A summary of the latest positions is as follows:

EntityAction underwayAnticipated timing
International Monetary Fund (IMF)Has established a working group with 25 of its member states. The group plans to agree on a “set of SWF principles that properly reflects their investment practices and objectives”. It is not expected that the IMF will develop a prescriptive code, but instead adopt a set of best practices as a point of reference for members that operate or plan to establish SWFs.The IMF is expected to produce a draft document in advance of its annual meeting in October 2008 with a report anticipated to follow in 2009.
Organisation for Economic Co-operation and Development (OECD)Work is continuing on how governments can maintain their commitment to open international investment policies, including for SWFs, while also protecting essential security interests. The ministers of the OECD have adopted a declaration on SWFs and recipient country policies following a council meeting in early June 2008.A final report, headed “Freedom of Investment” is projected to be released in the Spring 2009.
European CommissionEU leaders have agreed on the need for a common European approach based on certain principles proposed by the European Commission reporting on the matter in February 2008.The Commission wants a political agreement to deliver any necessary legislative changes before April 2009.
US TreasuryThe US Treasury has issued a set of five key policy principles for SWFs and certain other policy principles for countries receiving SWF investment. Other than this it has stated support for the processes underway at the IMF and OECD to develop voluntary best practices for SWFs.No specific timing determined for further action.

Appendix 2: List of SWFs and estimated value of assets under management

RegionFund nameAssets estimated $billions
North America and CanadaAlaska Permanent Fund (US – Alaska)$39.8
Alberta’s Heritage Fund (Canada)$16.6
New Mexico State Investment Office Trust (US – New Mexico)$16
Permanent Wyoming Mineral Trust Fund (US – Wyoming)$3.7
Alabama Trust Fund (US – Alabama)$3.1
South and
National Development Fund (Venezuela)$17.5
Social and Economic Stabilisation Fund (Chile)$15.5
Oil Income Stabilisation Fund (Mexico)$6.2
Pension Reserve Fund (Chile)$1.4
FIEM (Venezuela)$0.80
Macroeconomic Stabilisation Fund (Venezuela)$0.79
Western and
Central Europe
Government Pension Fund – Global (Norway)$396.5
Reserve Fund (Russia)$162.5
National Welfare Fund (Russia)$125
National Pensions Reserve Fund (Ireland)$30.8
State Oil Fund (Azerbaijan)$3.3
Government Petroleum Insurance Fund (Norway)$3.0
Middle EastAbu Dhabi Investment Council (Abu Dhabi)$875
SAMA Foreign Holdings (Saudi Arabia)$300
Kuwait Investment Authority (Kuwait)$250
Qatar Investment Authority (Qatar)$60
Brunei Investment Agency (Brunei)$30
Kazakhstan National Fund (Kazakhstan)$21.5
Dubai International Capital (Dubai)$13
Oil Stabilisation Fund (Iran)$12.9
Istithmar World (Dubai)$12
Mubadala Development Company (Abu Dhabi)$10
Mumtalakat Holding Company (Bahrain)$10
Public Investment Fund (Saudi Arabia)$5.3
State General Reserve Fund (Oman)$2.0
RAK Investment Authority (UAE – Ras Al Khaimah)$1.2
Palestine Investment Fund (Palestine)$0.89
Investment Corporation of Dubai (Dubai)(not available)
Emirates Investment Authority (UAE – Federal)(not available)
Far East and
Government of Singapore Investment Corporation
SAFE Investment Corporation (China)$311.6
China Investment Corporation (China)$200
Hong Kong Monetary Authority Investment Portfolio (China – Hong Kong)$163
Temasek Holdings (Singapore)$159
National Social Security Fund (China)$74
Australian Future Fund (Australia)$58.5
Korea Investment Corporation (South Korea)$30
Khazanah National (Malaysia)$25.7
National Stabilisation Fund (Taiwan)$15
New Zealand Superannuation Fund (New Zealand)$13.8
China-Africa Development Fund (China)$5.0
Timor-Leste Petroleum Fund (East Timor)$3.0
State Capital Investment Corporation (Vietnam)$2.1
Revenue Stabilisation Fund (Kiribati)$0.4
AfricaLibyan Arab Foreign Investment Company (Libya)$50
Revenue Regulation Fund (Algeria)$47
Libyan Investment Authority (Libya)$40
Excess Crude Account (Nigeria)$11
Pula Fund (Botswana)$6.9
Poverty Action Fund (Uganda)$0.35
National Fund for Hydrocarbon Reserves (Mauritania)$0.3
Reserve Fund for Oil (Angola)$0.2
National Oil Account (Sao Tome)$0.02
CaribbeanHeritage and Stabilisation Fund (Trinidad & Tobago)$0.5
Revenue Stabilisation Fund (Trinidad & Tobago)$0.5


Norton Rose LLPEMPEA
Ian Moore
Norton Rose LLP
Tel +44 (0)20 7444 5263
Jennifer Choi
Tel +1 202 449 1155