If the Investor is a Foreign Sovereign

Sovereign funds are an emerging reality in the world economy. These are new players in transnational investment flows and comprise financial actors that vary in terms of resources, institutional role and investment strategies. Globally, they can mobilize the staggering amount of $2.4 trillion. What they have in common is that they are in public hands, controlled and managed by national governments or agencies, hence they are effectively state property. The sources of their wealth are diverse. Initially, sovereign funds were about piling up the receipts coming from selling raw materials, oil and gas, especially. This is the case with the sovereign funds of Norway (the world's largest), Libya, and Persian Gulf oil states. In these cases, investing the resources accumulated by the private economy abroad is motivated by the need for diversification and to preserve "treasure" when natural resources will have become exhausted. This perspective suggests a prudent investment policy, with transparent management, inspired by the typical considerations made by any private investor, who usually does not seek controlling stakes in the companies he/she invests in. So these actors act according to a market philosophy, rather than for political aims, although the sheer size of such investments inevitably call for political judgment, viz. Libyan investment in Unicredit. This picture has been considerably altered by the entry into the club of China and other emerging economies that accumulate foreign reserves through international trade. These are unable or unwilling to absorb their trade surpluses via domestic demand (additional infrastructural investment or more imports). Stocking up US T-bills is not only an alternative to investing in the real economy; other types of preoccupations come into play. Not so much about the safety of capitals invested, but rather the country's strategy to secure the control of key raw materials (e.g. wood and minerals from Africa) or access to advanced technology. When a sovereign fund targets the strategic sectors of the recipient country, such as when Dubai tried to buy stakes in the Port Authorities of US harbors, or when China tried to buy into the Germany energy sector, the targeted countries, for sovereign reasons, reacted by blocking (US) or preempting (Germany) such moves.
So the issue of potential hostile behavior on the part of sovereign fund owners arises, but an international framework to discipline sovereign wealth funds is slow to take off, because of the web of contrasting interests and the heterogeneity of actors coming into play. In this respect, the Norwegian fund looks very transparent, since it does not invest in the arms industry or in unethical business. But otherwise the opacity in the investment strategy and the management of individual investments generally prevails, since many sovereign funds belong to non-democratic states. The only form of international discipline, non-binding at that, are the Santiago Principles drafted by the IMF in 2008, which call for transparent and market-based investment policies. This is easier said than done, and much harder to monitor and sanction. In the current economic context, when many firms are in desperate need for fresh capital to withstand the crisis, there is an excess demand for the capital provided by sovereign wealth funds. Governments in advanced economies are wary about maintaining their countries' economic independence but are facing a race to the bottom in terms of regulatory competition. On the other hand, they can ill afford to ignore the demands coming from their industrial companies and banks calling for an easening of regulations regarding sovereign flows. This is a Gordian knot that not even Europe will find easy to untangle.