Sovereign Wealth Funds

Janice Carpi is National Underwriting Counsel for GRS Group
480.428.5585
[email protected]

A Sovereign Wealth Fund (“SWF”) is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals, or other financial instruments or interests.  SWFs are usually special purpose investments or arrangements that are owned by a government.  Many nations of the world, especially the oil-exporting countries such as those in the Middle East (Abu Dhabi, Dubai, Saudi Arabia) and Norway, possess massive financial reserves which exceed the country’s needs for liquidity or foreign exchange management.  These reserves are used by the SWF to invest in opportunities world-wide for profit and to maximize high-quality growth in their own economies.[1]  Other SWFs have been formed by government pension funds, in order to obtain a higher return on investment than simple interest.

For some countries, where their economies are not highly diversified and are dependent on the sale and export of oil, sovereign wealth funds allow the country to diversify their exposure to the volatility of oil prices.   Other countries have different reasons to create SWFs.  Singapore, for example, has two large funds, the Government Investment Corporation and Temasek Holdings, which are used to increase Singapore’s exposure and standing as an international financial situs.   Some SWFs have created wholly-owned subsidiary investment vehicles known as Sovereign Wealth Enterprises (SWE).  These allow for greater flexibility for the SWFs in investing.[2]

Some of the more widely recognized SWFs are Qatar Investment Authority, Dubai World, China Investment Fund, and  FIEM (Venezuela).  There are even several funds in the United States, such as the Alaska Permanent Fund, the Texas Permanent School Fund, and CalPERS (California Public Employees Retirement System).  A list of sovereign wealth funds can be found at the Sovereign Wealth Fund Institute’s webpage:  www.swfinstitue.org/what-is-a-swf/.

Since 2005, at least 20 sovereign wealth funds have been created.[3]  As you can imagine, the potential pool of available capital from these funds can be huge.  It is estimated that if all of the SWFs’ assets were added together, they would total $20 trillion, made up of assets under their management, pension reserve funds, development funds and state-owned enterprises’ funds and other official foreign exchange reserves.  Since SWFs are not regulated entities, there is a problem with transparency and lack of disclosure about governance, independence and possible conflicts of interest. [4]  Some countries are aware of these issues.  Norway’s SWF, for example, has said that it sees transparency as crucial to building trust and confidence in the management of the fund, both domestically and internationally.[5]

Some sovereign wealth fund transactions that you may have heard of are:

1. Dubai World, an affiliate of the government of Dubai, United Arab Emirates, entered into a joint venture with MGM Resorts International to build the $8.5 billion CityCenter project in Las Vegas.  CityCenter was the largest single phase construction project in the United States, consisting of a 4,000 room hotel-casino, retail complex and several condominium towers located on the Las Vegas Strip.  The project started just as the recession started, and together with project delays and construction defects, there was significant litigation between the joint venturers as Dubai World tried to avoid putting additional capital into the project.  In the end, Dubai World did pony up more capital, and the project has successfully opened.
2. In February of 2012, the Canada Pension Plan Investment Board announced an agreement to form a joint venture with the Westfield Group to own 10 regional malls and two redevelopment sites in the United States.  The properties have a total gross value of $4.8 billion.  The CPPIB stated at the time that its real estate investments totaled $14.4 billion, representing 9.5% of the CPP fund.[6]
3. The Wall Street Journal reported on Wednesday, August 15, 2012, that one of the Singapore SWFs is forcing an auction of four luxury resort properties in the United States.  The Government of Singapore Investment Corp. (known as “GIC”) is a major creditor to the properties, which have been under bankruptcy protection since for the past 18 months after the prior owners were unable to pay off $1.5 billion in mortgages.  The properties are the Grand Wailea Resort in Maui, Hawaii, the La Quinta Resort in La Quinta, California, the Arizona Biltmore in Scottsdale, Arizona and the Claremont Resort in Berkeley, California.[7]

For further information on sovereign wealth funds, check out the SWF Institute’s website above, or the webpage of the International Working Group of Sovereign Wealth Funds, www.iwg-swf.org.

The inspiration and much of the information in today’s blog came from the Phil Feder’s excellent presentation at ACREL in Las Vegas, in March of this year.  I appreciate his scholarly discussion and materials.  Phil is Partner and Chairman of the Real Estate Department at Paul, Hastings LLP, in Los Angeles, California.