How Sovereign Wealth Funds Invest

Private vs. public equity: An academic analysis of where sovereign wealth funds put their money.

(December 12, 2012) -- Investment decisions of sovereign wealth funds (SWFs) differ from those of other institutional investors, academic research demonstrates.

SWFs, similar to other institutional investors, are less likely to invest in private equity versus public equity internationally, according to a newly published paper, written by Sofia Johan of York University, April Knill of Florida State University, and Nathan Mauck from the University of Missouri.

However, the economic significance of this impact is surprisingly low, the paper asserted. "Unlike other institutional investors, SWFs are more likely to invest in private equity versus public equity in target nations where investor protection is low and where the bilateral political relations between the SWF and target nation are weak." The research demonstrates that contrary to non-governmental institutional investors, SWFs do not seek protection by investing in private equity in nations that provide strong investor protection.

Surprisingly, cultural differences play a marginally positive role in the choice to invest in private equity outside of a SWF's own sovereign nation. "Comprehensively, we find that SWFs act distinctively from other traditional institutional investors when investing in private equity," the authors claimed.

Furthermore, according to the paper, SWF investment in private equity may be primarily financially motivated as SWFs tend to underperform in the public markets.

In addition, political relations significantly influence the probability that SWFs will invest in private equity (versus public equity). The authors continued: "These results suggest that the literature on institutional investors may not be used as a guide for policy making for SWF investment in private equity. Rather, policy will need to be based on individual SWFs/investments."

The paper was compiled by examining the investments of 19 SWFs in 424 firms (both public and private) around the world from 1991 through 2010.


Click here to read the full paper.

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