Sovereign wealth funds in a post-pandemic landscape: a UK perspective

The ‘Post-Pandemic Landscape’ presents the UK with challenges that are impacting its economy and people. In this new landscape the British government must continue to stimulate a stagnant economy, navigate through the various challenges, and continue to attract Foreign Direct Investments (FDI) as full implications of Brexit and the Covid-19 disruptions take effect. Furthermore, the governments ‘10 Point Plan’ for starting a ‘New Green Industrial Revolution’ and achieving ‘Net-Zero’ carbon emissions by 2050 will require substantial levels of investments that we estimated to be over £440bn. The UK will require suitable investors with a long-term horizon, large capital and have Environmental, Social and Governance (ESG) principles; enter Sovereign Wealth Funds (SWFs), a distinct class of investors with US$10tn of Assets Under Management (AUM). The objective of this research is to enhance our understanding of SWFs in the post-pandemic era, and from a UK perspective where there is currently a gap in the literature. To assess how SWFs can be of benefit to the UK, this thesis investigates their investments and allocations amongst different assets, the attractiveness of the UK for the funds, and assess their ESG principles. To answer our research questions, a qualitative methodology was used, with an Interpretivist Interdisciplinary approach. We conducted a documentary analysis of annual reports of 22 SWFs before and after the pandemic. Using Thematic Analysis, four Key Relevant Themes (KRT) were identified: Mandates, Financial Performance, Investment Allocations and ESG; these were used as beacons for discussions and interpretation. Additionally, primary data were obtained via 15 interviews with leading figures from academia, research consultants, politicians, and representatives of five SWFs. This thesis makes empirical and theoretical contributions to the field of Political Economy and Theories of International Trade. With an expanding and sometimes conflicting range of definitions and lack of clarity on the ownership and beneficiaries of the funds, we placed SWFs in the context of State Capitalism, a form of state intervention in pursuit of financial and strategic motives that includes cross-border investments. SWFs have adopted the Modern Portfolio Theory as their preferred investment strategy to diversify their capital allocations to maximize their financial returns. Empirical results suggest that SWFs have been shifting their investment strategies towards ‘alternative’ assets such as real estate, infrastructure, and private markets. The pandemic has accelerated their investments into new innovative ventures including technology, consumer goods, life sciences and artificial intelligence (AI). SWFs have become venture capitalists, both domestically and internationally, with some funds morphing their savings and development mandates to become what is known as ‘strategic funds’, seeking natural resources, assets and markets for their state champions and domestic companies, hence engaging in Strategic Foreign Direct Investment (SFDI). We developed a Sophisticated Investors Theory that highlights the evolving nature of these funds because of gaining external experiences and developing their internal capabilities to meet their financial and strategic objectives. SWFs have continued to invest in the UK in the post-pandemic era; we can verify that they have over £130bn of Assets Under Management (AUM) in the UK, but the actual figure is likely to be much higher. We argue that the UK remains an important destination for SWFs capital allocations due to its ‘Internationalized Statism,’ a sound financial ecosystem and access to a diverse pool of assets. SWFs are also developing their ESG policies, becoming more transparent and taking the risks of climate change more seriously; this enhances their suitability as co-investors for the UK’s Green Industrial Revolution and drive to Net-Zero. The newly established Office for Investment (OFI) has been successful in attracting substantial levels of funds from both Mubadala of UAE and Qatar Investment Authority (QIA). However, the UK can substantially benefit from using Sovereign Investment Partnerships to attract more SWFs to invest in UK’s drive for a New Green Industrial Revolution. Furthermore, as a policy recommendation we suggest that in the post-pandemic landscape, the UK should also consider establishing a British Sovereign Wealth Fund. A British fund can attract further large-scale investment and accelerate the growth of key sectors across the country such as renewable energy, life sciences, venture capital and technology. A British fund can also function as a savings vehicle to support future pension liabilities, giving British citizens a stake in all its investments.