A Multi-Jurisdictional Perspective
Since their inception more than 50 years ago, there has been a dramatic increase in the number and size of government-owned special purpose investment funds, commonly referred to as sovereign wealth funds. The so-called "Super Seven Funds," which represent less than 25% of currently existing sovereign funds, are sponsored by the governments of Abu Dhabi, China, Kuwait, Norway, Russia and Singapore (two funds) and are each estimated to have more than $100 billion in assets. As sovereign funds searched for off-shore investment opportunities for these assets and began taking positions in public equities and other higher risk securities in recent years, policy makers and others began to express apprehension about their influence and motivation. Of particular concern was the possibility that sponsoring governments would use these funds not purely for financial gain but to further their respective political objectives.
The recently-released Santiago Principles are an attempt to address these and related concerns. The principles were published in October 2008 by the International Working Group of Sovereign Wealth Funds, and are a set of voluntary, generally accepted principles and practices that address three broad areas with respect to sovereign funds: (1) legal framework, objectives and coordination on macroeconomic policies, (2) institutional framework and governance structure, and (3) investment and risk management.
It is now dear--shortly after their release and in the midst of what is clearly a global recession of historic proportions--that the Santiago Principles are making their debut during a time of immense economic turmoil. The same policymakers and commentators that expressed alarm over the political implications of large government-sponsored investments are now preoccupied with maintaining some sense of stability in their respective markets. Sovereign funds, on the other hand, are dealing with mounting losses, weakened funding sources and domestic demands for capital. As a result, the effectiveness of the Santiago Principles remains largely untested, and off-shore investment activity by sovereign funds is likely to remain suppressed for some time.
With this as background, the following is a series of reflections on the Santiago Principles and sovereign funds from each of the United States, the United Kingdom, the United Arab Emirates and Singapore.
The United States
The Santiago Principles are a helpful step towards combating skepticism among U.S. policymakers and transaction participants that sovereign funds are seeking political influence in addition to or in lieu of financial gain. The non-binding nature of the principles, however, leaves parties with no legal recourse against funds that do not adhere to the principles, and the principles are, understandably, also subject to home country rules, regulations and numerous other caveats. Sovereign funds and parties dealing with sovereign funds, therefore, should remain attuned to potential political and third-party concerns when structuring investments so as to minimize the risk of attracting disproportionate government attention.
Public scrutiny of sovereign funds appears to have waned as the United States grapples with volatile domestic financial markets and a struggling economy. U.S. efforts to deal with these and related issues intensified throughout the second half of 2008 and the first quarter of 2009, with unprecedented regulatory action and government intervention in the financial services sector. As a result, much of the near--to medium-term is likely to be focused on digesting these actions and related issues. In the meantime, sovereign fund investment in the United States has shrunk considerably.
With a newly elected Democratic president and Congress, regulatory policy in the United States towards sovereign investment in the United States remains uncertain, but most speculation expects a protectionist bias. …