A quantitative, multivariate, comparative analysis is conducted between sovereign wealth funds’ and pension funds’ investment strategies. The results highlight industry-, country-, and firm-level factors that differentiate between the two investment strategies. Sovereign wealth funds have stronger preferences for firms operating in weak legal and institutional environments, and sovereign wealth funds are more likely to invest in strategic industries when compared with pension funds. Sovereign wealth funds are also less attracted by liquidity and dividends. A unique perspective is provided on the determinants of sovereign wealth funds’ investment decision making.

As of December 2015, the 79 largest sovereign wealth funds have total assets under management (AUM) of $7.19 trillion, establishing them as a major global investor. During the past 10 years, the annual growth rate of sovereign wealth funds has been approximately 12%. The majority of sovereign wealth funds are related to commodities and energy, and the largest funds include GPF-Global ($825 billion AUM), Abu Dhabi Investment Authority ($773 billion AUM), SAMA Foreign Holdings ($669 billion AUM), and Kuwait Investment Authority ($592 billion AUM). Although sovereign wealth funds and pension funds are both institutional investors, sovereign wealth funds use different determinants to select their target investments.

The authors assess firm-specific factors, including size, liquidity, profitability and dividends, growth, and risk. They find that the probability for a firm to be targeted by a sovereign wealth fund rather than by a pension fund is negatively related to firm size, firm liquidity, and high dividend payouts. Regarding the industry-specific factor, the authors conclude that a sovereign wealth fund will more likely target a firm operating in a strategic industry. The country-specific factors include the country’s institutional and legal environment and economic growth. The authors find that sovereign wealth funds prefer lower-quality political, legal, and institutional environments, where opposition to the specific acquisition is less likely.

The authors compare sovereign wealth and pension fund investment strategies based on firm-level, industry-level, and country-level determinants. They conduct a multivariate regression analysis and merge databases extracted from Worldscope/Datastream and SDC/Zephyr. The deals database is complemented with country-level data from the World Bank. Legal, political, governance, and cultural variables are also added. The final step in the data collection process is to mitigate the effects of outliers by winsorizing firm-level variables at the top and bottom 1%.

In order to identify the relevant factors that explain the acquisition decisions of sovereign wealth funds and pension funds, the authors run probit regressions that compare the two fund types. The independent variables are firm specific (e.g., liquidity ratio), industry specific (e.g., strategic industry), and country specific (e.g., political rights index). The dependent variable equals zero if targeted by a pension fund and 1 if targeted by a sovereign wealth fund. The authors’ robustness checks exclude investments made during the financial crisis in real estate and financial firms.

Sovereign wealth funds have garnered significant attention as global investors, especially since the financial crisis. These funds seek out investment factors that differ markedly from those of traditional pension funds. Because geopolitical issues can ignite nationalist fervor when one of these state-owned funds targets a foreign firm that is considered a crown jewel, sovereign wealth funds also have more willingness to minimize political attention and regulatory opposition. The determinants of sovereign wealth fund investments are in these respects unique and differ from those of traditional institutional investors.