The Rise of State-Owned Investors: Sovereign Wealth Funds and Public Pension Funds

Abstract

State-owned investors (SOIs), including sovereign wealth funds and public pension funds, have $27 trillion in assets under management in 2020, making these funds the third largest group of asset owners globally. SOIs have become the largest and are among the most important private equity investors, and they are key investors in other alternative asset investments such as real estate, infrastructure, and hedge funds. SOIs are also leaders in promoting environmental, social, and governance policies and corporate social responsibility policies in investee companies. We document the rise of SOIs, assess their current investment policies, and describe how their state ownership both constrains and enhances their investment opportunity sets. We survey the most impactful recent academic research on sovereign wealth funds, public pension funds, and their closest financial analogs, private pension funds. We also introduce a new Governance-Sustainability-Resilience Scoreboard for SOIs and survey research examining their role in promoting good corporate governance.

Sovereign wealth funds in the post-pandemic era

“…A concise method of categorizing SWFs is by their investment objective. We follow the Global SWF method of classification (Megginson et al, 2021).…”

“…These SWFs share characteristics with development banks, but rely primarily on equity investments while development banks make loans to projects or firms. Carney (2021) offers an alternative SWF classification scheme to Megginson et al (2021), though one also based on observed investment purpose. He categorizes SWFs into foreign exchange reserve funds, stabilization funds, pension reserve funds, and savings funds.…”

“…3 shows, while investments in public equities was approximately 21% of SWF As mentioned above, SWFs are increasing their investments in alternative assets. SWFs and PPFs collectively increased investments into private markets from 10% in 2008 to 22% in 2020 (Megginson et al, 2021). The asset allocation of SWFs continues to change.…”

“…Much empirical work has analyzed SWFs. Early studies are summarized in surveys by Balding (2012), Megginson and Fotak (2015), Fotak, Gao, and Megginson (2018), Megginson and Liu (2022), Megginson, Lopez, and Malik (2021), and Zhou (2022). These studies focused on papers that constructed their sample with SWF data from 1990 to 2016.…”

Financial Reporting Consequences of Sovereign Wealth Fund Investment*

“…Their assets grew at a compound annual growth rate of 12.2% from $830 billion in 1999 to $8.3 trillion in assets in 2020 with 41.1% of SWF assets allocated to listed equities (SWFI 2021). This growth outpaces contemporaneous growth in assets held by other major conventional institutional owners such as insurance companies, pension funds, and hedge funds (Megginson et al 2021). Consequently, SWFs are recognized as new geopolitical powerbrokers (Drezner 2008).…”