phenomenon, but SWFs have been around
for quite a long time. In fact, what’s
believed to be the first such vehicle, the
Kuwait Investment Authority, was established in 1953. It now holds nearly $265
billion in assets, according to the Sovereign
Wealth Fund Institute, an organization
designed to study SWFs and their impact
on global economics, politics, financial
markets, trade and public policy.
According to the SWF Institute, there
are around 50 such funds in existence, with
a total of some $3.9 trillion in assets under
management. Many are from oil-rich countries, including Dubai, Norway, the United
Arab Emirates, Kuwait and Saudi Arabia,
“There are some governments out
there that have built up huge cash positions,” says Jan Randolph, head of the
sovereign risk group at Global Insight, an
economic and financial research firm in
London. “The existence of a SWF says
those countries want to be able to convert
that cash into more profitable investments. That means moving away from
holding it in dollars, which earns no interest, or even US Government Treasuries,
which earn a single-digit return. SWFs are
really no different than institutional
investors such as JP Morgan or Merrill
Lynch. They basically want to do the
same thing. And they’re increasingly
trophy properties, especially hotels or
office buildings, in large, top-tier cities.
Whereas historically SWFs have funneled capital into the US through indirect
means such as buying bonds and securities and participating in private equity
funds, they’ve increasingly been taking a
more direct route by joint venturing with
local players.
The strategy, says Randolph, depends
somewhat on how sophisticated the player
is. SWFs that have been around for some
time, such as ADIA, the Norway fund and
Singapore’s GIC have built up in-house
expertise and have even formed specialized real estate investment arms. Other,
T hese highly capitalized funds have the potential to be a massive
f orce in the investment universe. But their size—and relative
s ecrecy—has raised some concerns.
t hat have clearly benefited from the
i ncrease in oil prices. Others, such as
C hina, are mass exporters that have seen
t heir coffers fill up through the globaliza-t ion of goods and services. Even countries
a s small as East Timor, Mauritania and
A ngola have established these vehicles.
The 10 largest SWFs hold more than
$ 3. 2 trillion, reports the SWF Institute.
A mong them are the $875-billion Abu
D habi Investment Authority, created in
1976; the Government Pension Fund-Global of Norway, established in 1990 and
holding $396.5 billion; the 27-year-old
Government of Singapore Investment
Corp., with $330 billion in assets; and
China Investment Corp., which was established last year and has an estimated $200
billion in its portfolio.
The rise of SWFs is simply a sign of glob-alization, says Kenneth P. Riggs, president
and chief executive officer of the Real
Estate Research Corp. in Chicago. And as
large as they are, he adds, these funds are a
relatively small piece of the overall $50-tril-
lion institutional investment pie—although
it’s a growing piece.
going up the risk-return ladder, touching
on lower-rated bonds and equities, and
real estate is definitely in there as well.”
Drawn by the weak dollar and the relative safety and stability of US commercial
real estate, SWFs have increasingly been
placing capital in the sector. Plus, says
Riggs, “Commercial real estate here is relatively cheap compared to other major cities
throughout the world. From the perspective
of SWFs and other foreign investors, they
see it as a tremendous opportunity to diversify and inexpensively get into the US.”
According to Real Capital Analytics,
foreign investors bought nearly $51.5 billion worth of US property in 2007, and by
midyear 2008 had picked up some $6.1
billion in assets. While the exact percentage of SWFs among foreign investors is
unknown, by sheer size alone, they are
likely to be a large component.
It’s difficult to determine the specific
strategy SWFs deploy, though they seem to
be going after cash flow overall, says
Michael Maduell, president and founder of
the SWF Institute in Roseville, CA.
Preferred real estate investments tend to be
less-experienced ones tend to use third-party advisors. China’s CIC, for instance,
keeps part of its operations in house and
outsources the rest.
“A lot of SWFs that are not experienced
are quite happy to tender out the money to
private-sector, fairly well-known fund managers at investment banks,” says Randolph.
“Or they can forge an unholy alliance with
private equity and hedge funds. There are
good reasons to do that because the reputa-tional risk is reduced. No one sees sovereign
wealth being channeled through private
equity, so it’s difficult to keep track of it.”
In real estate, the more experienced
SWFs are not hiding in the shadows. They
were behind some of the most notable
deals closed recently and, in fact, many
credit these capital-flush players with helping to keep the US real estate market going
at a time when domestic equity players are
sitting on the sidelines and the debt market
continues to dry up.
“SWFs are helping to keep valuations
strong,” says Guy Langford, national real
estate sector leader, merger and acquisition transaction services at Deloitte &
