The Future of Sovereign Wealth Fund
by Shelby Dattilo
October 14, 2014
Panelists: Ian Macfarlane, Goldman Sachs Advisor - Ahn Hongchul, Korea Investment Corporation Chairman and CEO - Charles Dallara, Partners Group Executive Vice Chairman of the Board of Directors and Chairman of the Americas - Glenn August, Oak Hill Advisors, Founder and CEO
In the last decade alone, sovereign wealth funds have increased their total asset management from 3 trillion to 6 trillion dollars. The investments into Western banks made by sovereign wealth funds during the global financial crisis have been cited as a key element to recent global economic recoveries. In light of this, however, Glenn August, Founder and CEO of Oak Hill Advisors, explained, “The sovereign wealth fund phenomenon is still relatively new.”
At the 15th Annual World Knowledge Forum in Seoul, Korea, various experts in the fields of investment gathered to discuss why sovereign wealth funds are special and to forecast trends for future investments. Joining Mr. August in the panel were Ian Macfarlane, Goldman Sachs Advisor, Ahn Hongchul, Korea Investment Corporation Chairman and CEO, and Charles Dallara, Partners Group Executive Vice Chairman of the Board of Directors.
The panel pointed out that the major difference between sovereign wealth funds and other traditional investment funds is that the former can be long-term investments. Squashing some growing fears over the power of sovereign wealth funds, Mr. Dallara noted that they can be responsible and stablizing, rather than frightening. The stabilizing effects of sovereign wealth funds are achieved through their ability to make long-term investments.
These investments do not discourage alternative asset investment. In fact, sovereign wealth funds seek high interest investments which can, at times, also be high risk.
As August put it, “All investors are looking for yield in a yield-starved world.”
Many of the higher risk investments the panelists spoke of arise in emerging markets. In turn, this type of investment is what helps to spur global economic change.
“Sovereign wealth funds look for developing countries and are more likely to spread wealth or investment around the world than if the funds were in a central bank,” said Mr. Macfarlane. Nevertheless, long-term investments are the major developmental goal of most sovereign wealth funds.
Mr. Hongchul cited that the key is to make well planned long-term investments as well as to look into co-investing to reduce some of the risk involved in alternative and direct investments. He compared this partnership to the tango, because in order to tango, you need a partner.
Mr. Hongchul spoke of his plans to open a co-investing platform next year as a way for the Korean Investment Corporation to match with like-minded investment banks, asset management companies, management advisors, law firms, accounting firms, insurance companies, university endowments, and foundations.
Mr. August, however, gave an alternative perspective on co-investment.
“[There are firms with] hundreds of billions in capital, but cannot execute,” he said. He observed that sovereign wealth firms differ greatly in size and expertise, meaning that the co-investment models are not applicable for all firms.
Mr. August also explained that the notion of co-investment calls attention to the issue of asset allocation. The panel was then posed the question of whether sovereign wealth funds should be investing in infrastructure. Mr. Dallara stated that, “Governments are wrong if they think sovereign wealth funds will be a great slush fund to pull into infrastructure.”
Overall, the panel tended to agree on a need for sovereign wealth funds to aim for long-term goals while simultaneously reaching for higher yield investments. It was clear that sovereign wealth funds will be closely watched in the future as key players in the global economic framework, due to the way that they differ from other investment funds.
“Sovereign wealth funds are the only unconstrained publicly oriented investors in the world today,” Mr. Dallara said.