Even in a difficult market context, the activity of sovereign wealth funds during 2010 was significant. The leading SWFs completed 172 deals worth $52.7 billion, a 50 percent increase in deal numbers and a 23 percent decrease in value. The first fact to remember derives from these numbers: a greater number of smaller-scale transactions, largely carried out directly by the funds and not through asset managers. The preferred sector is again the financial one with 50 operations and 20.4 billion dollars of investment, almost 40% of the total. Second fact: despite the losses accumulated in US banks, the funds continue to play the role of market maker of the global financial sector. Asia leads other regions as a destination, accounting for more than 40% of deals and nearly half the value. Third fact: the United States and Europe are losing relevance in favor of emerging areas, with important flows towards Latin America within a new south-south geography.
Beyond the figures, 2010 could be the year of the metamorphosis of sovereign wealth funds. Until yesterday, all things considered, the logic of pecunia non olet prevailed in political and financial circles. Initially there was a great debate on sovereign wealth funds as actors of a new state capitalism that would have shaken the foundations of Western capitalism, which then had no concrete consequences. On the contrary, around the world sovereign wealth funds have been courted and welcomed with open arms as investors of last resort at the height of the crisis. First cleared by American politics when they helped save Wall Street with a liquidity injection of over 100 billion dollars, they then made their way to Europe and Italy without any discussion or prejudice as to their origin.
To tell the truth, the first signs had reached the Italian banking world that sovereign wealth funds were not shareholders like everyone else. However, this became clear after the outbreak of the riots in North Africa and in particular the war in Libya. The United Nations resolution, later accepted by the Council of the European Union and implemented by many member countries on the blocking of assets attributable to Gaddafi's control, perhaps represents the key event that led to a change of perception and context: we has finally realized that the countries from which almost all sovereign wealth funds come are not democratic and therefore are profoundly unstable on a political, social and therefore economic level. With important consequences on the companies in which they invest.
The new point of attention, well known to analysts but heightened by recent events, is that sovereign investment also partly carries with it the sovereign risk of the country of origin. If we use the Economist's Index of Democracy classification, 62% of SWF assets are managed by authoritarian regimes, 20% by unstable democracies and only 18% by fully democratic countries. The other indicators of the Economist based on the percentage of young people under 25, the duration of the regimes in office, the level of corruption and censorship return a high risk of riots in countries that manage important sovereign wealth funds, such as Malaysia, Bahrain , Oman, as well as China and of course Libya.
The high political risk of home countries has two main implications for sovereign wealth funds and the companies in which they invest: first, funds lose that characteristic of "patient", passive and long-term oriented investors since they can be forced to arrest flows investment or even unexpectedly liquidate their positions to meet internal needs in the event of a crisis. Second, they may be involved in sanctions or other diplomatic incidents that induce sell-offs and pressure on stocks, as was the case for example recently for Unicredit. Both factors generate excess volatility that must be compensated for by higher returns causing an increase in the cost of capital. Perhaps this observation can partly explain why the companies in which funds invest tend to underperform their benchmarks.
Certainly, from now on the investment of funds will be weighed more carefully by receiving companies and governments. So what is the future of sovereign wealth funds in a world where growing political instability and social tension can hold back investment? Is it possible to tackle this issue and restore an orderly flow of capital between emerging and developed countries capable of absorbing global imbalances and at the same time contributing to the emancipation of those countries? This is a complex problem that international economic diplomacy could try its hand at, perhaps by designing schemes of conditionality between sovereign investment abroad and guarantees for the promotion of human and civil development in the countries of origin. The West would continue to attract investment by exporting perhaps its most precious asset: democracy.
