The rise of sovereign wealth funds as a new category of investors

The Zurich office of Baker & McKenzie has held a business briefing on the rise of sovereign wealth funds as a new category of investors.

The presentation was led by Anne-Catherine Hahn (pictured).

Since the onset of the global financial crisis, sovereign wealth funds, such as Temasek Holdings and GIC, Qatar Investment Authority or China Investment Corporation (CIC), have made a number of prominent investments in the US and in Europe, for example by acquiring stakes in UBS, Morgan Stanley, Citi-group, Credit Suisse, the London Stock Exchange, Volkswagen, Royal Dutch Shell, Canary Wharf or the Swiss luxury hotels Bürgenstock and Schweizerhof Berne. 

Although the inflow of money from state-controlled investors was initially viewed with scepticism, many now hope that SWFs will help to overcome the slowdown in global M&A activities and more generally contribute to the economic recovery.

For financial service providers, such as investment bank and private equity houses, this development presents opportunities, but it also raises specific governance and compliance challenges, as illustrated by recent controversies surrounding the Libyan Investment Authority.

As SWFs are controlled by foreign governments, their managers may, for example, qualify as foreign officials for the purposes of anti-bribery regulations. In addition, as not all of the countries relying on SWFs to manage their foreign reserves and surpluses from commodity sales present the same level of political stability, there needs to be a much greater focus on issues of sovereign risk management than in relation to other institutional investors. 

The increasing importance of SWFs also raises questions with regard to litigation risks. SWFs are likely to be seen as deep pockets by creditors trying to enforce claims against states, for example in the context of expropriations. Such creditors may seek to obtain the attachment or seizure of assets held by SWFs, as has indeed happened in Switzerland and in England. In turn, SWFS may raise immunity pleas to defend themselves, claiming that their activities ultimately serve sovereign purposes. 

Hahn said: “Such pleas do not sit well with the commercial nature of their activities, and are likely to be rejected in many countries as far as immunity from jurisdiction is concerned.”

By contrast, the enforcement of claims against SWFs may turn out surprisingly difficult, as immunity from execution tends to be interpreted broadly in many countries, and as the assets held by SWFs may, at least in some instances, even enjoy immunity privileges reserved for central bank funds.

Consequently, it is crucial for parties dealing with SWFs to understand the structure and operation of their particular counterparty, and to ensure through appropriate contract drafting and waivers that any potential claims can actually be enforced.

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