Canadian Investment Review

SWFs Working Together

Written by Ashby Monk on Tuesday, June 7th, 2011 at 9:10 am

293035_tug_o_warA little over two years ago, I wrote a series of posts on SWF collaboration, co-investing and clubbing. At the time, I was of the opinion that this sort of behavior would become increasingly common, believing that SWFs could fruitfully work together to bolster their returns. In large part, the economic geographer in me was convinced that the local knowledge and asymmetric information (not to mention access to deals and elites) that would come with partnering would have real commercial value for SWFs. And — no need to hide your shock at hearing this — it turns out I was right. In particular, CIC, GIC, KIA, KIC, Khazanah, Mubadala, and a few others have been actively partnering with other funds. And, recently, news about collaborative ventures has been spiking. Here is just a snippet of the collaborative ventures I’ve come across (or been told about offline) in the past month or so:

In addition, the New Zealand Superannuation Fund’s newly released statement of intent goes public with the fund’s plans to collaborate with peers:

“We are actively pursuing co-investment and research opportunities and partnerships…Co-investment is our particular focus as it is a potentially valuable access point to investment opportunities.”

With all this activity, I thought it an opportune time to revisit the subject and add some conceptual logic to this increasingly popular trend. As I see it, there are a variety of factors at play here:

That’s not a complete list of why SWFs are working together, but it’s at least a start. And it gives you a sense for why this is taking place. After all, many people might expect these funds to behave like competitors with one another (which they are), but there is clearly still room for collaboration.

Now, to be fair, we should acknowledge some downsides to all this. For one, coordination costs in co-investments can be quite high. (A wise man once told me that the factor of complexity of a co-investment is the square of the number of co-investors; I still think that’s a fair assessment.) In addition, because of the asymmetric information among the collaborators, there are obvious agency issues to be considered in the design and governance arrangements.

Notwithstanding these constraints, however, I expect this trend to continue and become more popular. Working together offers a mechanism to grow their sovereign assets more quickly. Welcome to the era of SWF collaboration!

This post originally appeared on the Oxford SWF Project

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