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02 December 2023

SWFs: what’s all the fuss about a name?

By Nigel Sillitoe


Sovereign wealth funds (SWFs) are no more than government investors in developing markets who have been targeted by the West for years, renamed. Even for a seasoned Gulf financier like myself, the term “sovereign wealth fund” is a relatively new one.


For the seven years I have worked for international investment businesses seeking to raise assets here, myself and my colleagues referred to these government funds simply as institutional investors, or government institutions. Now, rebranded by the markets as SWFs, these powerful entities seem to be attracting even more interest, but it is not all positive.


The momentum behind the current global debate on the merits of regulating SWFs seemed to gather force in the furore following the acquisition by Dubai Ports World of P&O’s business in the US.


Each subsequent transaction including some as far afield as New Zealand, Australia, as well the EU have fanned the flames of controversy, and calls for the regulation of funds have got ever louder.


In this maelstrom of ire and indignation, many of the positives SWFs have brought to international capital markets over many years has been overlooked. Further, many commentators and asset raisers have completely forgotten how SWFs have directly allowed them to develop their own businesses in the Gulf and other emerging regions.


Indeed, the world’s biggest asset management and private equity firms from the established markets of the West have courted these funds for years.
Never, has there been a suggestion that such institutional investors are anything other than extremely worthy of the attention of the blue-chip money managers who have poured into the Gulf, first as classic suitcase bankers, and latterly armed with DIFC licences.


In fact, what many of these bankers have learned is that in the Gulf we deal with some of the most sophisticated, analytical and successful investors in the world.
Investors who were among the first to realise the opportunity hedge funds represented and then to put their money where their mouths were.


Notably, many of these investors are increasingly shying away from the international behemoths and see increasing opportunities in investing in boutique firms – perhaps the next major trend for the so-called SWFs. Meanwhile, this willingness to spot an opportunity and go for it has also helped to stabilise markets in the rockiest of times – one need only consider the recent investments of Kuwait Investment Authority (KIA) into Merrill Lynch; Abu Dhabi Investment Authority (ADIA) into Citi and most recently Qatar Investment Authority (QIA) into Credit Suisse.


 How would the volatility in equity markets look now had these massive investments not occurred?


I assume that what has caused such a dramatic turn around in sentiment towards SWFs is the sheer scale of some of these funds. Frankly, there is little concrete data on just how big they are but at best guess, ADIA could account for as much as $750 billion (Dh2.75bn) to $1 trillion, KIA in excess of $250bn and Saudi Arabia Monetary Authority in excess of $200bn.


The uncertainty over the exact figures, coupled with the dramatic growth in the size of the funds has certainly raised eyebrows in the West. However, this perceived lack of transparency is hardly unique for large institutional investors and certainly matched, for example, by some of the pension funds of the United States.


A further unjustified criticism levelled at the SWFs is that they contribute little strategically and are only invested for the short term. Again, this is not born out by fact and I can confirm that I have personal experience of working with sovereign institutions over long periods of time and have seen mandates retained by fund managers for as long as 13 years. Such a time scale would be rare in Europe.


Further, an investment vehicle such as Dubai International Capital is noted for its strategic investments in hotels and leisure businesses, where it benefits both from the experience of the management it seeks to retain and support, as well as from the obvious expertise Dubai Government can input, having been behind some of the most innovative and successful tourism ventures the world has ever seen.


Ultimately though, the call for transparency may be too great. Much as some hedge funds have attempted to do in the US and EU, the SWFs of the Gulf and other emerging markets may seek to pre-empt legislation and adopt a self-regulated approach.


 A voluntary code of conduct would be one way forward and I believe the Middle East’s sovereign institutional investors may surprise us all, and lead the way in this as they have done in so many other global investment trends over the past 10 to 15 years.

(The writer is executive officer Middle East, Thames River Capital)