Intense national security and political discussions have surrounded major Sovereign Wealth Fund (SWF) transactions in the past two years. Federal regulations, and particularly the review process of the Committee on Foreign Investment in the United States (1) (CFIUS), are well-designed to address any national security concerns while not imposing heavy transaction costs on SWF transactions. However, the interests of target firms and federal regulators are not always aligned. Indeed, the interests of all of the various federal agencies involved in reviewing SWF and other foreign acquisitions are not always aligned one with another. In a hierarchy of interests, the financial interests of individual firms will often be subordinated to national security concerns.
Alongside these political and security concerns, many of the target firms in recent SWF transactions, particularly those in the financial services area, were negotiating from a position of relative weakness. The firms needed the funds desperately, and were perhaps willing to make concessions that they would not have under better financial conditions. Caught between political and regulatory forces on one hand and an acute need for capital on the other, the target firms were limited in their bargaining positions. Regardless of internal factors affecting the bargaining position of a target firm, regulatory and political factors also affect the structure of the transaction if national security is at issue. When thinking about how SWF transactions may be affected by regulatory and political forces, it is useful to consider how interests of regulators and target firms converge, diverge and interact. Additionally, although it is not possible to determine how the transactions between SWFs and target firms would be structured outside of the shadow of federal regulation and political scrutiny, a review of various deals can at least provide indications of how the deals were affected by these pressures, and suggest how target firms and SWFs shape their transactions in order to minimize concerns about SWF behavior and reduce subsequent transaction costs for SWF deals.
This essay proceeds as follows. Part 1 describes some of the concerns raised by SWF investment, and also provides an outline of some of the regulatory framework that governs SWF transactions. Part 2 then shifts to a discussion of how the regulations, which serve as an expression of state interests in SWF investment, contrast with interests of SWF target firms, as viewed through a lens of investor selection. In Part 3, the essay then briefly reviews several recent, high-profile transactions to show how regulatory and political forces help to shape SWF transactions. The essay concludes with suggestions for future research on SWF dealmaking in the shadow of regulation and politics.
1. The Trouble with Sovereign Wealth Funds
SWFs have been active for years, yet only in the last several years have they reached significant public visibility. However, the significant press generated by the rise of sovereign wealth funds has subsided somewhat in recent months as attention has shifted to more pressing economic concerns. Given the turmoil in the commodities and financial markets--with sovereign wealth funds suffering significant losses as a result (2)--it is difficult to predict how SWFs will behave in the near future, although it is practically certain that as a general matter, SWFs will continue to invest in established markets such as the United States. As the world economy recovers, and SWFs again become more active in equity markets, questions about the purpose, behavior, and governance of SWFs will again become prominent.
a. The Political, Economic, and Security Concerns of SWFs
SWFs provoke both political and economic concerns. Yet in many ways, SWF behavior and investment philosophy mirror other investment forms, such as public pension funds, which have a long history of dealing in Western equity markets. …