LOS ANGELES – Although sovereign wealth funds (SWFs) have been around for decades, it was not until the subprime mortgage crisis of 2007 that they truly garnered recognition as major players in the investment market.
When they did, they were hailed as saviors for injecting billions of dollars into struggling US companies. With foreign direct investment into the US shrinking, SWFs provide an attractive alternative source of capital.
And they are growing. Global SWF assets increased 16% last year, and are currently valued at more than US$6 trillion; roughly equivalent to Japan’s GDP.
They may be flush with cash, but accepting money from an SWF comes with some risk—at least on the surface.
Politicians and business executives have expressed concern that as government-operated investment funds, the motives of SWFs will be guided by the interests of the state rather than those of international business community.
Although there is little evidence to suggest that SWFs behave much differently than ordinary investment funds, many of them are operated by countries with which the United States’ relations waver— China, Saudi Arabia and the United Arab Emirates.
Concerns over SWFs are often exaggerated. Those that invest in US-based enterprises hold a direct stake in continued Western prosperity.
Their investments provide three distinct advantages. First, SWF investments collectively have the power to serve as an economic stimulus; their purchases in US-based companies throughout the crisis were instrumental.
In fact, SWF investments align their economic interests with those of the US, unlocking the potential for stronger political relations. Second, SWF investments are typically small and passive.
SWFs face more intense US government investigations when purchasing more than 10% of a US-based company, so funds typically purchase long-term stakes valued at less than 1%. This strongly indicates that SWFs invest for financial gain, rather than political manipulation.
Moreover, these investments provide companies with a platform to take more long-term financial risks; companies are often more concerned with short-term survival. Third, SWF executives who sit on Western boards offer seasoned and global perspectives.
Many Westerners worry that SWF investments would permit foreign executives to sit on corporate boards — and advance their state objectives — within influential US companies. There is little evidence to justify such fears.
Rather, many SWFs attract and groom their nations’ top talent, producing executives whose insights could prove valuable for the companies they invest in. Although SWFs provide plenty of advantages, due diligence is always prudent when considering offers from new investors.
The following steps can help a company avoid key risks associated with SWF transactions: In order to mitigate reputational risks, communicate with multiple stakeholders both in government agencies and the community.Companies often make the mistake of working with just one government agency during the transaction process.
In most cases, multiple local, state and federal agencies have an interest in an SWF transaction, so companies should identify and engage all stakeholders. It is also helpful for communities to grasp the benefits—or setbacks—of a potential deal in order for companies to avoid serious opposition down the line.
Thoughtful outreach can help minimize scrutiny and allow companies to display their deal in a more honest, less threatening light. Submit voluntary filing to the Committee on Foreign Investment in the United States (CFIUS).
CFIUS is a multi-agency government body that reviews transactions in which foreign entities may obtain control over a US business.
Companies are encouraged to submit an early, voluntary filing for their review. Notably, the CFIUS has responded positively to companies whose filings anticipate potential transaction issues and provide a list of viable solutions. Use the Santiago Principles as a platform for transparency.
The International Monetary Fund (IMF) and the US Department of the Treasury have responded favorably to SWF investments that align with the Santiago Principles. Companies that ensure their SWF investors adhere to these standards are more likely to see a positive review procedure by the CFIUS.
Historically, the Santiago Principles have also ensured that the deal is better received by shareholders. Given that the principles lack any enforcement mechanism, companies should consider contractual provisions requiring disclosure of the SWF’s policy purposes, governance framework, financial statements, general voting approaches for risk management and legal relationship with other state bodies.
forbes.com
When they did, they were hailed as saviors for injecting billions of dollars into struggling US companies. With foreign direct investment into the US shrinking, SWFs provide an attractive alternative source of capital.
And they are growing. Global SWF assets increased 16% last year, and are currently valued at more than US$6 trillion; roughly equivalent to Japan’s GDP.
They may be flush with cash, but accepting money from an SWF comes with some risk—at least on the surface.
Politicians and business executives have expressed concern that as government-operated investment funds, the motives of SWFs will be guided by the interests of the state rather than those of international business community.
Although there is little evidence to suggest that SWFs behave much differently than ordinary investment funds, many of them are operated by countries with which the United States’ relations waver— China, Saudi Arabia and the United Arab Emirates.
Concerns over SWFs are often exaggerated. Those that invest in US-based enterprises hold a direct stake in continued Western prosperity.
Their investments provide three distinct advantages. First, SWF investments collectively have the power to serve as an economic stimulus; their purchases in US-based companies throughout the crisis were instrumental.
In fact, SWF investments align their economic interests with those of the US, unlocking the potential for stronger political relations. Second, SWF investments are typically small and passive.
SWFs face more intense US government investigations when purchasing more than 10% of a US-based company, so funds typically purchase long-term stakes valued at less than 1%. This strongly indicates that SWFs invest for financial gain, rather than political manipulation.
Moreover, these investments provide companies with a platform to take more long-term financial risks; companies are often more concerned with short-term survival. Third, SWF executives who sit on Western boards offer seasoned and global perspectives.
Many Westerners worry that SWF investments would permit foreign executives to sit on corporate boards — and advance their state objectives — within influential US companies. There is little evidence to justify such fears.
Rather, many SWFs attract and groom their nations’ top talent, producing executives whose insights could prove valuable for the companies they invest in. Although SWFs provide plenty of advantages, due diligence is always prudent when considering offers from new investors.
The following steps can help a company avoid key risks associated with SWF transactions: In order to mitigate reputational risks, communicate with multiple stakeholders both in government agencies and the community.Companies often make the mistake of working with just one government agency during the transaction process.
In most cases, multiple local, state and federal agencies have an interest in an SWF transaction, so companies should identify and engage all stakeholders. It is also helpful for communities to grasp the benefits—or setbacks—of a potential deal in order for companies to avoid serious opposition down the line.
Thoughtful outreach can help minimize scrutiny and allow companies to display their deal in a more honest, less threatening light. Submit voluntary filing to the Committee on Foreign Investment in the United States (CFIUS).
CFIUS is a multi-agency government body that reviews transactions in which foreign entities may obtain control over a US business.
Companies are encouraged to submit an early, voluntary filing for their review. Notably, the CFIUS has responded positively to companies whose filings anticipate potential transaction issues and provide a list of viable solutions. Use the Santiago Principles as a platform for transparency.
The International Monetary Fund (IMF) and the US Department of the Treasury have responded favorably to SWF investments that align with the Santiago Principles. Companies that ensure their SWF investors adhere to these standards are more likely to see a positive review procedure by the CFIUS.
Historically, the Santiago Principles have also ensured that the deal is better received by shareholders. Given that the principles lack any enforcement mechanism, companies should consider contractual provisions requiring disclosure of the SWF’s policy purposes, governance framework, financial statements, general voting approaches for risk management and legal relationship with other state bodies.
forbes.com
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