Oxford SWF Project

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This is the last DB of the year. And there’s actually a few interesting stories:

• Reuters has announced $50 billion in new funding for the China Investment Corp. In case you’re already on your way to the bank, here’s a CIC funding flashback and an explanation as to why I remain skeptical about rumors and unnamed sources when it comes to this SWF.
• Apparently Britain will adopt an “SWF Model” for foreign aid in order to render it more effective. Fascinating.
• Mumtalakat has finally released its 2010 results. The returns look really good…they’re just a bit stale.

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Tomorrow’s my last blog day for the year. Naturally, then, I awoke thinking I’d write a sort of reflective post recapping the top sovereign fund stories of 2011. I thus dutifully sat down at my desk this morning to read through all the posts I wrote over the past 12 months. When I woke up — keyboard imprinted on my face — I decided to do something a bit more…eye opening, as it were.

So, let’s make some stuff up about 2012 instead! In other words, I thought I’d conjure up the big stories for next year. So, by the end of 2012…

1) Infrastructure: Every institutional investor in the world will be planning how they can allocate (or increase their allocation) to infrastructure.

2) Africa: Many institutional investors will be planning how they can allocate (or increase their allocation) to Africa.

3) New SWFs: Seven new countries will begin the process of launching a new SWF. (That’s right, seven, exactly.)

4) IFSWF: The International Forum of Sovereign Wealth Funds will transition from a silent, placeholder-of-an-organization into a vibrant entity that effectively champions the interests of its constituents.

5) Data: SWFs around the world will begin restructuring and revamping their data management systems in order to increase the visibility of senior staff over the funds’ portfolios and risks therein.

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This just in:

• Kazakh President Nazarbayev has publicly fired the head of the country’s sovereign wealth fund Timur Kulibayev. This is absolutely remarkable: 1) He was only appointed in April; 2) He is a titan of Kazakh industry and a billionaire; and 3) he’s married to President Nazarbayev’s daughter; i.e., Nazarbayev just fired his son-in-law! It will be very interesting to get more details on this.

In other news:

• The CIC has invested $245 million in the African investment / holding company Shanduka Group.
• Iraqi Kurdistan is considering a new sovereign fund: the “Next Generation Fund.”
• When Mubadala isn’t investing, it’s organizing football workshops and tennis championships. Cool.
• The CIC is considering investment opportunities in…Leeds and Manchester City. I’m guessing these are much-needed infrastructure investments.

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Singapore’s sovereign fund Temasek increased its holdings of the American fertilizer company Mosaic, bringing the total value of the sovereign fund’s position to roughly $1 billion and making it the single largest investor. Given the growing interest of sovereign investors in agricultural assets and food security, I wasn’t all that surprised to receive an email this morning asking whether I thought this specific investment was ‘strategic’ or ‘commercial’ in nature. My response: “Both.”

To understand why, I thought it useful to first give you some background on Temasek and then offer some reflections on “strategic” investing more generally. On Temasek, let me turn your attention to a paper by Wilson Ng:

“Temasek is a highly active form of sovereign wealth fund that makes equity investments in Singapore’s national interests. Temasek’s State sponsors understood that national interests would comprise both commercially-driven and non commercial criteria, and that those interests had to be pursued internationally…Temasek is a corporate investor with a genuine commercial interest in high-growth businesses both in developed and in emerging markets; but it is also an investor with a deep interest in acquiring large stakes in industries that will benefit Singapore’s competitiveness…Unlike other sovereign wealth funds that typically prioritize either commercial or political objectives, Temasek seems to have embraced both objectives in advancing Singapore’s national interests.”

Let’s also take a look at this (really good) paper by Henry Yeung of the National University of Singapore:

 “In the new millennium, Temasek Holdings has become more strategic in its investment focus. Its strategic plan is now committed to investment in new strategic or risky ventures (e.g. life sciences and water resources), in companies that would bring foreign skills and technology and access to foreign markets, and in nurturing global or regional leaders from its stable of companies or other non-Temasek Singapore firms…Meanwhile, its divestment policy continues unabated in areas outside its strategic plan because Temasek Holdings wants to concentrate its scarce management resources on those new growth areas.”

In short, Temasek makes investments to advance strategic national interests. At the same time, however, its over-arching objective remains commercial and financial success. In other words, the strategic objective of Temasek…is commercial in nature. Recall that Temasek is the holding company for Singapore’s government linked companies (GLCs), which means that the fund may be considering its portfolio companies in its investment decisions.

This reminds me of another type of investor that I’ve often thought of as ‘strategically commercial’: family offices. Indeed, many family offices operate according to a similar ‘double bottom’ line to the one espoused by Temasek; they want investments that will make money on an absolute basis, but they also want to support companies and industries that will help them with their core operating companies — i.e., the companies that made them rich enough to warrant setting up a family office in the first place.

In sum, ‘strategically commercial investors’ base their investment decisions on purely commercial objectives. However, these commercial objectives are broader than the typical financial investor. In a way, these strategically commercial investors are picking investments also based on added benefits to their other operating companies.

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Here are today’s top stories:

• Angola seems to have ‘misplaced‘ $32 billion. For real.
• It appears PNG took another step towards establishing its new SWF today, as Parliament mustered the 70 votes required for an absolute majority.  (The final tally was 73.)
• Australia’s super funds shrunk, on average, 2% in 2011.
• Central Bank’s reserve managers are reportedly moving into real assets. Doesn’t the definition of the former preclude the latter?
• Temasek is now the biggest shareholder in Mosaic Co., which is North America’s second-largest fertilizer producer.

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Sovereign and public pension funds often face a daunting human resources challenge: How do they fill public sector jobs with individuals who can compete in and with the private sector? I think it’s a fascinating question. And so I thought I’d flag up the types of employees that these investors (in my experience) are usually very capable at attracting:

• Green: Public funds are generally quite competitive in attracting young (i.e., green) talent. At this early stage, the disparity between the public sector salaries and the private sector salaries are lowest. Moreover, the opportunities for career development at a public fund are (in many cases) far superior to those in the private sector. As a CIO recently told me, he often pitches to young recruits by saying, “If you give me three years of your time, I’ll give you 20 years of experience.”
• Grey: Public funds also seem competitive in the war for older (i.e., grey) employees. Generally, these are individuals that have had successful careers on Wall Street.  They’ve made their money and are now interested in giving back or just escaping the rat race.
• Grounded: Public funds are also, as you might expect, competitive at hiring people that are tied to the region (i.e., grounded) due to family, identity or affinity. Indeed, many employees at public funds are there because they want to stay close to relatives, give back to their country, or just be close to some great skiing or fishing (see Alaska).

In short, those are the individuals that I often see thriving at public funds. By implication, however, these sovereigns and pensions are quite poor at hiring the mid-career professionals who can earn high salaries in the private sector. So should they even try? Perhaps public funds should just accept this and focus their recruiting efforts on green and grey and work strategically to pick up the occasional grounded employee.

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And now, the news:

• The IMF’s Lagarde applauds Nigeria’s new SWF.
• Daimler is apparently in talks with a Chinese investor about a 5-10% stake in the car company.
• Saskatchewan once had a heritage fund…and some would like to see it re-established.
• It looks like Australia’s SWF debate will continue into 2012.
• If you REALLY want to manage some of Qatar Investment Authority’s money…move to Qatar.

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Over the past few years, I’ve written time and time again that collaboration and cooperation among institutional investors would become increasingly common. Why? Because I believed that long-term investors, such as pensions, sovereigns, families and endowments, could fruitfully work together to bolster their returns and achieve their objectives. In large part, the economic geographer in me was convinced that the sharing of local knowledge and asymmetric information that would come from partnering with peers (not to mention access to other funds’ skill-sets, deal pipeline, and network of elites) would have real commercial value. And I still believe that. But, I have to say, I’m much more cynical than I was a few years ago.

While I remain enthusiastic about co-investment arrangements, I think there are a few major roadblocks that ‘potential partners’ will have to overcome if they are to work together on more than an ad-hoc basis. Here are three that jump to mind:

• Compensation: The design of incentives has enormous influence over the behavior of individuals. So, if an institutional investor designs its incentives (i.e., its compensation system) in such a way that drives employees to think of peers as competitors instead of as partners, then collaboration will be all the more challenging. And, at the top funds in the world, that’s exactly what’s been happening; compensation is increasingly a function of how a fund or individual adds value above a market-based benchmark. Put another way, compensation is based on a fund’s performance relative to its peers. How can we expect people to collaborate if their compensation is tied explicitly to the amount by which their fund beats its peer group on an annual basis?
• Formalization: Try all you want to come up with Memoranda of Understanding or even (bless your soul) formal organizational structures to facilitate collaborative investing (with allocated assets and joint-investment committees), all you’ll end up doing is helping a few lawyers put their kids through college. Recall that most institutional investors are often bureaucratic to begin with, which means it can be extremely difficult to get internal approvals to launch a vehicle where one fund relies on the investment advice of another fund. But even aside from the legal challenges, these formal arrangements are an attempt to replace trust and interpersonal relationships with contracts and commitments. And that’s not easy. As such, most of the collaborative ventures I’ve seen eventually revert back to more informal arrangements (whereby each member retains absolute authority over their assets and resources) and instead focus on building trust and inter-personal relationships.
• Ontology: In order for meaningful collaboration to occur between two or more investors, these organizations have to have very similar world views (ontology). By this I mean to say that like-minded investors will be more apt to collaborate than those funds that see the world in different ways. It’s not all that important that they act in exactly the same way (methodology) – in fact it’s probably better if they have different skills and knowledge to round out each others’ endowments – but it is important that they agree in the way assets should be deployed in a given domain. The problem here is that it can be very challenging to identify the reasoning and motives (ontology) underpinning a fund’s actions and behavior (methodology), which makes attempts to find partners quite challenging. Again, in order to really assess whether a fund is “like-minded” requires inter-personal relationships built around mutual respect and trust; this is not something that an artificial contractual edifice can replace.

So that’s what’s limiting collaboration (beyond one-off transactions). What are the implications? I’ve got two competing thoughts:

1) Potential collaborators can keep it simple / informal and focus on ways to build trust and friendships with other investors. In this case, the ‘dating game’ at conferences and events will inevitably reveal ‘like-minded’ investors, and the co-investment opportunities will bubble up organically.

2) Potential collaborators can get together with one or more like-minded investors to launch a new vehicle. In other words, they can take an additional step to create a de-novo asset manager (with a dedicated team) that will deal with all of the issues that tend to derail collaboration. I’ve seen these types of vehicles a few times in the Middle East (e.g., Kuwait China Investment Corporation).

Anyway, I remain a fan of collaboration — it’s a useful way to extend the reach of under-resourced funds — but the hurdles above represent, in my view, enduring challenges.

This blog is moving. Not to worry: same blogger; same content; same price (free).

And now, the news:

• Political unrest in Papua New Guinea may be preventing rapid passage of the country’s SWF Bill.
• Medvedev may raid Russia’s National Welfare Fund (set up to pre-fund pensions) for domestic infrastructure.
• The China Investment Corporation and Singapore’s GLP are creating a JV to acquire 15 Japanese logistics firms.
• It looks like most of Libya’s frozen assets will be thawed in the coming month. And, on that note, the Libya Investment Authority is apparently back at work, as it just cut a deal with Indonesia’s Medco.
• In case you’re into this sort of thing, as I am, here’s South Carolina Retirement System’s annual report.
• Why is it the only time I read about the Brunei Investment Agency is in stories about hotels? Is this all the BIA owns? Or is there something particularly transparent about the hotel industry?