Posts Tagged 'Mubadala'

SWFs Work Well Together

Published June 6, 2011 Uncategorized 5 Comments
Tags: , , , , , , , , , , , ,

Ashby Monk

A little over two years ago, I wrote a series of posts on SWF collaboration, co-investing and clubbing. At the time, I was of the opinion that this sort of behavior would become increasingly common, believing that SWFs could fruitfully work together to bolster their returns. In large part, the economic geographer in me was convinced that the local knowledge and asymmetric information (not to mention access to deals and elites) that would come with partnering would have real commercial value for SWFs. And — no need to hide your shock at hearing this — it turns out I was right. In particular, CIC, GIC, KIA, KIC, Khazanah, Mubadala, and a few others have been actively partnering with other funds. And, recently, news about collaborative ventures has been spiking. Here is just a snippet of the collaborative ventures I’ve come across (or been told about offline) in the past month or so:

  • ADIC and Japan’s SBI launched a $100 million private equity venture focused on Turkey.
  • Singapore’s GIC linked up with Australand Property Group.
  • CPPIB is working with ADIA on an investment in Norwegian gas infrastructure.
  • Khazanah has just linked up with India’s Infrastructure Development Finance Company in a joint venture to develop road projects in India.
  • Gulf SWFs are collaborating with a local partner in Morocco.
  • Kuwait and Bulgaria started a new company to make investments in Bulgaria’s agriculture industry.

In addition, the New Zealand Superannuation Fund’s newly released statement of intent goes public with the fund’s plans to collaborate with peers:

“We are actively pursuing co-investment and research opportunities and partnerships…Co-investment is our particular focus as it is a potentially valuable access point to investment opportunities.”

With all this activity, I thought it an opportune time to revisit the subject and add some conceptual logic to this increasingly popular trend. As I see it, there are a variety of factors at play here:

  • Direct Investing: You’ll note that many of the funds collaborating are also in-sourcing asset management functions. You are no doubt aware of the growing trend towards direct investments among SWFs. What you might not be aware of, however, is the considerable burden that in-sourcing places on SWFs in terms of governance, management and operations. One mechanism to overcome these challenges (or at least minimize them) is to collaborate with like-minded investors facing the same challenges.
  • Frontier Finance: The center of gravity of global financial markets is shifting away from New York, London and Tokyo to frontier outposts in Abu Dhabi, Auckland, Beijing, Edmonton, Juneau, Oslo, Santiago and Seoul, among others. (Be honest, asset managers, I bet you’ve all been to one of these cities in the past year.) But how do the SWFs in these locations attract the human capital they desperately need to manage hundreds of billions of dollars? There isn’t a ready pool of financial laborers in these places as there would be in the global financial centers. So, successful investing in these locations requires knowledge sharing, collaboration and co-investment among SWFs. And that’s what is happening.
  • Economies of Scale: Scale brings competitive advantages in financial markets. The CEO of the KIC recently summed up this point nicely by saying that ‘size matters most’ for doing direct deals. Working together allows funds to reap the benefits of scale while also keeping a diversified portfolio.
  • Information Asymmetries: In asset classes in which there are considerable informational advantages to having local partners, working together with local funds can offer considerable advantages. Research shows that local knowledge can translate into as much as 2% per year in additional returns.
  • Benefits of Club Deals: Academic research also shows that there is a discount on pricing (specifically in private equity deals) when institutional investors club together; this can be as much as 10% of the purchase price in a transaction.
  • Political Cover: In certain jurisdictions and industries, gaining access to the best assets requires having a local partner to mute headline and political risk.

That’s not a complete list of why SWFs are working together, but it’s at least a start. And it gives you a sense for why this is taking place. After all, many people might expect these funds to behave like competitors with one another (which they are), but there is clearly still room for collaboration.

Now, to be fair, we should acknowledge some downsides to all this. For one, coordination costs in co-investments can be quite high. (A wise man once told me that the factor of complexity of a co-investment is the square of the number of co-investors; I still think that’s a fair assessment.) In addition, because of the asymmetric information among the collaborators, there are obvious agency issues to be considered in the design and governance arrangements.

Notwithstanding these constraints, however, I expect this trend to continue and become more popular. Working together offers a mechanism to grow their sovereign assets more quickly. Welcome to the era of SWF collaboration!

Who is the King of SWFs?

Published April 7, 2011 Uncategorized 4 Comments
Tags: , , , , , , , , , , , , , , , , , , , ,

Ashby Monk

I wonder if you asked a US Senator or Congressman which country sponsored the most sovereign funds in the world, what would he or she say? China? No doubt it would be one of the top responses, as it has three well-known funds (CIC, SAFE, and NSSF) and a variety of lesser known funds (CADF). How about Russia? That would probably be a popular guess too with the Reserve Fund, National Welfare Fund and the new Russian Direct-Investment Fund. Those with a bit more knowledge, however, would likely say the United Arab Emirates; with ADIA, ADIC, EIA, IPIC, Mubadala, RAKIA, and a couple of other hard-to-define entities, it’s a fair bet that UAE is the world leader in the number of sovereign funds. But how many US policymakers would ever say that the country with the most sovereign funds in the world is…the USA?

Well surprise, US policymaker, there’s a solid case to be made that the United States is in fact the king of SWFs. No, I’m not talking about public pension funds; I’m talking about funds that would meet the IMF’s definition of a SWF. Impossible? Not so. US states are big into permanent and rainy day funds. It’s just that these funds have been hanging out under the radar. For example, the SWFI only managed to count three US funds. But, trust me, they’re more out there. For proof I refer you to this report on the Alaska Permanent Fund‘s webpage from 2008. I only came across this for the first time yesterday, but I realized in reading it that it listed some US funds that I had never even heard of. In addition, I realized that this report didn’t manage to find all of the US funds that I know about. Perhaps (since the US is such an outspoken proponent of sovereign fund transparency) the US funds are soooo transparent that most of the world simply looked right past them. In addition to flagging up a bunch of new American funds, the APF report also makes the remarkable claim that the State of Texas sponsored the very first SWF in the world (in the 1800s)! (Sorry Kuwait!)

So, without further ado, here’s a list of American sovereign funds that combines the APF’s report with my own knowledge. And based on the fact that these funds keep popping up, I’m guessing this isn’t even a complete list:

  • Alabama: The Alabama Trust Fund was set up in 1986 and acts as a sort of permanent fund in anticipation of the eventual decline of oil and gas royalties to the state.
  • Alaska: The Alaska Permanent Fund was set up in 1976 with a spending and saving mandate. In 1980, Alaska set up the APF Corporation to manage all the Fund’s investments.
  • Louisiana: The Louisiana Education Quality Trust Fund was set up in 1986 to save and invest off-shore revenues for education. The LEQTF has both a Permanent Fund and a Support Fund as subsidiaries.
  • Montana: The Montana Permanent Coal Tax Trust Fund (PCTTF) was set up in 1978. The PCTTF actually has six (!) sub-funds, of which the state’s Permanent Fund is the largest. The Montana Board of Investments manages the combined assets.
  • New Mexico: The State actually has four different permanent funds that are all jointly managed by the State Investment Council (which is itself larger than the New Zealand Superannuation Fund). Apparently, the Land Grant Permanent Fund goes back to 1910!
  • Oklahoma: The State recently approved a new rainy day fund that will see gross production tax collections above a three-year average sequestered in the new stabilization fund. This fund will join the pre-existing “Rainy Day Fund” in Oklahoma, which already has around $600 million.
  • Texas: Remarkably, the State of Texas has two permanent funds going back to the 1800s! The Permanent School Fund (1854) and Permanent University Fund (1876). These are likely the first sovereign type funds ever created. The State also has a Rainy Day Fund that was set up in 1988 with the idea of sequestering all oil and gas production taxes exceeding 1987 levels. It’s worth roughly $10 billion today.
  • Wyoming: The Permanent Wyoming Mineral Trust Fund was established in 1974 to receive the state’s 1.5% excise tax on coal, petroleum, natural gas, oil shale, and other minerals. The Wyoming State Loan and Investment Board manages the funds (along with the assets from several other state permanent funds).

For a fascinating graphic of sovereign fund creation, click this remarkable timeline:

An interesting thing to point out is that many of these funds are tied to education, much in the same way sovereigns today are often tied to pensions or other contingent future liabilities.

In sum, it’s clear the American states have found these funds extremely useful in helping to manage their resource revenues over time. Moreover, Ben Bernanke’s recent pronouncements about the utility of these types of funds suggests that more US states may become sponsors in the coming years. And given that some of these funds have been around for over a 100 years, the “permanent” moniker seems to have legitimacy. In other words, they probably aren’t going anywhere.

All this leaves me with a final thought for US policymakers: If you find yourself tempted to express concern over the rise of SWFs around the world, perhaps you should first ask yourself why the United States has more funds than any other country, and why the United States was perhaps the first country in the world to set up such a fund?

Mubadala The Map Maker

Published February 16, 2011 Uncategorized Leave a Comment
Tags: , , , , , ,

Ashby Monk

Given my love of maps – in case you hadn’t noticed, I have PhD in economic geography – how can I do anything but congratulate Abu Dhabi’s Mubadala for its new foray into mapmaking. Apparently, the Abu Dhabi development company will absorb the Military Survey Department and then relaunch it as a commercial geospatial data company called Bayanat. Here is Mubadala’s Chief Operating Officer Waleed Al Mokarrab Al Muhairi explaining the deal:

“Against a backdrop of rapid development in the UAE, Bayanat’s comprehensive offering will enable businesses to take advantage of the latest customized geospatial data to facilitate strategic planning; day to day business activities; and the development of new and innovative services across a range of industry sectors.”

According to GulfNews, the new entity will continue to service the UAE Military – its largest client – while expanding commercial operations. It is hoped that this move will facilitate map-making efficiency and professionalism, which will in turn provide the UAE military with better maps than it’s getting now. Here’s how a Bayanat spokesperson explained things:

“We also believe that by launching Bayanat as a commercial company we will improve service levels, efficiency and delivery for the UAE Armed Forces, which remains our most important client.”

The decision to locate Bayanat within Mubadala sort of reminds me of Beijing’s decision to locate Central Huijin within the China Investment Corporation. In both cases, there was an expectation that the commercially-oriented investor (Mubadala and CIC) would impose efficiency and professionalism on the state-owned operations (Bayanat and Huijin). I don’t know whether that’s a realistic expectation, but it is interesting to see these governments using their sovereign funds to infuse commercial norms and practices into bureaucratic entities.

Investing in Conflict Affected Economies

Published December 9, 2010 Uncategorized Leave a Comment
Tags: , , , , , ,

Ashby Monk

Apropos to yesterday’s post on frontier markets and Mubadala’s possible investment in Afghanistan, the Multilateral Investment Guarantee Agency (MIGA) has just released its 2010 World Investment and Political Risk report. And this year’s edition is quite interesting, as it focuses on the many challenges in attracting investments into conflict affected and fragile economies (CAFs).

This is a topic for which large institutional investors and SWFs have been particularly interested, as many would-be investment targets, thanks to natural resource endowments or infrastructure needs, are often bypassed due to a variety of political risks. Interestingly, despite the limitations, CAF countries still manage to attract their fair share of investments. I’ve copied (and clarified) some of the relevant findings from the report:

  • CAF countries have absorbed between 5 and 8 percent of FDI into developing countries over the past half decade.
  • FDI flows into CAF countries are heavily concentrated in a few countries. During 2006–2009, the five largest recipients accounted for 60 percent of FDI flows to CAF countries, compared to 54 percent for all developing countries.
  • FDI to CAF economies has flowed primarily into resource-rich countries. These resource rich economies accounted for 72 percent of inflows.
  • Sub-Saharan Africa—which accounts for 23 out of 43 CAF economies and most of the 18 resource-rich ones—absorbs more than two-fifths of FDI flows into CAF states.
  • The United States is the largest source of foreign investment into CAF economies, with a stock of FDI valued at around $11 billion as of 2008 (0.4 percent of its global outward stock).
  • China’s FDI stock in CAF states stood at roughly $5 billion in 2008 (or 9 percent of its global outward stock).

The CAF countries are actually doing better than I might have thought, given the difficulties facing investors in these jurisdictions.

I was surprised to see that war and terrorism rank relatively low among investor fears. According to MIGA:

“This rank may reflect that in CAF countries, the main asset–given the importance of the primary sector—is the mineral underground, which is not prone to losses caused by violence.”

The investors surveyed instead felt that government intervention was a bigger constraint:

“‘Changes in regulations’ not only ranks first among investors’ concerns in CAF countries, but also is most frequently responsible for losses in these investment destinations.”

All this bodes well for MIGA, which is one of the main purveyors of political risk insurance. Indeed, MIGA sees a bright future for itself. And, personally, I think that’s a very good thing.

I’m all for developing new and innovative ways — be it governance policies or risk mitigation strategies — to bring private investment into these troubled countries. As I’ve said before, a thriving private sector is crucial for domestic political stability and international security. And it sounds like MIGA’s Executive Vice President Izumi Kobayashi agrees:

“Conflict-affected and fragile economies suffer from cycles of political violence that are hard to break and from a high probability of relapse into conflict. Steady economic growth and rising incomes following conflict can lead to a substantial reduction in the risk of relapse. FDI is an important element in helping to break that vicious cycle by supporting economic growth and development through the transfer of tangible and intangible assets, such as capital, skills, technological innovation, and managerial expertise.”

More to the point, though, there are plenty of amazing investment opportunities within these capital starved jurisdictions if your’re willing to get a bit creative. With that, I turn it over to you, SWFs!

Beyond the Investable Frontier

Published December 8, 2010 Uncategorized 3 Comments
Tags: , , , , , ,

Ashby Monk

Government funds of all kinds are increasingly looking to Frontier Markets (FMs) for investment opportunities. While these geographies carry additional risks, the ‘investable’ FMs do offer considerable upside. The trick, then, is picking the right FMs to invest in.

One of the ways institutional investors choose their ‘investable’ markets is to perform a screen of the various target countries’ political, regulatory, financial, economic and even cultural criteria most likely to effect investment performance. I myself have helped a multi-billion pension set up and implement a screen, which was then used by the ‘powers that be’ to select ‘permissible’ markets for investment.

Typically, these EM/FM screens start with 200(ish) countries. Then, you eliminate the developed world, where growth rates are lower, and then you screen out those countries with, for example, high levels of corruption, poor domestic demand, a non-diversified export sector, banking weakness, terrorist threats, or outright war. After all this, you usually arrive at a handful of countries ripe for investment.

Yet one large institutional investor is turning this method on its head. Indeed, the UAE’s Mubadala is apparently looking to make some rather large investments in Afghanistan, which, as you can imagine, is not typically included in FM screens. Tom Arnold of the National has the story, which quotes Mubadala’s Business Development Manager Khaled al Rashedi:

“It’s in exploration phase right now and it’s interesting to see the size of potential…There is an appetite and we are representing the Government but let’s see what develops”

The fund is interested in Afghanistan’s vast mining deposits as well as the oil and gas sector.

Challenging? You bet. Have a gander at the following stats:

  • Transparency International’s Corruption Index lists Afghanistan at 179th place (out of 180).
  • It is deemed “highly corrupt” in perception surveys.
  • The country is not even ranked on the Heritage Institute’s Economic Freedom Index (along with such investment havens as Iraq and the Sudan).
  • The World Bank’s doing business survey had the country pegged at 160th out of 183 in 2010. (Actually, that’s a bit of a surprise to me; it tops Venezuela, Lao, and a bunch of African countries.)

Anyway, the point here is that Afghanistan ain’t easy for even the most intrepid investors. So, I give full credit to Mubadala for actively considering this. Few countries need investment more than Afghanistan, as a thriving private sector is crucial for domestic political stability (and international security).

However, let’s remind ourselves that this is not foreign aid…this is (ostensibly) an investment. So, the real question is whether Mubadala will: 1) actually make the investments in Afghanistan; and 2) whether the fund will make any money. I’m optimistic on both counts. Here’s why:

  • First, there is a growing number of ‘investment facilitators’ popping up to help bring capital into the country. For example, there’s now an American Chamber of Commerce in Afghanistan.
  • Second, The World Bank’s MIGA (multilateral investment guarantee agency) has the Afghanistan Investment Guarantee Facility, which will “…bridge the gap between investors’ desires to tap business opportunities in the country and concerns about political risks. The facility, administered by MIGA, will mitigate key risks for foreign investors by providing political risk guarantees (insurance) for their investments.” This will help to limit the political risks for any interested investors.
  • Third, I recently had a conversation with a frontier investment guru who told me:

‘The risk mitigation options are so numerous and sophisticated today that even challenging frontier market investments can be done in manner that limits your exposure to political risks…

So far so good! Maybe Afghanistan is the next…oh wait, no, the investment guru went on to say:

‘So long as physical safety isn’t threatened and the government officials your working with aren’t overly corrupt, you can pretty much get a deal done anywhere these days.’

Hmmm. Fair enough. That kind of puts us back to square one. I guess we’ll just have to watch this space and see what happens!

Mubadala’s Debt Conversion

Published September 23, 2010 Uncategorized 2 Comments
Tags: , , , , , ,

Ashby Monk

The news of the day seems to be Mubadala’s big loss for the first six months of 2010. However, in my view, the subtext of this announcement is much more interesting. Apparently, there has been an agreement to convert the debt held by the government into an equity stake in Mubadala; which could triple the firm’s capital base over night, as Mubadala owes the Abu Dhabi government over 40 billion dirhams. This conversion will do two things: It will give the government greater control over the operations of the fund and, more significantly, it will remove the short-term pressure of interest payments.

This actually reminds me of the conversion the China Investment Corporation did back in 2009:

“…due to heavy paper losses from two high-profile overseas investments made before the financial crisis, CIC has been postponing the interest payment to its State shareholder…CIC has reached a consensus with the Finance Ministry to treat the $200 billion as its asset rather than debt, and the firm will pay dividends to the State instead of interest.”

In both cases, the SWFs took losses that might have made their interest payments back to the government difficult. And, instead of leaving the SWFs to stew, the governments then agreed to take the pressure off by converting the debt to equity. It’s really quite interesting. And, when you think about it, the SWFs end up in a much stronger position than before, as removing the interest payments facilitates a long-term investment time horizon, which is a prerequisite for the success of any ‘strategic investor‘.

West Still Afraid of SWFs? Sometimes

Published September 15, 2010 Uncategorized 6 Comments
Tags: , , , , , , , , , , , , , , , , , ,

Ashby Monk

With news out that China may make a rival bid for PotashCorp (perhaps via Sinochem or CIC), Ottawa may finally be getting a bit nervous about China’s “commercial” interest in Canada’s natural resource wealth (…the FT’s Kevin Brown says China’s motivation is “entirely political“…) . According to an article in The Globe and Mail yesterday by Brenda Bouw:

“Ottawa will scrutinize any state-owned company bid for Potash…to ensure its motives are in line with a free-market economy and not government interests…”

Moreover, Industry Minister Tony Clement said Monday :

“We have specific rules about state-owned enterprises…to ensure that they are acting in a way that is consistent with a market-based economy, rather than as an agent for a foreign government’s interests…”

And so, the behavior of Canadian policymakers would seem to suggest that the West is still afraid of SWFs’ motives, which means that we haven’t come that far since 2008. Question: weren’t the Santiago Principles supposed to alleviate this type of concern and stop political and strategic investing by SWFs? After all, recall what GAPP 19 says:

“The SWF’s investment decisions should aim to maximize risk-adjusted financial returns in a manner consistent with its investment policy, and based on economic and financial grounds.”

And what does that mean? Well, it means that SWFs should avoid investments that put country ahead of portfolio. And, you ask, why do Western countries seem to care about this? In short, they’re afraid that ‘strategically oriented’ SWFs will become national security threats by secretly advancing geopolitical interests via investments in technologies or resources. (Quick note: China needs potash and lots of it.) Clearly, the Santiago Principles aren’t having the intended effect among certain Canadians (and one could also say the Chinese).

Now, while Canada frets about the strategic interests of China’s state actors, I came across a remarkably candid interview with an emerging market SWF executive that, in effect, explains his SWF’s strategic and political value to the sponsoring country. In light of the Western fears on display in Canada this week, I found this interview to be utterly astounding.

However, to make things interesting for you (…or at least for me…), I’m going to anonymize all the identifying information in the excerpts I’m reposting below (I’ll explain why later…just go with it). So, let your mind wander while reading these remarks; basically I’d like you to think about how you would react if you learned this Executive was at ADIA or CIC or the National Welfare Fund in Russia or any other SWF for that matter. But remember, the following are actual comments from a real executive of a real SWF. This is not a wind-up. Over to you, SWF Executive:

“If you look at the different priority areas where [this SWF] deploys its capital, you’ll see that there’s a very good fit between what’s articulated in [our national strategy] and what we do. We invest in highly innovative industries that play to [our country’s] strengths and competitive advantages…”

“This investment was a good fit: [this metal is an] energy-intensive business and relies on a multifaceted transport infrastructure, both of which we have. It also creates the type of employment we think will be quite beneficial for [our nation]. So in many ways, it meets our priorities. Now, there are many opportunities for deals we might make to support [our state owned enterprise operating in this business]. For example, we want to diversify and secure our upstream supplies. We don’t necessarily have a target in mind, but we will look for potential transactions.”

“…all our deployments of capital, even from a financial perspective, have had a strategic twist…We have many examples of investments that start out as financial investments but take on a strategic angle…” (emphasis added)

So, what do you think? Now, what if I told you that the above SWF Executive is in fact Jin Liqun of the China Investment Corpation? Concerned? Worried? Rustling around for the name of your local MP or Congressman? Well, relax, it’s not Jin Liqun.

It turns out, this is an interview with Mubadala’s Chief Operating Officer, Waleed Al Mokarrab Al Muhairi (kudos to McKinsey on this). And the reason I went to the trouble of anonymizing the discussion above was to illustrate the extent to which the West seems to treat SWFs differently; certain funds are given the freedom to invest ‘strategically’, such as Mubadala, while others are all but forbidden from investing this way (such as the CIC — even though it’s pretty clear it does anyway).

I’ve increasingly been thinking about why this is the case. Now, I don’t have any profound insights here, but I do have some initial thoughts. The foremost explanation has to be transparency of motive. Mubadala is a highly transparent entity that offers private sector levels of detail on its investment strategy and allocations. Let’s refer back to the interview:

“Because of our bondholders, we are committed to being very transparent about our financials, which we release twice a year. We have our pro forma midyears and then we have final statements we release at the end of every year. We’re committed to doing that and think that’s done wonders, from a transparency perspective, for Mubadala.”

And so, even though the fund has unabashedly strategic and political motives, it sets the target countries at ease. On the flip side, take the Qatar Investment Authority, which is also a highly strategic investor. It scores poorly (relative to Mubadala) on transparency, and, as a result, it has been taking quite a bit of flack in Australia for investments in farmland to ensure food security for Qatar. (Though, to be fair, most of its high profile investments in the UK, and even the acquisition of UK icon Harrods, haven’t raised too much concern.)

Next, a big part of Mubadala’s ‘freedom to operate’ stems from its ongoing (and credible) focus on a “double bottom line”. Put another way, it acknowledges its focus on both strategic and financial returns (most other SWFs do not):

“…we always use financial returns as the first filter when making an investment. If it passes the financial test, we look at the strategic metrics and see if, together, the financial and strategic metrics create a cluster or businesses that make sense from an Abu Dhabi perspective.”

Finally, I feel obliged to mention that the West probably pays less attention to Mubadala’s strategic ambitions because its sponsor, Abu Dhabi, is…well…to be blunt, it isn’t China. And that seems to matter a lot these days. In my fieldwork, I’ve come across quite a bit of Sinophobia in policy circles (some off the record and some not).

Anyway, if you read the paper I posted to the website yesterday (which you almost definitely did not…but if you did), you’d know that Gordon and I have a sneaking suspicion that most SWFs will eventually revert back to strategic investing. What will (can) the west do about that?  If you want to know more, read the paper.

Rethinking the ‘W’ in ‘SWF’

Published July 9, 2010 Uncategorized 6 Comments
Tags: , , , , , , , , , , , , , , , , , , ,

Ashby Monk

I’ve had the following question nagging at me for almost year now: If a sovereign wealth fund is financed by something other than sovereign wealth, should we still think of it as a sovereign wealth fund?

My interest in this topic stems from the fact that a growing number of SWFs are looking to the private sector for capital. And I’m not just talking about Mubadala or Mumtalakat – there are a bunch of SWFs that are going this route:

  • I noted yesterday that Temasek was exploring ways to bring private investors into their operations through its new SeaTown venture.
  • The GIC is also considering a $2 billion IPO of GIC Real Estate.
  • Qatari Diar – a subsidiary of the Qatar Investment Authority – is looking to issue $3.5 billion in debt.
  • Central Huijin, a subsidiary of the China Investment Corporation, is about to launch a big debt offering.
  • And, finally, news came out this morning that Kazakhstan’s Samruk-Kazyna is looking to issue debt in the short term and potentially take the SWF public through an IPO in the long-run.

Clearly, raising cash from the private sector is increasingly popular among SWFs. So, back to my original question, should we still view these entities as SWFs if they are managing private money? I’m not so sure, and here’s why:

1) Liabilities: Back in 2007-08, those of us that were researching SWFs expended considerable effort trying to define the term ‘sovereign wealth fund‘. In addition, the SWFs themselves made an attempt at defining which funds were and were not within their community. In short, the common thread among SWFs was their liability profile — or rather their lack thereof — they have no liabilities (at least beyond the sponsoring government). In other words, if a SWF owes money to anybody, it owes it back to the government that set it up. Why is this important? Well, if a SWF issues debt to the private sector, its liability profile now includes non-governmental creditors.

2) Investment strategy. The liability profile of SWFs affords them a strategic advantage, as they have perhaps the longest time horizon among all institutional investors (although it is debatable whether all governments actually afford their SWFs this duration in practice). Now, if a SWF is taking in private money, then the investment strategy of the fund is going to have to shift, albeit slightly, towards investments that pay-off in a time-frame that meets private sector interests.

As such, the core characteristics of these funds are altered by accepting to manage private capital. This raises the question as to why they would want to do this. Again, I have some thoughts:

1) Cash poor. Undoubtedly, the rise in SWFs’ interest in private money is due to the fact that some SWFs found themselves over-committed during the financial crisis. In short, salvaging certain projects necessitated a turn to the private sector for additional financing.

2) Risk Seeking. Some SWFs have sought to use their solid credit rating – which they garnered on the back of their state sponsor’s rating – to issue cheap debt and then invest it in the market in riskier assets that generate higher returns. The economic principles that underpin this type of strategy are similar to those that underpin pension obligation bonds (POBs) in the United States. In my view, it’s overly risky behavior for governments.

3) International Legitimacy. If a SWF can attract private investors, then it is demonstrating to the world that it is purely commercial and financially oriented (because that’s all private investors care about). In turn, investment receiving countries will perceive them as non-threatening, which means that access to their markets will be assured.

4) Domestic Legitimacy. The big losses incurred by SWFs during the financial crisis caused plenty of problems at home for certain SWFs. One way to avoid this domestic criticism is to illustrate that private sector investors  made similar investments, i.e. the SWF’s investment strategy is blessed by the private sector, which carries weight with domestic audiences.

5) A Myth. This final point is an acknowledgement on my part that many governments demand their SWFs make returns over short- to medium-term time horizons. Indeed, despite all the theory about SWFs being the longest-term investors in the world, I routinely find myself looking at counter examples that show how, in practice, these funds take the short-term view. As such, it is reasonable to say that some funds may not be giving up much by bringing private investors into their pool of capital.

In sum, I think we need to rethink the W in SWF. The evidence suggests that, over time, this may grow to include private as well as public capital.

SWFs in Search of Legitimacy

Published February 16, 2010 Uncategorized 4 Comments
Tags: , , , , , ,

Ashby Monk

I think it’s intriguing to watch new organizations vie for legitimacy. It’s something they all have to do; Freeman et al. called this phenomenon the “liability of newness” back in 1983, and I think they were right on. As Greenwood and Suddaby explained in 2006, a contestation over legitimacy is a clue that a new organizational form is emerging. In this regard, I think it’s safe to say that SWFs represent a new organizational form. Over the past three years, we have seen SWFs face off against crises of legitimacy both at home and abroad, as the world community has had to come to grips with the dramatic rise of this new organization.

However, it’s crucial that organizations achieve legitimacy; without it an organization simply can’t be sustained. As such, in order to achieve legitimacy SWFs have done a lot of “institutional work”, improving their governance and transparency while justifying their activities to both domestic and international constituencies.

Significantly, there is an interesting legitimacy strategy that a small cohort of these funds has decided to try, and that is “dis-association”. By that I mean that some SWFs are simply claiming that they are not SWFs at all, and thus should not be treated as such. I’m referring specifically to Mubadala and Temasek. For those of us who have adopted a broad definition of SWFs, Mubadala and Temasek are SWFs. But that’s not what these two funds are now saying publicly:

According to Mubadala’s website:

“Although we receive funding from the Government, we are not a Sovereign Wealth Fund. Rather, we are a business builder. We harness expertise and resources – including partnerships with international best-in-class companies – to generate sustainable financial returns and build businesses, clusters of expertise and new industries.”

Also, the WSJ reported late last year:

“Despite the government being its sole shareholder, Temasek doesn’t consider itself to be a sovereign-wealth fund. Temasek officials insist its goals are primarily financial rather than to support Singapore government policy, although Singaporean companies make up a substantial portion of its portfolio.”

I obviously disagree with the quotes above, as I think each fund is a SWF. In both cases, the government is the sole shareholder. The government sets the mandate for the investment fund. Both hold domestic and international assets. While both use leverage, it is not out of necessity; it is to “juice” returns and ensure that the funds maintain a commercial focus. Moreover, Temasek was an active participant in the IWG of SWFs. And Moody’s describes Mubadala as “one of a group of government-owned entities whose primary task is to manage Abu Dhabi’s substantial hydrocarbon wealth.”

So what’s going on? In my view, these SWFs are going through an identity crisis. Why? They have come to see the SWF moniker as imparting a negative connotation that jeopardizes their legitimacy. As such, they are attempting to dis-associate themselves from SWFs on the grounds that they have higher than average levels of transparency, accountability, governance and operate exclusively on commercial principles. In other words, they think SWFs are bad and since they are good, they are not SWFs. This is an error.

SWFs are government-owned and controlled (directly or indirectly) investment funds that invest according to the interests and objectives of the sponsoring government. Nowhere in this definition is there a statement about governance or transparency. The term SWF should not in and of itself mean that a fund is not transparent, accountable, or well-governed. If it did, it would imply that as SWFs improved these characteristics, they would ‘graduate’ from being a SWF and become something else altogether. That doesn’t seem right to me. Consider a different type of financial institution: are central banks with perfect governance practices and those with deficient governance practices all still central banks? The obvious answer is yes; the same principle should hold for SWFs.

In attempting to achieve legitimacy through dis-association, these SWFs perpetuate the misconception that all ‘sovereign wealth funds’ operate at sub-standard levels. In my view, Mubadala and Temasek would better serve the SWF community and themselves if they simply accepted what they are and continued to operate according to their high standards of transparency and governance. If they want to achieve international legitimacy, they should be championing the SWF movement…not attempting to leave it.

Motoring Mubadala

Published September 8, 2009 Uncategorized 1 Comment
Tags: , , ,

Ashby Monk

According to an investor presentation released by Mubadala this week, the Abu Dhabi-based “business development and investment company” saw its assets under management increase dramatically between 2006 and 2009. The SWF checked in at $4.9 billion in 2006, $10.7 billion in 2007, $14.8 billion in 2008, and was most recently listed at $21.6 billion. Over the 3.5 year period, Mubadala reports a compound annual growth rate over 80%!

What is going on here? I was under the impression that all investment funds lost money over this period. Even the CIC, which sat out 2008, lost roughly 2%. One explanation is that the SWF revalued its holdings of oil and stocks, which drove the enormous increase in income (up 450%). So perhaps it isn’t quite as impressive as we think. However, it is apparent that the SWF has done quite well in diversifying Abu Dhabi’s economy (for more details see the 2008 annual report).

When I have a bit more time, I’m going to listen to the open conference call…which is something I didn’t expect to write about any Middle Eastern SWF even a year ago. It is remarkable how transparent and open Mubadala has become.

About

This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

RSS Feed

 RSS

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 328 other followers

Latest SWF News

Recent publications

Clark and Monk Partisan Politics and Bureaucratic Encroachment: The Principles and Policies of Pension Reserve Fund Design and Governance

Clark, Monk, Orr and Scott The New Era of Infrastructure Investing

Clark and Monk Modernity, Institutional Innovation, and the Adoption of Sovereign Wealth Funds in the Gulf States

Clark and Monk Sovereign Wealth Funds: Form and Function in the 21st Century

Dixon and Monk Rethinking the Sovereign in Sovereign Wealth Fund

Clark and Monk The Norwegian Government Pension Fund: Ethics Over Efficiency

Monk Sovereignty in the Era of Global Capitalism: The Rise of Sovereign Wealth Funds and the Power of Finance

Clark and Monk Nation-State Legitimacy, Trade, and the China Investment Corporation

Clark and Monk Resource wealth and the ethics of global investment: The legitimacy and governance of Norway’s sovereign wealth fund

Clark and Monk The Oxford Survey of Sovereign Wealth Funds' Asset Managers

Clark and Monk Government of Singapore Investment Corporation: Insurer of Last Resort and Bulwark of Nation-State Legitimacy

Gordon L. Clark Temptation and the Virtues of Long-Term Commitment: The Governance of Sovereign Wealth Fund Investment

Monk, Recasting the Sovereign Wealth Fund Debate: Trust, Legitimacy, and Governance

Visitors Since August 2010

Locations of visitors to this page
Follow

Get every new post delivered to your Inbox.

Join 328 other followers