FINANCE - INVESTMENT FUNDS

Sovereign wealth funds hit $3.5 trillion in 2007

3 min

Sovereign wealth funds have grown by a quarter annually over the past three years, said US economic firm Global Insight, warning that SWFs were changing the nature of ties between developed and developing countries.

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Sovereign wealth funds have mushroomed 24 percent annually over the past three years to hold a total of 3.5 trillion dollars in 2007, a US economic firm said Monday.

Global Insight said that projected on that annual growth pace, sovereign wealth funds (SWFs) would surpass the entire current economic output of the United States by 2015, and the European Union by 2016.

The surge in the funds comes as emerging economies, flush with swelling financial resources from higher energy and commodities prices, invest abroad seeking better returns on their investments.

However, the rapid rise in investment by the state-run investment funds has raised concerns that governments could use them as political tools.

Global Insight, a Massachusetts-based company specialized in economic and financial analysis and forecasting, noted that SWFs were changing the nature of ties between developed and developing countries.

"Armed with such large amounts of debt-free cash, sovereign wealth funds are the new financial power brokers, replacing the combined financial muscle of hedge funds and private equity, and usurping central banks as the international capital providers of last resort," Jan Randolph, head of sovereign risk at Global Insight, said.

According to the company's Sovereign Wealth Fund Tracker, in 2007 SWFs injected up to 80 billion dollars into bank shares or bank equity stakes in the United States alone. Worldwide, 93 percent of their equity investment has so far targeted the western financial sector.

"There has since been a shift of financial weight from West to East, particularly to China, Asia, the Middle East and other energy countries," Randolph said.

The largest sovereign wealth generator remained China, with approximately 1.2 trillion dollars, followed by Russia and Kuwait, according to Global Insight data.

The fastest-growing generators of sovereign wealth over the last five years were: Nigeria, up 291 percent; Oman (256 percent); Kazakhstan (162 percent); Angola (84 percent); Russia (74 percent); and Brazil (65 percent).

In January 2008, worldwide acquisitions by SWFs totalled 20.6 billion dollars or nearly one-third of the total 60 billion that SWFs made in mergers and acquisitions (M&A) for the entire year 2007.

SWFs accounted for 35 percent of world M&A activity in 2007, and 28 percent of all M&A in the US during January 2008.

"SWFs have fostered new alliances with private equity to avoid scrutiny," Global Insight said. "SWFs already account for approximately 10 percent of private equity investments globally and should grow further in the next few years."
 

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