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Newsmakers

Support Grows for US Creating a Sovereign Wealth Fund

Ray Dalio, Joseph Stiglitz say such a move could help close the wealth inequality gap.
By Michael Katz


By all accounts, the economic fallout from the COVID-19 pandemic is expected to take an already wide wealth inequality gap and widen it even further. According to the United Nations (UN), low-income households will face both income losses and rising health care costs simultaneously, which will deplete their savings and other assets.

“A prolonged economic crisis—reducing global demand for manufacturing, especially for durable goods—could destroy millions of manufacturing jobs worldwide, particularly in manufacturing-dependent economies, and stall or reverse the process of reducing inequality within and between countries,” the said UN in an economic analysis in May.

According to the World Economic Forum, 84% of all stocks owned in the US four years ago belonged to only 10% of American households. Economists and scholars have discussed and debated ways to close the economic inequality gap for years, but one idea being floated around recently is to create a sovereign wealth fund in the US so all Americans can benefit from the country’s prosperity.

America could use Norway’s Government Pension Fund Global (GPFG), Japan’s Government Pension Investment Fund (GPIF), and Australia’s Future Fund as models for such a fund.

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The idea of a US sovereign wealth fund has gained support from Ray Dalio, founder of hedge fund giant Bridgewater Associates, and Nobel laureate and Columbia University professor Joseph Stiglitz. The two discussed the idea with think tank Berggruen Institute.

“Inequality in America has become a national emergency, so this idea couldn’t be more timely,” Dalio told Berggruen Institute publication Noema. “It is an idea worth exploring. By allowing everyone to be a capitalist, it would generate more buy-in within a system that today is being torn apart by inequality.”

Stiglitz agreed that now is a good time to discuss the creation of an American sovereign wealth fund because of the “massive assistance” going to many companies where the government is providing liquidity.

“As taxpayers, we bear the downside risk. If the businesses don’t pay back, we bear the losses,” Stiglitz said. “If that is so, we all must also benefit from the potential upside when companies are profitable again. A sovereign wealth fund that holds those equity shares in a trust for all citizens would end up owning significant parts of the economy.”

Stiglitz also pointed out that the parts of our economy that have done very well have been based on technological advances that have come from basic research funded by the public. “Yet, while the public has been providing that critical intellectual infrastructure, it has captured very little of the return,” he said.

And the same thing should apply for natural resources, added Stiglitz, who suggested America should emulate Norway and put a substantial part of its oil revenues into a sovereign wealth fund from which everyone would receive dividends.

“It would reduce the burden that would be put on taxation, on redistribution, while augmenting people’s assets,” Stiglitz said. “People would feel like they have an ownership stake in that system. That, in turn, would create more stability.”

Dalio said he thinks Australia’s sovereign wealth fund is “an important model” for figuring out how to structure universal basic capital, adding that it is worth tapping knowledge from Paul Keating, the former Australian prime minister who helped design the system when it was established.

“But we’ve got to move fast in the political realm because the time is now,” said Dalio, who added that he didn’t think the idea of a sovereign wealth fund necessarily fits on either end of the political spectrum.

“You can’t say ‘this is this left’ or ‘this is right,’ that it is a Republican or Democratic idea,” Dalio said. “It’s an odd duck that is neither capitalist nor socialist. And the fact that you can’t so easily label it is one of its more appealing aspects.”

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Home > News > Alternatives > Private Equity Investments Withstand COVID-19 Slowdown
Alternatives

Private Equity Investments Withstand COVID-19 Slowdown

Survey finds pandemic has had little effect on capital structure of private equity funds.
By Michael Katz


The economic turmoil in capital markets sparked by the COVID-19 pandemic has had little effect on the capital structures of private equity funds, according to a recent survey published by Willis Towers Watson.

“Private equity-owned companies have a number of structural advantages that may have allowed them to navigate this crisis,” said Jon Pliner, Willis Towers Watson’s US head of delegated portfolio management. “In addition to the expertise provided by private equity managers, the additional access to equity and debt capital from their sponsors may also have provided some respite.”

The survey, which took place in April and covered 36 private equity funds representing 300-plus portfolio companies, was intended to find out how businesses were coping with the pandemic and to set expectations for the coming months.

The results of the survey indicate that, despite a subdued environment for exit deals during the first half of 2020, there has been little evidence of forced exits by private equity firms into a depressed market.

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“Managers have been able to maintain significant flexibility over both the timing and the terms of company exits,” Pliner said. “Beyond the short-term dislocation, we also see several opportunities where we can continue to deploy capital, notably in technology, health care, and consumer staples.” He added that “with deal volumes depressed, there appears to be far less competition for opportunities and, as a result, potentially better entry pricing.”

According to the survey, 87% of respondents said their holdings were unlikely to breach covenants as a result of the pandemic, while only 13% said their holdings were either close to breaching or likely to breach covenants in the next two to three months.

However, the responses were more varied regarding customer demand for products or services, with 46% of respondents saying their holdings were experiencing a medium-to-high impact from the slowdown in global economies, mostly within the consumer discretionary, industrials, energy, and materials sectors. Meanwhile, sentiment among commercial services firms was strong, and 20% of consumer staples firms reported a positive impact on demand.

The impact on businesses’ supply chains and their own internal operations also remained small, with approximately 80% of respondents showing low levels of concern, indicating most private equity-held businesses effectively implemented alternative working arrangements to avoid disruptions from the COVID-19 crisis.

Private equity-owned companies “have access to high-quality expertise from managers, access to equity and debt capital from their sponsors, and active owners that are well aligned to business success,” said Willis Towers Watson in a report analyzing the survey’s findings. “Whilst the impact of the COVID-19 pandemic on global economies is still evolving, firms and companies have the right tools to tackle issues that arise.”

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