Funds explore liabilities side of balance sheet
NOT only the assets, but also the liabilities side of sovereign funds’ balance sheets are starting to matter. Their growing debt issuance is adding considerably to their overall investment potential. Prior to the 2008 financial crisis, few sovereign funds issued debt; only three had done so before 2005. Yet their issuance took off after the crisis, as these institutions sought to develop their local bond markets, acquire leverage, or diversify their funding sources. In spite of this, their outstanding bonds are still a fraction of the total global bond market. An important distinction that needs to be drawn is between sovereign funds as asset managers and sovereign funds as holding companies. From the asset-side perspective, these are functionally equivalent. Yet important differences emerge when looking at the liability side of their balance sheets. Issuance by the latter, especially through subsidiaries, is more like corporate debt than supranational or agency debt. For instance, Dubai World is a minor bond issuer as a holding company, but its shipping subsidiary Dubai Ports World has significant debt. The latter should be considered distinct as it is fundamentally corporate debt.