Large scale was viewed largely as an impediment for achieving investment success because smaller funds were viewed as more nimble and less likely to move a market while it was securing disproportionate benefits (e.g., by investing in small cap stocks). Sovereign investment funds were few in number, lightly staffed, and seemingly one step behind their more adventurous institutional fund peers.
Today, the impact of these same sovereign funds cannot be understated both in terms of their impact on the global investment markets and economic development but also on modern life generally. Indeed, the significant changes we are seeing worldwide in ride-sharing versus taxis, away from motor-fueled cars and towards electric ones, and towards sharing office and home spaces can all be attributed in large measure to the actions of these sovereign investors. Rather than being rogue actors, which was greatly feared prior to 2008-2009, these sovereign investors have become a stabilizing force in the global capital markets for stocks and bonds because of their long investment time horizons and acceptance of long-term risk.
Moreover, rather than large scale being a disadvantage, these sovereign funds have also demonstrated that large size can become an advantage in terms of their ability to access new opportunities and their heightened credibility among project managers around the world who increasingly view them as the Investment Partners of Choice for international investing.
It is this now firmly established role as the Investment Partners of Choice for international investing that will enable the sovereign funds to have a disproportionately strong impact on modern life for many decades to come. Ma and Downs’ clear and expansive insights into these disproportionately important and yet little-known institutions will prove critical both to practitioners in the field of investing as well as to the general public seeking answers to the big picture questions of why the new unicorns transforming their lives arose from the modern financial system.
Russell Read, CFA, Ph.D., London
Russell Read, CFA, Ph.D. is the former Chief Investment Officer for the California Public Employees' Retirement System (CalPERS), the Gulf Investment Corporation (GIC-Kuwait), and the Alaska Permanent Fund Corporation (APFC)
Into the Vanguard of the Digital Transformation
Sometimes a book sheds light on a little known but powerful force. Sometimes it is timely because it catches the world at an inflection point. Rarely does a book accomplish both.
With the arrival of Sovereign Investment Funds: The Hunt for Tech Unicorns from Winston Ma and Paul Downs, we have that rare beast: a book that, against the backdrop of the world-altering coronavirus epidemic, provides a thoughtful guide to the role sovereign investors play in the world-changing digital transformation – and how one accelerates the other. The authors capture in a fast-paced, engaging format the way in which the world's largest pools of capital have again come to the fore, both as economic superheroes of the developing world and the comic-book villains of the developed markets.
Sovereign investors have gone from strength to strength as they navigated the first Gulf War, the Global Financial Crisis, and now the coronavirus pandemic. It is no wonder that they have been called upon in times of crisis. The resources at their command are staggering: $30 trillion, which may be on the conservative end. Simple, mechanical portfolio rebalancing at one of the larger funds can alter the course of the world's currency markets. Norway's fund holds, on average, 1.5 percent of every listed company on earth. And as they pivot from Wall Street to rescue their home economies, the resultant departure and arrival of their cash hoards will surely be felt as much in the corridors of investment banks as in their home governments' budgets and stimulus packages.
Meanwhile, the advent of stay-at-home orders and social distancing have only accelerated the trend toward the digitalization of everything. This digital transformation has been driven increasingly by massive pools of sovereign capital. Tracing the dramatic rise and recent fall of some unicorns – private companies with valuations of more than $1 billion — the book reveals in case studies how the Sovereign Investment Funds of its title have fueled the rise of this once-rare breed, backing the likes of Alibaba, AirBnb, JD.com, Tesla, Uber, WeWork, and the well-known unicorn-maker, the Softbank Vision Fund. And similarly, how they are themselves integrating AI and blockchain into their own operations – and into their thinking about mitigating digital disruption to their portfolios.
The book profiles a diverse cast of characters from the Middle East to Canada, from Southeast Asia to Africa, from Europe to Australia and from Latin America to East Asia as they invest in the digital transformation and are they themselves digitally transformed. The focus moves on from the tech hubs of Silicon Valley and Beijing to capture emerging hubs in India, Europe and the Middle East as well as Africa, a continent now entering the digital economy.
Geography also contributes to a growing digital divide: China and the US, homes to the authors, each envision a different digital future, forcing other nations to pick sides on such developments as the emerging 5G digital technology and the Internet of Things. The activities of sovereign investors are increasingly perceived as presenting risks as well but also, paradoxically, as the very means to counter those perceived risks. Against this backdrop, new funds are being launched and existing funds are being repurposed.
The sovereign investors are also becoming key arbiters of ESG and SDG principles. As major holders of equities, they have weighed in on sustainability, governance, climate change and more. In doing so, they have united across continents, giving one voice to their trillions as they speak to the companies with whose management they engage.
The authors' extensive, hands-on involvement in the deals and operations of this little-known world lends vibrancy as they recount practical, illustrative examples in a non-pedantic style. The book benefits from the contrasting backgrounds of its authors. Ma is a Chinese-born Wall Street veteran and was most recently the North America office head of China Investment Corporation (CIC), one of the world's largest sovereign wealth funds. He brings a depth of insight from his background as a lawyer, as a dealmaker, and as an institutional investor. Downs is American, formerly a partner in global law firm Hogan Lovells and has long acted as outside counsel for many sovereign funds across continents, bringing to bear on this book his decades of experience working on deals, governance and training. Together, their unique perspectives and differing approaches have produced a nuanced roadmap to the little known past and exciting prospects of these giants.
The book's timely message is clarion clear: the world's sovereign investors, the “trillion dollar club” in the authors' parlance, have shaken off their traditional, passive investor roles and stepped into the vanguard of the digital transformation we are all living through. No longer simply channeling their trillions through Wall Street handlers, these super asset owners have instead become active ESG guardians, fintech powerhouses, sustainability champions and – the authors propose a new leading role – digital diplomats. Thanks to the authors, we are now able to see clearly the perceived threat and – hopefully – the opportunity they present.
Margaret Franklin, CFA
President and CEO
CFA Institute
Charlottesville, Virginia
Authors' Notes and Acknowledgments
Winston Ma
At the early days of the global financial crisis 2007-2008, I was an investment banker and equity-linked products trader on Wall Street