on the determinants of sovereign wealth funds investment: are arab swfs different?
TRANSCRIPT
On the Determinants of Sovereign Wealth Funds’ Investments:
Are Arab SWFs different?
Washington DC, 9-10 September, 2016
Mohamed Arouri
Université d’Auvergne, France
Sabri Boubaker
ESC Troyes, France
Wafik Grais
Central Bank of the Republic of San Marino & ERF
Motivation of the paper
• SWFs control more than $ 7 trillion with an acceleration intheir growth in the recent decades until lately
• SWFs have Different goals:
- Inter-Generational Transfers: They transfer present to future times � they serve as a source of capital for future generations.
- Economic Stabilization: Stabilize funds to reduce boom and bust of commodity dependent economies � The government access fund capital to smooth out economic downturns.
- Developmental: SWF are a means to diversify the domesticeconomy and improve human capital.
What do SWFs invest in?
• They are long term institutional investors and have similar financialobjectives: maximize their risk adjusted returns by holding welldiversified portfolios (across asset classes, industries andgeographies). Their demand for liquidity reflects their long-terminvestment horizon.
• They are state owned funds � they may have sovereign objectives� take into account non-financial considerations.
• The fusion of the investment and development objectives isexpected to have portfolio allocation implications;
• A rich ongoing financial literature tests the validity of the twohypotheses : Long term financial investors versus sovereigndevelopment funds(Dyck and Morse, 2011;Knill et,2012; Megginsonand You, 2013; and Boubakri et al.,2016).
• In the literature, some recent studies have shown thatnon-financial (sovereign developmental) objectivesmatter in SWFs investment strategies [Dyck and Morse(2011), Megginson et al. (2013)].
• Some studies/reports suggest that Arab-SWF are lesstransparent and more difficult to disentangle from thelocal economy than other funds (Balding, 2012) �
They seem to serve more sovereign objectives thannon-Arab SWF.
• But those studies do not explicitly compare Arab andnon-Arab SWF investment strategies.
Contributions of the paper
• Investigate determinants of Arab SWFs’
investment decisions
• Check whether Arab SWF investment
strategies are different from non-Arab SWF.
Data
• The initial sample considered contains all sovereign wealth funds’ successful acquisitions of publicly traded firms over the period 2000–2014.
• Details of these transactions are obtained from different sources:Thomson Reuters SDC Platinum Global Database, Bureau Van DyckZephyr Database of Global Mergers& Acquisitions, and thesovereign wealth fund (SWF) Institute website(www.swfinstitute.org). Target―level financial data (in US dollars)are retrieved from the Worldscope database and country–level macro–economic data are gathered from the World Bank.
• Data on the enforcement of insider trading laws and theestablishment of the host countries’ main exchanges are retrievedfrom Bhattacharya and Daouk (2002).
• We discard all deals for which the needed
financial data of the target party are missing.
• The final sample includes 223 firms targeted
by SWFs over the 2000–2014 period, among
which 73 (33%) are targeted by SWFs owned
by Arab countries: Bahrain (1), Libya (5), Qatar
(36), Saudi Arabia (4), and United Arab
Emirates (UAE) (27).
Empirical approach
• A Probit model is used to investigate the determinantsof Arab SWFs’ decisions to invest in publicly tradedfirms.
• A right hand side variable is Arab_SWF, a dummyvariable set to one if the firm is targeted by a SWFowned by an Arab country, and zero otherwise.
• The model also contains a set of independent variablesshown in previous studies to bear on SWFs investmentdecisions: Target―level variables andCountry―specific variables
Conclusion
• We studied the determinants of Arab SWFs’ investment decisions using a sample of 223 firms targeted by SWFs over the 2000–2014 period (among which 73 are targeted by SWFs owned by Arab countries).
• We show that :
- Arab SWFs have higher preferences for larger firms in comparison tonon―Arab SWFs.
- Targets operating in strategic industries (such as the financial sector,mining, telecommunication, utilities) are more likely to be acquired byArab SWFs than firms in other industries.
- Firm―related variables measuring investment targets’ liquidity,profitability, growth or dividend payout are not the main drivers of ArabSWF investments.
- Additional results show that target countries with higher levels ofeconomic and capital market development are more attractive for ArabSWFs in comparison to non―Arab SWFs.