They are more like sovereign holding companies.
LONDON: Once the preserve of rich oil exporters or nations with trade surpluses, like Norway, Kuwait and Singapore, an unlikely new breed of sovereign wealth fund is emerging – in countries with large deficits and deep debt.
Sovereign wealth funds (SWFs), which first emerged in the 1950s, are traditionally associated with huge financial firepower. They control about $6.5 trillion, according to data provider Preqin, and have transformed the global investment landscape by snapping up stakes in multinational companies and landmark real estate in cities from London to Melbourne.
Now Turkey, Romania, India and Bangladesh are launching sovereign funds – but for very different reasons than usual, and with very different methods.
Traditionally, wealthy nations use SWFs to invest their surplus billions overseas to prevent inflation at home, diversify income streams and accumulate savings for the day when commodity revenues run out.
In stark contrast, the countries launching the new funds, burdened by large current account deficits or external debt, are using them as vehicles to get their economies moving in the face of a global slowdown and lower trade volumes. And rather than splashing cash abroad, the plan is to attract finance from overseas and invest it at home to stimulate growth.
“Sovereign wealth fund is a term that’s used very loosely in the labelling of some of these new entities, they are more like sovereign holding companies,” said Elliot Hentov, head of research for official institutions at asset management firm SSgA. “They need to lever up – they need private sector co-investment to work.”
There are both potential benefits and risks to this strategy – and only time will tell whether it will be effective. Read more