SWF 3.0: How sovereign wealth funds navigated COVID-19 and changed forever

Abstract

Sovereign wealth funds (SWFs) have been significantly and uniquely affected by the COVID-19 pandemic. From March 2020 to December 2021, governments around the world withdrew over US$ 211 billion from their books and “invited” them to bailout different sectors and businesses, most notably, state-owned airlines. However, some SWFs were also able to pursue opportunities overseas, and most grew their assets under management tremendously due to the stock market rally that followed the market and oil bust of the beginning of 2020. However, state investors are not expecting markets to stay bullish forever, and have been building an adequate level of liquidity in their books and of resilience as an organization for the next market shock, which may as well come with ESG. One can argue that SWFs have indeed entered a new phase “SWF 3.0” characterized by increasing size, influence, maturity, and sophistication; by an interest in different asset classes, regions, and industries; and by a focus on sustainability, collaboration, and long-term survival.

Introduction and Background

Definitions and Objectives

In the period from March to May of 2020, the quarterly searches for the term “sovereign wealth fund” hit levels not seen by Google since the end of 2008¹. The global economy had come to a sudden break, financial markets and oil prices had plummeted, and public officials, industry experts, and concerned citizens were desperately looking for liquidity in their governments’ balance sheets.

The searches probably did not provide much clarity, as there is no universally agreed-upon and updated definition of what a sovereign wealth fund (SWF) is. The most widely used characterization has been the one issued in September of 2007 by the International Monetary Fund (IMF), which defines SWFs as “special investment funds created or owned by governments to hold foreign assets for long-term purposes, typically funded from reserves or other foreign currency sources […]” (Das, 2007).

Since then, the industry has evolved significantly, and that definition has become largely obsolete: some SWFs do not hold a single foreign asset, some others do not only hold assets for long-term purposes, and there is an increasing number of funds established as pools of assets (Divakaram et al., 2022). Global SWF defines SWFs as “investment vehicles owned by national or regional governments that buy, hold, and sell securities and/or assets on behalf of their citizenry in pursuit of financial and/or economic returns.” In practice, there are some characteristics that result in very different types of funds.

Figure 1 illustrates the potential combinations of characteristics defining sovereign wealth funds, including source of wealth, investment mandate, and investment restrictions. Each combination makes a unique type of investment institution, which partially explains how they deploy capital and behave.

Figure 1.

Taxonomy of SWFs according to source of wealth, investment mandate, and restrictions.

First, SWFs can be classified into three different groups according to their source of wealth:

• Commodity-based SWFs that invest the revenues derived from the sale of commodities, including oil, gas, copper, phosphate, and diamonds, usually to avoid the resource course or Dutch disease (Natural Resource Governance Institute, 2015) and for diversification purposes, like Abu Dhabi Investment Authority (ADIA). Contrary to popular beliefs, the proportion of commodity-based funds as a percentage of the total has been decreasing over time, and they only represent 51% of SWF capital today.

• Non-commodity-based SWFs that manage foreign exchange reserves, budget surpluses, issuance of securities, and/or proceeds from governments’ land sales or other privatizations, such as the Korea Investment Corporation (KIC). In practice, these funds may have an ongoing arrangement for injections and withdrawals (e.g., up to 50% of the net investment return), or may have had a one-off injection of capital at its inception, which must be grown over time.

• Wealth-less SWFs that have not been injected with significant capital but have received stakes in national companies to be managed and/or privatized, such as Kazakhstan’s Samruk-Kazyna (SK). Some of these funds may have the additional objective of acting as catalyzers to attract further foreign direct investment into their country, as can be seen in the “Novel Markets” section. These kinds of funds have become particularly popular in the past few years.

Second, SWFs can be classified into three major categories according to their investment mandate:

• Stabilization or “rainy-day” funds that act as buffer mechanisms, benefitting from fiscal surpluses in good years and covering fiscal deficits in times of uncertainty and market shocks, such as Chile’s Economic and Social Stabilization Fund (ESSF). These funds may use counter-cyclical fiscal tools to insulate the economy from market shocks, to balance large capital inflows and outflows caused by volatility, and to protect the exchange rate.

• Savings, capital maximization, or intragenerational funds that have no explicit obligations and are designed to ensure the transfer of wealth to future generations in the long term, like Singapore’s GIC Private Ltd (GIC). These also include reserve investment corporations and pension reserve funds (not to be confused with public pension funds), which may have been defined separately in the past but, in practice, keep a very similar risk and investment profile.

• Strategic or development funds that combine a financial goal with an economic mission, contributing to the development and/or catalyzing foreign capital into the domestic economy, like Ireland Strategic Investment Fund (ISIF). This universe, which is increasingly popular and important, has sometimes included strategic investment funds fully or partially sponsored by multilateral or multinational organizations (Halland et al., 2016), although those will remain out of our scope here.

Certain SWFs may have more than one mandate, e.g., Nigeria Sovereign Investment Authority (NSIA) is divided into a stabilization fund, a future generations fund, and an infrastructure development fund – which helped them navigate the COVID-19 distress in a better manner, as can be seen in the “Opportunistic Funds” section.

Finally, there are three types of SWFs grouped according to their investment preferences or restrictions:

• Overseas investors that cannot invest in domestic securities, most prominently Norway’s Government Pension Fund Global (GPFG), via Norges Bank Investment Management (NBIM).

• Domestic investors that are designed to invest at home only and to attract further capital into the national economy, such as India’s National Investment and Infrastructure Fund (NIIF).

• Flexible investors that can invest both at home and abroad, e.g., Abu Dhabi’s Mubadala.

SWFs are therefore highly heterogeneous with different origins, missions, and restrictions, but they all share the goal of preserving capital and/or portfolios they have been given and of maximizing returns. This is paramount to understanding how SWFs behaved during and after the pandemic.

Evolution of the SWF Industry

Certain economists have claimed (Hildebrand, 2007) that France’s Caisse des Dépôts (CDC) was the first SWF when it was established in 1816 to protect public funds. However, this entity has been focused on the country's civil servants' retirement accounts, and it fits more into the definition of a public pension fund.

The first form of SWF arguably emerged in Ohio in 1803, when the State Constitution was signed, and a land trust was created to finance the public schools. Similar models followed in other states, including Mississippi, Alabama, and, most notably, Texas in 1854, with the Permanent School Fund (PSF).

The Kuwait Investment Authority (KIA), which manages the country’s oil revenues, has been wrongly regarded as the world’s first SWF. KIA’s predecessor, the Kuwait Investment Board (KIB), was formed in 1953 under the auspices of the Bank of England – 99 years after the establishment of Texas’ PSF.

In any case, the industry was not observed in a joint manner until the start of the 21st century. In fact, the SWF term was not coined until 2005 – when several such investment vehicles had already been in existence for decades – by leading economist and Global SWF’s senior advisor, Andrew Rozanov (2005).

Shortly after the SWF term was coined, an event would unintentionally change the future of the industry: Dubai-based DP World launched a takeover bid for P&O, a British operator that managed several key ports on the East Coast of the US. In March 2006, the deal was blocked by Congress and triggered subsequent dialogues among policymakers that paved the way for the supervision of SWFs.

The period until 2008 can be referred to as “SWF 1.0”. As many as 90 SWFs or quasi-SWFs had been set up, but were largely scattered and acting as independent, unregulated, and random pools of capital. Between June of 2007 and September of 2008, nine of these funds took a major role in rescuing some of the world’s largest financial institutions by injecting US$ 71.2 billion into a damaged global system (Global SWF, 2021a).

Table 1 lists the major investments done by Middle Eastern and Asian sovereign funds in the global financial crisis during the period 2007 to 2009. Most of the institutions that received capital were of financial nature and were headquartered in the United States or the United Kingdom.

Table 1.

Capital injections of SWFs into financial institutions during the global financial crisis (GFC)

SWF	Financial Institution/s	Injection (US$ bn)
ADIA (Abu Dhabi)	Apollo, Ares, Citigroup	8.4
CIC (China)	Blackrock, Blackstone, M. Stanley	10.0
GIC (Singapore)	Citigroup, UBS	16.6
ICD (Dubai)	LSE, Nasdaq	2.5
KIA (Kuwait)	Citigroup, Merrill Lynch, Visa	5.8
KIC (South Korea)	Merrill Lynch	2.0
Mubadala (Abu Dhabi)	Barclays, Carlyle	8.2
QIA (Qatar)	Barclays, Credit Suisse, LSE	12.0
Temasek (Singapore)	Barclays, Merrill Lynch	6.4
Total		71.2

The fate of these investments was very diverse: KIC lost most capital when BofA merged with Merrill and had to apologize to the people of Korea and ADIA sued Citi for fraudulently inducing the sale, while CIC made positive returns out of Blackstone and GIC scored a US$ 3.2 billion gain out of Citi itself.

On September 2, 2008, a few days before Lehman Brothers collapsed, the IMF met in Santiago, Chile, with government and an international working group of SWFs and announced the publication of 24 Generally Accepted Principles and Practices (GAPPs), which became known as Santiago Principles². Even if not enforceable, this set of guidelines would contribute significantly to the evolution of the industry, with SWFs meeting year after year to discuss governance, best practices, and collaborations.

It was the beginning of “SWF 2.0”, the period in which the industry started experiencing a tremendous growth in assets under management (AuM), both because of new injections and positive investment returns among the existing funds, and because of the emergence of new funds. Between 2008 and 2019, both inclusive, 59 new vehicles were established by 50 different countries in all six continents.

It also brought an acceleration in their investment activity. Up to September of 2008, SWFs had only invested US$ 272 billion in the financial markets (US$ 71 of it during the global financial meltdown). From October of 2008 to March 2020, they deployed US$ 1,368 billion, i.e., US$ 119 billion per year. During this period, funds became not only larger but more sophisticated, with internal teams of seasoned professionals capable of investing in all major asset classes, geographies, and industries.

Then, COVID-19 hit us all, and very few were able to predict it, or to prepare for it. The SWF industry suffered a double shock: On the one hand, the pandemic and subsequent halting of the world economy; on the other hand, the price of oil went to historical low levels and largely affected commodity-based economies, which account for half of all SWF’s wealth origins today. Most funds had not built the liquidity needed for such market distress and were found swimming naked.

In a way, COVID-19 ended the opulence and excesses of SWFs and accelerated some of the trends occurring in the industry. This time, most of the spending was not in shopping assets overseas, but in assisting national economies through withdrawals and/or domestic bailouts, as seen in the “Sources of Data and Literature Review” to “Opportunistic Funds” sections. One can argue that 2020 has indeed marked the beginning of “SWF 3.0”, a period for a more mature industry that is focused on specific matters such as sustainability, resilience, and cooperation.

This argument may not be intuitive if one looks exclusively at the evolution on the assets under management of the SWF industry (Figure 2 below). In fact, the largest deacceleration of the industry’s growth did not happen in 2020, but in 2015 due to a sharp drop in oil prices. The former was a largely acute shock that affected markets for a few months only, before recovering by the end of that year. However, what made COVID-19 unique is that, similarly to the financial crisis, it was an external shock SWFs were not prepared for, and one that has made profound and permanent changes as a result.

Figure 2.

Growth of the SWF industry in terms of assets under management from 2008 to 2021.

Scale and Significance

As of January 2022, there are 161 SWFs from 90 different countries that manage US$ 10.5 trillion (Global SWF, 2022). This number may not be impressive when compared to the size of other groups of asset owners, including pension funds (US$ 57 trillion), mutual funds (US$ 55 trillion), or insurance companies (US$ 33 trillion)³. However, SWFs are arguably the most active and acquisitive among them all.

The set of global institutional investors more akin to SWFs is the one formed by Public Pension Funds (PPFs). SWFs and PPFs share several commonalities, including state control and political oversight, and investment profile, with similar setups, risk managements, structures, and objectives.

However, an important fraction of SWFs hail from emerging markets and autocratic regimes, which makes them heavily scrutinized, while PPFs are usually from democratic and developed economies, which makes them more transparent and accountable. The most crucial difference between them is that PPFs have an explicit stream of pension liabilities that must be serviced, whereas SWFs do not (Megginson et al., 2021).

The top five countries by SWF-managed capital are China (US$ 3.0 trillion), the UAE (US$ 1.6 trillion), Norway (US$ 1.4 trillion), Singapore (US$ 1.0 trillion) and Kuwait (US$ 0.7 trillion). There is a significant concentration, and the 14 largest countries represent 95% of the industry’s AuM. Asian funds represent 44% of the total, and those from the Middle East and North Africa (MENA), 32% of the total.

The development of the industry in the past 13 years has been unparalleled. On the one hand, the AuM has tripled from US$ 3.4 trillion to US$ 10.3 trillion, with a more diversified set of funds from the point of view of sources of wealth, mandates, and restrictions (see the “Definitions and Objectives” section). On the other hand, the risk appetite has also changed significantly, and the capital allocated to private markets, including real estate, infrastructure, and private equities, is today 8.5 times the capital allocated in 2008.

Figure 2 depicts the significant growth of the capital managed by sovereign wealth funds, both those sourced from commodities (mostly, oil and gas), and those sourced from foreign exchange reserves, during the period 2008 to 2021, according to data from Global SWF.

With a size equivalent to that of all the private capital and hedge fund industries combined, SWFs have become key players in the global financial markets even if their growth stabilized in the next few years.

COVID-19 AND SWFS

Sources of Data and Literature Review

The data used in this article come from Global SWF, a rich data platform that includes many thousands of transactions and details of the activities of the world’s sovereign wealth funds and other institutional investors since their establishment. In addition, the author draws on his own work experience, after consulting for and advising these funds directly and professionally since 2008. Conclusions throughout the article rely upon such datasets and experience, and not merely based on speculations.

The academic literature covering SWFs and COVID-19 has been quite limited to date: Megginson and Fotak (2020) offered an early view of the government equity investments in COVID-related bailouts; Bortolotti, Fotak, and Hogg (2020) analyzed the resilience of funds and predicted profound changes in the industry; Bauer (2020) offered a partial account of the government actions in resource-rich countries, and Capapé (2020) summarized the funds’ actions into mitigation, adaptation, and opportunity.

Interestingly, Raymond (2010) looked at the issue of SWFs as domestic investors of last resort during crises back in 2010, and she concluded that despite the high-profile foreign investments during or after the GFC, SWFs had indeed been used on many occasions for domestic interventions, including the creation of France’s own SWF, FSI – later renamed Bpifrance – for the purpose of supporting domestic firms.

At that respect, it may seem that the industry has not changed much in the past 10 years, but the contrary applies, due to the tremendous growth in capital managed and in allocation to private markets, and to the rising complexity and sophistication of the funds. The heterogeneity of SWFs has made them react to this crisis in a way they never had before, shaping them to enter the new phase SWF 3.0.

The Effect of COVID-19 on Sovereign Funds

On Monday, March 16, 2020, a day after most developed economies announced an absolute lockdown to avoid the spread of the novel coronavirus, the S&P 500 fell 12.0% and the DJIA 12.9%, the second largest daily percentage loss in history, just behind the infamous Black Monday in 1987. As a reference, the largest daily loss of both indices in the GFC was 9.0% and 7.9%, respectively, on October 15, 2008.

Stock markets around the world continued to fluctuate abruptly and, a month later, the price of a barrel of West Texas Intermediate (WTI) oil hit, for the first time in history, negative levels. For a short while, traders were paying investors to take oil contracts off their hands because of the crash in demand, along with a price war between Saudi Arabia and Russia that created a fear of storage risk.

This represented a double shock for oil-based economies that could have been fatal in the long term. However, the situation has reversed since then, with the S&P 500 enjoying a historical peak of US$ 4,537 on September 2, 2021, and WTI prices back to US$ 80, a level not seen in the past 7 years.

Figure 3 compares the Standard and Poor's 500 (S&P 500), a market index that tracks the performance of 500 large companies listed on exchanges in the United States; and the price of oil as measured by the West Texas Intermediate (WTI) Spot, a widely accepted reference to track the price of the barrel.

Figure 3.

Daily change of the S&P500 and WTI oil prices during the pandemic.

Sovereign funds sourced from commodities were therefore especially affected: on the one hand, their portfolios were equally affected by the rapid drop in the value of bonds and stocks globally; on the other hand, their governments started running rapid deficits that would have been covered by significant withdrawals by year end. One would think that they would have acted more carefully than other SWFs. However, certain opportunistic funds proved otherwise, as highlighted in the “Opportunistic funds” section.

Most media covering the effect on SWFs during the pandemic missed a very important point: it is a highly heterogeneous universe with very different mandates and structures, which determined how each fund could help their respective governments and citizenry during the economy shock. This is best represented by the decision tree below, and subsequently explained in the section on “The Effect of Covid-19 on Sovereign Funds”.

Figure 4 depicts a decision tree on how governments around the world used their SWFs to alleviate the effects of COVID-19 in their economies, according to the investment mandate and restrictions. Each criterion forms a different category or response, which are illustrated with real examples.

Figure 4.

Decision tree for governments with SWFs during the pandemic.

For countries with SWFs, the use of such investment vehicles was determined by two key questions. The first one was whether the government could withdraw capital from the SWFs, legally and practically. For example, the Abu Dhabi Department of Finance had three SWFs under its purview in March 2020. ADIA was the only one accountable for fiscal deficits but cannot invest domestically – which places the fund in green-colored, box #1. The other two Abu Dhabi funds, Mubadala and ADQ, could not be used to withdraw capital from but could be “invited” to rescue domestic companies, which puts them in box #3.

This was in contrast to the government of Singapore, which had two major SWFs. Just like ADIA, GIC withdrew large amounts of capital but could not be used to invest in domestic companies – i.e., box #1. The other one, Temasek, was used to rescue several domestic assets, including Singapore Airlines, Sembcorp Marine and Pacific International Lines, and to keep sending dividends to the government, via the net income return contribution, or NIRC – which places them in box #2.

First responders: withdrawals

As explained in the “Definitions and Objectives” section, there are several funds that were conceived for stabilization purposes during fiscal shocks. These are funds that keep a very liquid portfolio (generally only bonds and stocks) and have therefore conservative targets for their investment returns. They are generally referred to as “rainy-day” funds, and they knew their time had come when, in March 2020, it started pouring rain.

The idea of capital calls is nothing new, and in fact, certain SWFs such as Alaska PFC, and GIC and Temasek (via NIRC⁴) give out dividends every year to their governments. Contrary to popular beliefs, most SWFs did not have to pursue fire sales of their private assets during COVID-19 as they either had enough capital in liquid markets, or most of their portfolio was liquid. However, large capital calls usually disrupt the fund’s target allocation and restrict the spending in other asset classes in the following years.

Several SWFs that had a stabilization function were used by their governments as first responders. These included savings funds and even strategic funds, in countries where the rainy-day vehicle was non-existent or insufficient. In total, US$ 211.3 billion has been withdrawn from 33 funds in 27 different countries in all six continents, an unprecedented level of domestic interventionism in the SWF world. Also, as shown by Figure 4, these funds were not necessarily exempted from domestic bailouts, either.

Table 2 includes all the major withdrawals of capital suffered by SWFs between March 2020 and December 2021. The first column refers to the name of the fund, the second column to the country it hails from, and the third and fourth columns to the absolute and relative size of the capital call.

Table 2.

Withdrawals from SWFs during the COVID-19 pandemic

Fund	Country	Withdrawal (US$ bn)	Withdrawal (% AuM)	Fund	Country	Withdrawal (US$ bn)	Withdrawal (% AuM)
ADIA	AE	24.0	3	HSF	TT	1.0	16
Alaska	US	2.9	4	ISIF	IE	2.2	19
ESF	US	4.6	46	Khazanah	MY	2.2	7
ESSF	CL	4.1	33	KIA	KW	25.0	4
FAEP	CO	12.1	100	NDFI	IR	1.4	6
FAP	PA	0.1	8	NOF	KZ	1.4	2
FEF	PE	5.5	100	NMSIC	US	0.1	0
FEIP	MX	8.4	100	NSIA-SF	NG	0.2	43
FGRF	BH	0.5	49	NTSF	TW	0.0	0
FRC	MC	0.6	9	OIA	OM	10.9	25
FSDEA	AO	1.5	33	PF	TL	0.3	1
FSRB	CG	0.0	33	PRF	CL	1.6	15
FSRB	GQ	0.2	88	Pula	BW	0.9	21
GIC	SG	40.1	7	SAMA	SA	13.3	3
GPFG	NO	38.3	4	SK	KZ	0.3	0
GPFN	NO	4.7	21	SOFAZ	AZ	2.7	6
GSF	GH	0.3	79	Total		211.3

Even though the most significant capital calls in absolute terms occurred to Singapore’s GIC, Norway’s NBIM, Kuwait’s KIA, and UAE’s ADIA⁵, the worst part was for those funds that were smaller and much more affected in relative terms. For example, in Latin America, where stabilization funds from commodities are most popular, Chile’s ESSF-PRF, Panama’s FAP and Trinidad & Tobago’s HSF were partly withdrawn, and Mexico’s FEIP, Colombia’s FAEP and Peru’s FEF were exhausted altogether.

The dimension of such capital calls in some countries caused for the buzzword of the year 2020 to be resilience. In July 2020, data specialist Global SWF issued a new system to rate the governance, sustainability, and resilience of the world’s largest state-owned investors, which was called GSR Scoreboard and highlighted the inadequate measures of certain funds around legitimacy and long-term survival. In July 2021, the firm repeated the assessment and found slightly better results (Global SWF, 2021c).

Second responders: bailouts

Capital withdrawals certainly provided governments with some short-term solution for the fiscal deficits, but there was another assistance required from their SWFs. Several industries were hit very hard by the pandemic, and public companies were struggling to stay afloat. In no sector was this more apparent than in aviation, where airlines stopped having revenues, and yet, bore similar levels of costs.

It is estimated that government bailouts to airlines since March 2020 have exceeded US$ 191 billion. Part of that amount was covered by SWFs, especially in cases where the airline was state-owned. In only two instances have SWF-owned airlines managed to hold off any support, for now: Bahrain’s Gulf Air (which did receive US$ 0.5 billion in aid in 2014) and Turkish Airlines. In addition to domestic carriers, Qatar’s QIA also contributed to the rescue of IAG and LATAM, where it owns significant stakes.

Table 3 lists the largest lifelines extended to SWF-owned airlines, whether in the form of equity contribution, convertible bonds, or interest-free loan. The first column refers to the airline, the second column, to the SWFs owning a significant stake in the company, and the third column, to the injection.

Table 3.

Investments in domestic airlines during COVID-19

Airline	SWF/s behind	Injection ($m)
Aeroflot	NWF, RDIF	0.9
Air Lingus	ISIF	0.2
Emirates	ICD	2.0
Gulf Air	Mumtalakat	0.0
IAG (BA, Iberia)	QIA (25% via QR)	0.8
LATAM Airlines	QIA (20% via QR)	0.6
Malaysia Airlines	Khazanah	0.9
Qatar Airways	QIA	2.0
Singapore Airlines	Temasek	4.7
Turkish Airlines	TVF	0.0
Vietnam Airlines	SCIC	0.3
Total		12.4

The container industry received some financial aid from their SWFs, too. Carrier Pacific International Lines got a US$ 110 million lifeline from Temasek, Jeddah-based Red Sea Gateway Terminal received US$ 140 million from PIF, and RDIF backed the fundraising of Russian tanker company Sovcomflot. The Oil & Gas crisis affected exporting countries significantly, and Kuwait’s KIA was “invited” to buy the national oil company along with two other local assets from its government for US$ 14.7 billion (Global SWF, 2021d).

Other funds were more structured in their response and created specific packages or entities to support domestic businesses struggling with liquidity. This included Norway’s Folketrygdfondet with a US$ 5.8 billion bond fund, Ireland’s ISIF with the US$ 2.3 billion Pandemic Stabilization and Recovery Fund, Canada’s CDPQ (which manages the Generations Fund) with a US$ 3.2 billion envelope, and Egypt’s TSFE that created four industry-focused sub-funds and committed to the rebuilding of downtown Cairo.

The Russian Direct Investment Fund, which was established in 2011 to invest in high-growth national companies and sectors, took the assistance to the extreme and sponsored the production and marketing of Sputnik V Covid vaccine overseas. It is unclear whether this initiative will be profitable and whether it aligns much with the fund’s initial mandate, or it was rather an imposed, additional task.

Such enforced investments and strategy changes have taken a toll in the overall levels of activity. Disregarding the funds that can only invest overseas and those that can only invest at home, and studying the behavior of the flexible investors only, one can observe a large jump, from 22% of capital invested at home before the pandemic, to 44% of the capital since the pandemic started (Wall Street Journal, 2021).

However, this does not mean that SWFs have stopped seeking foreign investment (see Figure 4) and funds are expected to move from imposed investments into opportunistic deals as economies recover.

Opportunistic funds

A third group of SWFs was not affected by withdrawals or domestic bailouts, or if they were, they still had the firing power to pursue international investment opportunities in a distressed environment. There are two distinct sub-groups here: those that went on the offense, and those that mostly defended.

Seeking opportunities in a distressed environment was nothing new for SWFs, which had taken advantage of the GFC to inject over US$ 71 billion in “cheap” financial stocks. This time around, they found bargains in other industries including healthcare, technology, oil and gas, and entertainment.

Perhaps surprisingly, one of the first SWFs to react was Saudi’s PIF, which by March 31, 2020, had invested US$ 7.7 billion in 23 new stocks in energy, banking, entertainment, and tech. Media analysts have implied that PIF’s shopping spree was representative of the industry, but the reality is that it was an isolated case, and that, unlike the GFC bailouts, it mainly sought short-term gains. Most of the positions were exited in the following quarter or two, and only three stocks remain in the portfolio today.

Table 4 includes the listed companies Saudi Arabia’s PIF invested in during the period January 1, 2020 to March 31, 2020 (presumably, in the last 2 weeks of that quarter), and when it sold them, as disclosed by the quarterly reporting at the US regulator Securities and Exchange Commission (SEC).

Table 4.

Investments in US stocks by PIF in March 2020

Stock	Industry	Investment ($m)	Sold?
BP plc	Oil & Gas	828	Q2 2020
Boeing Corp	Aviation	714	Q2 2020
Citigroup Inc.	Financials	522	Q2 2020
Facebook Inc.	Technology	522	Q2 2020
Marriott Intl Inc.	Hospitality	514	Q2 2020
Walt Disney Co.	Entertainment	496	Q2 2020
Cisco Systems Inc.	Technology	491	Q3 2020
Bank of America Corp	Financials	488	Q2 2020
Royal Dutch Shell plc	Oil & Gas	484	Q2 2020
Suncor Energy Inc	Oil & Gas	481	Q1 2021
Carnival Corp	Entertainment	457	Not yet
Live Nation Entertainment Inc	Entertainment	416	Not yet
Canadian Natural Resources Ltd	Oil & Gas	408	Q3 2020
TotalEnergies SE	Oil & Gas	222	Q2 2020
Union Pacific Corp	Transportation	79	Q3 2020
Pfizer Inc.	Healthcare	79	Q2 2020
Automatic Data Processing Inc.	Technology	78	Not yet
Berkshire Hathaway Inc.	Financials	78	Q3 2020
Booking Holdings Inc.	Hospitality	78	Q3 2020
Qualcomm Inc.	Technology	78	Q2 2020
IBM Corp	Technology	78	Q2 2020
Starbucks Corp	Consumer	78	Q2 2020
Broadcom Inc.	Technology	77	Q2 2020
Total		7743

Singapore’s Temasek was another fund that sought opportunities in the US stock market. In June of 2020, the investment company bought a US$ 3.5 billion worth stake in Blackrock Inc., becoming its fifth largest shareholder. Twelve months later, it divested a sixth of the shares, scoring an important profit.

However, SWFs are not only investing in developed markets these days, and the portfolios that some of them are amassing in growth markets such as China and India are starting to be significant. Despite the geopolitical tensions and regulatory concerns, most SWFs have been found to be bullish in Chinese stocks – except for Singapore’s GIC, which has halved its portfolio since the pandemic started, to the benefit of Indian stocks. Other investors have been found to be increasingly bullish in India, too (Global SWF, 2021e).

Finally, a different sub-group of funds had to be on the defensive given the significant portfolio of equities they held as of March 2020. Norway’s NBIM, for one, not only is the world’s largest SWF but also holds one of the most liquid portfolios. When COVID-19 hit, it had 71% of its assets (US$ 814 billion) in listed companies. That portfolio had lost 21% (US$ 172 billion) by March 31, 2020 (NBIM, 2020). However, the fund did not panic and made use of its traders, managing to recover two-thirds of the loss by June 30.

NZ Super Fund was another example that had as much as 80% of its portfolio invested in stocks, and 17% of the total AuM was wiped off in a matter of days. Yet, the fund’s leadership was prepared for a market correction and stayed put (AFR, 2021), which proved to be a winning strategy: the fund reported a 29.6% return for the year ending on June 30, 2021, beating most of its peers and its benchmark by 1.7%.

In summary, every fund had a different strategy and way of dealing with the pandemic. In no fund was this truer than in the Nigeria Sovereign Investment Authority (NSIA), which due to its three-tier mission and structure, had a positive effect in its capital structure despite seeing a significant withdrawal to its stabilization fund. In September of 2021, it reported an even bigger AuM of US$ 3.5 billion, thanks to the record-high returns and profits in 2020, and to the fundraising efforts on the infrastructure side.

Table 5 summarizes the effect of COVID-19 in the different sub-funds of the Nigeria Sovereign Investment Authority (NSIA). While the stabilization fund suffered a significant withdrawal in relative terms, the overall effect was positive given the injections into the other two funds.

Table 5.

Net effect of withdrawals and contributions to NSIA’s three sub-funds during COVID-19

Sub-fund	Pre-COVID19 Dec’19 (US$ bn)	Contributions /withdrawals (US$ bn)	Post-COVID19 Sep’20 (US$ bn)
Stabilization Fund	0.35	– 0.15	= 0.20
Future Generations Fund	0.89	+ 0.25	= 1.09
National Infrastructure Fund	1.25	+ 0.31	= 1.56
NSIA	2.44	+ 0.41	= 2.85

Also in Sub-Saharan Africa, other funds experienced more fundamental changes due to COVID-19. Angola’s FSDEA, which was on the brink of extinction after a corruption scandal with its previous leadership and an asset manager, saw its problems increase with a US$ 1.5 billion call (a third of the AuM) from the government, effectively transitioning from a strategic to a stabilization and savings fund.

In yet another case, the Rwandan government announced in April 2020 a halt in the cash flows transferred regularly to Agaciro Fund from the country’s public servants and diaspora. Facing an inadequate size and a lack of funding, the new leadership of the fund is now seeking a new fiscal rule that would allow the fund to receive capital from foreign investors and would take it to the next level.

Long-Term Effects

Novel Markets

COVID-19 accelerated the investment trends that were happening well before the start of 2020. The first three quarters of 2021 have confirmed some of these trends: less and different real estate, more healthcare and technology, more partnerships, more ESG, and, especially, more venture capital.

Investments in brick and mortar, once favored by SWFs because of their alignment in risk and horizon, have decreased in volume from 34% of the total in 2012, to 18% in 2021. Furthermore, there has been a change in pattern, with investors being less attracted to fancy hotel brands and to core real estate in major cities, and more inclined into logistics, data centers, warehouses, and senior and student housing.

Unlike real estate, infrastructure has remained an important part of the SWFs’ portfolios. It is an asset class that is very much aligned and understood by global investors, and one that allows for partnerships and club deals although changes in regulation could pose some challenges. In the past 5 years, there has been a slight tilt from O&G to renewable energy. Power and utilities are still a very important part of the outreach, and so is transportation, despite the profound effect of COVID-19 in the industry.

But without a doubt, the two most favored industries during the past 10 years, and especially since the pandemic started, are healthcare and technology. Pharma and life sciences only accounted for 2% of all deals in 2012, and they are now 10%. Some of these deals are on the venture capital space, as start-up companies try to come up with new vaccine and solutions and get funded by SWFs. More significantly, almost one in every four deals is now related to technology, as compared to 4% in 2012.

Figure 5 illustrates the change in industry preferences of SWFs during the period 2012 to 2021, as shown by the number of transactions completed in eight major sectors: real estate, infrastructure, energy, financial services, healthcare, industrials, consumer, and technology.

Figure 5.

Changes in industries of preference by SWFs during the period 2012–2021.

Additionally, there has been an increase in long-term partnerships, especially during the past 15 months. For example, Abu Dhabi’s Mubadala joined forces with Apollo for private credit, with Barings for mid-market, with Silver Lake for technology, and with Blackrock for secondaries. Other partnerships brought together several funds with climate change in mind: Blackrock Decarbonization Partners (Temasek), Brookfield Transition Fund (Temasek, IMCO, OTPP, PSP), and TPG Rise Climate (PIF, OTPP, PSP).

ESG is indeed a topic of rising concern among many SWFs. COVID-19 has brought up the deficiencies of funds when tackling sustainability issues, especially around climate change. SWFs are still significantly behind public pension funds and other institutional investors when it comes to sustainability: only 12 funds are signatory members of the UN Principles for Responsible Investing and only German quasi-SWF KENFO and NZ Super Fund have committed to the objective of Net Zero by 2050 (UNEPFI, 2020).

The pressure on a greener future is not only fueling partnerships and investments in established renewable energy projects, but also early bets on cleantech and biotech. In 2021, SWFs broke all records around venture capital, with US$ 12.5 billion deployed in 242 investments. This compares to US$ 7.4 billion invested in 114 different transactions in 2020.

Figure 6 shows the significant growth experienced by venture capital (VC) activity during the period 2012 to 2021, as shown by the number of transactions and capital deployed by SWFs in financing rounds of companies of recent creation, also known as start-ups.

Figure 6.

Rise of venture capital investments by SWFs during the period 2012–2021.

We can identify trends in the way most SWFs invest in start-ups. First, funds are now able to enter earlier and smaller financing rounds, including Seed and Series A, which was unthinkable of a few years ago. This is normally done by subsidiaries like Mubadala Ventures or Temasek’s Vertex Ventures and means that fund investing, which is very common in private equity, has become increasingly rare in VC. Many SWFs prefer investing alongside Sequoia, Kleiner or GV, rather than doing it in their funds.

Second, there is a rising preference for pre-IPO rounds, where the risk may be lower and the horizon to reap the rewards shorter. This strategy resonates with a lot more funds, and the likelihood of seeing them coming together is much higher, as in Flipkart, which saw US$ 1.9 billion coming from SWFs; in Zomato’s pre-IPO, backed by four SOIs; and in Telegram, which saw support from RDIF and Mubadala.

Lastly, there are now start-ups arising and getting funded by SWFs in every corner of the world. Silicon Valley only represented a third of all investments by SWFs in VC in 2021, and companies from 32 other countries received funding. Developed markets such as Canada, UK, France, and Singapore are blossoming, but the big winners are without a doubt China and India, with 35% of the total VC capital.

In fact, SWFs are directly responsible for the creation of two new start-ups incubators in Singapore and Abu Dhabi. The former is taking advantage of the challenging political situation Hong Kong is going through and has become a technological hub thanks to Temasek’s subsidiaries for VC (Vertex) and machine learning (Aicadium), while the latter is leading the efforts in the Middle East thanks to ADQ-funded DisruptAD platform, to ADIA-housed Science Lab, and to investment promotion agency ADIO.

These activities are intrinsically intertwined with foreign direct investment (FDI). In fact, there is a relatively high positive correlation of 0.64 between the foreign investments of SWFs and the inward FDI in the past 13 years. In 2020, SWFs investment overseas peaked at 6.3% of the global FDI, which contracted to US$ 999 billion (UNCTAD, 2021). Such alignment has been pursued by countries such as India or Indonesia, which in the past few years have established domestic-focused SWFs to attract further FDI.

Novel markets such as logistics, biotech, private credit, and early stage investing are not only a consequence of the pandemic or an attempt to diversify revenue streams in the short term, but they represent long-term trends that will certainly keep shaping the future of the SWF industry.

Governance, Sustainability, and Resilience

SWFs are not regulated by any specific international treaty. The only set of guidelines concerning the industry globally are the General Accepted Principles and Practices (GAPPs), also known as Santiago Principles, which are not enforceable and have not changed since they were written in October 2008.

In fact, governance, transparency, legitimacy, and resilience remain key concerns. Over the years, several SWFs have been exhausted due to misappropriation of public funds. The most infamous case was Malaysia’s 1MDB, which channeled billions of dollars of taxpayers’ money into private accounts.

Due to their increasing size and influence on global financial markets, there are ongoing debates about SWFs’ political agendas. Their investments are usually scrutinized and moderated by certain agencies of the hosting economies: in the USA, the Committee on Foreign Investment in the United States (CFIUS) reviews national security implications of foreign investments in U.S. companies or operations.

Such lack of regulation and concerns has motivated academia and practitioners alike to study and quantify best practices among state-owned investors (SOIs). In 2007, Dr. Edwin Truman (PIIE) developed a biennial scoreboard for the transparency and accountability of SWFs (and some PPFs) that has been widely welcomed and published since then. Earlier this year, the latest update of the scoreboard was published, finding a strong correlation between the results and Global SWF’s 2020 GSR Scoreboard (Marie et al., 2021).

Sustainability is an increasingly important topic for global investors. There is mounting pressure for asset owners to be not only transparent but also responsible. Some of these organizations are now signatory members of the Principles for Responsible Investing, of the One Planet SWF Group, and/or of the UN-convened Net Zero Asset Owner Alliance (NZAOA). However, the NZAOA seems to be the only one to force its members to commit to very specific goals, and to meet them year after year (Global SWF, 2021b).

Lastly, resilience is crucial and only the most robust and responsible funds will be able to subsist. During the COVID-19-related withdrawals, three funds in Latin America (Mexico, Colombia, Peru) were exhausted, and some others in the Middle East (Kuwait, Oman) and Africa (Angola) were reformulated or merged. Long-term survival has become a crucial issue among many SWFs and liquidity risk proves the importance of fiscal discipline, spending control, strategic asset allocation, and crisis management.

Organizational Changes

The increase in investment activity with sophisticated deal structures and innovative trends and the preference for an internal and active management comes at a cost: most SWFs are getting larger in terms of personnel, too. Global SWF estimates that the number of personnel employed by SWFs has more than doubled from 7100 in 2008 (an average of 79 per fund) to 15,700 in 2021 (102 per fund).

More interestingly, this staff is now more diverse and hails from all over the world. ADIA employs people from 65 countries (only 30% Emiratis), GIC from 45 nationalities, and NBIM from 38 nations. When seeking opportunities in a new market, a SWF has three main options: to rely on a partner or asset manager on the ground, to bring experts on that region into their HQs or to open a new satellite office.

The latter is an increasingly popular option. Today, SWFs have 81 offices away from their headquarters. London and New York are by far the most popular cities, with 11 overseas offices each. Only in the past 12 months, KIC opened in San Francisco, PIF in New York, QIA in Singapore, and Temasek in Brussels and Shenzhen, but there are cases of shutdowns, too. ADIA closed London, CIC shut Toronto, QIA transferred Beijing and Mumbai, and Khazanah sealed London and Istanbul, primarily due to costs.

Some of these offices are not only dedicated to investing, but also to fundraising. For example, Mubadala’s New York office is led by the Investor Relations & Business Development Team, which sits under Mubadala Capital and seeks third-party capital for the SWF’s private equity business. In August 2021, leading asset manager Blackrock committed US$ 400 million into Mubadala Capital’s Fund III.

Table 6 shows the most popular cities for SWFs when it comes to setting offices overseas, as measured by the number of offices and by the number of personnel currently based in those cities.

Table 6.

Most popular cities for SWFs’ offices overseas

City (Country)	Count	Staff	Latest SWF to Open (Year)
London (UK)	11	452	Mubadala (2019)
New York (US)	11	404	PIF (2021)
San Francisco (US)	6	142	KIC (2021)
Beijing (CN)	5	54	Samruk (2018)
Shanghai (CN)	5	79	KIA (2018)
Mumbai (IN)	4	141	GIC (2010)
Singapore (SG)	4	94	QIA (2021)
Hong Kong (CN-HK)	3	31	ADIA (2016)
Moscow (RU)	2	12	Mubadala (2019)
Tokyo (JP)	2	32	NBIM (2015)
Luxembourg (LX)	2	38	ADIA (2015)
São Paulo (BR)	2	33	GIC (2014)
Other Cities	24	438	Temasek (2021) [Brussels/Shenzhen]
Total Overseas	81	1950	–

The increasingly blurry boundaries between asset owners and asset managers are a product of the sophistication, collaboration, and competition seen in the investment world today. General partners are venturing into new strategic areas and becoming asset class-agnostic, and limited partners are no longer those naïve and unsophisticated institutions⁶ that simply rely on, and pay for, fund investing.

In this new normal, asset owners have no option but to constantly evolve. Today, there are SWFs with a broad range of new strategies such as raising capital from other institutional investors and from private investors, issuing green bonds, creating venture capital or private credit subsidiaries, and even setting up their own science labs with mathematicians and PhDs looking for the next alpha strategy. More collaboration and cooperation between SWFs and other market players seems to be unavoidable.

Since March 2020, six new SWFs have been established, all six in emerging economies and with the mandate of assisting their government build a more sustainable financial system. Djibouti’s FSD, Indonesia’s INA, Bangladesh’s BIDF, and Cape Verde’s FSGIP were set up to catalyze foreign direct investment into the country’s infrastructure following India’s NIIF model, and Azerbaijan’s AIH was transferred several stakes in national companies following Kazakhstan’s Samruk-Kazyna model.

Other countries remain hopeful of establishing their vehicles soon – including Israel and Mozambique, which are relying on newly discovered gas fields to channel monies into a savings account soon. Governments do not necessarily need a SWF, but it certainly provides them with flexibility and options. In fact, the new breed of strategic funds is helping catalyze further FDI into the country and close the domestic infrastructure or healthcare gap, rather than spending valuable savings in overseas assets.

The reality is that COVID-19 has changed the SWF industry forever, and governments need to think very carefully what sort of fund they will need (rather than want) in terms of mandate, which has become paramount and fluid during the life of the fund, and in terms of legitimacy and long-term survival.

SWF 3.0

The New Normal and the Future

The SWF industry is still relatively young. Before 2008, SWFs were largely scattered and independent pools of capital that kept a low profile by design. The global financial crisis and the establishment of the Santiago Principles changed these features: the industry started attracting the attention of academics and practitioners, and experienced a tremendous growth in size and importance in the following decade.

As these global investors grew and matured, we started observing certain changes in the second half of the 2010s: SWFs had more objectives beyond pure investment returns, allocated more and more to alternative assets, diversified to different industries beyond real estate, and changed trophy assets for venture capital. COVID-19 accelerated these trends and established the period 3.0 for once and for all.

We cannot forget that this is a very heterogeneous and dynamic industry that can change rapidly in a short space of time. New forms of funds, organizational structures, and investment strategies are emerging as a response of the ever-changing financial markets and landscape, and the size and portfolio of most major players is drastically different than 13 years ago during the global financial crisis.

In that context, some of the changes that COVID-19 has introduced or accelerated will be permanent, and will shape the industry in the years to come. The changing needs of governments must be reflected in the establishment of new vehicles that will challenge the definition of “pure SWF” and will be sourced from different sources and will be designed to address several economic and financial objectives.

A clear definition of the sources and uses of funds (fiscal rule) and of the mandate of the fund is the most important factor of success when establishing a SWF. However, in this new world 3.0, such a mandate may be changed according to the circumstances and needs of the government. The survival of Angola’s FSDEA after corruption scandals and significant withdrawals, by changing its mandate from a savings fund to a strategic fund, brings hope and example to other regions and players in the industry.

The uniqueness of SWFs comes from the fact that there is usually a double agenda in investments and strategies – whether political or macroeconomic. Truly independent vehicles will continue to operate out of democratic countries (Norway, Australia, New Zealand), but it is unlikely that such level of governance and political insulation will be followed in other parts of the world with autocratic regimes.

From the point of view of the recipient countries, both in developed and emerging countries, there will continue to be a strong scrutiny of incoming SWF capital, especially in years of positive GDP growth. However, facilitating additional sources of income – after a proper due diligence – can be a win-win situation. The recent commitment of UAE’s Mubadala to invest US$ 14 billion in the UK over the period 2022–2027 will reverse the steady decline of FDI since Brexit and could be replicated in other countries.

In this new period 3.0, SWFs are not only investors but enablers of change and hedge, which are able to work with and against megatrends. These include not only climate change but also geopolitics, the shift in global economic power, rapid urbanization, demographic changes, shortage of water and other resources, and technological breakthroughs, which are changing the world as we know it and will represent both risks and opportunities for global investors in the years to come.

In this context, predicting what the SWF industry will look like in the distant future is a difficult exercise. In another 10 or 20 years, the industry may be twice as large and look much different – and we may be even speaking of a SWF 4.0 then. But for now, let us enjoy what SWF 3.0 has in store for us.

NOTES

1. Google Trends (2022): Monthly searches worldwide for the term “sovereign wealth funds” aggregated quarterly. https://trends.google.com/trends/explore?date=2008-07-01%202021-12-31&q=sovereign%20wealth%20funds

2. IWG of SWFs (2008): Sovereign Wealth Funds Generally Accepted Principles and Practices. https://www.ifswf.org/sites/default/files/santiagoprinciples_0_0.pdf

3. Willis Towers Watson (2021): Global Pension Asset Study, Thinking Ahead Institute. https://www.thinkingaheadinstitute.org/content/uploads/2021/02/GPAS__2021.pdf

4. Ministry of Finance of Singapore: What is the Net Investment Returns Contribution (NIRC). https://www.mof.gov.sg/policies/reserves/how-do-singaporeans-benefit-from-our-reserves

5. Fitch Ratings (2020): Special report: Sovereign Wealth Funds in the GCC. https://www.fitchratings.com/research/sovereigns/sovereign-wealth-funds-in-gcc-17-12-2020

6. Royal Courts of Justice (2016): The Libyan Investment Authority vs Goldman Sachs International. https://www.judiciary.uk/wp-content/uploads/2016/10/lia-v-goldman.pdf

Diego López

is the Managing Director of Global SWF, a consultancy focused on sovereign wealth funds that has rapidly become the provider of reference when it comes to SWF-related research and services. Prior to founding Global SWF, he spent 5 years building up PwC’s footprint in the SWF industry as the director of COO of the global practice, based in Abu Dhabi and New York.