How did you get into the field of sovereign wealth?  

Things came together in a rather extraordinary way, actually.  I just happened to be doing a master’s degree on financial markets at the exact time of the global financial crisis: 2007-2008. It could not have been a riper learning environment and the director of my program, Emilio Ontiveros, decided we’d focus the entirety of the course on studying the crisis.  I filled myself on papers from the IMF, OECD, World Bank, and many academic discourses. We were trying to understand what was going on. And, one of the hot topics in those days was sovereign wealth funds and the idea of state-owned investment funds fascinated me.  Why had they deployed so much money (at the time, in 2008, nearly USD60 billion) in the Western banking system (UBS, Barclays, Citigroup, Morgan Stanley, etc)? What was the intention; the significance? We were required to prepare a session on a given topic (lenders of last resort, credit rating agencies, and subprime crises) and, you guessed it, I chose SWFs. Then I was lucky to meet with Javier Santiso, who became my PhD Co-supervisor and boss for many years, and was one of the few people in Europe researching SWFs.

Since then, my life has been quite sovereign =).  These giant investors have changed a lot! I’ve been publishing an annual report on SWFs, now in its tenth year and the research has allowed me to travel the world, from Vancouver to Auckland participating in academic and practitioner conferences on sovereign wealth.  In addition, I’m the director of the Sovereign Wealth Research at IE University’s Center for the Governance of Change and I teach an advanced seminar on the topic at the university as well as courses in the Bachelor in Politics, Law and Economics program.

Is there a model for SWFs that works better than others? 

It’s a good question and the quest of the IMF and many governments. In my opinion, governance, accountability, and clear investment and fiscal mandates are the ingredients for success. Governance means many things but in the case of SWFs, independence from governments is essential. They should be able to follow their mission without political pressures. Accountability means mainly transparency, and is the explanation for why very democratic countries have very transparent funds (Norway, New Zealand.) And the investment and fiscal mandates… for example, how much of the oil and gas revenues should go to the fund, how much to the budget? When can politicians withdraw money from this long-term pocket? Funds tend to behave properly when these rules are clearly stated, defined, and followed. There are good examples of functioning SWFs in complicated countries such as Nigeria and Botswana, as well as in the United Arab Emirates.

And on the flipside, there are some not so good examples, for example Malaysia, Brazil, Libya, and Angola. The Malaysian case is quite illustrative. They used to have two SWFs, one is quite transparent, well defined and internationally oriented. The other was quite opaque, without a clear mission or monitoring, and it focused solely on domestic development (this is not necessarily bad, but increases the odds of misconduct) Yes, the 1Malaysia Development Berhad (1MDB) was the opaque one and was one of the world’s biggest financial scandals; governance was completely missing, as was accountability. In the case of Angola, the son of the president ran the SWF, and it was suspected that some checks and balances were not put in place. What is interesting about both of these two cases is that the world learned of the issues when the new governments came to power – and in both cases, the new governments were able to dismantle the situation and bring transparency to the public resources.

What does the maturation of SWFs tell us about globalization and the future of finance?

SWFs have started to co-invest more and more with the established financial players around the world. This public-private investment cooperation is growing substantially. There’s a very interesting paradox, which I can spend hours discussing with my colleague and co-author Patrick Schena: SWFs are government-owned or controlled, yet we have seen the sovereign wealth fund of China establishing alliances with private investors in countries like France and the United States, at a time when these countries were rising barriers to prevent China from investing. So, SWFs add a new layer of complexity to international relations, below state-state dyads and above private players. This is the very nature of SWFs: hybrid players between the state and capitalism.

I do not think, however, that these different layers (government, hybrid state-controlled investment vehicles, private companies) will work without some sort of coordination in a given country. But they do represent different and more complex relations between countries (and within countries) and introduce new questions about international relations. When a SWF invests in a company that creates environmental damage or is involved in a corruption scandal, who is responsible? Is it up to the government that ultimately controls that particular SWF? Does it only stop at the SWF? Often, SWF boards  are filled with government officials, including Ministers and even presidents. Yet, at the same time, as mentioned, the SWF industry is generally quite heterogeneous and some funds act much more independently from governments than others.

Can you talk about Europe specifically?

SWFs now have sophisticated workforces, with offices around the world (though mainly concentrated in the US, India, and the United Kingdom). Meanwhile, Europe is consistently among the main destinations of SWF investment, and we can expect to see more investment in Europe, particularly in the tech scene.

One of the largest recorded investment deals in Europe came about when China Investment Corporation acquired Logicor, a pan-European logistics company (with lots of warehouses in various European capitals.) The reason to invest USD14 billion is quite clear: consumer behavior in Europe is shifting to digital. But digital requires a lot of brick-and-mortar (warehouses) and SWFs are quite reasonably content to own these warehouses that are now (and in the future will be) used heavily by the likes of Amazon, Zara, or Alibaba.

What’s in the future for SWFs?  

There will be a lot of pressure for SWFs to be sustainable investors. The recent announcement from Norway’s SWF is just the beginning for sustainable development goals. I expect more SWFs will align in this way, not only because it’s the trend but because, for many of them (particularly natural resource-based SWFs), it is a way to diversify risks. In the near future, changes in investments like this will be driven even more by societal demands (citizens calling for their wealth to be invested in a certain way), and by regulation and long-term risk-management (considering stranded assets or environmental damage.)

When one country invests in another, information is exchanged – and some of it could be quite sensitive, right?

The Santiago Principles were written precisely to prevent SWFs from investing solely for non-financial motives. Yet, it’s important to note that this is a non-binding document. So it helps in the sense that if you do not agree with the Santiago Principles, at least you should explain why to recipient countries or regulators. It is a good step, and necessary, but not sufficient.

One innovative solution to this issue relates to co-investments. Europe is using this kind of hybrid co-investment SWFs to minimize the “information extraction risk” while inviting foreign SWFs capital (mainly Gulf-based funds and China). The idea is simple: the host country establishes a vehicle that will co-invest jointly with the foreign fund in companies and projects. That way the “host” country in the agreement is at least aware of any sensitive material in the fund that is being shared with the other country. This hybrid process also helps funds that are targeting companies in the models already established in France, Italy, Spain or Ireland access more “complicated” markets in the likes of China, Oman, or the United Arab Emirates.

Another, albeit more disputed, solution is to allow capital from SWFs into listed or privately-owned companies but without voting rights. This might allow funding for strategic companies in sensitive sectors. However, the separation of capital from control rights is always a delicate issue because it creates an environment in which not all parties are represented and this could erode governance and accountability. Moreover, the consistency required to determine what a strategic company is raises new questions in host countries and dilute the interest of SWFs to invest in the country.

When not thinking about SWFs, what do you like to do?

I love to think about SWF and the world of finance but I must nurture my artistic side. I bought my first camera a year ago. The Madrid light, its skies, provides so much beauty. I also want to get into portraiture — I find it fascinating how one can capture a whole complex personality in one shot. I enjoy the rich cultural life in Madrid: there are always a lot of interesting exhibitions and conferences on multiple issues, from history to arts or philosophy. Normally I do sports too (not as frequent as I should and now stopped completely after breaking my Achilles tendon playing padel at Retiro park). And what would be life without killing time with friends and family? I enjoy spending time with them throughout the week, amazingly good and cheap food in the best company. I love cinema with beautiful photography and sharp scripts, stories told in an intelligent way. I hear a lot of music, almost every kind of it. Of course, I also like reading, from novels to essays I am reading more poetry now too.

Any literature that you’d recommend?

I don’t read much about the financial world, aside from the traditional academic and practitioner books. I would say the movie “The Big Short” is quite good, for those who haven’t seen it yet – it’s an “easy” way to understand the Big Financial Crisis. There’s also a good Netflix episode in “Patriot Act” on Goldman Sachs and the 1MDB scandal (the failed SWFs) which I also would recommend.

As for literature, I like Stefan Zweig’s Joseph Fouché: The Portrait of a Politician and the way it shows how the political nature of men can help them to adapt to all circumstances, albeit at a high cost. I quite like costumbrist American novels of the 50 and 60’s that portray personal and family relations, and I enjoy novels that help me understand cultures and histories different from my own, such as Jung Chan’s Wild Swans and Khaled Hosseini’s The Kite Runner. I am now reading Jesús Montiel’s poetry, a book title Sucederá la Flor and full of wisdom about love in our over-exposed society; and I’m also exploring C.S. Lewis’s books, his sharp mind is fascinating.

And, I am writing a book this summer on SWFs with two colleagues, so stayed tuned…

How do SWFs affect the general public’s day to day? 

I think the impact is quite clear for citizens in countries which already have a SWF in place – or plan to do so.  In developing economies, the effect can be quite substantial, so I believe it is important for these societies to demand well-governed, accountable funds with clear investment and fiscal mandates. Also, Australia and New Zealand, for example, are using SWFs to accumulate wealth to help with pension bills in the future. This a concern for many developed and aged societies in Europe too. And then, yes, there is the tension between national security and capital access that will be a revolving issue, especially in Europe. Likewise, the role of SWFs investing in early-stage technology companies; the approach to green and sustainable finance.

All of these issues have a direct effect on the general population, both in countries with SWFs and recipient countries. Maybe I am too biased, given what I read about the finance world every day, but I do think it’s important to educate ourselves about the world of sovereign wealth.  It will only continue to expand its place in our world.

What keeps you up at night?

Apart from Real Madrid? I like to think about the positive impact I can make daily on the people I know: listening to them, sharing time, worries, and thinking together – even better when over a good beer at a Madrid terrace or rooftop. I think a lot about – and enjoy discussing – the issues we face today in the middle of technological change and societal fracture, particularly when I can do so with people who do not share my views. I truly believe in the power of real constructive debates.  As Michael Sandel puts it, “To achieve a just society we have to reason together about the meaning of the good life, and to create a public culture hospitable to the disagreements that will inevitably arise.”

Professor Capapé was interviewed and photographed by Kerry Parke in Madrid.