Asset Management

Sovereign Wealth Funds' Lessons For HNW Advisors, Family Offices

Tom Burroughes Group Editor May 17, 2024

Sovereign Wealth Funds' Lessons For HNW Advisors, Family Offices

We talk to an organization speaking for the world's sovereign wealth funds about the big trends in the sector. SWFs have some similarities – of a kind – to large family offices, and we explore the parallels.

Gathering in London from May 28 to 30, the Sovereign Wealth Fund Institute, representing organizations collectively in charge of trillions of dollars of funds, will be meeting for a global wealth conference. SWFs are state-backed and controlled entities, yet they have (some) similar characteristics of large family offices. Typically, they must invest for the long term; they can be large acquirers and holders of illiquid assets. On the other hand, with SWFs in democratic states, such as Norway, there are limits to how much freedom of action they have. In other countries, however, there is considerable latitude. 

Some of the changes in investment thinking that family offices are acquainted with have also affected SWFs. And these big funds can also hold stakes in the kind of banks and wealth managers that readers might work for. There are, in short, crossovers between family offices and SWFs.

This news organization interviewed Lakshimi Narayanan, chairman of the Institute, about the conference, the Institute’s thinking, and thoughts about wealth management. 

Family Wealth Report : Sovereign wealth funds are, in some ways, similar to large family offices in terms of how they are supposed to invest for future generations and act as custodians of wealth, often requiring a particular approach to investing and risk. Do you agree with this, and do you think there are particular lessons that SWFs and family offices can learn from each other? 
Narayanan: Sovereign wealth funds and large family offices indeed share similarities in their long-term investment horizons and their role as custodians of wealth for future generations. Both types of entities often prioritize capital preservation, risk management, and intergenerational wealth transfer. However, SWFs operate on a much larger scale and have broader economic and social objectives, such as stabilizing national budgets and promoting strategic industries. 

Family offices can learn from SWFs' disciplined approach to asset allocation, risk management frameworks, and their ability to access unique investment opportunities. Conversely, SWFs can benefit from family offices' agility, entrepreneurial mindset, and their focus on preserving family values and legacy.

FWR: I notice that the conference features about 50 family offices in attendance – how important a connection is there between sovereign wealth funds and family offices? 
Narayanan: The connection between sovereign wealth funds and family offices is becoming increasingly important. Family offices are attracted to the long-term, stable capital provided by SWFs, while SWFs view family offices as valuable partners for co-investment opportunities and knowledge sharing. 

The Global Wealth Conference provides a platform for these two groups to engage, network, and explore potential collaborations. By fostering closer ties between SWFs and family offices, the conference aims to facilitate the exchange of ideas, best practices, and investment opportunities, ultimately benefiting both communities.

FWR: What do you see as being the most significant trends in how SWFs have been investing money over the past five, 10 years? Is it moves in alternative assets, ESG, impact, types of business sector, or other? Of all the changes that have taken place, what has surprised you the most? 
Narayanan: Over the past decade, sovereign wealth funds have significantly diversified their investment strategies. One notable trend is the increased allocation to alternative assets, such as private equity, real estate, and infrastructure. This shift reflects SWFs' desire for higher returns and their ability to tolerate illiquidity. Additionally, many SWFs have embraced ESG investing and impact investing, recognizing the importance of sustainability and responsible investing. 

The growing focus on technology and innovation-driven sectors, such as healthcare, fintech, and clean energy, is another significant trend. What has pleasantly surprised me the most is the speed at which SWFs have adapted to the changing investment landscape and their willingness to take on more complex and specialized investments.

FWR: Some sovereign wealth funds are based in liberal democracies, such as Norway; others are in different political entities. In your view, how are sovereign wealth funds performing today in terms of their investment transparency, and being accountable to the citizens of countries in which SWFs reside? Where do you see a need for change? 
Narayanan: Transparency and accountability are critical issues for sovereign wealth funds, given their role as state-owned entities. While some SWFs, such as Norway's Government Pension Fund Global, are known for their high levels of transparency and public disclosure, others have room for improvement. It is essential for SWFs to strike a balance between protecting their strategic interests and being accountable to the citizens of their respective countries. 

Increased transparency, regular reporting, and adherence to international best practices, such as the Santiago Principles, can help build trust and legitimacy. As the public's expectations evolve, SWFs will need to keep adapting and enhancing their governance and communication practices.

FWR: Many SWFs in the Middle East, for example, derive much of their wealth from carbon-based energy, and are likely to do so for some time, even with other technologies coming on stream. In general terms, do you expect the share of SWF revenues from carbon energy to decline, relatively, in the next 10 years? 
Narayanan: While many sovereign wealth funds in the Middle East currently derive a significant portion of their wealth from carbon-based energy, I expect this to gradually change over the next decade. As the global energy transition accelerates and the demand for renewable energy grows, SWFs will likely diversify their revenue sources and increase their investments in clean energy and low-carbon technologies. 

However, the pace of this transition will vary depending on each country's economic structure, energy reserves, and policy priorities. SWFs have a crucial role to play in supporting their countries' economic diversification efforts and positioning themselves for a more sustainable future.

FWR: SWFs can be important holders of stakes in particular businesses. Can or should SWFs, given that they are state bodies, be “activist” investors, bearing in mind the sometimes political sensibilities? (For example, the controversy over whether a UAE-backed bid for the UK's Daily Telegraph group can take place.) 
Narayanan: Sovereign wealth funds, as state-owned entities, must carefully consider their role as investors given political sensitivities. While SWFs have the potential to be influential shareholders and drive positive change, they must also maintain their credibility as long-term, financially-oriented investors. Engaging in overtly activist behavior could be seen as politically motivated and might raise concerns about foreign state influence in domestic affairs.

In the case of the UAE-backed bid for the Daily Telegraph group, the controversy highlights the delicate balance that SWFs must strike. Media ownership by foreign state-linked entities can be particularly sensitive, given the potential impact on public opinion and national discourse. SWFs should approach such investments with caution, ensuring transparency and emphasizng their commercial, rather than political, objectives.

Ultimately, SWFs may be better served by engaging with companies through constructive dialog and collaboration, promoting best practices in areas such as ESG, innovation, and risk management while respecting the boundaries of their roles as state-backed investors.

WB: SWFs have existed in different forms for many years now. In what way would you say this sector has changed the most? 
Narayanan: The sovereign wealth fund sector has evolved significantly over the years, becoming more sophisticated, diversified, and influential in the global investment landscape. One of the most notable changes has been the shift from passive, conservative investing to a more active and dynamic approach. SWFs are increasingly taking on the role of strategic investors, seeking to create long-term value, supporting the development of key industries and technologies. 

Another significant change is the growing collaboration among SWFs as they seek to pool their resources, share knowledge, and invest in large-scale projects with global impact. As the world continues to face complex challenges, from climate change to social inequality, SWFs are well-positioned to play a pivotal role in shaping a more sustainable and inclusive future.

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