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Josh Lerner Harvard Business School
• Where are sovereign wealth funds investing? • How successful have these investments been? • What drives the key differences in sovereign fund performance?
– Critical because of…
• • • • • Size. Future growth. Role in economic development. Politician’s concerns. Potential to supplant other intermediaries.
lack of clarity can unwarranted suspicions and doubts. . • At same time. – Secrecy as an optimal investment strategy.Limited insights • Relative limited information on groups and their activities. – Secrecy as a response to political controversy.
• This talk will highlight the key new insights from these works. . – Have illuminated many aspects. flurry of research into sovereign funds: – About one dozen papers released.But recent insights • In last year. – Have exploded a number of myths about these funds. – But leave a number of open issues.
.The agenda • A (very brief) history. • The new insights and surprises. • The open questions where research can add value.
– Holding company for strategic investments by government. • Variety of roles: – Sources of capital for future generations: • Like a university endowment.Early days • Pioneering awareness of Kuwait and others in 1950s of need to prepare for the future. – Provides an ability to smooth out cycles in commodity prices. .
Very different outcomes .
prudently managed. and interest represents 30% of national revenues. – Fund today is 10X GDP.. but lots of birds. – Fund established in 1956. . • Nauru: – Similarly small island. – Established fund upon independence in 1968. – Poorly invested in luxury real estate. etc.Very different outcomes (2) • Kiribati: – <100K residents. valuable phosphate deposits. – Fund entered receivership in 2006. London musical. – Mining stopped in 1979. national airline. theft and other problems.
• Only 1. .4 trillion). depending on how you count. mid-2008. • Big relative to hedge funds ($1. • $3.2% of all investible assets world-wide: – But rapid growth projected.Significant players • 40-70 funds.5 trillion of assets: – Morgan Stanley estimate.
. • The importance of fund governance. • Appear not to change firms in their portfolios. • The troubled track record of domestic investments.Insights from recent research • Sovereign fund investments are good news for targets. • Many concerns about investment strategies misplaced.
3% drop.1. . • Adjusted stock price rises on news of purchase: – Stock price up 1. – The bigger the stake. the more positive a reaction… to a point.7% on announcement. Han and Malatesta  look at 196 purchases and 47 sales of stock by SWFs. • Sales trigger a 1. Sovereign fund investments are good news for the target firms • Dewenter.
Reaction around stock purchase .
They may want to see their national companies compete effectively. 2007.2. or to extract technology or to achieve influence.” – Lawrence Summers. Financial Times. . It is far from obvious that this will over time be the only motivation of governments as shareholders. Many concerns misplaced • Many critics have suggested that sovereign funds investing to capture technology or key assets in the West: – “The logic of the capitalist system depends on shareholders causing companies to act so as to maximize the value of their shares.
et al. . – Appear to deliberately avoid sensitive industries and firms.Evidence • Miracky. • with different industries than those in home country. not developed nations. (2009): – Sovereign funds primarily focus on emerging markets. – Real estate and “old economy” industrial firms have been among most popular sectors. • Chhaochharia and Laeven (2009): – Sovereign funds tend to invest in countries … • with similar religion and culture.
• “Sovereign wealth funds are their own worst enemies. Joint Economic Committee. Little support for claims of distortions at portfolio companies • Many complaints that SWFs may distort firms in unseen ways. 2008. .3. February 13.” – Senator Charles Schumer. Most are not transparent or publicly accountable. and we know little about their governance structures or fiduciary controls.
. Profitability. Growth rates. CEO turnover. relative to similar firms: – No significant changes—for “better” or “worse”— in key performance measures: • • • • Governance.Evidence • Kotter and Lel (2009) look at changes at firms in three years after sovereign fund investment.
. • Also compute returns for public firms. not all deals and funds are equal! • Bernstein. 1984 to 2007. Lerner and Schoar  look at performance of 2662 investments by sovereign funds.4. • Look at change of P/E ratio in target industry and nation in the years after the deal: • Because many of firms are private. Investments made domestically do much worse • As Nauru/Kiribati example suggests.
7 -5.9 .3 +0.3 -0.Change in P/E ratio in country and industry in year after investment P/E change after domestic investment P/E change after foreign investment Asian sovereign funds Middle East sovereign funds -4.
• Moreover. since many investments made at relative peak.Troubling domestic performance • Asian and Mid-Eastern funds have negative industry P/E returns in year after deal at home (though about zero abroad): – Similar results hold for the returns of the subset of publicly traded firms. . unlikely to be “rescuing” companies.
focus on whether political leaders involved in the decision-making: – Data collected by JP Morgan as of 2008. . The fund’s organizational structure matters… a lot • Can governance structures help to explain the differences in investments across SWFs? • Would like to look at a broad array of measures. • For now.5.
He was appointed to the APFC board in July. He graduated from Northrop University with a dual degree in aeronautical and electrical engineering. Mr. and to serve on the APFC board. for a four-year term. and is a state-registered investment adviser. appointed February. appointed July. banking. prominent Alaska Native leader and Alaska public servant. In February. from1985 to 1986. 2009 Steve Rieger currently operates his own management and finance consulting businesses in Anchorage. and worked with Wall Street firms regarding its investment guidelines and governance. and a master’s degree in business administration from Harvard’s Graduate School of Business Administration. former Commissioner of the Department of Community and Regional Affairs. past president of Doyon Limited. 2007. and the Permanent Fund. and also holds an Honorary Doctorate degree from the Alaska Methodist University. A member of both House and Senate finance committees. and served on the APFC Board. Mr. He earned a bachelor’s degree in economics from Harvard University. and Veteran of the United States Navy. He was first president of the Alaska Federation of Natives.Example: Alaska Permanent Fund Emil Notti. Community and Economic Development.Governor Palin appointed Mr. Notti Commissioner of the Department of Commerce. representing south Anchorage. economics. As a legislative staffer before his election. Rieger served three terms in the Alaska House of Representatives and one in the Senate. 2007 Emil Notti is an engineer. Notti also held his commissioner's position. 30-year board member with the National Bank of Alaska. Steve Rieger. . 2009 by Governor Palin. Rieger helped develop the legislation establishing the Alaska Permanent Fund Corporation. his extensive legislative experience included the state operating and capital budgets.
and a master’s degree in business administration from Harvard’s Graduate School of Business Administration. A member of both House and Senate finance committees. and served on the APFC Board. former Commissioner of the Department of Community and Regional Affairs. representing south Anchorage. and is a state-registered investment adviser. 2009 Steve Rieger currently operates his own management and finance consulting businesses in Anchorage.Governor Palin appointed Mr. Rieger helped develop the legislation establishing the Alaska Permanent Fund Corporation. and also holds an Honorary Doctorate degree from the Alaska Methodist University. He was first president of the Alaska Federation of Natives. 2007. 30-year board member with the National Bank of Alaska. past president of Doyon Limited.Example: Alaska Permanent Fund Emil Notti. Mr. Notti also held his commissioner's position. his extensive legislative experience included the state operating and capital budgets. appointed February. . Mr. Community and Economic Development. for a four-year term. As a legislative staffer before his election. Steve Rieger. In February. prominent Alaska Native leader and Alaska public servant. and worked with Wall Street firms regarding its investment guidelines and governance. economics. from1985 to 1986. Notti Commissioner of the Department of Commerce. and Veteran of the United States Navy. 2009 by Governor Palin. Rieger served three terms in the Alaska House of Representatives and one in the Senate. He graduated from Northrop University with a dual degree in aeronautical and electrical engineering. appointed July. He earned a bachelor’s degree in economics from Harvard University. and the Permanent Fund. He was appointed to the APFC board in July. and to serve on the APFC board. banking. 2007 Emil Notti is an engineer.
Sovereign fund investment type and performance Politicians on Investment Committee Share of deals in home country Share of deals in home country or region Average deal size ($MMs) Politicians Not on Investment Committee 44% 75% 190 31% 60% 148 Change in P/E ratio in industry and country in year after deal -2.8 .6 -0.
• Obtain a negative change in industry P/E the following year.Governance and investment choices • SWFs are more likely to invest at home if politicians are involved in investments • Politician-influenced SWFs: • Invest in industries with higher P/E ratios. .
natural resource price changes and investment strategies? • What are consequences of more transparency about investment strategies? • What incentive schemes are best at attracting and retaining professional staff? • How can continue to generate returns as grow larger? – Particularly challenging in alternative investments.Open issues where research can add value • How to should respond to changing conditions: – E.g.. .
.Taking stock • So far. • But more work is surely needed: – Much of which should be more useful to funds.” • But important because it provides… – Ammunition to address critics. much of research has told us “what we know already. – Underlines areas where opportunities to change.
MA 02163 USA 1-617-495-6065 josh@hbs.Josh Lerner Rock Center for Entrepreneurship Harvard Business School Boston.edu/jlerner .hbs.people.edu www.