SWF Radar CharlieMcCreevy

The Irish Independent writes that, “Apart from a small number of investments in Irish listed firms, it wasn’t until last week that we experienced a first for private Irish business – the €200m investment in Jurys Inns by the oil-rich state of Oman [via the Oman Investment Fund].”

The article adds that, “Outside of the relatively small-beer deals we have seen so far, though, Ireland’s attractiveness to sovereign funds seems limited despite the openness of our economy to foreign investment.”

It is noteworthy that Ireland is home to the world’s lowest-profile SWF, the Irish National Pension Reserve Fund (which Charlie McCreevy has described as “[the] sovereign wealth fund I set up in Ireland in 2001”).

Charlie McCreevy, European commissioner for internal market and services, said in a talk at the Burren Law School in Ireland on May 2 that, “Inevitably, with the large trade surplus that the East is now running, it has become an increasingly important source of liquidity for the West. This has led to the creation of Sovereign Wealth Funds willing to invest in our markets in order to diversify their holdings. It is in our interest to welcome them; our markets and our economy need them, especially at times of economic volatility. Think of the financial services sector. These funds have proved to be a very useful source of capital for the financial institutions affected by the current crisis. Indeed, many of the Sovereign Wealth Funds that were being demonised by the Left in 2006 and the first half of last year have become the ‘Saviour Wealth Funds’ since the middle of 2007 and into this year.”

EU internal market commissioner Charlie McCreevy yesterday asked, “What's the difference between a state-owned enterprise and a sovereign wealth fund?” This is an important question that itself raises further questions about the usefulness of the standard understanding of the term “sovereign wealth fund.”

The standard definition

Taking “sovereign wealth fund” to mean, as is standard, state-controlled funds like ADIA, KIA and CIC, then on the most superficial level, the difference between SWFs and state-owned enterprises is obvious: It is the same as that between any type of investment fund and any type of company, a few edge-cases excepted.

Go a bit deeper, and in the context of the current debate about SWFs, the difference disappears as we see state-owned companies such as China’s Chinalco acting as a conduit for their respective state’s sovereign wealth, as part either of a longer channel involving a sovereign wealth fund or of a shorter channel between the foreign reserve manager and target company.

Go deeper still, and differences emerge again, but not in a way that answer McCreevy’s question reassuringly. For while SWFs so far have shown little interest in taking on an activist role as investors, companies, by definition, manage and control their assets. Since control is one of the issues spooking the west, sovereign investment channelled via state-owned companies should perhaps be causing more of a headache than such investments channelled via dedicated state-owned funds.

And it should be noted that the two cases that heralded the beginning of the new wave of sovereign investment involved the state-owned companies CNOOC of China and DP World of Dubai, not any sovereign wealth fund as commonly understood.

Unhelpful

This must surely pose a challenge to the authors of the various codes of conduct and sets of guidelines for SWFs currently in development. An SWF code of conduct would serve little more than a public relations purpose if it encouraged sovereign investment to flow through other investment vehicles not covered by the code.

The answer to McCreevy’s question is therefore surely to suggest that, as commonly understood, there are many similarities between sovereign wealth funds and state-owned enterprises in the context of the latest wave of sovereign investment, but that the common understanding of what the term “sovereign wealth fund” means is for this very reason unhelpful.

A broader definition

It might then make sense, once this unhelpfulness is recognized, to go on to redefine sovereign wealth funds along broader lines as something like, in the recent words of Robert Kimmit, “large pools of capital controlled by a government and invested in private markets abroad,” rather than as the funds that serve exclusively as investment vehicles for these pools.

With “sovereign wealth fund” defined in this way, a code of conduct for SWFs would cover sovereign wealth at its source, regardless of the route it then took to reach any foreign investment target.

A code that settled on the more standard definition could find itself in the pointless situation of being rigorously adhered to by e.g. Norway’s Government Pension Fund - Global while Russia’s Gazprom, which Charlie McCreevy today likened to a SWF (hence his question), felt no need to take any notice of it.

Update (Feb 29; quotation updated Mar 3 to match edited source): Rachel Ziemba of RGE Monitor highlights some further problems for legislators and codifiers posed by the standard definition of “sovereign wealth fund,” writing that:

A broad definition of sovereign wealth would capture related holding companies, state owned enterprises and possibly some public pension funds as well. A narrow definition might just mean that funds are channeled through other actors. More complicatedly, it means assessing their financial actors funded by sovereign funds - private equity for one. Australia hopes its new review achieves that. The US Treasury has used such a definition since at least the summer to my knowledge - but its becoming more common in the discourse. The EC defines them as “state owned investment vehicles which manage a diversified portfolio of domestic and international financial assets.” but there is little to no discussion of other investors backed by sovereign funds.

The acquisitions by SOEs are probably more concerning than those of SWFs. By their nature, SOEs prefer significant stakes as they usually want to build market share or increasing their supply chain. Voting rights are part of the package.

Even in the same country funds might have very different governance structures and goals. Despite Gazprom's penchant for threatening cutoffs for delayed payment or resisting new market rates, it is likely that Russia's new wealth fund will be bound to more disclosure requirements than most of the Gulf funds are currently- largely because it is bound to report to the Russian people.

She finishes her article with a list of the various foreign investment channels and vehicles through which sovereign wealth could be piped.

The Guardian reports that, “Brussels likened Russia’s state-owned gas monopoly, Gazprom, to a sovereign wealth fund (SWF) [Wednesday] and warned of a new age of industrial espionage unless the funds were subject to greater scrutiny and disclosure rules.”

The article quotes EU internal market commissioner Charlie McCreevy as asking, “What’s the difference between a state-owned enterprise and a sovereign wealth fund?” This question is likely to be asked more often over the coming months as various SWF codes of conduct take shape.

Thomson Financial reports on the EU internal market commissioner’s remarks at a press conference today that, “Charlie McCreevy said there is no need to amend EU laws regarding such ‘innovative’ investment instruments. ‘The commission does not see any need to address the current legal system in terms of inward investment to Europe,’ McCreevy said. ‘We have a comprehensive legal framework (already),’ he added.”

The article quotes McCreevy as saying that, “What is abundantly clear is that we need these funds to recycle their surpluses and invest in Europe. There is no incidence of an SWF acting in anything other than a responsible manner up until now. Over the past forty years … they have been the best type of investors you could attract to your enterprise, they take a long-term view.”

It quotes McCreevy as reiterating that, “[I]nvestments linked with national authorities and governments should follow rules on transparency.”

The New York Times writes that:

A top official of the European Union has warned the bloc's member countries not to pass broad laws to restrict investment from sovereign wealth funds, despite fears about state-controlled foreign predators gobbling up major European companies.

Charlie McCreevy, the European internal market and services commissioner, said that the 27-member states of the European Union should have the power to block investments only in sensitive, security-related sectors. Restricting the flow of capital for other reasons will lead to legal action by the European Commission, the union's executive arm, he said in an interview Monday.

McCreevy vs. Merkel would be quite a contest.

Thomson Financial reports that, “Charlie McCreevy, the EU internal markets commissioner, said Europe must welcome investment from sovereign wealth funds, with this being the best way to tackle concerns about governance and transparency.”

It quotes McCreevy as saying at a speech in London yesterday to the Council of British Chambers of Commerce in Continental Europe that, “We must not allow the discussion on Sovereign Wealth Funds to be used as an excuse to raise unjustified barriers to investment and the free movement of capital.”

The Wall Street Journal reports (subscription required) that, “Charlie McCreevy, the European Union commissioner who has been one of the region’s most vocal proponents of free markets, believes countries have valid concerns about the aims of foreign sovereign wealth funds whose billions are increasingly being used to take over European companies.”