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SWFs and cross-border investment
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- 3. Motivation and Objective • Traditionally, SWFssave extra‐budgetary surpluses (from resource revenues, foreign exchange reserves, or pension contributions) to smooth public revenue volatility and spending as well as to ensure intergenerational equity. • Enjoying ample liquidity, some SWFs with deep pockets (with over US$ 30 billion in assets) have emerged as major global investors (of global equity), seeking long‐ term investment opportunities, • Typically, SWFs have the choice to pursue either domestic (home) investments or abroad.
- 4. Motivation and Objective • The objective of this paper is to investigate the determinants of SWF capital allocation decisions between the home country and abroad. • In particular, the paper asks the following questions: •Do SWF investment decisions reflect profitability and economic objectives or other strategic considerations (such as geography, culture, or other geopolitical considerations)? • Do sovereign wealth funds target strategic sectors for their investment? • What determines the SWF decision to invest in infrastructure outside of the home country?
- 5. Motivation and Objective • Using data on the financial transactions on SWF and building on the limited literature on SWF, we use a random probit model to analyze the choice of the investment decision to be either home or abroad. •We control for both economic and political objectives • We also implement a few more controls: • The investment economic sector • The investment type (equity, real estate, infrastructure…etc) • Indicators of political and economic governance institutions. • We also extend the concept of domestic to include neighboring countries, with the view that the GCC countries may have potential considerations leading to investing in neighboring countries with close geographic, cultural and strategic ties.
- 6. Outline • Literature review • Data •Methodology • Descriptive statistics • Econometric results • Conclusion
- 7. Outline • Literature review • Data •Methodology • Descriptive statistics • Econometric results • Conclusion
- 8. Literature review • Borrowing from the literature on the determinants of cross‐border investment or foreign asset allocation • Thehome bias concept would suggest that investors prefer to investment in familiar environments (limited information asymmetry), which would translate in over‐investing in the home country and under‐investing abroad (e.g., Edison and Warnock, 2004; and Gelos and Wei, 2005) • Yet, the decision to invest abroad also depends on profit‐maximization considerations subject to an acceptable level of risk (political stability in the host country) • Other country characteristics such as economic governance (investor protection), culture and physical distance (geography) have been found to determine global asset allocation outside of the home country.
- 9. Literature review • In the particular case of SWFs, existing literature show that SWF home investments may not be desirable: • They may be inconsistent with macro stabilization objectives and may exacerbate business and asset‐price cycles by investing in domestic infrastructure. •They may be subject to political interference and elite capture, especially on the back of limited transparency • Weak public financial systems (ex‐ante project selection, appraisal and public procurement) may undermine the quantity and quality of public investments.
- 10. Literature review • Yet, findings from the previous literature show that: • SWFs may act purely or principally as commercial investors facilitating cross‐ border corporate investment (Balding, 2008 and Megginson et al., 2013). •They tend to respond to macroeconomic characteristics of destination countries (Knill et al., 2012): • SWF investment has a positive (negative) impact for relatively closed (open) countries. • SWFs may have non‐financial motives in investment decisions : • SWFs prefer to invest in nations with which they have weaker political relations (Knill et al., 2012). • They tend to invest in countries that share the same culture (Chhaochharia and Leuven (2009)) or that are geographically closer (Karolyi and Liao, 2009).
- 11. Outline • Literature review • Data •Methodology • Descriptive statistics • Econometric results • Conclusion
- 12. Data • We collect data from the SWF institute • We look at x number of SWFs (not pension funds) with assets estimated at xx and account for x percent of the assets of SWF. •They carried out 16,916 financial transactions between 2005 and Q1‐2016. The total amount of these transactions is estimated at over 1 trillion USD. • In total, on over xxx foreign equity investments by SWFs over the period 2005‐ 2015. • We are able to identify the investment biases of SWFs with respect to the type and sector of these SWF transactions.
- 13. Outline • Literature review • Data •Methodology • Descriptive statistics • Econometric results • Conclusion
- 14. Methodology • Building on Bernstein et al (2013), we analyze how funds vary in their allocation of investments between the home nation and abroad by estimating a random probit model where the dependent variable is a cross investment dummy, which equals one if the target investment is made abroad and zero otherwise: Prob(Crossij) = α0 +α1 ln(GDPi)+ α2 ln(GDPj) + α3 ln(LendRatei)+ α4 ln(LendRatej) + α5 ln(Distij) + α6 ComLangij + α7 Insti + α8 Instj + α9 Ln(Rent/cap)i + εij
- 15. Methodology • In someregressions, instead of introducing independent variables for both home and foreign countries, we introduce their differentials (for GDP, lending rate and institutional variables). • Moreover, institutions are measured by four main indices: • Polity IV • Time to enforce contracts • Time to start a business • Time to pay taxes • We also run some regression where the dependent variable is a dummy variable that takes the value of one if the cross border investment takes place in the infrastructure sector and zero otherwise.
- 16. Outline • Literature review • Data •Methodology • Descriptive statistics • Econometric results • Conclusion
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- 19. Descriptive statistics • Most GCC SWF transactions are in in the financial sector followed by the real estate and infrastructure sectors. 0 500 1000 1500 2000 2500 Consumer Discretionar Consumer Staples Energy FinancialsHealthcare Industrials IT and telecomm Real estate and infrastructure Materials Media and Entertainme Utilities GCC ROW
- 20. Descriptive statistics • GCC SWF FDI is targeted at consumers sectors followed by finance, industry and then real estate 0 50 100 150 200 250 300 350 400 Consumer FinancialsIndustrials Real estate and infrastructure IT and telecomm Materials Energy Utilities Media and Entertainme Healthcare Domestic Investment FDI
- 21. Descriptive statistics • SWF mainly invest in listed equity, followed by infrastructure and real estate 0 2000 4000 6000 8000 10000 12000 14000 16000 GCC ROW Convertible and fixed incomeInfrastructure and real estate Infrastructure and real estate Equity Alternative instruments
- 22. Descriptive statistics • GCC SWF transactions in by investment type Investment TypeARE BHR KWT OMN QAT SAU Convertible 1% 0% 1% 0% 4% 0% Fixed Income 1% 0% 0% 6% 1% 0% Fund 0% 0% 0% 0% 0% 0% Infrastructure 1% 0% 0% 3% 1% 0% Listed Equity 81% 0% 93% 22% 27% 94% Private Equity Fund 0% 0% 0% 9% 0% 1% Real Estate 8% 25% 3% 34% 39% 0% Real Estate Fund 1% 0% 0% 0% 0% 0% Unlisted Equity 7% 75% 3% 25% 27% 5% 100% 100% 100% 100% 100% 100%
- 23. Descriptive statistics Top Five Destination for GCC countries (most of them are in equities) Kuwait UEA OmanSaudi‐Arabia Qatar 1 JOR 1 JOR 1 CHN 1 NOR 1 SGP 2 CAN 2 KWT 2 OMN 2 GBR 2 YUG 3 KWT 3 MAR 3 USA 3 MYS 3 LUX 4 IND 4 TUN 4 AUS 4 CYM 4 AUS 5 GBR 5 GBR 5 HKG 5 TWN 5 NLD
- 24. Outline • Literature review • Data •Methodology • Descriptive statistics • Econometric results • Conclusion
- 25. Econometric Results: Levels ‐ The greaterthe distance, the higher the likelihood to invest abroad (uncertainty effect). ‐ The higher the GDP at destination, the more probable to invest abroad (market effect). ‐ Time to pay taxes and polity have a significant impact
- 26. Econometric Results: Differentials • When wetake the difference between the acquirer and the target countries, all the variables become significant and with the expected signs.
- 27. Econometric Results: Levels for Infra. • GDP anddistance still matter. • The interest rate differential is not significant: economic considerations do not have a significant impact on investing abroad in this sector.
- 28. Econometric Results: Differentials for Infrastructure • GDP anddistance still matter. • Institutions are not significant.
- 29. Econometric Results: Differentials for Infra • We controlfor languages and it turns out to be positive and significant: sharing common languages increase the likelihood of investing abroad in infrastructure. • The interest rate differential is also not significant. • GDP and distance still matter.
- 30. Outline • Literature review • Data •Methodology • Descriptive statistics • Econometric results • Conclusion
- 31. Conclusions • Promising, yetvery preliminary, results on determinants of cross‐ border SWFs’ investment • Plan to consider more econometric analysis, using: • Alternative sets of institutional variables • Measures of infrastructure deficits at home and abroad • Membership in regional economic or political groupings • Account for SWFs institutional features, such as transparency, possibly in a smaller sample for which data is available
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