2 years ago at the World Economic Forum the hot topic of conversation was hedge funds. Last year, it was private equity. This year, sovereign wealth funds were the ‘it’ topic at Davos.
In a session titled, “Myths and Realities of Sovereign Wealth Funds” a panel moderated by the Financial Times’ Martin Wolf debated and discussed most of the issues making headlines in recent weeks (centering primarily on the topics of transparency, objectives, motivations). The panelists included Lehman Brothers CEO Richard Fuld, Kristin Halvorsen of Norway’s GPF, Muhammad Al-Jasser of the Saudi Arabian Monetary Agency, Russian Finance Minister Aleksey Kudrin, Bader Al -Sa’ad of the Kuwait Investment Authority, Blackstone CEO Stephen Schwarzman, former US Treasury Secretary Larry Summers, and current US Deputy Treasury Secretary Robert Kimmit. Video of the hour-long session below:
Noteworthy comments that were made by the panelists (Reuters):
ALEXEI KUDRIN, DEPUTY PRIME MINISTER AND FINANCE MINISTER OF RUSSIA:
“When there was a period when traditional economies had strong funds and through several funds moved into markets and bought industries, we did not speak of restricting capital.
“Now (it is the other way around) we are having discussions about the aim of investment.
“It’s an interesting discussion – there is no cause for concern, but we are discussing a code of practice. Perhaps we are ahead of ourselves.
“So far, we have not identified any negatives but we are already talking about a code to protect us. Let’s first define what could give rise to concern.”
ROBERT KIMMITT, U.S. DEPUTY SECRETARY OF THE TREASURY:
“At this point, the history with sovereign wealth funds is they are generating higher investment returns without generating political controversy.
“Importantly, both fund management and investment decisions we have seen have been made on commercial not political grounds. We welcome that kind of investment in the United States. We don’t fear such investment.
“However, the growth in the size and the number of these funds is such that vigilance is required.
“Since Dubai Ports World, we have had over 200 cases that have come through the Committee on Foreign Investments in the United States — none of those has been blocked.
“The new investment law passed last July and further implemented by an executive order passed just yesterday…has struck a better balance on investment review between encouraging investment and protecting national security.”
LAWRENCE SUMMERS, FORMER U.S. TREASURY SECRETARY
“I would agree that the world is a better place because of those transactions that have taken place over the past three months. There’s not much that sovereign funds (have done) to date that one can be critical of.
“I do think there is potential grounds for concern here.
“Given we have made a decision that we are not going to invest our country’s money in companies because of the risk of politicisation, then it’s legitimate to be concerned about other countries’ use of those funds.
“The question is if we believe in market economies and we work very hard to create open markets and private enterprise — shouldn’t we be concerned with transactions that have an element, albeit a small element, of cross border nationalisation?”
STEPHEN SCHWARZMAN, CHAIRMAN AND CEO OF BLACKSTONE GROUP:
“Our experience with sovereign wealth funds is they are smart, long term, highly professional. All they are looking for is higher rate of return.
“We have a sovereign wealth fund as our largest stakeholder. It is indicative of the way a sovereign wealth fund would think. The first thing about that investment is it is a non-voting investment – that was important for them.
“We had originally asked them to vote with us, and they’d said they (would rather not). They are also a long-term shareholder.”
KRISTIN HALVORSEN, NORWEGIAN FINANCE MINISTER:
“The fund is an extremely long-term investor. In principal we are going to be shareholders forever. We are extremely transparent. Our investment guidelines are discussed in parliament each year.
“We have a very long-term horizon and that is not only to stabilise the Norwegian economy but also to stabilise global economy. We have ethical guidelines, to avoid our investments contribute to unethical acts. We are exercising these guidelines through our ownership rights.”
MOHAMED AL-JASSER, VICE GOVERNOR OF SAUDI ARABIAN MONETARY AGENCY:
“They have always taken a long-term stabilising role in financial markets.
“I don’t think there are any difficulties in understanding who is investing where. Regulators… make sure it is well-known and compliant with regulations.
“We should not look at sovereign wealth funds as a risk and a danger.
“Between the years 1983 and 2002 we had 20 years of budget deficits. “We need to provide oil for the world economy. We have managed that well for the sake of our economy but also for the sake of the global economy.
“Basically we’re trying to address a hypothetical situation — we’re talking about trying to regulate something that may happen.”
Al-Jasser said when there were similar calls for regulation on hedge funds the response was that would disrupt financial markets.
BADER AL SA’AD, MANAGING DIRECTOR OF KUWAIT INVESTMENT AUTHORITY:
“There is a lot of worry about sovereign wealth funds, but all of them are assumptions, they are not about real cases.
“Kuwait has been a shareholder in DaimlerBenz since 1969, it has probably been one of the most stable shareholders.
“Kuwait investment authority has one of the most regulated investment authorities. It is really well governed.
“For 55 years, we never had politically enforced decisions for our investment.
“We look at the bottom line, we don’t look at anything else. We have been passive in all our investments. We haven’t been active in any of our (holdings). All this fear about sovereign wealth funds has no real basis.”
The overall discussion was relatively balanced. The only complaint that I have is minor. I would have preferred to see some representation from the Southeast Asian, export surplus-orientated SWFs on the panel. I thought the format was really good and that Martin Wolf did an excellent job moderating (not surprising, his FT columns are also excellent).
Larry Summers hypothetical examples, while certainly plausible to debate in theory, have never even shown signs of manifesting in reality and are thus not fair to argue beyond the abstract. Several of the panelists made the prescient point that it wasn’t fair to call for regulation and transparency for SWFs while not holding other large investors such as hedge funds and private equity firms to the same standard, especially considering that the former has had a destabilizing effect on the global financial system time and timeagain. I suspect that the people making the calls to regulate SWFs and make them more ‘transparent’ are smart enough to know this. There’s something else, something much larger at work here that I’m going to take an in-depth look at in my next commentary piece.
