Evidence shows that the style of the co-investments of sovereign wealth funds (SWFs) is
determined by the size, industry, and country of the targeted companies, whereas the
choice of co-investor is driven by the SWF’s location and interconnectivity in the
entire network of SWFs.
How Is This Research Useful to Practitioners?
Following the financial crisis in 2008, co-investments among sovereign wealth funds became
more popular than ever before. A sovereign wealth fund (SWF) is a state-owned fund that
invests the surplus of public funds in equity of companies located around the globe, either
as a single investor or in co-investments with another SWF. Overall, 64 SWFs worldwide are
involved in 4,262 deals, including co-investments in 97 firms. The authors address two
fundamental questions pertaining to SWFs:
Regarding the first question, the authors find that the entire SWF network is segmented
into several clusters of funds that constitute investor alliances in which a single SWF
dominates the investment decisions of the rest. Regarding the second question, co-investment
by two or more SWFs seems to be geared toward larger companies operating in the transport,
telecom, energy, and financial services industries and located in the same country as the
investing fund. But the GDP growth, religion, and legal framework for minority shareholder
protection of the targeted country seem to affect neither the propensity of SWFs to proceed
with a combined investment nor their preferences regarding the profile of the end
The authors’ evidence provides insights for equity fund managers seeking to raise
capital from SWFs in the course of expanding total assets under management. These insights
shed light in two directions: (1) Equity fund managers need to identify and reach out to the
key player in the SWF cluster operating in their territory rather than try all the
cluster’s affiliated funds; (2) equity fund managers will increase the likelihood of
their receiving SWF co-investments by gearing their investment mandate to the target firm,
industry, and country preferred by particular SWFs.
How Did the Authors Conduct This Research?
To map both the surface and the depth of connectivity among SWFs, the authors use the
metrics of social network analysis (SNA) to draw conclusions about the strategic alliance of
SWFs that resulted in several co-investments in the same entities. The network of alliances
among members of the SWF ecosystem is depicted diagrammatically as a set of nodes, each
representing a single SWF, connected together based on whether a co-investment exists
between a single node and the rest of the SWF population. The authors then calculate three
centrality measures: (1) degree centrality, (2) betweenness centrality, and (3) eigenvector
centrality, which capture, respectively, the number of direct connections per SWF, the
relevance of the position of several SWFs in terms of their direct and indirect connections
with adjacent funds, and the ultimate prominence of a single fund in the entire network.
Twelve funds are found to be highly influential and connected, with the most prominent being
those in Norway, Singapore, and South Korea.
The authors also examine the role of firm-specific and country-specific factors expected to
affect the choice of SWF co-investment by running univariate and multivariate logistic
regressions on a sample of 1,433 invested companies involved in 4,262 deals funded by SWF
capital. More specifically, a dummy variable for whether or not a co-investment existed in
the sample deal was regressed against a series of independent factors: the total assets and
industry code of the target company, same-country bias, same-religion bias, degree of
affiliation with the prospective SWF manager when voting for policies decided at the UN
General Assembly, and the GDP growth and shareholder protection rights in the selected
country. According to the logit regression results, the probability of receiving an SWF
co-investment is higher for a larger company that provides transportation, utility, or
banking services and is located in the sovereign that owns the SWF. It is likely that
co-investments take place with SWFs in which the views at the United Nations may be very
different; for example, an SWF may be seeking assistance in navigating a different system of
regulations or beliefs.
Admittedly, in the aftermath of the 2008 global financial crisis, SWFs played a stabilizing
role by contributing significantly to the bailout of financial institutions whose
prospective failure to restore capital adequacy posed a serious threat in the capital
markets. Yet, today some are concerned that sovereign wealth funds serve such policy
objectives as regional business development or political diplomacy rather than seeking to
maximize risk-adjusted returns on investments.
Future research needs to examine relevant empirical evidence to determine the motivations
of SWF investments and whether SWF corporate governance structures truly and clearly convey
their reason for investing in selected companies. Moreover, SWF ex post
performance, which may be measured and evaluated both qualitatively and quantitatively, will
be the ultimate judge of whether investment choices were profit oriented in the first place.
If they prove not to be so, the next time equity fund managers consider partnering with a
sovereign wealth fund, they would be wise to review carefully the imperatives of its
investment mandate and to pay heed to its track record.