Engaging with Sovereign Wealth Funds

Direct investment transactions totalling more than half a trillion US dollars across all asset classes have been made in the past five years, which has attracted wide attention from issuers and stimulated interest into their investment strategies.

Historically, however, there has been a high level of apparent mystique surrounding the ways in which they invest, and in recent times we have seen our clients seek greater clarity on the merits of and processes for engaging sovereign wealth funds. In this paper, we form an analytical appraisal, to address four common preconceptions that we have regularly come across, namely:

  • “SWF investment is growing fast”
  • “There are a lot of new and existing SWFs that issuers should engage with”
  • “SWFs are not transparent and it is difficult to know what they invest in”
  • “SWF only invest strategically and ROI is not important to them”

The sovereign wealth fund universe is one that always warrants great interest from issuers, given their traditionally long investment horizons and the stability they bring to a shareholder base, particularly during market downturns. Historically, they proved to be difficult to find information on or to engage. Recently, as their own mandates have expanded to cover a wider range of regions and sectors, their level of interaction with issuers has also increased substantially.

However, the reality for each individual equity issuer is that there are still no more than half a dozen sovereign wealth funds of real relevance to them, and the approach to engagement with them is essentially no different than with most traditional investment managers. Sovereign funds are now more transparent about their investment objectives and, as explored in the paper, the mystique surrounding them is largely unjustified.

How do SWFs fit into your IR strategy?

Without doubt, there are certain SWF equity investment mandates in place that make interaction with sovereign funds extremely valuable for issuers. However, whether or not a particular SWF is right for a particular equity issuer remains contingent on the directives of the government bodies determining mandates. What is clear is that the size of an SWF is not relative to its international investment capacity; 6 of the 14 SWFs that manage foreign holdings in-house hold under $100 billion each in current assets. Areas of investment focus are becoming broader as funds grow and freedom increases, yet at the same time the increased reliance on active selection will, in some cases, limit the total number of stocks and sectors held.

The onus is on issuers to carefully consider the true value of each SWF to their IR programme. Understanding what triggers an investment, where there are constraints and, most importantly, who is behind the decision to buy are all critical in this assessment. In the best cases, a long-term, stable and potentially large investor can be added to the register, while the flip-side is uninformed conversations and wasted resources. No matter how much SWFs have started to resemble traditional funds in investment style, and we have seen a clear increase in meeting activity and willingness to engage, mandates ultimately remain at the behest of the economic ministries and, therefore, SWFs should always be treated on a case-by-case basis by corporate IR teams.