Sovereign Wealth Funds: A Growing Global Force in Corporate Finance

Sovereign wealth funds (SWFs) have emerged as among the most important players in global financial markets. With an estimated $3 trillion at present, the collective assets at their disposal are expected to reach or surpass $7.5 trillion by 2012. SWFs have shown a wide range of investment objectives, along with continually evolving time horizons and risk appetites. For example, some SWFs have become increasingly active in corporate acquisitions and other strategic transactions. Though many of these funds prefer to invest in debt or non‐controlling equity positions, a small but growing number are seeking substantial minority and controlling equity stakes. SWFs have also recently become major participants in the financial institutions and alternative investment industries, with several high profile investments in well‐known private equity firms and financial services companies. In certain corporate transactions, their longer time horizons and willingness to employ larger percentages of equity have made them attractive alternatives to established private equity. At the same time, however, the rising prominence and perceived lack of transparency of SWFs have raised concerns among governments and other market participants in countries where companies have been targeted for investment. For this reason, companies intent on obtaining funding from or investing with SWFs are advised to prepare for media and regulatory scrutiny, particularly if a transaction is perceived to involve a country's strategic or security interests. Government policymakers are urged to balance the perceived threats of SWFs against their potential benefits, particularly their ability to provide a stabilizing source of global liquidity in the current economic environment.