RM Paper Explores SWF Issues

A new report from RiskMetrics Group's Governance Institute that explores the governance implications of sovereign wealth funds suggests pressure from lawmakers and regulators for increased disclosure by sovereign investors could have "unintended consequences."

Growing political pressure on sovereign investors to be more transparent may potentially steer them away from taking stakes in U.S. corporate issuers.

The report notes that in a May regulatory filing, Washington Mutual disclosed that it had approached eight sovereign wealth funds as part of a capital solicitation. None “indicated an interest in participating” with the Seattle-based bank, according to the filing, and the bank instead relied on capital from private-equity firm TPG.

The lack of interest in Washington Mutual’s offering, according to the RiskMetrics' report, may suggest sovereign investors are weary of the potential for political fallout from additional direct purchases of distressed U.S. companies. That view, the report notes, is buttressed by the announcement in June of plans by China’s State Administration of Foreign Exchange to invest US$2.5 billion in TPG, thereby suggesting the preference for indirect investments in U.S. equities.

Should SWFs decide to invest more money into private-equity firms and other alternative investments in light of "political heat" generated by investments in issuers, boards may see an increase in M&A activity and proxy fights, particularly if that money flows to those adopting an activist strategy.

Corporate directors may find this emerging trend of interest. According to the report, should SWFs decide to invest more money into private equity firms and other alternative investments in light of "political heat" generated by investments in issuers, boards may see an increase in M&A activity and proxy fights, particularly if that money flows to those adopting an activist strategy.

The full report, "Sovereign Wealth Funds & Emerging Governance Issues," is intended to provide an overview of SWFs, identify key and emerging issues of interest to institutional investors; and explore potential solutions to concerns related to the transparency practices of sovereign investors.