I’ve been keenly interested in the notion of “SWF Cooperation.” In fact, this topic was one of my ‘top five stories’ to remember from 2009, and, a few months back, I wrote a post that summarized some of my main conclusions about the benefits of SWF collaboration:
- the benefits of having like-minded funds as partners when making direct investments in illiquid assets;
- the economies of scale that come with pooling resources;
- the research that shows that clubs negotiate better prices for assets than single investors;
- the idea that working together can help to overcome some of the challenges of “frontier finance”, whereby investment decisions are moving from New York, London and Tokyo to Juneau, Edmonton, Oslo, and Lagos;
- the ability to form networks of global partners to leverage local asymmetries on a global basis; and
- the benefits of investing alongside investors that have the same long-term time-horizon.
That was (and is) my position about collaboration. It isn’t without problems, but I’m convinced that there’s considerable upside to these relationships.
And, as it turns out, I’m not alone. In fact, the “pro-SWF-cooperation camp” just got a heavyweight new camper in the form of the Korea Investment Corporation’s CIO Scott Kalb. That’s right; the KIC’s website published this week a brand new paper by Mr. Kalb entitled “The Growing Trend of Cooperation among Sovereign Wealth Funds.” It’s an interesting piece of work. Sure I like it because it provides some unique insights into the behavior of one of the world’s most prominent SWFs. But, most of all, I like it because Mr. Kalb seems to agree with my views on the subject (and I usually like not being wrong about stuff):
- He agrees with the locational advantages argument, noting the benefits of sharing information to pinpoint future performers;
- He agrees that working together can mitigate reputation and headline risks;
- He agrees that collaboration among like-minded investors can result in a better alignment of interests than there is in traditional PE vehicles;
- He agrees that it can provide political cover for foreign investments;
- He also notes that there are cost savings associated with the economies of scale; and
- Truth be told, he takes my reasoning a useful step further in certain places, which is cool.
In addition, I thought Kalb’s reflections on a specific case study were quite interesting; the Chesapeake Energy transaction where a variety of SWFs came together to make the investment. Here’s a blurb:
“SWF from various countries, along with other long-term oriented institutional investors, cooperated to invest in a large firm in a third party country. The investors were able to put significant capital to work achieving scale and size. They were able to lower costs by avoiding private equity management fees and sharing financial and technical advisors. They worked together with management in setting terms and conditions for the investment and follow-on governance procedures for reporting and monitoring. For the SWF, teaming up with each other and with other long-term oriented institutional investors made it explicit they were purely financial investors, and the group and firm were able to smoothly guide the transaction through all regulatory requirements and hurdles. Apart from acquiring the necessary capital, Chesapeake was able to deepen its shareholding structure, adding an international element with positive implications for future global expansion plans. Most importantly, a group of SWF and other institutions was able to help a major US firm with its restructuring effort in a mutually beneficial non-threatening transaction that has been successful for all concerned.”
Sounds like a good deal to me (albeit quite complicated to coordinate). It’ll be interesting to see if more “Chesapeakes” pop up in the coming year.