Heterogeneity and internationalization of government investments: sovereign wealth funds and beyond

Abstract

Despite its continued significance and dynamic forms, government ownership is often presented in broad, monolithic terms. Comparing 67,464 government and private acquirer transactions over four decades, we highlight important distinctions in target selection and valuation effects of 129 unique government investment funds (GIFs), including sovereign wealth funds (SWFs), lesser-known subsidiaries called sovereign wealth enterprises (SWEs), and government-owned pension funds. GIFs, particularly SWFs, are significantly more likely to make foreign investments than non-government investors, which is consistent with their pursuit of internationalization. However, GIFs purchase smaller stakes in targets compared to private acquirers, reflecting concerns about their legitimacy and control over businesses, especially in foreign SWE transactions. Considering how investors evaluate government and private investments, we find that GIF transactions result in significantly lower target returns, with SWE acquisitions being the exception. Evidence suggests these results are driven by liabilities of stateness, such as multi-layered agency concerns and acquirer opaqueness, which vary across GIFs. We also find that macroeconomic conditions that restrict private investment create an internationalization channel for state investors. By recognizing a richer set of motivations and outcomes for various GIFs, public and private stakeholders can optimize state investment transactions, particularly as governments expand their use of different investing vehicles.