Sovereign wealth funds set to outgrow US economy

Sovereign wealth funds grew to $3,500bn (£1,750bn) last year, putting them on track to surpass the entire economic output of the United States within seven years, according to a new study.

While China remains the operator of the largest fund at $1,200bn, the fastest-growing pools of capital are controlled by previously overlooked regimes in Nigeria, Oman and Kazakhstan.

In total, the world's sovereign funds have managed 24pc compound annual growth over the past three years.

According to Global Insight, the US financial research organisation, the funds invested almost $80bn in US banks last year and are expected to provide even more capital in 2008 and 2009.

Jan Randolph, head of sovereign risk, said: "Sovereign wealth funds are the new financial power brokers, replacing the combined financial muscle of hedge funds and private equity, and usurping central banks as the international capital providers of last resort.

"There has been a shift of financial weight from West to East, particularly to China, Asia, the Middle East and other energy countries," he said.

"Riding the energy and commodities boom, together with the wilting dollar, sovereign wealth funds will continue to be the key players in the changing financial landscape of the global economy thrown into flux by the credit crunch."

The research company said that in January 2008 alone, worldwide acquisitions by the funds totalled $20.6bn, or nearly one-third of the total $60bn the funds made in mergers and acquisitions for 2007. The funds accounted for 35pc of world M&A activity in 2007, and 28pc of all M&A in the US during January 2008.

The organisation said this shows that the funds are taking the place of private equity firms, where M&A activity has fallen as the credit crunch prevents them from raising the same amount of debt.

The funds have attracted controversy, especially in the US - often due to the security threats posed by the countries they are run by - but have been welcomed in the UK, where they have snapped up a significant stake in BP, for example.

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