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date: 29 October 2020

(p. v) Preface

(p. v) Preface

Sovereign wealth funds (SWFs) represent both an increasingly important—and potentially dominant—category of alternative investor, and a novel form for governments to project their interests both at home and abroad. As such, they represent both economic actors and embody power vested in the financial and diplomatic resources they can leverage. Although at times they have acted in concert with other alternative investors, their intergenerational savings function should, in theory at least, promote more long-termist thinking. However, they may be impelled toward greater short termism in response to popular pressures, demands from predatory elites and/or unforeseen external shocks. Of all the categories of alternative investment, SWFs perhaps embody the most contradictory pressures, making for diverse and complex outcomes. The aim of this volume is to consolidate the present state of the art, and advance the field through new applied, conceptual, and theoretical insights. The volume is ordered into chapters that explore thematic issues and country studies—although all contributions represent fresh work—incorporating novel insights into the most recent developments in the SWF ecosystem.

Chapter Summaries

This handbook is organized into 4 parts and 24 chapters (including the introductory chapter).

Size and Governance of Sovereign Wealth Funds

Part I of this handbook provides an overview of SWFs in respect of the size of the market and the governance of SWFs. It comprises four chapters (Chapters 2–5). Chapter 2 by (p. vi) Veljko Fotak, Xuechen Gao, and William L. Megginson begins with an excellent overview of SWFs and explains and documents why they are a massive and global financial force. The chapter authors review an extensive literature and a massive amount of data to compare how SWFs allocate funds across asset classes. They point to patterns of investments and returns around the world. Also, they identify unresolved issues in SWF research and suggest directions of inquiry for future scholars.

Chapter 3 by Peter Bruce-Clark and Ashby H. B. Monk studies the structure of SWFs and sovereign development funds (SDFs). Further, the chapter authors show that with proper governance structures, SDFs can offer attractive financial returns. This evidence is counter to the conventional wisdom that predicts SDFs should offer lower returns due to dual, and sometimes conflicting, objectives of financial profit and regional development. The attractive returns to SDFs have given rise to a growing interest and capital allocation to such funds from non-developmental private investment organizations.

Chapter 4 by Daniel Haberly examines the “quadruple bottom line” of SWFs, which includes both state- and firm-level objectives of financial returns, strategic national development, political, and social initiatives. Haberly discusses the tension across these differing objectives, and how governance structures deal with these tensions in different parts of the world.

Chapter 5 by Jędrzej George Frynas examines the challenges of nations endowed with substantial resources (often dubbed the “resource curse”) and considers whether or not SWFs are an appropriate organizational form with appropriate governance structures to deal with this resource curse. In particular, Frynas examines issues of stabilization and savings in different contexts by SWFs over many countries and decades. After reviewing the literature and econometric evidence, Frynas concludes that SWFs can be an effective mechanism to deal with the resource curse as long as the country-level societal governance factors are sufficiently sound, governments are accountable and free from corruption, media are independent, and that they operate in a free civil society.

Political and Legal Aspects of Sovereign Wealth Funds

Part II of this handbook focuses on political and legal aspects of SWFs, and comprises three complementary chapters (Chapters 6–9). In Chapter 6, Gordon L. Clark and Adam D. Dixon explore trust and legitimacy issues from a global political economy perspective. They evaluate whether SWFs primarily constitute mercantilist and diplomatic agents of the state or simply investment vehicles, and the consequences of either orientation. They conclude that the portfolio investment practices of most SWFs broadly corresponds with that of other public institutional investors. Moreover, there has been a global move toward greater transparency, albeit that SWFs from the most authoritarian societies remain more opaque. The decline of primary commodity prices in 2015 (p. vii) and 2016 led to many SWFs making substantial withdrawals from their holdings. Again, Asian economies such as China may place more emphasis on enhancing domestic consumer demand than massive forex savings in the future. Moreover, states have a legitimate interest in their domestic development and may make use of their SWFs in support of this agenda. This may mean that SWFs become more inward-orientated; while this may reduce their global prominence as a leading category of alternative investor, it will also reduce concerns as to their potential role in projecting national power abroad.

Chapter 7 by Paul Rose investigates the relationship between SWFs and domestic political risk. The evidence is consistent with the view that the extent to which political risk is exacerbated by the creation of a SWF depends on the institutional context in which it was created: “an autocracy, a democracy, or something in between” to use the words of Rose. The “something in between” can be measured by indices of “Polity Score” that measures political risk. The evidence and implications are reviewed in detail by Rose, who highlights where SWFs are associated with heightened political risk.

Chapter 8 by Kathryn C. Lavelle studies SWFs and foreign policy. That is, SWFs can be an instrument through which a state exercises its foreign policy. Lavelle provides the tools and reviews the evidence on how one can distinguish between economic and political objectives of SWFs and foreign policy. Also, Lavelle shows how these mechanisms can be controlled, and where economic and political risks are more pronounced for home and target investment countries.

Chapter 9 by Salar Ghahramani extends the analysis of SWFs into other countries’ legal and norm settings. Ghahramani explains how legal principles can often be grey or open to interpretation, and how SWFs can influence norm setting and hence legal standards. Also, Ghahramani explains that transnational law is without a state, and codes of conduct are established by norm setting, which are in turn dependent on the actions of SWFs. SWFs in effect have a substantial influence on public and private international law.

Investment Choices and Structures of Sovereign Wealth Funds

Part III of this handbook comprises eight chapters (Chapters 10–17) that deal with the investment choices and structures of SWFs. Chapter 10 by Mike Wright and Kevin Amess examines SWF investment into private equity. The chapter authors explain that SWFs may invest directly into private companies, or indirectly into private equity funds that in turn invest in private companies. Wright and Amess examine the trade-offs with these different investment structures, and explain how SWF investment in private equity has implications for investment performance, risk, and financial regulation.

Chapter 11 by Joseph A. McCahery and F. Alexander de Roode similarly studies the direct investments of SWFs into private firms, and the co-investment of SWFs with (p. viii) private equity funds. The chapter authors present evidence that the SWF choice for co-investment with private equity funds is associated with deal size, risk-bearing, fees, and returns.

Chapter 12 by Fabio Bertoni and Stefano Lugo examines the use of debt by SWFs. The chapter authors provide extensive empirical evidence on the choice of debt financing by SWFs. Also, Bertoni and Lugo examine the relationship between SWF debt use, credit conditions, and a country’s credit risk.

Chapter 13 by April Knill and Nathan Mauck investigates the impact of SWF investment on firm volatility. The chapter authors differentiate between systematic (market) risk and idiosyncratic (firm-specific) risk. Knill and Mauck review evidence and data that show the relationship between SWF investment and firm volatility depends on the investment horizon examined. They explain that the evidence is consistent with the view that the relationship between SWF investment and firm volatility is mainly attributable to idiosyncratic risk.

Chapter 14 by Nuno Fernandes examines the relationship between SWFs and investee performance. Fernandes provides extensive empirical data that highlight a positive impact of SWF investment on investee firm performance in terms of firm valuation and operating performance. This evidence is consistent with evidence from Europe in Chapter 16. Fernandes’ evidence supports the view that SWF investment managers improve the governance of investee firms through monitoring and value-added active advice.

Chapter 15 by Christopher Balding and Kevin Chastagner focuses on the process surrounding the establishment of the China Investment Corporation (CIC), its coming of age, and shifting influence. The chapter authors highlight the potential long-term challenges facing the Corporation because the role of individual international Chinese-owned firms has increased in prominence, as Chinse outward FDI has now surpassed inward investment, and given the decline in value of Chinese foreign exchange reserves.

Chapter 16 by Jing Li examines the investment terms of SWFs in respect of control rights in investee firms. Li reviews extensive evidence from the China Investment Corporation from 2007 to 2015, and shows that this SWF takes significant equity in investees, but non-controlling stakes. Also, there are restrictions on SWF voting rights. Through a detailed review of the contractual documents (which is both very unique as well as time consuming to examine), Li considers whether or not it is efficient to restrict SWFs from remaining passive investors, and whether or not SWFs can extract private benefits from their control rights. Li provides an interesting analysis of the trade-offs associated with different policy and regulatory responses in different settings.

Chapter 17 by Di Wang studies SWF investment in the energy industry. Wang examines evidence that shows SWFs from poor countries are more likely to invest in energy sectors. Wang further shows that this energy industry focus of SWFs from poor countries can have negative consequences for bilateral relations. When SWFs invest in other sectors, they are much less likely to face opposition.

(p. ix) Country and Regional Analyses of Sovereign Wealth Funds

Part IV, the final section of this handbook, examines country- and region-specific analyses of SWFs and comprises seven chapters (Chapters 18–24). Chapter 18 by Geoffrey Wood, Noel O’Sullivan, Marc Goergen, and Marijana Baric begins Part IV with an analysis of the world’s largest and most famous SWF—the Norwegian Government Pension Fund Global. The authors extensively analyse the governance and performance of Norway’s SWF and its investment terms. They discuss implications for its stakeholders, including investors and employees, among other things. They also examine the role of Norway’s SWF in the broader political and economic environment around the world.

Chapter 19 by Sophie Béreau, Jean-Yves Gnabo, Malik Kerkour, and Hélène Raymond studies European-based SWF investments in ten countries, and industry-level performance of these investments. The chapter authors provide extensive evidence from Europe that is consistent with that from Chapter 12, namely that SWFs have a positive effect on industry-level performance. The authors present a rigorous statistical analysis and numerous checks to show that their findings are robust.

Chapter 20 by Javier Capapé, Ruth V. Aguilera, and Javier Santiso examines SWF investment in Spain. The authors provide evidence that these investments comprise four governance approaches that involve corporate governance supervision, in-house capabilities enhancement, international recognition, and developmental learning. Capapé, Aguilera, and Santiso document and explain how these approaches are successfully implemented in Spain.

Chapter 21 by Piotr Wiśniewski studies SWF investments in Central and Eastern Europe (CEE). Wiśniewski explains that whereas SWF investments in this region are still scarce, they have substantial positive implications for their targets and CEE economies. Further, Wiśniewski examines ways in which regulations could be changed and governance models improved to further stimulate the positive impact of SWF investments in the CEE region.

Chapter 22 by Gawdat Bahgat examines SWF investments in the Persian Gulf States. Bahgat explains that these investments are typically categorized in terms of two sources of funds: those from commodity exports, and those from non-commodity sources, such as foreign exchange reserves. Bahgat reviews the investments from a number of specific Persian Gulf States, including Kuwait, Qatar, Iran, Bahrain, Oman, Saudi Arabia, and the United Arab Emirates. Bahgat offers insightful evidence from each of these states, summarizes similarities across the funds, and offers suggestions for future directions.

Chapter 23 by Xu Yi-chong documents the establishment and investments of the Australian Future Fund. Yi-chong explains the objectives and governance of the fund, and key issues that have arisen in its management. Yi-chong explains that SWFs face different (often favorable) terms in their domestic investments relative to that of other types of investors. Also, Yi-chong notes how important sovereign immunity is in the governance of SWFs, and explains how this makes a harmonized set of rules for bilateral (p. x) relations for all SWFs difficult or impossible. Yi-chong provides specific details on these issues from the point of view of the Australia Future Fund, and provides empirical evidence in terms of its governance and performance.

In the final chapter, Eric Parrado explores the Chilean SWFs. Parrado argues that the funds have managed to combine high levels of accountability and transparency with domestic fiscal continence, but this has proved a complex balancing act, from which other SWFs could heed important lessons. This is particularly so because Chile survived a collapse in global copper prices without endangering its SWF; a number of petrostates have failed to attain a similar achievement in the face of the recent (since 2015) decline of oil and gas prices. Parrado links the Chilean experience to the development of the Santiago principles, in whose development he played a leading role. It is perhaps fitting that this collection should conclude with such insights from scholarly practice.


These 24 chapters highlight not only the fundamental sets of principles, and the combination of rules and practices that guide specific types of SWFs, but also the speed of change in the SWF ecosystem. Some SWFs are being rapidly dissipated, and others are changing their orientation and focus in the light of recent developments across the world economy. Although it may be desirable to subject SWFs to arms-length governance, increased macroeconomic instability, the crises of democratic politics and the rise of populist demagogues in some of the mature democracies, as well as the visible senility of some of the dictatorships overseeing SWFs in autocracies, suggest that the boundaries between SWFs, other arms of government, and indeed, the personal finances of ruling elites, are likely to become blurred in many cases. Furthermore, in some cases they already have become so. At the same time, SWFs represent a vital source of capital to many firms worldwide, and an important mechanism for husbanding foreign exchange windfalls for future generations. The former would suggest that, whatever the financial or governance pressures facing SWFs, the cause of anti-SWF financial protectionism is a lost one. In conceptualizing and theorizing the shifting role of SWFs, a synthesis of insights from finance, political economy, socio-economics and political philosophy may be in order. It is hoped that this collection represents some of the first steps in this direction.