Sovereign Wealth Fund Investments: The Bondholders’ Perspective
by Gianfranco Gianfrate
The history of state-owned investment funds can be traced back to the nineteenth century; however, this investment activity significantly increased in number and scope only in the last two decades. Despite such a long history, the term “sovereign wealth fund” is relatively recent in academic literature, having been introduced in 2005 (Rozanov, 2005). Prior to this, scholars mainly referred to this type of investment entities as “stabilization funds.” This term referred to the origin of these investment funds—countries with revenue flows strictly dependent on and arising from just one kind of commodity needed to diversify their investments for the greater goal of income stabilization.
Sovereign wealth funds (SWFs) were only recently defined; this definition implies that no universal meaning can be attached to this category. Sovereign wealth funds constitute quite a heterogeneous category that can vary widely with respect to their organization, disclosure, and their fund managers’ compensation schemes and purposes.
Several simultaneous macro-events, such as the rise in oil and raw material prices and increased prospects of cross-border investments (Chan et al., 2005), coupled and stimulated the growth and appetite for higher returns of SWFs in recent years, with these investment entities increasing assets under control from $500 billion in 1990 to $5.2 trillion in 2012 (SWF Institute, 2013).
Despite this recent trend, current empirical evidence regarding the effects of SWF investments on target firms is scant at most and mainly pertains to changes in the wealth of the target’s shareholders. This paper contributes to the existing literature by shedding new light on the effect of SWF investments on target bondholder returns.