Where SWFs are concerned, opinions differ. Their advocates see them as equal to, for example, hedge funds or private equity (PE) as an alternative source of capital. They are happy to see most of them adopt a long-term investment horizon, irrespective of whether the funds are underpinned by commodities or currency reserves.
Sceptics object above all to the SWF's lack of transparency and conjure up the spectres of political influence and the illicit appropriation of know-how, or else harbour misgivings about the lack of reciprocity and issues of security policy.
Sovereign wealth funds and their related sovereign wealth enterprises (SWEs) such as, for example, the China National Offshore Oil Corporation or Dubai's DP World, are major players on the global financial markets. In five to ten years, their assets under management are projected to be worth between USD 10 trillion and 15 trillion - in other words, even today more than hedge funds and private equity combined. They are set to gain decisive influence on the M&A market over the coming years and are likely to further consolidate their position by cooperating closely with PE firms.
The exponential growth in investments by SWFs expected over the next few years is a sign of a shift in economic power on the political world map," comments Patrik Kerler, Head of Corporate Finance at KPMG Switzerland. Compared with our traditional institutional investors - pension funds, mutual funds and insurance funds, for example - the proportion of SWFs is small as yet, but the balance will soon shift in their favour. The current financial crisis is accelerating this still further." Sovereign wealth funds and enterprises have enormous reserves of funds and are likely to demonstrate greater staying power than traditional investors.
Nevertheless, there is some doubt as to whether SWFs, having already invested a great deal in the financial industry, will be willing to dig deeper into their pockets to rescue it again after the latest events. "What motivates SWFs and guides their investment strategy is the prospect of profit and the chance to exploit favourable opportunities that promise above-average returns," explains Vijay Arumbakkam, a KPMG partner in the United Arab Emirates.
In recent years and months, they favoured certain attractive prospects in the financial sector. That changed, though, when a number of American financial institutions collapsed. "After the latest occurrences in the European and American financial sectors, we have seen a great deal of caution when it comes to new investments in these areas. In recent months, SWFs' holdings in banks and insurance companies have lost them a great deal of money," Vijay Arumbakkam adds.
Where corporate governance and transparency are concerned, Western states and businesses expect greater openness on the part of SWFs about their investments and activities. Most SWFs have yet to demonstrate that they are safe and credible alternatives to traditional investors, that they guarantee appropriate reciprocity and that the investments they make are also successful in the long term.
Experience shows, however, that SWFs see themselves solely as financial investors and have little interest in playing an active part in decision-making or, indeed, in taking up seats on boards.The presentations, accompanied by extensive statistics, illustrations etc., showing the largest holdings of SWFs in Western companies, can be downloaded from http://www.kpmg.ch/.
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