Are sovereign wealth funds “white knights”?

Abstract

PurposeIn the continuing credit squeeze, sovereign wealth funds (SWFs) are still active in international lending and are eagerly sought out by large, cash‐strapped companies in the West. The purpose of this paper is to examine their nature and strategies before and after the onslaught of the credit crunch and global economic downturn in order to advise corporates on how best to design their strategies and terms in approaching the SWFs for funds.Design/methodology/approachAn analysis is made of SWFs in their dealings with Western corporate borrowers and a case study made of Barclays Bank which, faced with three major options in 2008 to raise a large amount of cash, chose to attract funding from three Gulf SWFs.FindingsSWFs certainly qualify as lenders of last resort (“white knights”), providing ready loans, albeit on premium terms, at a current time of severely restricted credit supply from other sources. Alternative sources of funds – stockholders and government bail‐out – also suffer from disadvantages relating to the characteristics of their loans.Practical implicationsCorporate borrowers should currently view SWFs as attractive “white knight” sources of loans when other providers are constrained. The analysis in this paper, including the experience of a major borrower, Barclays Bank, suggests that SWFs are demanding tougher terms as a result of their strong bargaining positions and historical losses, and that companies should tailor SWF loan contracts to contain maximum incentives and safeguards to produce successful results.Originality/valueThis is the first paper to analyse the new role and strategies of SWFs in the credit crisis context, as well as the required response of cash‐strapped companies seeking loans from them.

The role of sovereign wealth funds as activist or passive fund managers

“…The average assets under management of SWF are by far larger than those of PPF, which raises doubts about an unadjusted transfer of evidence from PPF to SWF. Couturier et al (2009) are more in favor of an activist investment perspective when they discuss the abilities of SWF as lenders for cashstrapped companies during the financial crisis. By contrast, Bodie and Brière (2014) take a more passive perspective on SWF engagements.…”

Political Significance of Sovereign Wealth Funds

“…For certain cash-strapped companies in the West, they turned out to be veritable "white knights" -friendly investors that despite high risks moved to salvage distressed companies. Couturier et al (2009) cite the example of Bank Barclay, which being on the verge of bankruptcy managed to attract funding from three Gulf SWFs (albeit on premium terms). In a broader context, the SWFs' readiness to invest counter-cyclically is per se a stabilizing factor.…”

Delegation in sovereign wealth funds

“…1 The change in perception of these government-owned investment vehicles, which are managed separately from official reserves, and the adjustment of the public opinion about this phenomenon are remarkable. Not so long ago, SWFs were seen as one of the vicious instruments of state-owned capitalism, but in times of financial crisis and global depression, they became ''white knights'' for cash-strapped companies or countries and attractive buyers of last resort (Couturier et al 2009). Presently, SWFs are interpreted as a symbol of a shift in global power.…”