The Use of Debt by Sovereign Wealth Funds

Abstract

This chapter documents the use of debt capital by sovereign wealth funds (SWFs)—a growing and under-researched phenomenon. Three reasons are given for this. First: debt can help SWFs reach their target portfolio size. (Some do not receive regular inflows from their governments to increase their assets under management (AUM). Second: the development of capital markets is a key objective for most of the countries that have created an SWF, and debt may be especially useful for the development of the bond market. SWF bonds are quasi-governmental securities that can be used as collateral and create a reference yield curve. Third: the use of debt capital is particularly appropriate for portfolio SWFs investing in concentrated portfolios of selected companies for strategic and financial reasons. SWFs are more likely to use debt when they are non-commodity-based, come from countries with relatively less developed bond markets, and have a strategic investment style.