For decades, SWFs have been happy to invest in very traditional sectors, such as fixed interest bonds, real estate and commodities.
The view was that they were custodians of a country’s accumulated wealth and had a duty to preserve capital for the next generation rather than riskily seek to increase it, or use the vast financial power at their disposal to help the country’s economic development.
They were dead hand, passive investors, and when they did something proactive — which was rarely — it would be big news. In the 1990s, the Kuwait Investment Authority (KIA) roused all sorts of demons when it took a big stake in British oil company BP in one of the privatization rounds of that company, only to be told by the UK regulatory authorities to sell the shares down to a less influential stake.
It all began to change around about the time of the global financial crisis. Before that epochal event, SWFs were regarded with mistrust and suspicion by Western companies, especially bank and financial institutions, which feared they would come under the influence of a foreign government if they sold shares to an SWF.
During and after the crisis, the same westerners could not get SWF money fast enough, with very mixed consequences, as the executives of Barclays Bank, currently on criminal charges relating to the acquisition of shares by Qatari funds, will testify.
Post-crisis, SWFs have been accepted as mainstream, acceptable investors in all sorts of situations they would previously have been excluded from, and this seems to have led to a realization on their part that they could do far more than just buy some bonds or more real estate.
For example, Mubadala Investment Company of the UAE — which does not describe itself as an SWF but does state it is “proudly sovereign owned” — took the view early on that its investment activities had to benefit UAE citizens and the development of the Emirates’ economy.
It often insisted on elements of technology transfer and local job creation as part of its investment strategy.
Some of its earlier investments — such as the stake in Ferrari — looked distinctly exotic at the time, but it was a catalyst for the development of the hugely successful Abu Dhabi Grand Prix that took place last weekend.
Other Mubadala investments — in aerospace, for example — led to the creation of manufacturing facilities and real jobs in the UAE for Emirati citizens. Now, other SWFs are taking this interpretation of their function much further.
From Oslo to Riyadh, oil has primed the pump of sovereign wealth but funds are increasingly turning away from the commodity and toward emerging sectors, from robotics to artificial intelligence.
The Norwegian fund, the Government Pension Fund Global, is currently the biggest in the world at $1 trillion, and was created out of the country’s prudent management of its revenue from North Sea oil. (The SWF-less UK should take note).
Now, Norway is managing a radical departure from past investment strategy. It said it is considering divestment from oil and gas companies altogether, partly because of the risk to its financial returns from low oil prices and partly because of climate change worries.
So despite the fact that hydrocarbons were the source of all their wealth, Norwegians have decided they don’t like dirty fossil fuels after all, and are going to invest in future in something more politically correct, such as private equity funds and, even, the fashion industry.
It is hard to imagine Saudi Arabia ever ending its love affair with oil, but there is a similar radical process at work in the thinking of the Public Investment Fund, the once-sleeping government pensions agency now turned dynamic global investor in cutting-edge sectors such as technology, robotics and artificial intelligence.
PIF — surely there is a case for a rebranding of that name — is unashamed about being called a SWF, indeed it said it wants to be the biggest in the world. It is also unashamed about its function: It exists to help the Kingdom realize the Vision 2030 strategy to escape oil dependence and transform the national economy.
Of PIF’s six investment portfolio investment categories, four are set within the Kingdom, with big stakes in traditional sectors such as energy, telecoms, real estate and agriculture, as well as in what it calls the Saudi “giga projects,” such as the $500 billion Neom development.
Internationally, PIF made waves with its $3.5 billion investment in Uber, the $45 billion contribution to the SoftBank Vision Fund, and its partnership with Blackstone in a $40 billion infrastructure investment fund.
PIF is likely to make more investments in fast-growing technology sectors, as the Kingdom looks to make high-tech the backbone of the economy, eventually to replace oil as the main economic driver.
SWF’s globally have an estimated $6 trillion at their disposal — bigger than the GDP of Japan. The power they can wield is enormous. The new generation of SWFs realize this, and will be using their power for positive economic change.
— Frank Kane is an award-winning business journalist based in Dubai. He can be reached on Twitter @frankkanedubai