Panelists Discuss Growing Future of Sovereign Wealth Funds

Sovereign wealth funds’ assets total approximately $3 trillion, and are expected to quadruple to over $12 trillion in seven years, noted panelists during the NAREIT Week 2008’s “Sovereign Wealth – State Investors” panel discussion, held today at The Waldorf=Astoria in New York City. Forty sovereign wealth funds currently control $3.1 trillion, and are growing rapidly, especially in face of rising energy costs, noted David Marchick, managing director of The Carlyle Group, who moderated the panel. Leading the pack are the United Arab Emirates, Norway and Saudi Arabia. “It’s a new vehicle that finances the global cycle of money,” said Jan Randolph, head of sovereign risk-country intelligence group for Global Insight Inc. “The sovereign wealth funds have to make a decision on how to manage (their money), as countries face inflation pressure and simply cannot absorb the money internally.” He noted that in the past, most invested in the treasury, but are now shifting towards real estate. But in five years, the sovereign wealth leaders will change, the panelists predicted. Brad Setser, a fellow of geoeconomics for the Council on Foreign Relations, expects that China will account for two of the three top sovereign investment funds. “China bought $25 billion of U.S. equities in 2006 and 2007,” he said. “They’ll continue to go that way.” And if Russia reallocates its money, it could also become a big force quickly. However, Randolph said that the United States is underestimating Middle Eastern sovereign wealth funds because of the murkiness between the sovereign wealth, royal and private balance sheets. Barden Gale, vice chairman of real estate for Starwood Capital Group, noted that the Middle East is using sovereign wealth funds as a pure alpha play, and are interested more in the private equity approach. And they are also taking best practices from the world at large, going beyond their confines and hiring with attractive arrangements, thus becoming key competitors. The future of third-party intermediates use, like REITs and private equity was debated among the panelists. Gale mentioned that we will see a lower amount of investment professionals who will go set up shop in certain countries; even Norway runs its fund out of London. That, in addition to a small hiring pool, will force them to retain the third-party managers. Randolph said that half will be farmed out to managers, but the funds will want to learn how it is done until they can fully internalize. Setser also mentioned than in countries like China, there is strong pressure to manage funds internally, and also sees less use of third-party managers.