The Hunt for Unicorns

How Sovereign Funds Are Reshaping Investment in the Digital Economy

Winston Ma, Paul Downs

• Publisher: Wiley
• Year: 2020
• ISBN:
  9781119746621
• Edition: 1
• Topic: Politica e relazioni internazionali
• Subtopic: Commercio e tariffe

Who holds the power in financial markets? For many, the answer would probably be the large investment banks, big asset managers, and hedge funds that are often in the media's spotlight. But more and more a new group of sovereign investors, which includes some of the world's largest sovereign wealth funds, government pension funds, central bank reserve funds, state-owned enterprises, and other sovereign capital-enabled entities, have emerged to become the most influential capital markets players and investment firms, with $30 trillion in assets under management (" super asset owners ").

Their ample resources, preference for lower profile, passive investing, their long-time horizon and adherence to sustainability as well as their need to diversify globally and by sector have helped to transform the investment world and, in particular, private markets for digital companies. They have helped create and sustain an environment that has fostered the rise of the likes of Uber, Alibaba, Spotify and other transformative players in the digital economy, while providing their founders and business models the benefit of long-term capital.

Despite this increasingly important impact, sovereign investors remain mostly unknown, often maintaining a low profile in global markets. For the same reason, they're also among the most widely misunderstood, as many view investments made by sovereign investors as purely driven by political aims. The general perception is that most sovereign investors lack transparency and have questionable governance controls, causing an investee nation to fear exposure to risks of unfair competition, data security, corruption, and non-financially or non-economically motivated investments.

The current global tensions around the AI race and tech competition – and now the corona virus pandemic – have exacerbated such misperceptions, spawning controversies around sovereign investors and capital markets, governments, new technologies, cross-border investments, and related laws and regulations. As such, sovereign capital and the global digital economy are undergoing an unprecedented, contentious moment.

In short, the emergence of sovereign funds symbolizes a major shift of the world's economic power. For the first time, investment funds from developing countries are playing with OECD financial giants as equals. Furthermore, their investments into high tech enable them to participate at the cutting-edge of the fourth industrial revolution, challenging traditional innovation powerhouses like the US and Germany. For all stakeholders, from tech unicorns, VC funds, asset managers, financial firms, to policymakers, law firms, academics, and the general public, this is the must-have book to get to know these new venture capitalists and "super asset owners".

CHAPTER 1
Sovereign Investors Rising in Crisis

Passing through the understory of lounge chairs and low tables, you approach the bar with a view of televisions carrying the major international news channels. The suited barista serves up the coffee of your choice and you relax briefly as you scan your emails on the free wifi, glance at a few of the international papers and periodicals, and recover from the constant bustle just outside the lounge – business professionals from a multitude of lands clearing security and taking elevators from the towering atrium.

No, you are not in the first-class lounge at an international hub airport (although it might well be one from all appearances). You have arrived, instead, at the visitor lounge in the hometown high-rise offices of Abu Dhabi Investment Authority, one of the world's largest and lowest profile sovereign wealth funds. ADIA manages its vast $700 billion plus global portfolio from this edifice where it employs investment professionals from around the world in a gleaming glass tower that would not look out of place in any world city. And ADIA is but one of the growing number of large sovereign wealth funds that remain below the radar but have an increasing impact on global markets.

Their low profile is in contrast to the better known dealmakers in the centers of finance. But their checkbooks and influence on the world at large outweigh the erstwhile titans of finance.

And as the number and size of such operations continue to surge, their influence does as well. Large as they are, in crises they have an even larger role to play. As this book went to press, the world was facing a pandemic, an inflection point where two themes of this book converged in sharp relief: the power of these massive funds in times of crisis and the world's now urgent march to the digital economy.

Trillion-Dollar Club

The global economy has witnessed the emergence of a new set of key actors over the last two decades – the Sovereign Investors. In this group we include Sovereign Wealth Funds (SWFs) and the very large Public Pension Funds (PPFs), which are active in the global marketplace and have many of the characteristics of SWFs. The concept of SWFs also includes sovereign development funds (SDFs), government established investment vehicles with development objectives.

These Sovereign Investors have become pivotal players in global financial markets thanks to their enormous capital base, and they continue to increase in number, size, variety, and scope. This group of highly heterogeneous funds has different backgrounds, structures, and missions, but they share one ultimate goal: to preserve capital and maximize the return on investments. As such, in this book they are collectively referred to as the Sovereign Investment Funds (SIF).

How much money are we talking about? Tens of trillions of dollars sit in these funds. Table 1.1 shows the top ten sovereign wealth funds ranked by assets under management (AUM). The very top funds manage monies exceeding the GDP of good-sized European countries. If AUM were GDP, they would rank among the top 20 nations.

Table 1.1 Top Ten Sovereign Wealth Funds

Data Source: Sovereign Wealth Fund Institute, March 2020.

Government Pension Fund of Norway, Europe, $1,108,170,000,000 China Investment Corporation (CIC), Asia, $940,604,000,000 Abu Dhabi Investment Authority (ADIA), Middle East, $696,660,000,000 Kuwait Investment Authority (KIA), Middle East, $592,000,000,000 Hong Kong Monetary Authority, Asia, $509,353,000,000 GIC Private Limited, Asia, $440,000,000,000 National Council for Social Security Fund, Asia, $437,900,000,000 SAFE Investment Company, Asia, $417,844,700,460 Temasek Holdings, Asia, $375,383,000,000 Qatar Investment Authority (QIA), Middle East, $328,000,000,000

As is discussed in more detail below, these sovereign investors are derived from different sources and serve different ends. But a common factor is their growth in size and geographic spread. Commonly thought of as a Middle Eastern phenomenon, broadly viewed, the funds are based in much of the developed world and include very large funds from North America, East Asia, and Europe as well as the Gulf. Increased growth is expected to come from other regions, most notably, sub-Saharan Africa, where natural resources may be the source and domestic economic development the objective.

Currently, according to the Sovereign Wealth Fund Institute's (SWFI's) “Top 86 Largest Sovereign Wealth Fund Rankings by Total Assets,” the top ten largest sovereign wealth funds ranked by total assets are as shown in Table 1.1.

Public Pension Funds are important members of the SIF tribe. They are even larger, as the table below indicates; they are global and they are innovative, increasingly focused on tech innovation. GPIF (Japan), NPS (Korea), CPPIB (Canada), and CalPERS (US) are well known in the capital markets for their active investments (see Table 1.2). This combination of characteristics reinforces the perception of SIFs as savvy, silent heavyweights in the world's private and public markets.

Table 1.2 Top Ten Public Pension Funds

Data Source: Sovereign Wealth Fund Institute, March 2020.

Social Security Trust Funds, North America $2,925,789,929,172 Government Pension Investment Fund Japan (GPIF), Asia $1,490,240,000,000 Military Retirement Fund, North America $813,555,000,000 Federal Employees Retirement System, North America $687,000,000,000 National Pension Service of Korea (NPS), Asia $593,192,000,000 Federal Retirement Thrift Investment Board, North America $572,370,000,000 Zenkyoren Pension Japan, Asia $523,463,576,000 Stichting Pensioenfonds ABP, Europe $476,000,000,000 Canadian Pension Plan Investment Board (CPPIB), North America $385,634,000,000 California Public Employees Retirement System (CalPERS), North America $370,300,000,000

Given this enormous concentration of wealth, it is no surprise that these giants have been viewed as economic superheroes, repeatedly turned to in times of crisis: in war, in the global financial crisis, and now in pandemic. Like superheroes, each has a role to play and some have even morphed to encompass additional roles, particularly when, as now, a new crisis arrives on the scene.

And their ranks continue to swell at an increasing pace. Assets under management continue their relentless rise while new funds emerge. The establishment of new funds is not a region-specific trend, as can be illustrated by funds being set up across the globe, including the Hong Kong Future Fund, Holdings Equatorial Guinea 2020, and West Virginia Future Fund. Europe is especially interesting, because Europe traditionally is not a significant player when it comes to sovereign wealth. (The Norway Government Pension Fund (also known as the Oil Fund), managed by Norges Bank Investment Management (NBIM), is considered the world's largest SWF, but it sits outside the European Union.)

There is now a Luxembourg entrant into the SWF world: Fonds soverain intergenerational du Luxembourg, which will invest for many generations to come. Also in Europe, the French, Italian, and Spanish funds, among other nations, emerged as a solution to attract other foreign players to co-invest with them in their respective domestic economies. Even a UK Citizens Wealth Fund has been proposed. But look to sub-Saharan Africa for the next surge of sovereign investors. While Nigeria and Kenya are highlighted in case studies later in this chapter, there are also sovereign funds in Algeria, Angola, Botswana, Ghana, Libya, Morocco, Nambia, and Rwanda. Not to be left behind, others, such as Japan and India, have also joined their ranks.

Talk vs. Walk

There are two main approaches that institutional investors deploy when they seek to influence the strategies of their portfolio companies. To achieve environmental, social, and governance (ESG) aims, for example, they may remain as shareholders and engage with the top management and boards of such companies in order to reduce emissions (the “talk” channel). Or, they can “vote with their feet,” by divesting polluting companies from their portfolio (the “walk” channel).

NBIM is well positioned for active engagement with public companies' management. By most accounts, its $1 trillion plus portfolio holds, on average, 1.5% of every listed company on Earth. NBIM's latest report on responsible investing released in March 2020, covering its 2019 voting, engagement with management, and follow up, runs to over 100 pages. Of the more than 9,000 companies in which it holds voting shares, NBIM cast votes in more than 97%, and it was not shy about voting against management even in its top holdings, such as Google, Amazon, and Facebook.

For climate change, NBIM has exercised both options: on the one hand engaging with companies developing strong decarbonization strategies; and on the other hand, divesting from heavy polluters like coal and fossil ...