Sovereign wealth investors growing fast

March 13, 2008

Sovereign wealth funds — the increasingly powerful investment arms of governments around the world — are growing at a rapid pace, according to the Preqin Sovereign Wealth Funds Review.    

There are currently 46 active sovereign wealth funds worldwide, with aggregate assets at $3.05 trillion, the study says, adding that assets have risen 51 percent from the end of 2006.    

The Middle East is the biggest region for SWFs in terms of value, with 41 percent of all capital centered there. Asia has 31 percent of the capital, with Europe laying claim to 19 percent, according to the study.

Boosted by ballooning trade surpluses, these countries have been investing overseas, leading some to fear their strategic intentions. But several fund executives have recently said these funds present little threat to the fund management industry, but rather offer opportunities for asset growth.

Sovereign funds such as Temasek and the Government of Singapore Investment Corp have made high-profile investments in U.S. financial institutions such as Citigroup and Merrill Lynch, who sought billions of dollars after suffering huge subprime-related losses.

About 60 percent of the funds are investing in private equity, the study said.

“Sovereign wealth funds have long-term investment horizons, relatively few restrictions on investment, and are seeing their total assets being driven even-higher by record oil prices,” Tim Friedman, the editor of the study, says.

Morgan Stanley economist Stephen Jen earlier this week said the funds could reach $12 trillion in total assets by 2015, soon surpassing total official foreign reserves held by central banks, and becoming the main vehicle for capital investment.

The sovereign funds have been focusing on recapitalizing the sectors, like banking, where cash is needed to rebuild their balance sheets after the subprime meltdown resulted in massive losses. U.S. and European banks have been actively seeking cash from sovereign wealth funds.  

While some fear these funds are investing for political gain, many say there is only evidence of financial incentives for these investments.  U.S. lawmakers two weeks ago unveiled a task force to examine funds owned by foreign governments.

While the jury is out on SWF’s motivation, no one disagrees that times are tough, and the cash comes in handy.  But as Ralph Waldo Emerson once said: “Money often costs too much.”

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