Sovereign wealth funds, which are government-controlled pools of surplus capital produced by high oil prices or an export boom, do not represent a new phenomenon. They’ve been generating controversy since Margaret Thatcher forced the Kuwait Investment Authority (KIA) to sell most of a stake it bought in British Petroleum in 1987. But their financial muscle—and the political anxiety they generate—have grown sharply in recent years. Some view sovereign wealth funds (SWFs) as a threat to markets and national security; others see them as critical sources of financing and stability for stumbling economies. Whichever view you hold, one thing is certain: SWFs will play a growing role in global finance, and executives need to understand their implications for business. While not without risk, SWFs offer potentially important capital-raising opportunities for companies, provided that regulatory, reputational, and business risks are assessed and managed.
Until now, SWFs have been neither definitively defined nor distinguished from other forms of public wealth, such as pension funds, state-owned enterprises, stabilization funds, government investment companies, foreign reserves, and the wealth of sovereign individuals. We propose, therefore, that an SWF be defined as (1) an administratively distinct pool
of capital, (2) owned or controlled by a
state, (3) investing in risk assets, (4) with
at least a portion of its risk assets denominated in foreign currencies. While this is a
broad definition—and some of the public
wealth entities listed earlier fall under it—
it nevertheless offers a starting point in the process of carving out a distinctive set of characteristics most people can agree on.
Under this definition, there are more than 50 recognized SWFs around the world, managing an estimated $3 trillion to
$4 trillion. (See Figure 1.)
Figure 1: SWFs by geography
Percent of funds
Source: Estimates of 2007 from Sovereign wealth funds: A bottom-up primer, JPMorgan Research, May 22, 2008
