Lack of confidence in financial markets has driven investors and funds away from corporations. As balance sheets deteriorate, companies are in need of more and more capital, which investors are not willing to provide. In this setting, sovereign wealth funds (SWFs) have emerged as the funding source of the next few years. According to the Sovereign Wealth Fund Institute, SWFs manage $3,000bn. To put this figure into perspective, the hedge fund and private equity markets combined account for less than $2,000bn. Some estimates suggest that SWFs will manage more than $10,000bn by 2015.
However, SWFs’ investment strategies and potential political agendas remain controversial. In this article, we move beyond the strategic discussion and provide evidence on the impact of SWFs on company valuation, based on research done at IMD that covers more than 20,000 SWF holdings across 7,000 companies and covers funds’ stock holding in 58 countries’ stock markets. Our analysis of their portfolio choices shows how SWFs have a stabilising influence on companies, and that their ownership is positively valued by the market. We point to several reasons why SWFs can be valuable strategic investors: they have a positive impact on a company’s strength as an acquirer and value as a target; they allow companies to leverage political connections; they guarantee stable long-term finances; and as a cheap source of capital, they reduce companies’ cost of capital.