SWFs Invest As They Please

Ashby Monk

In the current lackluster M&A market, SWFs are starting to stand out. In fact, according to an article in Emirates Business, Middle Eastern SWFs are emerging as the world’s most active strategic investors.

“The region’s largest SWFs, particularly in Qatar and Abu Dhabi, are emerging as major investors, interested in sectors ranging from financial, commodities to real estate.”

Apparently it isn’t that these funds are doing more; it’s that other types of investors are simply doing less. Still, SWFs seem to have been able to do as they please in global financial markets. This is remarkable given the widespread “national security” concerns of 2007/08, which led to the IWG and the Santiago Principles.

This got me thinking, to what extent have recipient countries’ fears affected SWFs’ investments and deals. We all remember the Dubai Ports debacle. Is anything like that still going on?

Fortuitously, Paul Rose of Ohio State University just posted a paper to SSRN entitled, “Sovereign Wealth Fund Investment in the Shadow of Regulation and Politics.” The paper considers how recipient country public sentiment and regulatory burdens affect SWF deal-making. Drawing on a series of detailed case studies, he concludes:

“There is no evidence to suggest that SWF investment suffers from significantly higher transaction costs than other foreign investment. Indeed, the fact that other domestic and foreign investors are investing on the same terms as SWF investors in the Merrill Lynch and Citigroup transactions provides compelling evidence that transactions costs are not higher.”

In short, the article suggests that SWFs are not being constrained more than their private sector cousins (i.e. are not incurring higher transaction costs). In other words, national security concerns aren’t having an appreciable impact on SWF deal-making. This conclusion jives with the Emirates Business’ article.

That said, Rose goes on to acknowledge that his case material could be temporally biased. After all, he draws his conclusions from transactions that took place during the financial crisis:

“…the extraordinary pressures on the banks at the time of the investments may also suggest that the banks were willing to absorb higher transactions costs (perhaps by agreeing to terms that would not have accepted from only private investors) in order to secure investment from what were essentially lenders of last resort.”

So, while SWFs have had free reign during the financial crisis, Rose raises the possibility that this will end once target firms regain their footing.

2 Responses to “SWFs Invest As They Please”


  1. 1 rachel March 14, 2010 at 10:10 pm

    Ashby, interesting thoughts. though I think the regional picture varies, SWFs do seem to be active in M&A activity locally, but I’m not sure how active they are on a global level or especially in the U.S. That would be a real test of recipient response. What do you think?

  2. 2 Ashby Monk March 15, 2010 at 12:53 pm

    There’s been some direct and strategic investing of note. But it hasn’t been a torrent, so I take your point. Still, it may be that the santiago principles are doing their job; the protectionist rhetoric seems to have abated almost completely.


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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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