Investment Banks Seek Talent to Tap Sovereign Wealth Funds
Sovereign wealth funds (SWFs) are increasing compensation packages to attract the talent needed to manage their expanding portfolios. According to a recent FT report, the move by sovereign wealth funds to recruit their own experienced investment professionals reflects a shift from investing their money via third-party managers to investing it directly themselves. The FT contends that potential candidates are sober investors who understand risk. They have also typically come from endowments, pension funds and other public institutions.
Meanwhile, investment banks have made sovereign wealth funds a top priority as they seek to tap the vast pool of assets projected to hit $15 trillion within five years, according to Dow Jones Financial News. A recent report by Merrill Lynch Global Research also says that assets under management in SWFs could quadruple by 2011. The report states that SWFs are also likely to mandate external fund managers to invest the bulk of their assets resulting in “a major structural boost for the global asset management industry.”
As a result, investment banks are staffing up to boost their coverage of the funds. Executive search firm, A.E. Feldman, says the growing trend is likely to trigger a wave of hiring. Opportunities include risk management jobs as well as asset manager positions.
Sovereign wealth funds, investment vehicles funded by a country’s foreign reserves, have accelerated their purchases of stakes in western companies amid the credit crunch. Sovereign funds have existed since the 1950s, but their total size worldwide has increased dramatically over the past 10 to 15 years, according to the International Monetary Fund (IMF). This growth is expected to continue, led by Russia and South Korea. Currently, the IMF says that about one-third of sovereign wealth funds’ total assets are held by Asian and Pacific countries, including Australia, Singapore, and China.
Rapid Growth of SWFs
There are approximately 40 sovereign wealth funds world-wide, up from 20 in 2000. These funds and control about $2.5 trillion in assets, five times more than in 2000, according to the Government Accountability Office (GAO). Merrill Lynch Global Research also finds that assets under management in Sovereign Wealth Funds could surge to $7.9 trillion in five years. The report also states that a massive buildup of reserves at central banks is fueling this rapid growth, led by China, Russia and the Middle East.
Merrill Lynch economists expect this wave of extra liquidity to benefit world financial markets. Merrill Lynch Global Research adds that the funds are likely to hire external fund managers to invest their assets, providing a major structural boost for the global asset management industry.
Call for Increased Transparency
The rapid growth of sovereign wealth funds however, is not without controversy. Red flags were raised as funds spent billions of dollars for minority stakes in major U.S. financial institutions, such as Citibank, amid the subprime meltdown. Critics of SWFs argue the funds have the potential to adversely affect geopolitics as well as the U.S. and global economies. As a result, a new bipartisan Congressional panel recently announced plans to draft a set of “reasonable standards” for sovereign wealth funds.
Congressman Jim Moran, (D-VA) says, “With $2.2 trillion in currency reserves, sovereign wealth funds are poised to become the defining player in international finance. In the next decade, they are projected to grow to over $13.4 trillion, more than the value of the NY Stock Exchange. This bipartisan task force will explore issues surrounding sovereign wealth funds with an eye towards determining the need for legislative action.” Moran also says the emphasis will be on increased transparency for the typically opaque government-owned funds.
The group plans to seek input from the U.S. Treasury Department as well as the International Monetary Fund (IMF), which is developing a set of voluntary best practice guidelines for the funds.
As members of Congress monitor investment in the U.S. by SWFs, they are also examining how foreign governments are addressing this very issue. A new survey conducted by the GAO, demonstrates how other countries handle foreign investment, including investment by sovereign wealth funds and other state-owned companies. The survey found that six out of 10 countries polled have expressed concern recently about sovereign wealth funds. According to the GAO, “While the concepts of national security vary from country to country, all countries share concerns about a core set of issues. These include, for example, the defense industrial base, and more recently, investment in the energy sector and investment by state-owned enterprises and sovereign wealth funds. Most countries have established time frames for the review and can place conditions on transactions prior to approval.”
