Their wealth has spiked while their numbers have jumped. Sovereign wealth funds have moved into the media spotlight with their recent high-profile investments in Merrill Lynch, Citigroup, Morgan Stanley, UBS and The Blackstone Group, among others. The funds have poured billions of dollars into these and other companies and in some cases securing them from what could have been significant fall-out from losses, especially as a result of the sub-prime mortgage crisis. With less-than-rosy forecasts for many of Wall Street's largest brokerages and banks, large-scale infusions of cash have created a heated debate over whether investments by these increasingly massive funds are a cause célèbre or a cause for concern. Consider this about the growth of these funds. A May 2007 report by Morgan Stanley analyst Stephen Jen predicts that sovereign wealth funds—estimated at approximately $2.3 trillion in mid-2007—could reach $12 trillion by 2015, and is likely to exceed the total size of the world's official reserves by the end of 2011.Moreover, the long-term investing strategies of the funds and the nations behind them are emerging from hard lessons learned three decades ago, according to Van Wood, Ph.D., chair in International Business at Virginia Commonwealth University. "We're seeing these countries with enormous surpluses," Wood says. "The last time around was in the 1970s, when many countries had a big run-up of wealth, and they didn't invest it too wisely, buying weapons and consumer goods. This time, they want to invest for the long-term to accumulate more wealth for the stability of their countries," he says.

Establishing a U.S. Beachhead

The U.S. is an attractive market for many of these funds because of its history of political stability and overall transparency, says George W. Denninghoff, chief financial officer of Vista Research and Management, LLC, a Chappaqua, New York-based mutual fund management firm. In addition, the financial expertise in the U.S. is unparalleled. That, Denninghoff says, makes these funds willing to take on risky investments like financial companies that may still have significant exposure to losses from mortgage-backed securities.

But when foreign nations with governments and ideologies that are very different from Uncle Sam's—and which often operate with little transparency—start buying financial companies, people get nervous.

Singapore's Temasek Holdings recently purchased $4.4 billion of Merrill Lynch common stock with an option to buy $600 million more this year, and Beijing's State Foreign Exchange Investment Company poured $3 billion into private equity giant, The Blackstone Group.

Yet with most of these investors opting out of large-scale investor benefits such as board seats and voting rights, why should Americans be so uneasy? In his paper, Jen cautions that aggressive investment of funds from sovereign nations may spur a wave of economic nationalism, particularly as Western countries become apprehensive about the motivation of sovereign nations investing in their foremost companies.

Indeed, Peter Mandelson, the European Union's (EU) Trade Commissioner, recently spoke out against certain kinds of foreign investment opportunities, such as investing in defense contractors, by sovereign nations. And shortly afterward, the European Commission announced that it would push for a set of principles, but not legislation, relating to sovereign wealth funds investing in European companies, modeling those guidelines after the transparent operations of Norway's Government Pension Fund.

Mitigating Backlash

The U.S. has already had its share of backlash and change surrounding foreign investment. In October 2007, the Foreign Investment and National Security Act of 2007 (FINSA) went into effect, broadening the President's and the executive branch's ability to control foreign investment in the United States. According to a report by Edwin M. Truman, senior fellow at the Peterson Institute for International Economics, this was largely motivated by the controversy surrounding the proposed takeover of Unocal by the state-owned China National Offshore Oil Corporation (CNOOC) in 2005 and the proposed acquisition of the Peninsular and Oriental Steam Navigation Company by Dubai Ports World, a company owned and controlled by the government of the United Arab Emirates.

Truman makes the case that the time has come to create international guidelines that guarantee greater transparency and accountability as sovereign wealth funds continue to invest in U.S. companies. While he is not yet troubled about national security issues related to sovereign wealth fund investing, he points to the potential for economic fallout. "There is a concern about investment in banks and financial institutions in general. They are viewed as quasi-public utilities. With the U.S. government on one side and another government on the other side, that could—at a minimum—have bigger [financial] implications," Truman says.