# **Introduction**

Sub-Saharan Africa (henceforth referred to as “Africa” for simplicity) has been on a twodecades-long growth spurt and, despite the recent slowdown, the continent remains the third fastest-growing region in the world, with GDP growth averaging 4.6 percent in 2014. Africa’s commodities-driven growth has interestingly been underpinned by improved macroeconomic and fiscal stability, with inflation stabilized below 10 percent in most countries, lower debt, and significantly lower fiscal and external balances. Africa’s brightest prospects have led to a renewed interest from investors, most of whom have been awakened to the continent’s huge infrastructure deficit. Sovereign Wealth Funds (SWFs) have also joined the bandwagon.

SWFs are government-owned investment funds set up for a variety of macroeconomic purposes. Generally speaking, there are three types of SWFs: stabilization funds, savings funds, and pension or reserve investment funds. These funds invest in natural resources as well as in infrastructure projects. While much has been said about SWFs as political investments or as stabilization mechanisms to manage growing natural resource rents, their role as a source of long-term finance for development, especially in Africa, has not been fully explored. Indeed, if SWFs could invest only 1 percent of their assets in Africa, this would amount to about $420 billion over the period 2010-2020, which would broadly correspond to the missing half of required investments in infrastructure needed to meet the Millennium Development Goals (MDGs) (Zoellick, 2010). SWFs’ contribution to long-term finance is critical, as traditional foreign direct investments (FDI) cannot play this role.

In this paper, we theoretically and empirically analyze SWF investments in Africa. Since SWF activities remain minimal in Africa, the question is what would it take for SWFs to contribute more to long-term financing of development in Africa? In terms of the literature, Triki and Faye (2011) count at least 15 SWFs, and analyze how African economies can benefit from SWFs and use them as a channel to tap into international financial markets. They use data taken from different sources (Sovereign brands survey, JPMorgan) to discuss the landscape of African SWFs, as well as SWF interventions on the continent, and find that African Funds are small, suffer from poor governance structures, and mainly focus on stabilizing local economies. However, this paper does not analyze the determinants of SWF investments, nor the empirical relationship between SWF investments, economic growth and financial development. Turkisch (2011) analyzes the opportunities and barriers for SWF investments in Africa, and suggests that the introduction of SWFs in African economies facilitates up to 50 percent of the investment needed for infrastructure. However, this paper also identifies the main barriers for SWFs in Africa, which include macroeconomic risks and high volatility of returns, the lack of technological knowledge, and the size and liquidity of African economies. Moreover, the latter study did not use a theoretical model or empirical estimates to obtain these findings. This lack of studies motivated us to explore the landscape and determinants of SWF investments in Africa. In doing this, we use an enriched simple mean-variance portfolio model to derive testable results. First, we theoretically show that the determinants of SWF investments in Africa are rate of return, risk, and networks. More precisely, we find that the rate of return has a positive and significant effect on SWF investments, while risk exerts a negative effect.

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