by Jonathan Brookfield, Patrick J. Schena, Ravi Shankar Chaturvedi
(Article Contribution to Report “Braving the New World: Sovereign Wealth Fund Investment in the Uncertain Times of 2010” by Monitor Group: Pages 38-43)
The behavior, structure, characterization, and even definition, of Sovereign Wealth Funds (SWFs) all remain areas of active inquiry. The authors define SWFs broadly as investment funds owned by governments that are distinct from both official reserves and the capital available to state-owned enterprises (SOEs).
The latitude in this definition permits them to examine SWFs through the lens of a life-cycle framework. This is interesting, not only for the light it sheds on the SWFs universe, but also for the implications it may have for thinking about the privatization of state assets.
The authors focus their analysis on funds engaged in the structural transformation of state assets into viable private sector commercial entities. They refer to these funds as “transformational”. While all SWFs typically have investment objectives that lie somewhere between wealth preservation and wealth accumulation, there are a few critical characteristics that set transformational funds apart.
(1) illiquid holdings,
(2) active and engaged investment management,
(3) long investment horizons, and
(4) the tendency to invest in key areas of national importance.
Over time transformational funds often adopt a number of differing roles, including serving as a catalyst for the implementation of value enhancing initiatives in state-owned enterprises and government-linked companies, functioning as a vehicle for divestment, and working as an agent on behalf of home governments to enhance national competitiveness.
They are interested in both the restructuring undertaken by such funds as well as their own transformation from a development mandate to an investment mandate, whether based on public or private assets.
Typically distinctions among SWFs have largely been based on an evaluation of fund characteristics at a given moment. A life-cycle framework transcends such comparisons by framing SWFs in a dynamic context that leads to a more robust set of differentiating dimensions.
In this respect, they identify liquidity as fundamental to a life-cycle framework and important in two key ways: it is critical to funds seeking to maintain a balance between resources and commitments over time; and it is important for funds seeking to transform their mandate from restructuring and the monetization of state assets to investing.