Man has always been fascinated by money. From the dawn of civilisation, the pursuit of money – and the power it represents – dominates much of man’s social and economic history. But there is a special place in history and in human interest for fabulous wealth, for those who have money beyond measure and sometimes even beyond comprehension. The wealth of Croesus, king of Lydia in the 6th century BC, was legendary even in his own time and gave rise to the English expression of being “as rich as Croesus”. Closer to our own time, the wealth of John D. Rockefeller – whose worth at the start of the 20th century has been estimated at $320 billion in today’s money, making him the richest individual in history – earned him a status and a level of attention that today’s celebrities can only dream about.
Against this backdrop, it is not surprising that the stunning accumulation of wealth by a number of government funds – the so-called Sovereign Wealth Funds or SWFs – has attracted huge comment and analysis. Both the scale of the wealth of the richer SWFs and the speed with which it has been accumulated over recent years place SWFs in a league of their own. Never before in history has so much wealth been accrued in so few hands, or so quickly. And it is equally not very surprising that both the western economies and the funds themselves are finding it challenging to adjust to this new reality.
Not that SWFs are a new phenomenon. The oldest fund recognised to be a SWF is the Kuwait Investment Authority, which dates back to 1953, and there are several other SWFs with a 20 year, 30 year or even longer history. But for almost all of that history, the funds were seldom if ever in the news: they went about their business quietly with a low profile and minimum publicity.
Until the last 18 months or so. Suddenly, SWFs were the topic of the moment. Articles on SWFs abounded in the financial press and even made the non-financial pages. Western governments pronounced on their role and made sweeping statements on how they should conduct their business. The funds themselves found that they were in the spotlight as never before, their image oscillating between that of corporate raiders, rapaciously buying western companies and infrastructure, and white knights, rescuing and recapitalising the western financial system. Much of the tone of the debate was hostile.
For some months in the latter part of last year the dialogue between western governments and the SWF community bordered on the surreal. On the one side, there was a plethora of voices: every major western government held forth on SWFs, the EU stated its position, the OECD gave its views, the IMF was asked to opine. And on the other side, there was … silence. Several of the funds have since confided that they were taken aback (“stunned” was the word one SWF official used) at the assault on their operations: they were genuinely not expecting it and took time to formulate their response.
In fact, not the least of their concerns was knowing exactly how to respond. SWFs did not form a cohesive community and needed time to establish links among themselves to come up with a common position. And on a more prosaic level, as institutions which had never sought publicity, in many cases they had no experience or expertise in issuing public statements. It is revealing that when one of the world’s largest SWFs announced the appointment of a head of global communications in May of this year, his brief was specifically said to be “to oversee the fund’s relationship with the world’s media”. It is also interesting that this was a new post – the fund had not previously felt the need to have such an officer.
Since then the dialogue between the West and the funds has gone on behind closed doors, matured and – from all reports – become very much more positive and productive. For the West, it is now being led by the IMF, and for the funds, a number of leading SWFs are engaging positively in seeking a solution acceptable to all. Hopes are high that at this October’s IMF/World Bank meetings, the results of their discussions will be given to an eagerly awaiting world.
Underlying the evolution of this dialogue has been the fact that both the West and SWFs have had a major change in their circumstances. For the West, long-held assumptions about the invulnerability of western markets and indeed lifestyles have been challenged. The future for western economies is very much less certain than it was two years ago. For SWFs, the change is as dramatic: the comfortable life of low profile and publicity which they enjoyed has also gone, and they are finding that life as the financial titans of the age entails public interest in and scrutiny of their every move.
This is the new reality. The good news is that both sides are adjusting to it. And with the more hostile elements of the debate giving way to more constructive dialogue, we believe SWFs will soon be able to resume their traditional role of long-term investors, benefiting their populations and markets alike.
A version of this essay was first published by State Street Global Advisors as part of their Insight programme