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Sovereign wealth funds
Editor:
Dr. Javier Santiso
Professor of Economics, ESADE Business School
Vice President, ESADEgeo - Center for Global Economy and Geopolitics
Sovereign wealth funds 2012Index
1
Index
Foreword 3
Introduction 5
Sovereign wealth fund investment behaviour 9
Sovereign wealth funds and Spain: (re)thinking opportunities 25
Latin American sovereign wealth funds 51
Sunken treasure: Brazil, deepwater oil, and Brazil’s sovereign wealth fund 65
Principal factors justifying the existence of Chile’s sovereign wealth funds 77
Africa and sovereign wealth funds 87
Interview with Fabio Scacciavillani, Chief Economist, Oman Investment Fund 97
Appendix. ESADEgeo Ranking - Sovereign wealth funds 2012 101
Foreword
Sovereign wealth funds 2012Foreword
3
Sovereign wealth funds 2012Foreword 4
1. Foreword
1. ForEworD
Theglobaleconomyisgoingthroughaperiodofmajor
transformation.Thetraditionalcentre/peripherymodelisnotup
tothejobofexpressingthecomplexityofevents.Theemerging
economiesaregrowingstrongly,whiletheEuropeanandUS
economiesarestagnating.
Manyoftheimbalancescurrentlyseenintheglobaleconomy
leadtotheaccumulationofreservesineconomiesthatcontrol
largepartsoftheworld’snaturalresourcesorthathavesuccessful
economicmodelsbasedonexports.ThustheMiddleEast,Latin
AmericaandSoutheastAsia-aswellasChina–arecurrently
holdingtheliquiditythatWesterneconomiessobadlyneed.
Oneemblematicmanifestationoftheeconomictransformation
wearegoingthroughistheriseofsovereignwealthfunds-huge
accumulationsofcapital,nowtotallingcloseto$5trillion,thatbuild
upinthesurplusregionsandarespreadingallaroundtheglobe.
Additionally,weareseeinga“metoo”effectinregionssuchasLatin
AmericaandAfrica,astheseregionsseekbetterwaystomanage
theirabundantresources.
Recognisingtheroleplayedbythesenewelementsofthe
internationaleconomy,wehaveproducedthefirstSpanish
languagereportonsovereignwealthfunds.Inacollaborativeeffort
betweenthepublicandprivatesectorsandacademia,INVESTIN
SPAIN(ICEX),KPMGandESADEBusinessSchoolcametogetherto
carryoutthishighlytopicalproject.
Thisreportwilllookatthestrategiesemployedbythesefunds,the
investmentdecisionstaken,thealliancestheyformwitheachother
tooperateinotheremergingmarkets,andtheirindustrialjoint
venturesinWesterncountries.
Whilethemainfocusisonthefunds’actionsinSpain,the2012
Sovereign Wealth Fundsreportalsolooksattrendsintheseglobal
players’actionsandconsiderstheirimpactonotherregions,
particularlyemergingonessuchasLatinAmericaandAfrica.
Moreover,thecasestudiesonChileandBrazilwillshowusthat
someexamplesof“bestpractices”asappliedbyinstitutions
worldwidecomefromtheseemergingcountriestoo(Chileisan
OECDmember).
Javier Solana
President,ESADEgeo
Jaime García-Legaz
SecretaryofStateforTrade
John Scott
President,KPMGEspaña
Sovereign wealth funds 2012Introduction
5
Introduction
Javier Santiso
Professor of Economics, ESADE Business School
Vice President, ESADEgeo - Center for Global Economy and Geopolitics
Sovereign wealth funds 2012Introduction6
2. Introduction
2. IntroDuctIon
This2012 Sovereign Wealth Fundsreportisthefirstproducedby
ESADEgeowiththesupportofKPMGandINVESTINSPAIN,nowpart
ofICEX.Wewouldliketobeginbythankingbothinstitutionsfor
theirsupportinbringingaboutthisfirstannualreportonsovereign
wealthfunds.Wealsowishtoexpressourveryspecialthanks
toElenaPisonero,atthetimewithKPMGandnowpresidentof
Hispasat,withoutwhoseenthusiasmandvisionthisreportwould
nothavecometofruition.
Thisreportisnotaone-offundertaking.Itformspartofaseries
ofactivitiespromotedbyESADEgeooverthepasttwoyears.A
seriesofESADEgeoGlobalizationLabswereheld–lectureson
emergingmarketsfocusingonsovereignwealthfundsandemerging
countrieswithinstitutionsofthistype.On30May2011aLab1was
heldonsovereignwealthfundswithVictoriaBarbary,atthetime
withMonitorGroup,London.On7February2012wewelcomed
ChristopherBaldingofthePekingUniversityHSBCBusinessSchool,
Shenzhen,China,whopresentedhislatestbook2.Bothcollaborated
onthereportandareassociatedwithESADEgeoasresearchfellows.
ThereportalsodrawsonfieldworkcarriedoutinColombiaand
Chile.Inmid-2011wewereinColombiaadvisingFinanceMinister
JuanCarlosEcheverry,togetherwithHarvardprofessorandformer
ChileanFinanceMinisterAndrésVelasco,onsettingupasovereign
wealthfundforColombia,whichwassubsequentlydonelaterthat
year.WewerealsoinChile,towardstheendof2011,fortheLatin
AmericanEconomicAssociation(LACEA)conference,inwhichwe
heldasession3onsovereignwealthfundstogetherwithChilean
FinanceMinisterFelipeLarraínandIgnacioBriones,whoiscurrently
responsiblefortheChileansovereignwealthfundsandalso
collaboratedonthisreport.
This“private”initiative,undertakenasaresultofmany
conversationsbetweenESADEandKPMG,receivedcrucial“public”
supportfromINVESTINSPAIN.Thecommongroundbetween
thepublicandprivatespheresintermsoftheproject’sultimate
objectives,theneedforadetailedstudyoftheseinternational
players,andthespecificnatureofthecontentofthereport,
wereagreedonbybothsides.Withouttheirvision,initiativeand
financing,thisprojectwouldnothavebeenpossible.
Thestructureofthereportisasfollows:afterthisintroduction,
VictoriaBarbaryaddressesthecurrentworldsituationofandtrends
insovereignwealthfunds;afterthatJavierSantisofocusesonthe
impactofthesefundsandtheopportunitiestheypresentinSpain
andLatinAmerica.Thisisfollowedbytwocasestudies:oneon
theBrazilianexample,byChristopherBaldingandEllenCampbell,
andanotherontheChileanone,byIgnacioBrionesandFrancisco
Vergara.LastlyJavierCapapéconsidersthenoveltythatthesefunds
representontheAfricancontinent.Itisalsoincludedaninterview
withFavioScacciavillani,ChiefEconomistoftheOmanInvestment
Fund.
Severalconclusionscanbedrawnfromthestudy:
• Theriseofsovereignwealthfundsnowappliestoallemerging
regions,notjustAsiaandtheMiddleEast,butAfricaandLatin
Americatoo.Therearecurrentlymorethan70fundsofthistype
inoperation,withtotalassetsofcloseto$5trillion.
• Intheperiod2010-2012therehasbeenasteadyincreasein
sovereignwealthfunds’South-Southactivity.Inparticularwe
haveseenArabandAsianfundsinvestinginLatinAmerica.Some
ofthesetransactionspassedthroughSpain,viasubsidiaries
ofSpanishmultinationalsestablishedintheregion,suchas
IberdrolaandSantander.
• InthiswaySpainalsopoppeduponthesovereignwealthfunds’
radarscreens,partlyasaresultofitsmultinationals’involvement
inLatinAmerica.Buttherewerealsosometransactionslinkedto
theSpanishmarket,themostprominentbeingthepurchaseof
CEPSAfromIPIC.
• Theriseofsovereignwealthfundsrepresentsafinancial
opportunity,butalsoanindustrialopportunityforSpain.This
canbeseenfromthefirstcooperationagreementsbetweenthe
MubadalafundandSpanishcompaniessuchasSener,Abengoa
andIndra.
• However,itcouldpromoteamoresystematicstrategyof
establishingrelationswithsovereignwealthfundsinboth
theMiddleEastandAsia,andalsowiththoseofAfricaand
LatinAmerica,seekingtohavethemestablishtheirEuropean
headquartershere,andcarryingoutactionsviabusinessschools,
footballclubsorSpanishgovernmentcooperation.
1Availableathttp://www.esadegeo.com/globalisation-lab/index/page1/1.VictoriaBarbaryiscurrentlyDirectoroftheSovereignWealthCenteratEuromoneyInstitutionalInvestorandResearcherattheSovereignInvestmentLab,BocconiUniversity.2SovereignWealthFunds:theNewIntersectionofMoneyandPolitics,OxfordUniversityPress,2012:http://www.esade.edu/web/esp/about-esade/today/news/viewelement/219441/1/el-economista-christopher-balding-detalla-los-desafios-que-afrontan-los-funds-soberanos-de-inversion-en-una-conferencia-de-esadegeo.3http://www.uai.cl/facultades-y-carreras/escuela-de-gobierno/actividades/2011/sovereign-strategic-funds-the-political-economy-of-sovereign-wealth-funds-in-and-from-latin-america.
Sovereign wealth funds 2012Introduction
7
Thesearesomeoftheactionsrecommendedinthereport.Relations
withsovereignwealthfundsneedtobebuiltupovertimeand
coordinatedatthehighestlevelsofStateandofmultinationals’
management.
Inastrategyofsystematicattraction,Spaincouldleverageits
footballclubstoreallyspearheadthenationalbrand.Spain’s
businessschoolscouldalsobemoreactivelydrawnintothe
endeavour,developingad hocprogrammesforthesefunds,and
roadshowstotrainexecutivesworkinginboththepublicandprivate
sectorsofemergingcountriesthathavesovereignwealthfunds.
Lastly,anintegratedstrategycouldincludeinternational
cooperation.Thebilateraldevelopmentbanksofcountrieslike
BrazilandChinahavebecomemajorplayers,likethesovereign
wealthfundsofmanyofthesecountries.HereSpanishcooperation
couldidentifytop-levelpartnerstolendtheirsupport,particularly
inLatinAmerica,wheretheyhaveexceptionalcredibilitybasedon
experience.
Victoria Barbary
Director, Sovereign Wealth Center at Euromoney Institutional Investor
Senior Researcher, Sovereign Investment Lab at University of Bocconi
Sovereign wealth funds 2012Sovereign wealth fund investment behaviour
9
Sovereign wealth fund investment behaviour
Sovereign wealth funds 2012Sovereign wealth fund investment behaviour 10
3. SoVErEIgn wEalth FunD InVEStmEnt BEhaVIour
Ithasnowbecomealmostimpossibletoignoresovereignwealth
funds(SWFs).Therearenowupto73sovereignfundsinvesting
governmentsurplusesininternationalequityanddebtmarkets
withtotalassetsundermanagementestimatedatupto$5billion
–morethandoublethesizeoftheglobalhedgefundindustry.
Whileolderfundshadbeenquietlyinvestinginarangeofassets
acrosstheglobewithoutmuchfanfarefordecades(thefirstSWFs4,
inKuwaitandwhatisnowKiribati,werefoundedinthe1950s),
inthemid-2000stheworldsatupandtooknote.Theboominoil
pricesandworldtradeendowedanumberofemergingeconomies
withvastwealth.Manyofthesecountriessavedtheirsurplusesin
SWFs,whichhadtheexpressremitofinvestingthefundsabroad
forcommercialreturn,toprovideincomeforfuturegenerations
whentheircommodityreservesweredepleted,torelieveinflationary
pressures,coverfuturepensionliabilitiesorpreventDutchdisease.
3. Sovereignwealthfundinvestmentbehaviour
4US–TexasPermanentSchoolFundwasestablishedevenearlier:1854.ItisnotclearifitqualifiesasaSWF.5Inthischapterweconcentrateontheactivityofthis30fundsdirectlyengagedintheworld’sequitymarkets,listedinTable1.However,therearedivergentdefinitionsofa“sovereignwealthfund”aswewillcheckinnextchaptersofthisreport.Hereweexcludefundscontrolledbycentralbanks,financeministriesorgovernmentagencies(e.g.SaudiArabiaMonetaryAgency,China’sStateAdministrationofForeignExchange,theHongKongMonetaryAuthority,Indonesia’sGovernmentInvestmentUnitandBotswana’sPulaFund),thoseusedforcurrencystabilisationpurposes(e.g.Chile’sSocialandEconomicStabilisationFund,TrinidadandTobago’sHeritageandStabilisationFund),statepensionfunds,fundscontrolledbysub-nationalgovernments,withtheexceptionoftheUnitedArabEmirates(e.g.AlaskaPermanentFund,AlbertaHeritageFund)andthosethatonlyinvestindomesticmarkets(e.g.Malaysia’s1MalaysiaBerhad,Kazakhstan’sSamrukKazyna,andFrance’sFSI).Wealsoexcludestate-ownedenterpriseswithlargeinvestmentportfolios(e.g.SonangolandKingtheAbdullahUniversityofScienceandTechnology).
Table1
Sovereignwealthfunds5
Norway GovernmentPensionFund-Global 1990 Commodity(Oil)
U.A.E./Abu Dhabi AbuDhabiInvestmentAuthority 1976 Commodity(Oil)
China ChinaInvestmentCorporation 2007 TradeSurplus
Kuwait KuwaitInvestmentAuthority 1953 Commodity(Oil)
Singapore GovernmentofSingapore 1981 TradeSurplus InvestmentCorporation
Singapore TemasekHoldings 1974 Government-LinkedCompanies
China NationalSocialSecurityFund 2000 TradeSurplus
Qatar QatarInvestmentAuthority 2005 Commodity(Oil&Gas)
Russia NationalWealthFund 2008 Commodity(Oil)
Australia AustralianFutureFund 2006 Non-Commodity
Libya LibyanInvestmentAuthority 2006 Commodity(Oil)
Kazakhstan KazakhstanNationalFund 2000 Commodity(Oil)
U.A.E./Abu Dhabi InternationalPetroleum 1984 Commodity(Oil) InvestmentCompany
Brunei BruneiInvestmentAgency 1983 Commodity(Oil)
Republic of KoreaKoreaInvestmentCorporation 2005 TradeSurplus
Malaysia KhazanahNasionalBerhard 1993 Government-LinkedCompanies
Azerbaijan StateOilFundofAzerbaijan(SOFAZ) 1999 Commodity(Oil)
U.A.E./Abu Dhabi MubadalaDevelopmentCompany 2002 Commodity(Oil)
Ireland NationalPensionReserveFund 2001 Non-Commodity
Oman StateGeneralReserveFund 1980 Commodity(Oil&Gas)
Bahrain BahrainMumtalakat 2006 Government-LinkedCompanies HoldingCompany
New Zealand NewZealandSuperannuationFund 2001 Non-Commodity
U.A.E. EmiratesInvestmentAuthority 2007 Commodity(Oil)
U.A.E./Abu Dhabi AbuDhabiInvestmentCouncil 2007 Commodity(Oil)
East Timor Timor-LestePetroleumFund 2005 Commodity(Oil&Gas)
U.A.E./ RasAlKhaimah(RAK) 2005 Government-LinkedCompaniesRas Al Khaimah InvestmentAuthority
Vietnam StateCapitalInvestmentCorporation 2005 Government-LinkedCompanies
Kiribati RevenueEqualizationReserveFund 1956 Commodity(Phosphates)
São Tomé & NationalOilAccount 2004 Commodity(Oil)Principe
Oman OmanInvestmentFund 2006 Commodity(Oil&Gas)
Country Fund name Inception Source of Funds year
Sovereign wealth funds 2012Sovereign wealth fund investment behaviour
11
Astheircoffersswelled,andmarketsboomedmanySWFsbecame
moreconfidentandlookedfornewwaystoinvestandfounded
newvehiclestodoso,asChart1shows,therewasaspateof
foundingnewSWFsbetween2005and2007.Thesefunds,andto
anextenttheolderones,lookedtoinvestwithaneyetohigher-risk,
higher-returns,theyalsoincreasedtheamountofinvestmentthey
undertookdirectly,ratherthanbyinvestingwithassetmanagers
orintofunds.Thismadethemmorevisibleontheinternational
investmentlandscape,particularlynewfunds,whichoftenpursued
anaggressiveoverseasinvestmentstrategy.
ThiswasevidentasSWFsmovedtowardsbiggerinvestmentsand
dealsinOECDmarkets:between2005and2007SWFs’publicly
reported,directinvestmentactivityincreasedmarkedly(byover50
percent),butwiththeinvestmentvalueoutpacingthisincrease,
risingfrom$10.6billionto$74.5billion(by600percent).Muchof
thisgrowthwasfocusedondevelopedmarkets,withthevalueof
directSWFinvestmentsintheOECDrisingfrom$5.0billionin2005,
to$43.0billionin2007.
Chart 1
Number Value (US$bn)
Publicly available data for direct SWF equity & real estate deals, joint ventures and capital injections.Source: Sovereign Investiment Lab, Universitá Bocconi, 2012.
Direct SWF investments since 2000
2000 20022001 2003 2005 20072004 2006 2008 2009 2010 2011
24
33
20
35
88
138
51
89
160 156
202
232
1.7 10.5 1.710.6
74.5
5.6
25
107.8
90.8
47.1
80
0
50
150
100
200
250
Sovereign wealth funds 2012Sovereign wealth fund investment behaviour 12
Inthelastquarterof2007andthefirstquarterof2008,the
AmericanandEuropeanbankingsectorswentintomeltdownasa
resultoftheirexposuretotheU.S.subprimemortgagedebt.As
theglobaleconomyspiralleddownwards,bankslookedtoSWFs
torecapitalisethefinancialsystem,whichhadcavedinonits
foundationofbaddebt.BetweenNovember2007andJanuary
2008,AmericanandSwissbanks,includingCiti,MerrillLynch,
MorganStanleyandUBS,received$24.7billionfromSWFs.
Theseinvestmentsplayedamajorroleinstabilisingthefinancial
system,buttherapidfallinthevalueofAmericanandEuropean
bankingstockssawtheirmarketvalueplummet.Themajorityof
theseinvestmentswerestructuredasmandatoryconvertiblenotes,
payingacouponofaround10percentforabouttwoyears,which
cushionedsomeoftheblow;however,thesubstantialmark-to-
marketlossesputSWFsunderconsiderablepressuretoretreatfrom
internationalmarketsfromtheirgovernmentsanddomesticpopular
opinion.ThecollapseofLehmanBrothers,whichprecipitatedthe
dryingupofglobalcreditandcapitalflightfromemergingmarkets
byWesterninvestorsattheendof2008,exacerbatedthesituation.
NowSWFshadlittlechoicebuttoturntotheirdomesticmarkets.
ThiswasparticularlyobviousinthecasesofKuwaitandQatar.In
December2008,theKuwaitInvestmentAuthority,KuwaitPetroleum
CorporationandthePublicInstitutionforSocialSecuritycontributed
toaKWD1.5billion($5.2billion)fundtoinvestinlocalstocks,KIA
alsopumpedoverKWD50millionintotheAlRaedFund,aKuwaiti
mutualfund,andwasamajorparticipantinbailingoutGulfBank,
oneofthecountry’smajorlenders.Likewise,theQatarInvestment
Authority,boughttenpercentofthefourlargestbanksinthecountry
tokeepthemsolvent–abailoutthatwascompletedduring2011
andcostthefundover$3billion.
During2009and2010mostsovereignfundsretrenchedfollowing
theheavylossesmostSWFssufferedin2008:Singapore’sTemasek
Holdingswashardesthitbythedownturn,reportinglossesof31
percent(about$39billion)betweenMarchandNovember2008.
TheAbuDhabiInvestmentAuthority,KIA,QIA,Malaysia’sKhazanah
NasionalandAbuDhabi’sMubadalaDevelopmentCompanywere
allreportedtohavemadelossesofbetween20and25percent
in2008.Singapore’sotherSWF,theGovernmentofSingapore
InvestmentCorporation,faredbetter,incurringapparentlosses
of15percent,whiletheKoreaInvestmentCorporation’sportfolio
onlyshrankby14percent.EventheChinaInvestmentCorporation,
whoseglobalportfoliowasmostlyincash,reportedasmallloss
(2.1percent)fortheyearfollowingdisastrousinvestmentsinprivate
equityhouseJCFlowers,MorganStanleyandtheLehmanBrothers
ReservePrimaryFund.
CriticismofSWFs’losses,fromboththedomesticandinternational
media,andtheinsinuationfromsomequartersthattheywere
politicallymotivated,aswellasbeingundeniablyopaqueencouraged
manytoopenup.Avoluntarycodeofconduct,theGenerally
AcceptedPrinciplesandPracticesforSWFs(theSantiagoPrinciples)
werewrittenandsignedbySWFsfrom23countriesinOctober2008,
whichboundthesignatoriestoinvestcommerciallyandtransparently
andwithrespecttothetargetcountry’sregulatorystructures.Thishas
givenlifetotheInternationalForumofSovereignWealthFunds,which
meetsonanannualbasis,andwhileitsworkisnascent,itsabilityto
helpsovereignfundsbecomemoretransparentlookspromising.
Lossesandthemovetowardsincreasingtransparencyencouraged
manySWFstorethinktheirinvestmentapproachandphilosophy,
particularlytheirattitudetorisk.Theeconomicenvironmenthad
beenfundamentallyaltered,andtheyhadtoreconsiderunderlying
assumptionsaboutassetallocation.Thiswasmanifestedby
restructuringtheirorganisationalarchitecture,changingtheir
investmentfocus,assetallocationorrebalancingtheirportfolio.
Awiderscalerestructuringofsovereigninvestmentvehicles
wasundertakeninDubaifollowingitsdecisiontosuspenddebt
repaymentsandbringitssovereigninvestmentvehiclesunder
closergovernmentscrutinythroughtheAdvisoryCouncilofthe
GovernmentofDubai,andlookingtoreallocatethedebtburden
acrossthe“DubaiInc.”network.
ThisrealignmentsawSWFsstartinvestingincompaniesbasedin
therealeconomy,aspartofadrivetodiversifytheirportfolios.
Althoughtheproportionofinvestmentsstayedrelativelyconstant
acrosssectors,agreaterproportionofsovereignfundspublicly
reporteddirectexpenditurewasdirectedtowardsthecommodity
valuechain–petroleumandnaturalgas,miningandmetal
processing–whileinfrastructurebothathomeandabroadbecame
anincreasinglyimportantsectorforsovereignfunds,astheysought
low-risk,long-terminvestmentswithsustainableincomestreams.
3. Sovereignwealthfundinvestmentbehaviour
Table2
SovereignwealthfundinvestmentsinwesternbanksNovember2007-March2008
Abu Dhabi Investment Authority CitiGroup $7.5billion November2007
China Investment Corporation MorganStanley $5.6billion December2007
Temasek Holdings MerrillLynch $4.4billion December2007
Government of Singapore CitiGroup $6.88billion January2008Investment Corporation (GIC)
Kuwait Investment Authority MerrillLynch $3billion January2008
Kuwait Investment Authority CitiGroup $2billion January2008
Korea Investment Corporation MerrillLynch $2billion January2008
Temasek Holdings MerrillLynch $600million February2008
Government of Singapore UBSAG $10.34billion March2008Investment Corporation (GIC)
Sovereign fund Bank Value Date
Sovereign wealth funds 2012Sovereign wealth fund investment behaviour
13
Chart 2
Number of SWF direct investments by target sector, 2007-2011
2007 2008 2009 2010 2011
35
32
3
14353
43
47
44
9
17
284
29
41
37
15
111
102
39
62
33
21
20
87
6
45
59
45
25
29
49
7
53
138
160 156
231
202
+67.4%
Others
Financial Services
Real Estate
Hydrocarbons
Infrastructure
Mining & Metal Processing
Aircraft, Autos, Ships & Trains
Health & Personal Care
0
Publicly available data for direct SWF equity & real estate deals, joint ventures and capital injections. Source: Sovereign Investment Lab, Universitá Bocconi, 2012.
View as percentage
(US$bn)
Sovereign wealth funds 2012Sovereign wealth fund investment behaviour 14
3. Sovereignwealthfundinvestmentbehaviour
TheonsetoftheEurozoneCrisisin2010destroyedthebeliefthat
developed-marketsovereigndebtwaslowriskandliquidasheavily
indebtedcountriesintheEurozone–firstGreece,thenPortugal,
IrelandandSpain–struggledtopayofftheirdebt,andbailouts
wereagreedforGreeceandIreland,theinvestmentclimate
deteriorated.Theconsequencesrippledacrosstheworld,andas
aresult2010wasanadirforsovereignfundinvestments,beingat
thelowestlevelsofSWFactivityinthe“modernera”ofSWFs6,with
theyearonlyseeingthemdirectlyinvest$47.1billion–halftheir
expenditureduringthepreviousyear.
WhereasSWFshadpreviouslybeencontenttomakebig-ticket
investmentsinEurope,theinstabilityintheinvestmentenvironment
sawthemtrytospreadriskbyundertakingalargernumberof
smallertransactions.TheexceptionwasQatar,withQIApurchasing
high-endLondondepartmentstore,Harrods($2.2billion),and
undertakinga$2.7billioninvestmentinBancoSantander’sBrazilian
unit.Theotherexceptiontothisrulewereobviousgrowthmarkets,
exemplifiedbythemuch-anticipatedIPOoftheAgriculturalBankof
China,inwhichKIA,QIA,theChineseNationalSocialSecurityFund,
andTemasekboughtatotalofover$6billionofstock.
2007 2008 2009 2010 2011
51.6
9.1
2.52.7
7.7
80.3
10.0
11.2
1.1
1.82.9
15.6
10.4
8.4
16.4
12.4
1.5
26.0
21.4
4.1
4.1
5.8
5.9
0.82.8
2.3
35.2
12.5
13.2
7.1
6.1
1.43.4
0
Chart 3
Value of SWF direct investments by target sector, 2007-2011
Publicly available data for direct SWF equity & real estate deals, joint ventures and capital injections.Source: Sovereign Investment Lab, Universitá Bocconi, 2012.
View as percentage
Others
Financial Services
Real Estate
Hydrocarbons
Infrastructure
Mining & Metal Processing
Aircraft, Autos, Ships & Trains
Health & Personal Care
(US$bn)
6Asthemajorityofthefundswetrackhaveonlybeenfoundedinthelastdecade,itisnotuntil2005thatwehaveafunduniversecomparabletothepresentday.
Sovereign wealth funds 2012Sovereign wealth fund investment behaviour
15
SWFsalsodiversifiedtheirportfoliosbyconcentratingoninvesting
inemergingmarkets,SWFsmakingawealthofsmallersouth-
southinvestments:Indianhealthcareandelectricitytransmission,
Vietnamesebanking,Zambiantelecoms,SouthAfricanplatinum
mining,andatouristresortinJordanallreceivedSWFinvestments.
Consequently,over80percentofSWFinvestmentsweremade
abroadin2010,withalargeproportioninemergingmarkets.
Retreatcouldnotbealong-termstrategy,andtheenvironment
offeredsomeprospectforpatientinvestorswithcashtoidentify
under-valuedassets.
2007 2008 2009 2010 2011
2,9
25.1
15.5
26.9
3.43.63.1
31.0
38.5
27.1
7.70.90.6
15.8
29.2
10.3
32.9
1.80.5
10.4
17.1
2.01.84.10.6
10.5
6.3
34.4
29.6
1.71.0
6.4
77.6
105.8
90.5
46.5
79.4
+2.3%
0
Chart 4
Value of SWF direct investments by target region 2007-2011
Publicly available data for direct SWF equity & real estate deals, joint ventures and capital injections. Source: Sovereign Investment Lab, Universitá Bocconi, 2012.
View as percentage
Sub-Saharan Africa
North America
Europe
Asia-Pacific
MENA
Non-Pacific Asia
Latin America
(US$bn)
Sovereign wealth funds 2012Sovereign wealth fund investment behaviour 16
3. Sovereignwealthfundinvestmentbehaviour
Theglobaleconomicenvironmentin2011continuedtobe
dominatedbythesovereigndebtcrisisinEurope,buttheonsetof
thepoliticalunrestthatstartedinTunisiaandspreadacrossNorth
AfricaandtheMiddleEastaswellaspoliticaldeadlockintheUnited
Statesfurtherdentedconfidenceintheinvestmentclimate.Insuch
anuncertainsituation,itwasaremarkablethatSWFinvestment
rosefromits2010levels.Butwithoilpricescontinuingtorise
towards$100perbarrel,SWFscontinuedtoinvestabroaddespite
manygovernmentsintheMiddleEastdivertingspendingtotheir
homemarkets.InFebruaryandMarch2011,SaudiArabiaunveiled
benefitsworth$130billion—30percentofitsgrossdomestic
product—inanapparentbidtoinsulatethelargestoilexporter
fromtheArabSpring.Bahrain,Libya,Oman,andKuwaitalso
increaseddomesticspendingorhandedoutrightcashtoitscitizens
inpackagestotalingasmuchasfourpercentofGDP.
However,withtheimperativetocontinuetodiversifywealth
awayfromoilindustries,andtopreventinflationarypressures
andcurrencyappreciationasaresultoflargeforeignexchange
reserves,SWFscontinuedtobesuppliedwithcurrencyfromtheir
governmentsandputittowork.In2011,SWFactivityrose,witha15
percentincreaseinthenumberofdealscompletedover2010,from
202to232,buta41percentincreaseinvaluefrom$47.1billionto
$80.0billion.
WhilethismayappeartorepresentanincreaseinSWFconfidence
intheglobaleconomy,inrealityitreflectsthecontinuingimpactof
theglobalfinancialcrisisontheirbalancesheetsandinvestment
behaviour.Somesovereignfundsarestillbeingcalledonto
capitalisedomesticbanks.Ireland’sNationalPensionsReserve
Fund,thehighestspendingfundoftheyear,wasrequiredtoinject
$12.5billionintoAlliedIrishBanksin2011,accountingforallits
directinvestmentactivity.QIAalsocontinuedtobeaffectedbythe
falloutfromthefinancialcrisis,spending$1.3billiononcontinuing
therecapitalisationoffourofitsdomesticbanks–abailoutthathas
costthefundover$3billionsince2008.Inaddition,thefundalso
cametotherescueofCreditSuisse,whichdetractedconsiderably
itsbalancesheet.InFebruary,QatarHoldingandOlayanGroup
receivedanaggregateofapproximatelyCHF6billionofTier1buffer
capitalnotestobepaidupnoearlierthanOctober2013forcashor
inexchangeforTier1capitalnotesissuedin2008.Suchtransactions
serveasareminderthatinvestorsarestillcontendingwiththe
consequencesofthefinancialcrisis.Whilesomefunds,notablyKIA
andGIChavemanagedtoselloutoftheirill-fatedbailoutofthe
Westernbankingsystemtovariousdegreesofsuccess,others–
Temasek–havebookedenormouslossesonthoseinvestments,and
furtherfunds,suchasKIC,arestillholdingstakesinbanksthatare
worthafractionofthepurchaseprice.
TheweightofdomesticbailoutsonSWFsisevidentinthedifference
betweentheirdomesticinvestmentbehaviourandtheirinvestment
patternsinforeignmarkets.Indomesticmarkets,80percentof
theirpubliclyreportedexpenditureand42percentoftheirdirect
investmentswereinfinancialservices.Inforeignmarkets,while
financialserviceswerethemostsignificantsectorforsovereign
funds,itonlyaccountedfor20percentoftheinvestmentsand
25percentoftheexpenditure.Thissuggeststhattheoverallbias
towardsfinancialservicesisnottheresultofconsideredstrategising
onthepartofsovereignfunds,butadomesticpolicyobjectiveto
recapitaliseandsupportdomesticbanksinthewakeofthefinancial
crisis.
Sovereign wealth funds 2012Sovereign wealth fund investment behaviour
17
Outsideofdomesticbailouts,onlyeightoutofthe23funds
thatinvesteddirectlyin2011investedinfinancialservices.The
vastmajorityofthesewereinemergingeconomies,withthe
twoSingaporeanfundsfocusingonChina.OtherSWFs’foreign
investmentsinthissectorhavebeenspreadacrossAsiaandAfrica,
withADIAbuyingsharesinIndia’slargestgold-loancompany,
MuhootFinance,andHDFCBank,fourthlargestbankinIndiaby
assetsandthesecondlargestbymarketcapitalisation.Temasek
establishedaninvestmentvehiclewiththeOppenheimerfamilyto
concentrateonAfrica,andinjectedtieronecapitalintoNIBBankin
Pakistan,ofwhichitowns74percent.CICboughta25percentshare
ofSouthAfricaninvestmentgroup,ShandukaGroup.
0
50
25
75
100
150
125
175
538
3
927
22
1
1 27.2
1.40.80.60.51.5
21.9
179
44
763
20
23
39
37
52.85.31.12.51.1
12.7
5.8
11.0
13.3
SWF direct investment: sectors in domestic vs. foreign markets, 2011
Chart 5
Publicly available data for direct SWF equity & real estate deals, joint ventures and capital injections.Source: Sovereign Investment Lab, Universitá Bocconi, 2012.
View as percentage
Financial Services
Real Estate
Hydrocarbons
Infrastructure
Mining & Metal Processing
Other
Health & Personal Care
Aircraft, Autos, Ships & Trains
(US$bn)
Domestic (nº) Foreign (nº)Domestic ($) Foreign ($)
Sovereign wealth funds 2012Sovereign wealth fund investment behaviour 18
3. Sovereignwealthfundinvestmentbehaviour
Anothersectorthathasalwaysbeenamainstayforsovereignfund
investmenthasbeenrealestate.Afterseveralyearsofsovereign
fundsdiversifyingoutofpropertiesintorealestateinvestmenttrusts
andotherpropertyfunds,2011sawareturntobricksandmortar.
Inparticular,propertiesinLondonandNewYork,considered“safe
havens”,werepopular,withKIAreturningtotheNewYorkproperty
market,andrebalancingitsUKpropertyportfolio,divestingnon-
coreassetssuchasprovincialshoppingcentres,inexchangefor
centralLondonofficebuildings,including1BunhillRow,whichwas
announcedinDecember2011.GIChastakenaslightlydifferent
routeintothepropertymarket.Followingapartnershipwith
DeutscheBankinFebruary2010toprovidetheEuropeanproperty
marketwithdebtfinancing,GICunderwrotethejuniorportionof
Blackstone’spurchaseofChiswickParkinLondoninMarch2011,and
againfinancedpartofBlackstone’s£600millionpurchaseofeight
MinthotelsintheUnitedKingdominSeptember.
Emergingmarketrealestate,however,hasbeenofrelativelylittle
interesttosovereignfunds.Wheretherehasbeeninvestment,
thishastendedtobeindevelopmentfunds,suchasMorocco’s
WesselCapital,whichwilldevelopsustainabletourismprojects
intheKingdom,andreceivedinvestmentfromQIA,KIAandthe
InternationalPetroleumInvestmentCompany’s,AabarInvestments.
TheexceptiontotheruleistheSingaporeanSWFs–GICand
Temasek–whichhavebeenrelativelyactiveintheChineseproperty
market,butagaininfinancingnewdevelopments,ratherthan
buyingexistingproperties.Forexample,GICRealEstateenteredinto
apartnershipwithYanlordPropertiestodeveloparesidentialsitein
JinnanDistrict,TianjininChina,inwhichithasinvestedaround$240
million,whileTemasekinvestednearly$700millionin65.5percent
oftheChaoTianMendevelopmentinChongqingwithCapitaLand,
CapitaMallsAsia,whichwillwhichwillincludeashoppingmalland
eighttowersforresidential,officeandhotels.
Q1 Q2 Q3 2011
20.0
13.8
24.9
21.3
3.8
2.3
1.8
1.7
2.5
12.3
3.6
6.2
2.1
35.2
12.5
13.2
7.1
3.4
6.1
80.0
1.4
10.9
3.1
2.2
Q4
8.2
4.7
4.6
2.7
0.2
+6.5%
0
Value of SWF investments by target sector
Chart 6
Publicly available data for direct SWF equity & real estate deals, joint ventures and capital injections.Source: Sovereign Investment Lab, Universitá Bocconi, 2012.
Financial Services
Real Estate
Hydrocarbons
Infrastructure
Mining & Metal Processing
Other
Health & Personal Care
Aircraft, Autos, Ships & Trains
(US$bn)
Sovereign wealth funds 2012Sovereign wealth fund investment behaviour
19
Ashasbeenwidelytrailedoverthepastyear,withcurrentmarket
volatilityandaneedforsovereignfundstodiversifytheirportfolios
withassetswithstable,long-termincomestreams,therehasalso
beenawiderinterestininfrastructure.Tollroadswereattractivewith
theAbuDhabiInvestmentAuthority,ChinaInvestmentCorporation,
theFutureFundandNewZealandSuperannuationFundall
makingsizableinvestmentsintollroadoperatorsConnectEastand
TransurbaninAustralia,whileGICparticipatedinacapitalincrease
toenableSintoniatoincreaseitsshareinItaliantoll-roadoperator,
Atlantia.Utilitieswerealsoatargetforsovereignfunds,withpower
generationbeingaparticularfocusinbothEuropeandtheUnited
States,assovereignfundssoughttodiversifyportfoliosandlookfor
assetswithstablelong-termincomestreamsindevelopedmarkets.
Forsimilarreasons,formanyfunds,particularlythosefrom
Asiawhoseinflowsdonotoriginatefromhydrocarbonrents,
commoditieshavebecomeamoreimportantpartoftheirasset
allocationstrategy.Petroleum,naturalgas,andcoalassetshave
remainedafocusforSWFacquisitionin2011,accountingforsome
ofthebiggestdealsoftheyear:CIC’s$4billioninvestmentinGDF
Suez’sExplorationandProductionbusiness,aswellasastakein
theirTrinidadianLNGLiquefactionplant;IPIC’s$5billionpurchase
ofSpain’sCEPSA;andTemasek’s$1billioninvestmentinUSshale
gasproducerFracTechHoldings,whichitundertookinaconsortium
withKIC,theCanadaPensionPlanInvestmentBoardandRRJCapital
inFebruary.Inanotablechangefrom2010,however,miningand
metals,whichhadbecomeanimportantsector,appearedtobea
lesspopulartargetfordirectinvestment.Itmaybethatsovereign
funds,waryofabubble,havechosentogainexposuretothese
commoditiesinotherways,whichhaveagreaterexposuretoa
rangeofcommodities,ratherthanmakingsubstantialbets.Possible
examplesincludeexposurethroughcommodityindices,ordirectly
bytakingstakesincommoditytraders,suchasGlencore,whose
sharesbegantradingontheLondonStockExchangeinMayand
attractedinvestmentsfromAabarandGIC,orHongKong’sNoble
Group,inwhichKICboughta1percentstakeinApril.
Developedmarketsarestillreceivingthegreatestproportionof
sovereignfundinvestment.TheOECDaccountedfornearlyhalf
theinvestmentsand55percentoftheinvestmentvaluein2011.
However,whilethismightsuggestthatsovereignfundsremainwary
ofinvestinginemergingmarkets,theheadlinefigureobscuresthe
factthattheseinvestmentsdonotrepresentavoteofconfidencefor
thedevelopedworld.SWFshaveinvestedincommodities,especially
NorthAmericanshalegasextraction,safe-havenassets(London
andNewYorkrealestate,utilities)andlookedforcompanieswith
Q1
0
Q2 Q3 Q4 2011
62
49
63
58
9
11
6
4
13
8
10
11
17
12
2,1
59
46
25
29
9
53
232
7
28
12
4
11
13
7
4
17
14
-6.5%
Number of SWF investments by target sector
Chart 7
Publicly available data for direct SWF equity & real estate deals, joint ventures and capital injections.Source: Sovereign Investment Lab, Universitá Bocconi, 2012.
Servicios financieros
Real Estate
Hydrocarbons
Infrastructure
Mining & Metal Processing
Other
Health & Personal Care
Aircraft, Autos, Ships & Trains
Sovereign wealth funds 2012Sovereign wealth fund investment behaviour 20
3. Sovereignwealthfundinvestmentbehaviour
alargepresenceintheemergingworld.Forexample,QIAbought
intotwomajorIberianutilities:IberdrolainSpain($2.7billionfor
6.16percent,andafurther2.24percentbeforetheendoftheyear)
andEnergiasdePortugal($230millionfor0.05percent,which
broughtitstotalholdingtojustovertwopercent).Bothofthese
haveextensiveoperationsinLatinAmerica,anditislikelythatitwas
theseasmuchasthedesireforexposuretoinfrastructureassetsor
theirbeingunderpricedduetotheeconomicenvironmentinSpain
andPortugal,thatattractedQatartothesecompanies.Itisthrough
thistypeofexposurethatsovereignfundshaveappearedtoobtain
exposuretoLatinAmerica,whichrecordedonlythreeinvestments,
totalingU.S.$1,030million,representing1.3%ofdirectspending
thatSWFspubliclyreportedinthatyear.Indeed,QatarHolding’s
investmentinIberdrolawasaccompaniedbyamemorandumof
understandingtodevelopnewbusinessopportunitiesindifferent
areasoftheglobalpowerchainwithafocusonhigh-growthand
emergingmarkets.
Q1 Q2 Q3 Q4 2011
62
49
63
58
23
15
5
6
30
15
14
1
39
13
7
2,1
109
70
21
27
5
232
17
27
8
4
0
-6.5%
Number of SWF direct investments by market type
Chart 8
Publicly available data for direct SWF equity & real estate deals, joint ventures and capital injections. The countries included in “Emerging Markets” and “Established Frontier Markets” are based on those in the MSCI Indices of the same names.Source: Sovereign Investment Lab, Universitá Bocconi, 2012.
OECD
BRIC
Emerging Market
Other
Established Frontier
Sovereign wealth funds 2012Sovereign wealth fund investment behaviour
21
Q1 Q2 Q3 Q4 2011
20.0
13.8
24.9
21.3
6.6
5.4
0.80.9
14.9
2.1
2.5
0.5
16.5
5.8
2.3
44.1
23.4
6.8
5.00.7
80
6.1
10.0
3.7
1.4
+6.5%
0
Value of SWF direct investments by market type
Chart 9
Publicly available data for direct SWF equity & real estate deals, joint ventures and capital injections. The countries included in “Emerging Markets” and “Established Frontier Markets” are based on those in the MSCI Indices of the same names.Source: Sovereign Investment Lab, Universitá Bocconi, 2012.
OECD
BRIC
Emerging Market
Other
Established Frontier
(US$bn)
ThisstrategyhasalsobeenevidentinQIA’sbetonluxurygoods
retailerssuchasLVMHinFrance(1.03percent),andTiffany&
Co.intheUnitedStates(5.02percent),whichhavegrowing
marketsinChinaandtheMiddleEast.Inpreviousyears,high-end
manufacturingindevelopedmarkets,particularlyintheautomotive
andaeronauticssectors,havebeenattractivetoSWFs,particularly
thosefromtheArabianGulf,butin2011,littlewasinvestedin
EuropeanorAmericanmanufacturing,suggestingthatSWFsarenot
yetbullishontheirabilitytoadapttocurrentmarketconditionsand
thatthequesttechnologytransferisbecominglessimportantthan
inpreviousyears.
Whilethismayseemtobeafootnoteinthewaysovereignfunds
invest,itappearstobeanimportanttrend.Onthefaceofit,if
wecomparethemarketallocationsacrossdirectinvestmentsfrom
2007withthosefrom2011,weseerelativelylittlechange,with
proportionsofinvestmenttotheOECDandBRICcountriesstaying
relativelystable,andthemostnotabletrendbeingamoveinto
establishedemergingmarkets(outsideBrazil,Russia,Indiaand
China),andawayfrommoretruefrontiermarkets(notincludedon
MSCIEmergingorFrontierMarketsIndices),asshownbelow.The
conclusiontobedrawnappearsthatsovereignfundsaretaking
advantageofglobalisationtogetexposuretoemergingmarket
growththroughestablisheddevelopedmarketcompanieswith
strongbrands,whichhavesubstantialgrowthmarketsinemerging
economies.Thisenablessovereignfundstogetdevelopedmarket
accountingandgovernancestandardsandlegalprotectionintheir
investments,thustakingonlowcorporateandlegalrisk,while
tappinggrowthinapparentlymoreriskymarkets.
Sovereign wealth funds 2012Sovereign wealth fund investment behaviour 22
3. Sovereignwealthfundinvestmentbehaviour
Table3
SWFsinvestmentin2007and2011bynumberofdealsandvolumeinvested
2007 (Number ) 28.57% 6.43% 12.14% 8.57% 44.29%
2011 30.17% 9.05% 11.64% 2.16% 46.98%
2007 (Value $) 39.82% 0.22% 3.94% 1.21% 54.81%
2011 29.25% 8.54% 6.21% 0.83% 55.18%
BRIC Emerging Markets Frontier Markets Others OECD
Table4
SWFSouth-Southinvestmentsin2011,valuedatover$500million
Temasek Holdings Pte. Ltd. ChinaConstructionBankLtd. China 2,788.47
Temasek Holdings Pte. Ltd. FestivalWalkMall,HongKong China 2,412.74
Temasek Holdings Pte. Ltd. ChinaConstructionBankLtd. China 2,184.61
International Petroleum Investment Company RHBCapitalBhd Malaysia 1,941.86
Qatar Investment Authority QHIndonesia Indonesia 1,000.00
China Investment Corporation LNGAtlanticliquefactionplant Trinidad&Tobago 852.10
Temasek Holdings Pte. Ltd. ChaoTianMenlandmarkmixeddevelopment China 671.35
International Petroleum Investment Company WessalCapital Morocco 625.00
Kuwait Investment Authority WessalCapital Morocco 625.00
Qatar Investment Authority WessalCapital Morocco 625.00
Qatar Investment Authority “NileCorniche”inCairoandresortElSheikh Egypt 543.80 developmentinSharm
Government of Singapore Investment Corporation Pte Ltd. HeroInvestmentsPvtLtd India 503.50
Fund Target Country Value (US$MM)
Thatsaid,someSWFsareveryinvolvedininvestingdirectlyinto
emergingmarkets,with13fundsundertaking75directinvestments
inforeignemergingmarkets,valuedat$21.2billion(aquarterofall
expenditure)in2011.Asthebelowtableshows,Temasekisoneof
thelargestinvestorsinAsia,investingbillionsofdollarsinChinese
banksandrealestate.ThisischaracteristicofTemasek’sinvestment
strategy,asthefundhas45percentofitsportfolioinvestedinAsia,
outsideofSingapore,32percentinitshomemarketandafurther
threepercentinLatinAmerica,Africa,CentralAsia&theMiddle
East.Thistablealsorevealsthat,forthefirsttime,QIAismakinga
realplayinemergingmarkets,withthefoundationofitsIndonesian
subsidiary.However,QIA’sinvestmentsinEgyptandMoroccoare
alsoillustrativeofQatar’sdesiretobearegionalleader,particularly
investingincountries,likeEgypt,thathavebeeneffectedbytheArab
Spring.
Sovereign wealth funds 2012Sovereign wealth fund investment behaviour
23
So what for Europe?
SWFinvestmentsinEuropeoverthepasttwoyearshavenotbeen
avoteofconfidencefortheEuropeaneconomy,andinvestment
inEuropehascertainlybeenhamperedbytheEurozone’sfailure
tocomeupwithacrediblesolutiontothesovereigndebtcrisis.
SWFshaveinvestedincommodities,safe-havenassets(Britishreal
estate,utilities)andlookedforEuropeancompanieswithalarge
presenceintheemergingworld,whichprovidethemwithemerging
marketexposurewiththelowerregulatoryandpoliticalrisksof
theEuropeanUnion.However,SWFsinvestedlittleinEuropean
manufacturingsuggestingthattheyarenotyetbullishonthe
region’sabilitytoadapttomoreexport-orientatedworld.Evenhigh-
endmanufacturing,whichhastraditionallybeenastrongsector
forEuropeasSWFshavebeenseekingtechnologytransfertotheir
domesticeconomies,receivedlukewarmsupport,withMubadala’s
investmenttryinAERnnovaandAabar’sfollow-oninvestmentin
MercedesBenzGrandPrixbeingtheonlynotableexceptions.
However,itmaynotbealldoomandgloom.Severalfund
executives,includingScottKalbofKICandhissuccessorDonLee,as
wellasJinLiqun,chairmanoftheBoardofSupervisorsofCIC,have
beenconfidentintheunderlyingfundamentalsoftheEuropean
economy,andhavesaidtheyarelookingatundervaluedassetsin
theregion,butemphasisetheneedtobecautiousandtocontrol
riskamidintensemarketfluctuations.Moreover,inApril2012,
centralbanksandsovereignwealthfundsoutsideEuropewhich
hadshunnedtheEuropeanFinancialStabilityFacilitycreditsince
theendof2011madeastrongreturntothename,buyingover40
percentoftheEFSF’sinaugural€3billionseven-yeartrade,wellin
excessofwhattheytookinEFSF’sfiveandthree-yearissuessoldin
2012,whichsaw10percentand18percentgotothatinvestorbase.
However,thepileinonseven-yearinstruments,ratherthanmore
near-termbondssuggeststhatsovereignwealthfundsbelievethat
thenextfewyearsaregoingtoberockyonesfortheEurozone,and
thatthelong-termprospectsaremorecompellingthantheshort-to-
mediumterm.
Javier Santiso
Professor of Economics, ESADE Business School
Vice President, ESADEgeo - Center for Global Economy and Geopolitics
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities
25
Sovereign wealth funds and Spain: (re)thinking opportunities
4. SovereignwealthfundsandSpain:(re)thinkingopportunities
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities 26
Theemergingcountries’sovereignwealthfundshavebecome
internationalprotagonists.Althoughthesefundsareneithernew
–somehavebeeninexistenceforupwardsofhalfacentury-nor
specifictoemergingcountries,theyhavenonethelesstakenon
unprecedentedprominenceoverthepasttenyears,springingup
fromallcontinentsandregions,fromCentralandEastAsia,the
MiddleEastandAfricaandfromLatinAmerica7.
BeforetheonsetofthecrisisnowaffectingtheeconomiesofOECD
countries,theystartedtoinvestinothercountries,bothdeveloped
anddeveloping.Bythebeginningofthecurrentdecadetheyhad
becomeessentialplayersininternationalfinance,transformedas
itwerefromvillainsintoinvestingangels,courtedbyEuropeanand
Americangovernmentsfortheirsupportinbuyingbondsorinvesting
inbanksandindustrialslookingforliquidityandlong-termcapital.
InthecaseofSpain,tripstoChina,SingaporeandtheMiddleEast
byMinisters,thePrimeMinisterandeventheKingnowincludevisits
tothesefunds’offices.
Thereisnodoubtthattheyrepresentinvestmentopportunities.
However,theirnewprominencegoesbeyondthat.Aboveall,from
thepointofviewofanOECDcountrysuchasSpain,sovereign
wealthfundsrepresentanopportunitytothinkanewaboutrelations
withtheemergingeconomies.Theseeconomiesarenolongerjust
marketsinwhichtogrow,countriestotradewithorinwhichto
extendone’scorporatepresence:theyhavebecomeleadingplayers
intradeandinvestment,industrialholdingsandstrategicfinancial
alliances.
Inthisrespect,Spain’srelationswiththesovereignwealthfundsare
notconfinedtoinvestment:theyalsohaveanindustrialdimension.
Sovereignwealthfunds,particularlythosefromtheMiddleEast,
seekinvestmentopportunities,butalsostrategicpartners,tohelp
themdevelopinfrastructureandindustrialhubsintheirhome
countries.HereSpainhasgreatpotential,asshownbythegrowing
successofitsengineeringandconstructioncompaniesbeyondLatin
America,nowcarryingoutprojectsinAsiaandtheMiddleEasttoo.
Therecenthigh-speedtraincontractforSaudiArabia,awardedin
2011totheSpanishconsortium,bearseloquenttestamenttothis
potential.
Sovereignwealthfundscertainlypresentfinancialopportunities.But
theyalsopresentopportunitiesfromtheindustrialpointofview.And
aspartofamoreintegratedstrategyofrapprochement,onecould
alsoimaginefindingwaystopersuadethesefundstolocatetheir
EuropeanandinternationalheadquartersinSpain(fornow,London
leadsEuropeinthisregard).Spain’sRealMadridandFCBarcelona
footballclubsareotherattractionsthatSpaincouldpushharder,as
partofanattractionstrategy.Equally,Spainhasbusinessschools
(threeofthem-IESE,ESADEandtheIE–areworldleaders)that
couldputdownrootsinthosemarketsanddevelopprogrammes
designedforthesegroups.
Inthischapterweshallseehowthesovereignwealthfundsarepart
oftheglobalre-balancingtowardstheemergingmarkets.Farfrom
itsbeingathreat,weshallseehowSpaincouldturnthissurgeinto
anopportunity.Itisalreadydoingsoatfinancialandindustriallevel.
Weshallalsoseehowitcouldpromotethismovewithcorporate
headquartersandprojectionthroughitsfootballclubsandbusiness
schools.
Sovereign wealth funds and global re-balancing
SpainandEuropeareatacrossroads:theyarehavingtofacean
unprecedentedcrisis.However,beyondtheimmediateeconomic
situation,onecandiscernamorestructuraltrend:thegreat
economicandfinancialshifttowardstheemergingmarketsthatwe
havebeenlivingthroughforthepasttenyears.
ThecrisisoftheOECDcountriesisnotaglobalcrisis:itsimpactis
admittedlyfeltineverycorneroftheworld,yetmanyemerging
economiescontinuetogrowapace,buildingupreservesandposting
unprecedentedgains.FromthispointofviewtheEuropeancrisisis
justonemoreepisodeinthisrebalancingoftheworld,aneventthat
acceleratestherealheadlinenewsoftheearlypartofthecentury,
whichistheunprecedentedriseoftheemergingeconomies.
Thespearheadoftheseeconomiesisthegroupreferredtoasthe
BRICs,atermcoinedatthebeginningofthelastdecadebythe
thenchiefeconomistatGoldmanSachs.Nowadaysthesefour
economies(Brazil,Russia,IndiaandChina)–towhichonemight
addSouthAfrica,TurkeyorIndonesia,tomentionjustafewofthe
mostbuoyantemergingmarkets–accountformorethan25%of
worldGDPand41%oftheworld’spopulation.In2011,intra-BRICs
tradereached$230billion,8%oftheworldtotal.Atellingindication
ofhowtimesarechangingisthefactthattheemergingeconomies
nowtrademoreamongthemselvesthanwiththecountriesofthe
OECD.
Theyareincreasinglyinvestingbeyondtheirownborders,taking
positionsinbothOECDcountriesandotheremergingmarkets.Thus
Chinahasbecometheworld’sfourthbiggestinvestor,channelling
7Ontheseplayers,seealsoSantiso,“Agentesemergentesenlosmercadosdecapitales:BRIC,fondossoberanosylosnuevosdepositariosdecapital”,Economistas,No.128,09/2011,pp.66–71;andJavierCapapéandJavierSantiso,“Losfondossoberanoscatalizanelre-equilibriodelaeconomíamundial”,ESADECenterforGlobalEconomyandGeopolitics(ESADEgeo),ESADEgeoPositionPaper,no.18,September2011.AvailableinSpanishathttp://www.esadeknowledge.com/view/los-funds-soberanos-catalizan-el-re-equilibrio-de-la-economia-mundial-2736.
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities
27
moreandmoredirectinvestmentintoothereconomies.In2011,
ChinaovertookSpaininforeigndirectinvestmentinLatinAmerica,
accountingfor9%ofthetotalinvestedintheregion,comparedwith
Spain’s4%.Thephenomenonaffectseverycontinent,including
LatinAmerica,fromwhichhome-grownmultinationals(alsoknown
asmultilatinas)arestartingtoventureforth–mainlyMexicanand
Brazilian,butalsoChilean,ColombianandPeruvian8.Amongthe
highest-profileplayersinthisinvestmenttrendaretheemerging
countries’sovereignwealthfunds,whoseassetsundermanagement
(AUM)amountto$5trillionin2012,twiceasmuchasthoseofthe
UKpensionfundindustryforexample.
Letusquicklyreviewthedevelopmentofthreeofthemost
significantsovereignwealthfunds(SWFs)ontheinternational
scene.First,QatarHolding,theinvestmentarmoftheQatari
sovereignwealthfund,theQatarInvestmentAuthority,isoneof
theSWFsthatismostactiveinEurope,withholdingsincompanies
suchasVolkswagen-Porsche,HarrodsandTotal.Secondly,we
haveprovidedsomeinformationontheequityholdingsofChina
InvestmentCorporation(CIC),aChineseSWFwithanestimated
$482billioninAUM,whichrecentlyinvested$1billioninaRussian
state-ownedprivateequityfund,anotherclearsignofthetrend
towardsinvestmentamongemergingcountries.CICmaysoon
becometheleadingsovereignwealthfundbyAUM,sinceChinahas
thegreatestvolumeofforeignexchangereserves,morethan$3
trillion.Lastly,wehaveincludedupdatedinformationonMubadala,
astrategicfundoftheUnitedArabEmirates,whichhasalready
establishedindustrialrelationswithseveralSpanishcompanies,and
whichalsohassubstantialgrowthpotential.
Thesefundssawbigincreasesintransactionsduring2011and
20129.In2011alonetheyinvestedmorethan$60billionbeyond
theirborders.TheycontinuetoinvestinOECDcountries,ascan
beseenfromtheirinterestinEuropeanassets,Spanishincluded.
TheEuropeancountryinwhichtheyinvestedmostin2011was
theUK(17%oftheworldtotal),aheadofFrance,Germanyand
Spain.TheEuropeancrisisinfactpresentsanunprecedented
opportunitytotakeuppositionsinthecontinent,asshownbythe
agreementbetweenChinesesovereignwealthfundCICandtheIrish
government,in2012,toexploreinvestmentsinIreland.Chinese
corporationsalsomademoreacquisitionsinEurope,withGeely
acquiringSwedishauto-makerVolvoin2010,whileinthechemical
sectoroneyearlaterChinaNationalBueStaracquiredNorway’s
Elkem,andtowardstheendof2011aChinesepowercompanytook
astakeinEnergiasdePortugal,investingarecord$3.5billion.For
itspart,in2012QatarbecamethemainshareholderintheFrench
groupLagardèreandalsoventuredontothehallowedgroundof
theFrenchluxurygoodsindustry,takingastakeofmorethan1%
inLVMH,whichownsChristianDiorandLouisVuitton.Through
itssovereignwealthfundQatarHolding,theemiratenowholds
closeto13%ofLagardère.In2012anotherQatariinstitution,Doha
InsuranceCompany,bought3%ofSiemensforjustover$3billion.
8SeeJavierSantiso,El auge de las multilatinas,Madrid,FundaciónCarolinaySigloXXI,2011.9Severalbooksdealwiththeriseinthisphenomenon;seeinparticularKarlSauvant,LisaSachsandWouterSchmit,eds.,Sovereign Investment: concerns and policy reactions,Oxford,OxfordUniversityPress,2012;GordonClarkandAshbyMonk,Sovereign Wealth Funds: legitimacy, governance and global power,Princeton,PrincetonUniversityPress,2012;FabioScacciavillaniandMassimilianoCastelli,The new economics of sovereign wealth funds,NewYork,WileyFinance;andChristopherBalding,Sovereign wealth funds: the new intersection of money and politics,Oxford,OxfordUniversityPress,2012.ThislastbookwaspresentedinESADE,inMadrid,inthecontextoftheESADEGlobalizationLabwhichtookplaceatthebeginningof2012;seehttp://www.esade.edu/newsletter/eng/rrii/globalisationlab_balding.
Table5
EquityholdingsofQatarHolding
Qatar Holding Volkswagen-Porsche 17.00% 9,900 2009 Germany
Qatar Holding AgriculturalBankofChina* 6,000 2010 China
Qatar Holding Xstrata 7.76% 4,375 2012 Switzerland
Qatar Holding CreditSuisse*** 8.90% 3,060 2008 Switzerland
Qatar Holding Lagardère 12.80% 3,000 2012 France
Qatar Holding Barclays*** 5.80% 2,770 2008 UK
Qatar Holding Santander(Brazil) 5.00% 2,720 2010 Spain-Brazil
Qatar Holding JSainsbury 26% 2,393 2009 UK
Qatar Holding Harrods 100% 2,300 2010 UK
Qatar Holding Iberdrola 8.40% 2,270 2011 Spain
Qatar Holding Total* 2.00% 2,000 2011/12 France
Qatar Holding LondonStockExchange 20% 1,200 2007 UK
Qatar Holding LVMH 1% 914 2011 France
Qatar Holding Goldfields 10% 775 2011 UK
Qatar Holding EurobankEFG&AlphaBank N/A 685 2011 Greece
Qatar Holding SongbirdEstates 24% 559 2009 UK
Qatar Holding Hochtief 9.10% 530 2010 Germany
Qatar Holding PavilionREIT* 36.10% 397 2011 Malaysia
Qatar Holding Adecoagro 6.50% N/A 2011 Argentina
Qatar Holding BanyanTree 26.40% N/A 2010 Singapore
Fond Company % Capital $ millions Year Country
Source:ESADEgeo(2012).*Estimated.**SwapofaunitofQatariDiar(Cegelec)forastakeinVINCI.***Estimatedasat31December2011.
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities 28
4. SovereignwealthfundsandSpain:(re)thinkingopportunities
Howeverseveralnewtrendscanbediscerned.Oneofthem,perhaps
themoststriking,istheevergreaterappetiteforinvestinginother
emergingmarkets.Thesefundsareinfactincreasinglysigning
agreementsamongthemselvesonjointinvestmentinemerging
markets.Thusattheendof2011MalaysiaandQatar,throughtheir
sovereignwealthfunds,agreedtosetupa$2billionco-investment
vehicletooperateinbothcountries.Qatar,viaitssovereignwealth
fundQatarInvestmentAuthority(with$135billioninassets)also
signedanagreementwithMoroccoattheendof2011forthe
investmentofseveralbilliondollarsinthecountrythroughajoint
vehiclebetweenbothcountriestopromoteinfrastructureprojects.
ForitspartVietnam,whichalsohasasovereignwealthfund,carried
outmorethan600projectsin55countries,investingatotalof
nearly$11billion.Laos,CambodiaandVenezuelatookthebulk
oftheinvestments(nearly$7.5billion).PetroVietnamisthemain
foreigninvestor,includingoperationsinPeru.In2012,Indiaand
SaudiArabia,viathePublicInvestmentFund,agreedtosetupa
$750millioninvestmentvehicletoinvestininfrastructureprojectsin
India.In2011ChinesesovereignwealthfundCICinvestedatotalof
abilliondollarsinthenewRussianDirectInvestmentFund,oneof
itsbiggestinvestmentstodateandthefirstofsuchsizeinanother
emergingcountry’ssovereignwealthfund.
In2012,inamovesymbolisingtheappetiteforSouth-South
investments,Kuwait’ssovereignwealthfundKIAopenedanofficein
Beijing.Ithadnotopenedanyinternationalofficessince1953,when
itopenedoneinLondon,sothisshowsKuwait’sstronginterestin
establishingbasesandtieswithChina.TheGovernmentInvestment
CorporationofSingapore(GIC)foritspartopenedanofficein
Mumbai,India,in2011,inanotherdemonstrationofgrowingSouth-
Southrelations.Temasek,Singapore’sothersovereignwealthfund,
openedofficesinMumbai(2004)andChennai(2009).Italsohas
officesinBeijing,ShanghaiandHongKong,inVietnamandinLatin
America(SãoPauloandMexicoCity).ForthemomentTemasek
hasnoofficesinEurope,unlikeGICwhichhasoneinLondon(ithas
atotalofnineinternationaloffices).GICalsoboosteditspresence
inemergingmarkets,inparticularwithofficesinBeijing,Shanghai,
HongKongandSeoul.In2011itopeneditslatestinternational
office,inMumbai.IthasnoofficesinLatinAmerica,coveringthis
regionfromNewYork.
Table6
EquityholdingsofCIC
CIC MorganStanley 9.9% 5,000 2007 USA
CIC GDFSuez 30% 3,240 2011 France
CIC JCFlowers 80% 3,200 2008 USA
CIC Blackstone 9% 3,030 2007 USA
CIC AES 15% 1,580 2009 USA
CIC TeckResources 17% 1,500 2009 Canada
CIC LexingtonPartners,PantheonVentures, N/A 1,500 2010 USA GoldmanSachs
CIC PennWestEnergy 5% 1,220 2010 Canada
CIC MorganStanley N/A 1,210 2009 USA
CIC GoodmanGroup N/A 1,090 2009 Australia
CIC GeneralGrowthProperties N/A 1,030 2010 USA
CIC RussianDirectInvestFund N/A 1,000 2011 Russia
Fond Company % Capital $ millions Year Country
Source:ESADEgeo(2012).
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities
29
.
KUWAIT INVESTMENT AUTHORITY
London
International offices of KIA
Chart 10
Source: Kuwait Investment Authority, 2012.
Beijing
Hong Kong
Shanghai
MumbaiMumbai
BeijingBeijing
Mexico City
São Paulo
Hong KongHong Kong
SeoulNew York
San Francisco
London
Chennai Ho Chi Minh City
Hanoi
Tokyo
Shanghai
SINGAPORESINGAPORE
International offices of TEMASEK and GIC
Chart 11
Source: TEMASEK, GIC, 2012.
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities 30
4. SovereignwealthfundsandSpain:(re)thinkingopportunities
TheArabfundshavebeenveryactiveinLatinAmerica,aswitnessed
intheUAEstrategicfundMubadala’s2012investmentofmorethan
$2billioninBrazil,specificallyinEikeBatista’sEBXGroup,inwhichit
tooka5.63%stake.ThisisMubadala’smostsignificantinvestment
todateinLatinAmericaandindeedinemergingeconomiesin
general.During2011MubadalaalsoenteredChina,Russiaand
Nigeria.TheBraziliandealisnotunique,comingasitdoesontop
ofinvestmentsbyotherArabfunds,inparticularADIA,alsofrom
theUAE,whichin2011investedatotalof$1.8billioninBrazilian
investmentbankBTGPactual,foran18%stake.Alsotakingpart
inthisdealweretheAbuDhabiInvestmentCouncilandChinese
sovereignwealthfundCIC.In2012BTGPactualfloatedonthe
stockexchange,withitsequitybeingvaluedat$15billion.Aclear
indicationofArabfunds’growinginvestmentappetitecameinthe
formofthe2012hiringbyADIA,thebiggestofthemall,ofasset
managerEduardoFavrintoheadupitsLatinAmericandivision.Now
basedinAbuDhabi,FavrinwaspreviouslyinchargeofBrazilfor
HSBCAssetManagement,whereheheadedateamthatmanageda
portfolioof$2.6billioninvestedintheregion.
Anotherwayforsovereignwealthfundstoboosttheirpresencein
emergingmarketsistotakeequitystakesincompaniesthatare
highlyexposedtooractiveinthesemarkets.Anexampleofthis
isthepurchasein2012of5%ofagriculturalcommoditytrader
Bunge,headquarteredinNewYorkbutwithrootsinArgentina,by
Singapore’sGICsovereignwealthfund,foratotalamountof$500
million.Thistransactioncomesontopofthosecarriedoutpreviously
byChina’sCICandKorea’sKICintraderNobleGroup,andby
TemasekinOlamInternational,bothofthemcompetitorsofBunge.
Infact,theappetiteofmanysovereignwealthfundsforEuropean
assets,particularlyPortugueseorSpanishones,isultimately
directedatgainingincreasedaccesstomarketsinLatinAmerica,
andinparticularBrazil.ThisexplainstheChineseinvestments
mentionedpreviouslyinPortugal,andthoseofArabfundsinIBEX
35companiesortheirBraziliansubsidiariesasinthecaseofQatar
Holding’sstakeinSantanderorIberdrola,withinvestmentsof$2
billionin2010andafurther$2billionin2011,respectively.The
alliancebetweenRepsolandChina’sstate-ownedoilcompany
Sinopec,formorethan$7billion,fitsintothesamelogic,asdoes
theinterestshownin2012byChinesesovereignwealthfundCICin
Repsol.
Asanexampleofthefunds’activeapproachtoemergingmarkets
inotherregions,in2012Chinaannouncedthesettingupofa$1
billionfundwiththeInter-AmericanDevelopmentBank(IDB)ina
dealledbystate-ownedChinaEximbank.Inanotherillustrationof
howtimesarechanging,in2012theBRICsannouncedtheirinterest
inestablishingtheirownmultilateralbank,inparallelwith,but
separatefrom,thosealreadyinexistence,allofwhicharepromoted
byOECDcountries.SothenextBRICssummit,tobeheldinSouth
Africa(whichisnowagroupmemberandsupportstheinitiative),
islikelytoseethebirthofasupranationalfund,aBRICsmultilateral
bank,withsignificantresources.
Theproactivestancebeingadoptedbysovereignwealthfundsshows
justhowmuchtheworldischanging.Attheveryleastitgivescause
forustoreassessthecentralpositionofEuropeandtheUnited
States:wearenolongerthecentreoftheworld,andthesoonerwe
realisethis,thesoonerweshallbeabletotakeadvantageofthe
opportunitiesarisingfromthistectonicshiftemanatingfromthe
emergingmarkets.
Table7
EquityholdingsofMubadala
Mubadala GECapital JV 8,000 Capital
Mubadala SowwahIsland N/A 3,000 Hotelsand realestate
Mubadala DolphinEnergy 51% 2,448 Energy
Mubadala EBXGroup 5.63% 2,000 Capital
Mubadala LeasePlanEmirates 25% 2,000 Services
Mubadala CarlyleGroup 7.50% 1,350 Capital
Mubadala ClevelandClinicAbuDhabi 100% 1,300 Healthcare
Mubadala Tabreed(NationalCentral 26.10% 1,200 Industrial CoolingCompanyPJSC)*
Mubadala AMD 19.30% 914 Capital
Mubadala PearlEnergy 100% 833.3 Energy
Mubadala FourSeasonsHotelAbuDhabi N/A 272 Hotelsand atSowwahIsland realestate
Mubadala RosewoodAbuDhabi N/A 218 Hotelsand realestate
Mubadala ArzanahWellness& N/A 110 Healthcare DiagnosticCentre
Mubadala VernoCapital N/A 100 Capital
Fund Company % Capital $ millions Sector
Source:ESADEgeo(2012).US$millions.MubadalaalsohasstakesinPiaggioAero(32%),SRTechnics(70%),SaabSpykerAutomobiles(22%),GuineaAluminaCorp.(8%)andEtisalatNigeria(30%).*A$844issuanceinMarchandanadditional$400millioninMay2011.
Spain and the sovereign wealth funds: investment opportunities
Thisglobalrebalancing,andtheincreasinglyproactivebehaviourof
emergingcountries’sovereignwealthfunds,opensupanumberof
opportunitiesforSpain,someofwhichhavealreadybeensketched
out10.Themostobviousoneisfinancial,asweshallnowsee.
Spanishcompanies’internationalisationwasnotjustcommercial,
itwasalsofinancial,forastheysoughtnewmarketsandhorizons,
sotheyalsofoundnewinternationalinvestors,someofwhichwere
emergingcountries’sovereignwealthfunds.
OverthepastfewdecadesSpanishcompanieshaverapidlybecome
moreinternational.Asevidenceofthis,in2010foreignrevenues
oftheIBEX35companiesexceeded53%ofthetotalforthefirst
time.Anotherwayofgaugingthisinternationalisationistolookat
theattractionexertedbythecountry’slistedcompaniesonforeign
investors.Attheendof2009,foreigninvestorsheldmorethan40%
oftheircapital,anotherall-timerecord.However,therearealso
lessencouragingsigns.CorporateshareholdingsinSpain’sbanks
andsavingsbankshavebeendrasticallyreduced,goingfrom15to
5%between1995and2010.Lookingahead,theredrawingofthe
savingsbanksmapandtheimpactofBaselIIIwillfurtheraccelerate
thistrend.Andthisdynamicnowcombineswiththeimperativesof
manynon-financialcompanieswhichincreasedtheirholdingsto
26%oftotalmarketcapitalisationoflistedcompanies,butwhichare
nowfacedwithunsustainablelevelsofindebtedness.
Soweareinasituationinwhich,inthisnewdecade,2010-2020,
itisquitelikelythatalargeportionofthecapitalonthestock
exchangeisgoingtohavetochangehands.Thecaseoftheoil
companyRepsolisrepresentative:withmorethanathirdof
itscapitalheldbysavingsbanksor(heavilyindebted)financial
institutions,RepsolinturnholdsathirdofanotherbluechipIBEX
35company,GasNatural,whosemainshareholderisLaCaixa.
OthercompaniessuchasAbertis,Iberdrola,Iberia,Indra,Mecalux,
NHHoteles,Pescanova,SOSCuétaraandTecnocom(andthe
listgoeson)arealsoinasituationwhereaquarterorathirdof
theircapitalisheldbysavingsbanks.Fromthispointofviewthe
recenttransactionwherebyChineseoilcompanySinopectooka
stakeinRepsolBrazilisgoodnews,sinceitprovidestheSpanish
multinationalwithanewfinancialmargin(Sinopecpaidmorethan
$7.1billionfor40%ofRepsol’sBraziliansubsidiary).
Toputitanotherway:aconsiderablepartofSpain’slisted
companiescouldbeacquiredbyindustrialrivals.Analternative
isformorefinancialinvestors,particularlyforeignones,toshow
interestininvestingyetmoreinourcompanies.Onepossibilitycould
besovereignwealthfunds.Howevertheseinvestmentvehiclesstill
havearelativelylimitedpresenceinSpanishcompanies’capital.
OneexceptionistheNorwegianfund,theworld’ssecondbiggest
sovereignwealthfund,withinvestmentsintheSpanishstockmarket
inexcessof€17billionin2011.Thisfund,totallling$654billionin
AUM,hasinvestmentsinmorethan8,300companies,77ofwhich
areSpanish.SantanderandTelefónicaareitsbiggestpositionsin
Spain.TheNorwegianfund’slatestreportshowsmanydetailsabout
thepositionsinthevariousSpanishcompanies.Inageneralsense
ithasreduceditsplayonSpain,disinvesting7%.Thereductionwas
notableaboveallinTreasurybills(downbyalmost30%from2010
to2011).Telefónica,Santander,BBVA,RepsolandInditexarethe
mainIBEXinvestments,asshowninthefollowingtable.
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities
31
10Onthissubject,seeJavierSantiso’sbook,ed.,Las economías emergentes y el reequilibrio global: retos y oportunidades para España, Madrid,FundacióndeEstudiosFinancieros,2011.Available(inSpanish)athttp://www.ieaf.es/_img_admin/1326987939Binder1.pdf.
Table8
GovernmentPensionFund–Global(Norway)inSpain
1 Telefónica 1,284 1,145 -10.86%
2 Santander 1,124 1,029 -8.47%
3 BBVA 516 646 25.21%
4 Repsol 375 573 52.73%
5 Inditex 227 404 77.77%
6 Iberdrola 410 341 -16.75%
7 Ferrovial 174 170 -2.77%
8 Amadeus 0 95 N/A
9 ACS 101 90 -10.17%
10 BancodeSabadell 63 89 40.82%
11 Abertis 55 81 47.11%
12 BancoPopular 66 73 9.63%
13 CaixaBank 0 72 N/A
14 GasNatural 45 67 48.67%
15 Grifols 33 63 93.28%
16 Enagás 43 55 29.02%
17 DIA 0 52 N/A
18 Acerinox 70 49 -30.07%
19 IndraSistemas 41 44 7.01%
20 CorpFinancieraAlba 45 42 -4.58%
TreasuryBills* 3,243 2,314 -28.65%
TOTAL** 18,479 17,174 -7.06%
Top 20 Company 2010 2011 2011/2010
Source:NBIM,2012.€millions.*Sovereignfixedincome.**Fixedandvariableincome.
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities 32
4. SovereignwealthfundsandSpain:(re)thinkingopportunities
IngeneraltermsthisfundishighlyinclinedinfavourofOECD
countries’equitiesandfixedincomesecurities(59%and41%of
theportfoliorespectively).In2011itstartedtodiversifysomewhat
intorealestateassets,mainlyinParisandLondon11.Thebulkofthe
portfolioreplicatesstockmarketindicesandismanagedin-house,
butthefundcurrentlyalsohas52externalmandatesmanagedby
45assetmanagementspecialists.In2011itcontinuedtobeton
diversifyingsomewhatmoreintoemergingmarketequities,granting
threenewmandates.Intotal,itsplaysonemergingmarketstake
inBrazil,Russia,China,India,SouthAfrica,Malaysia,Indonesia,
Thailand,TurkeyandPoland.InSpain,theNorwegianfundgranted
amandatetoBestinverGestión12.
Thefundhasinvestmentsin68countries,50%inEurope,35%inthe
Americas,theMiddleEastandAfrica,andtherestinAsia.Forequity
investments,47countriesmakethecut(in2011Colombiawas
addedtothelist).Thegreaterpartofitsinvestments,bothequities
andfixedincome,isintheUS,whichaccountsfor29.2%,followed
bytheUKwith15.5%,France8.6%,Germany7%,Japan5.5%and
finallySwitzerlandandSpain,tied.Overall,takingfixedincomeand
equitiestogether,Spainisamongthetoptencountriesinwhich
theNorwegianfundhasinvestments,accountingforjustover4.1%
ofthetotal,aheadofcountrieslikeCanada,theNetherlandsand
Sweden.Spainisalsointhetoptenforfixedincomeinvestments.
ThefundisheadquarteredinOslobutalsohasteamsinLondon,
NewYorkand,morerecently,SingaporeandShanghai.
However,takenasawholethepresenceofsovereignwealthfunds
inSpanishcompaniesislittlemorethansymbolic–andthisdespite
thefactthat40%oftheirtotalassetsareinvestedinEurope.
Sovereignwealthfunds’relationswithSpaindatefromthe1980s,
whentheKuwaitInvestmentOffice(KIO)–thefinancialarmofthe
London-basedKuwaitInvestmentAuthority(KIA)–decidedtocarry
outanumberofinvestmentsinSpain-ExplosivosRíoTinto,Banco
Central,realestateassets,etc.-,whichproducedcontrastingresults
andinsomecasesconsiderablelosses,andledtothemliquidating
theirinvestmentsinSpain.Inthemid-1980s,aftertakingaposition
inpapercompanyTorrasHostench,the‘petrodollars’alsotookone
oftheirfirststepsinSpainthroughaBasquecompany,Bancode
Vizcaya,inwhichtheyendedupacquiringasignificantpercentage,
closeto5%.SinceKIOunwounditspositions,investmentsinSpain
fromthesecountrieshavebeenfewandfarbetween.Upuntil2005
whentheflowstartedtorevive,annualincominginvestmentfrom
theGulfwasbarely€20millionayear.
SincethenthepresenceofthesovereignwealthfundsinSpainhas
beenrathersymbolic.InEurope,thesovereignwealthfundsare
investing,atleastfornow,aboveallinBritish,Italian,Frenchand
Swisscompanies.Spaindoesnotappearintherankingofthetop
fifteencountriesintheworldinwhichtheyinvest,asdrawnupby
MonitorandFEEM.Thereweresomeadhocinvestmentssuchas
thoseofAabarInvestmentsinSantander(subsequentlysold),or
thoseofSaudiPrinceAlWaleed,oneofthemajorshareholdersin
AfricaMixtaSA,acompanybasedinBarcelonaandpromotinglow-
costhousing,withapresenceinnumerousAfricancountries.Others
weremoresymbolic,likethepositionofalmost$100millionofthe
LibyansovereignwealthfundLIA13inRepsol(beforethecollapseof
theLibyanregime,thefundhadbeenveryactiveinEurope,with
significantinvestmentsinUniCreditandENIinItaly,andalsoin
SiemensandBASFinGermanyandPearson,ownersoftheFinancial
Times,intheUK)14.
Inthepastfewyearshowever,thingsseemtohavechanged,and
frombeingpracticallysymbolic,thepresenceofsovereignwealth
fundsinSpainhasbecomemuchmoresignificant,withsome
substantialdealstakingplace,particularlythoseledbytheArab
fundsQatarHoldingandIPIC.Thusin2009InternationalPetroleum
InvestmentCompany(IPIC),anAbuDhabistate-ownedcompany,
hadalreadyinvestedmorethan€3.6billioninCEPSA,becoming,
with47%ofthecapital,therefiner’ssecondbiggestshareholder
afterFrance’sTotal.In2010,IPIChadatotaloffourdirectorsonthe
Spanishoilcompany’sboard,amongthemKhademAlQubaisiand
DavidForbes,ManagingDirectorandStrategyDirectorrespectively
oftheAbuDhabifund.In2011IPICtookafurtherstepandbought
allthesharesintherefinerforanamountof€3.7billion,makingit
AbuDhabi’sbiggestSpanishinvestmenttodate.
However,thistransactionwasnottheonlyone.InOctober2010
QatarHolding,thesovereignwealthfundoftheneighbouringstate
ofQatar,bought5%ofSantanderBrazilforapriceofnearly$2
billion.Afewmonthslater,inMarch2011,thesamefundmadea
strongplayonalistedSpanishmultinational,investingsome€2
billioninIberdrolaforastakeofjustover6%.Inbothcases,ason
occasionsexplicitlystatedbyQatarHoldingCEOAhmadMohamed
Al-Sayed,thesovereignwealthfundwaslookingtoincreaseitsplay
ontheemergingmarketsofLatinAmerica,andinparticularthatof
Brazil.QatarHoldinghasalsosetitssightsonTelefónica,another
multinationalwithextensiveinterestsinLatinAmericabuiltup
overthepastfewdecadesandforwhichBrazilhasbecomeamajor
11SeeanualreportofNIBM,theNorwegiansovereignwealthfund:http://www.nbim.no/Global/Reports/2011/Annual%20report%202011/Arsrapport_11_ENG_web%20final%20version.pdf.12Seehttp://www.bestinver.es/.13LIA’sinterestsinSpainalsoincludeabank,Aresbank,asubsidiaryoftheLibyansovereignwealthfund;seeannualreport:http://www.aresbank.es/memorias/report2011s.pdf14SeeSvenBehrendtandDeenSharp,The Libyan Investment Authority: Sanctions and Post-Conflict Reconstruction,Geoeconomia,2011:http://geoeconomica.com/index.php/newsreader-9/items/the-libyan-investment-authority-sanctions-and-post-conflict-reconstruction.html
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities
33
market.Inallthesecases,LatinAmericaaccountsforapproximately
40%oftotalgrouprevenue–morethanthepercentagecoming
fromSpain.Inotherwords,ArabinvestorsarebettingonSpain,but
moreparticularlyonSpanishcompanieswhosestrategicfocusison
theemergingmarkets,andespeciallythoseofLatinAmerica.
Allthesedealsendorse,asifendorsementwereneeded,the
decisionofmanySpanishcompaniestofocusonLatinAmericaover
thepastfewdecades:thankstoLatinAmericatheyhaveestablished
anarrativeandatrackrecordthatmakethemattractiveprospects
forMiddleEasternsovereignwealthfunds,asinthecasesof
SantanderandIberdrola,orforChineseinvestors,asinthecaseof
Repsol.Formany,LatinAmericahasbecomethegreattrumpcard.
ManySpanishgroups’storiesaremoreLatinAmericanthanever,
andnowoftenAraborChinesetoo.Toanunprecedentedextent,
thesecompaniesseemtohavetransformedthemselvesintoeuro-
emergingmultinationals,multinationalsbasedinOECDcountries
butwithstronglinkstoemergingcountries.
Thesovereignwealthfunds’burstingontotheSpanishscenehas
alsoopenedthewaytoindustrialalliances.Manyofthesesovereign
wealthfunds,particularlytheArabones,areseekingnotjustreturns
butalsostrategicinvestments.InthisregardQatarHolding’sstakes
inIberdrolaandBancoSantanderconformtoaduallogic,financial
andstrategic,andthusalsoindustrial.BybuyingintoSpanish
companiestheyarealsoseekingexposuretoemergingmarkets,and
inparticularaccesstoBrazil,whichisaprioritymarketforMiddle
EasternArabfunds.Buttheindustriallogichasbeentakentothe
extremebytheArabfundMubadalawhichseeksnotjustfinancial
returnsfromitsequitystakesbutalsoindustrialreturnsinthehome
country,theUAE.ThusitsinvestmentsinGEandAirbuswerealso
basedonconsiderationstodowitheconomicdevelopment,seeking
tomakeAbuDhabianaeronauticalclusterandtopromoteMasdar,
theeco-friendlycityrisingupoutofthedesert.
MubadalaalsoincreaseditsindustrialtieswithSpain.In2011,
engineeringcompanySENERandMasdar(aMubadalasubsidiary)
signedanagreementunderwhichtheyarejointlyinvesting€940
million,ofthe$2billionsetastheobjectiveforthefive-yearperiod
2008-2012.SENERhashadstrongbusinesslinkswiththeEmirate
ofAbuDhabisince2008,whenitenteredanalliancewithMasdar
fortheestablishmentofTorresolEnergy,ajointventurebetween
thetwocompaniestopromotelargeconcentratedsolarpower
(CSP)plantsworldwide,inwhichSENERcanmakeuseofitsown
technology.IndraandMubadalafortheirpartsignedaMoUon
cooperationin2010,establishingaframeworkfornewtechnological
alliancesandjointventureprojects.Spain’sAbengoaSolar,together
withFrance’sTotalandMubadalasubsidiaryMasdar,succeededin
reachinganagreementin2010aspartnerstoacquire,construct
andoperateShams1,theworld’sbiggestCSPplantandthefirstof
itskindintheMiddleEast.Ontheotherhand,somedealsfailed
togetofftheground,suchasMubadala’smooted€500million
acquisitionofAERnnova,Spain’sbiggestaeronauticalcompany.
InAbuDhabi,apartfromMasdarthereareotherprojectsof
interesttoSpanishoperators,oneofwhichisAldar,30%ownedby
Mubadala,whichsharesownershipwithotherinvestorsincluding
InvestAD–AbuDhabiInvestmentCompany,anotherofthe
country’ssovereignwealthfunds.Aldar,whichisdevelopingthe
Emirate’stourisminfrastructure,hasawardedprojectsworthmore
than$75billionsinceitsestablishmentin2005.
ButinterestinSpainisnotconfinedtoArabsovereignwealthfunds.
China’sCIC,withaportfolioofmorethan$480billion,hasalso
showninterestinSpanishassets,particularlyin2012,settingits
sightsonRepsol,REE(RedEléctricadeEspaña,theSpanishNational
Grid)andEnagás.Sofarnoneofthedealshascometofruition.
HoweverREN,Portugal’sequivalenttoREE,liftedrestrictionsto
Table9
Emergingmarketsovereignwealthfundsandstate-ownedcompaniesinSpain2010-2011($millions)
Sinopeca Repsol Capital 40% 2010 5,160 (Brazil) increase
IPIC Cepsa Shares 100% 2011 3,650
Qatar Holding Iberdrola Shares 8%* 2011 2,000
Qatar Holding Santander Convertible 5% 2010 1,953 (Brazil) bonds
China Unicoma Telefónica Shares 1.37% 2009/11 1,500
Pemexa Repsol Shares 9.50% 2011 1,150
Mubadala Sener Joint-Venture 60% 2011 940
(60|40)
Mubadala (Masdar) Abengoa Joint-Venture 60% 2011 600 (60|20|20)
Sonatracha GasNatural Shares 5% 2011 514
Mubadala Aernnova Shares*** N/A 2011 500
Mubadala Indra MoU N/A 2008/10** N/A
Government Shares N/A 2011 17,174Pension Fund-Global
Alaska Permanent Shares N/A 2011 148Fund
TOTAL 32,689
Sovereign entity Company Transaction Shareholding Year Value
Source:ESADEgeo(2012).aState-ownedcompanies.*Theinitialpercentagewas6.16%;atyear-end2011itexceeded8%.**2008inaerospacetechnologyandsecurity;2010intransportandtraffictechnology.***Thetransactionenvisagedfor2011didnotcomeabout;theobjectivewastoacquire71%ofthecompany.Notincludedinthetotal.
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities 34
4. SovereignwealthfundsandSpain:(re)thinkingopportunities
allow40%tobesoldtoChina’sStateGrid.In2012,StateGridand
OmanOilacquired40%ofRENfor€600million.Itshouldbenoted
thatREEandRENhaveshareholderexchangeagreementsandthat
REEholdsa5%stakeinREN.
Thesefundsofferseveraladvantages.Theyareusuallylong-term
investors15andbymeansoftheirsometimesactiveinfluencethey
canhaveapositiveeffectonthereturnontheirequityholdings16,
aswiththeprivateequityindustry,whichiscurrentlyveryactivein
Spain.However,unlikeprivateequityorindustrialinvestors,theyare
usuallyfinancialpartners,withnointerestinmanagingthegroup
theypresideoverorinvestin.Moreover,withfewexceptions,theydo
notusuallydemandasubstantialpresenceontheboardofdirectors
(inbarely7%ofcases)andwhentheydotheygenerallykeepalow
profile,especiallyincompaniesinOECDcountries.
Spain as a base for European hQs of sovereign wealth funds?
Apartfromtheseinvestments,Spaincouldalsoseektopromote
itselfasabaseforsovereignwealthfunds’internationaloffices.As
farasEuropeisconcerned,Londonhasbecomethedefaultlocation:
KuwaitInvestmentAuthority,LibyanInvestmentAuthority,Brunei
InvestmentAgency,AbuDhabiInvestmentAuthority,Temasekand
GovernmentofSingaporeInvestmentCorporation,forexample,
allhaveofficesinLondon17.Attheendof2011,Londoncontinued
itsstrategyofconsolidatingitselfasabaseforEuropeancorporate
officesofsovereignwealthfunds,managingtoattractKorea
InvestmentCorporation(KIC).Atthebeginningof2012,theQatar
InvestmentAuthority,Qatar’ssovereignwealthfund,boughtthe
LondonheadquartersofCreditSuisse.Malaysia’spublicpension
fund(KWAP),withAUMof$25billion,isalsoconsideringopening
anofficeintheBritishcapital.
However,manysovereignwealthfundshaveyettoopen
internationaloffices,andnotallareconsideringLondonorNew
York.China’sCIChasopenedofficesinHongKongandToronto,
butnotyetinEurope.ItisinterestingtoseehowinNorthAmerica
itpreferredTorontotoNewYork,partlyforstrategicreasons,to
distanceitselffromWashington.InEurope,therecouldbeasimilar
opportunity,ofwhichSpaincouldtakeadvantage-Madridcould
putitselfforwardasanalternativeto(overlyUS-aligned)London.In
2012,inaclearindicationofCIC’sappetiteforEuropeanassets,it
appointedCollinLauasnewheadofEuropeanprivateequity.
15Onthissubject,seetheWorldEconomicForumreportMeasurement, governance and long term investing,Geneva,WorldEconomicForum,2012:http://www3.weforum.org/docs/WEF_IV_MeasurementGovernanceLongtermInvesting_Report_2012.pdf16Onthiseffect,seeAdairMorse,“Activist investors and performance in venture capital and private equity funds”,UniversityofChicago,BoothSchoolofBusiness,February2012(unpublished).Seehttp://faculty.chicagobooth.edu/adair.morse/research/MorsePE_SWFMarch2012.pdf.17SeereportTheCityUKandInvesco,SovereignWealthFunds2012,London,2012.http://www.thecityuk.com/.
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities
35
Oficinas internacionales de CIC
CHINA INVESTMENT CORPORATION
Hong Kong
TorontoBeijing
International offices of CIC
Chart 12
Source: China Investment Corporation, 2012.
Beijing
Hong Kong
SeoulNew York
San Francisco
London
Tokyo
SINGAPORE
Mumbai
International offices of GIC
Chart 13
Source: GIC, 2012.
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities 36
4. SovereignwealthfundsandSpain:(re)thinkingopportunities
Beijing
International offices of QIA
Chart 14
Source: Qatar Investment Authority, 2012.
QATAR INVESTMENT AUTHORITY
AsshowninthegraphicsonCICandSAFE(Chart15),their
investmentsinEuropeareconcentratedaboveallintheUK
andFrance,andtoalesserextentinGermany:Spaindoesnot
yetappearontheradar.IfweaddtheinvestmentsofChinese
companiesinEurope,weseethesameconcentration.Withthe
Europeancrisis,GreeceandPortugalappeared.InthecaseofSpain,
thebulkoftheinvestmentisaccountedforbyChinaUnicomin
TelefónicaandSinopecinRepsol(althoughinthislattercasethe
investmentisdirectlyintheBraziliansubsidiary).
Oficinas internacionales de CICChinese investments in Europeto 2012
US$ millions
Chart 15
Source: ESADEgeo, 2012.
CHINA ROAD
AND BRIDGESINOM
ACH
DO
NGFAN
G ELECTRIC
BLUESTAR
CIC
CITIC
CHIN
A U
NIC
OM
UN
ICO
MCHIN
A DEV
ELOPM
ENT B
ANK
SAFE
CNPC
SINO
CHEM
ZOO
MLIO
N
Tele
fóni
ca (
1.4%
)
Tele
fóni
caForm
e Acciaio (60%
)Vodafone
Energy FinancingH
UAW
EI
BCGI
COSCO
DATONG
Hattat Holding
GREAT WALL MOTOR
Litex Motors
BorsodChem(58%) BorsodChem
CHINA
NATIONAL M
ATERIALS
Lafarg
e
Ford
CNO
OC
Orkla
WO
LON
G HO
LDING
ATB Group
CHIN
A N
ATIO
NAL
PREC
ISIO
N M
ACH
INER
WANHUA INDUSTRIAL
LENOVO
Medion
LINKGLOBAL LOGISTICS
Parchim Airp.
SANY HEAVY INDUSTRY
Munich Re (3%)
THRE
E GO
RGES
Ener
gias
de
Por
tuga
l (21
%)
PING ANFortis (4.2%)
SINOPEC
ZIJIN MINING
Addax
Glencore
MARINE CONTAINERS
Burg Industries
BP 1%
INEOS 50%
Songbird 19%
Apax Fin.2
.3%
Diageo 1.1
%
Barcla
ys 3
.1%
Anglo-A
1.1
%
Adisseo
480 Total 1.6%
Rhodia
Credit Agr. 2
0%
INEOS 50%
GDF Suez 30%
Emer
ald
CHEMCHINA
EUROPE
49,510 million invested
BELARUS UKRAINE HUNGARY BULG
ARIA TURKEY GREECE SERBIA BOSNIA ITALY SPAIN PORTUGAL
U
K
FRA
NCE
SW
ITZ.
BEL
GIU
M
HO
LLAN
D G
ERM
ANY AUSTRIA NORWAY SWEDEN
8,100
7,300
2,700
140
9,100
2,800700
510
3,240
800880
880
1,020
370
700
5,510
3,51
0
3,51
0
3,51
0
1,50
0 1,220
420
480
5,160
750
120
2,110
1,660
140
2,490 1,8
00
600
210
1,0
00
1,0
00
250
250970
970420
420
260
260
220
220
4,910
4,910
130
130
FOSUN INTERNATIONAL
120
120
750
750
120120
2,110
260
1,660
210
210
600
600
1,8
00
1,8
00
2,490
2,490
140
140
130
130
670
670
140
140
720
140
140
2,970
2,7002,700
7,200
7,200 100
100
190
(10%)
500
500
3,040
3,840
5,020
3709604505101,990
370
GEE
LY A
UTO
Chinese investment European companies
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities
37
ChinaaccumulatesinEurope,throughitssovereignwealthfundsandstateagencies,about50billiondollars.ThemostactiveinvestorsontheEuropeancontinentarethesovereignwealthfundCIC,veryfocusedontheUK;SinopecwithpurchaseofAddaxandtheChineseagencyreservemanager(SAFE)withholdingsinBP,TotalandMunichRe.CountriesthathavereceivedmajorinvestmentsaretheUK,followedbyFranceandSwitzerland,aswellasGreeceandPortugal.Spainisnotobjectiveofthesecompanies,TelefónicareceivedonlyinvestmentfromUnicom.
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities 38
4. SovereignwealthfundsandSpain:(re)thinkingopportunities
Oficinas internacionales de CICChinese investments in the EU-15 (by sectors)to 2012
US$ millions
Chart 16
Source: ESADEgeo based on data of sovereign funds and annual reports, 2012.
SWF / National Companies Countries
UK
France
Spain
Italy
Austria
Belgium
Netherlands
850
970
13,450
7,790
7,120
3,140
700
800
Sectors
Agriculture
Real Estate
Energy
Finance
Transport
Technology
Chemical
Metals
Portugal
Sweden
Greece
Germany
CIC 5,120
5,510
3,840
1,020
3,510
880
2,700
370
4,910
1,800
140
140
130
1,000
970
670
500
250
140
130
480
700
SAFE
CITIC
Wolong Holding
Geely Auto
ChemChina
Bluestar
Sinochem
CNPC
BCEGI
Lenovo
China Unicom
Huawei
Three Gorges
Ping An
COSCO
LinkGlobal Logistics
China Int. Marine Containers
Unicom
Zoomlion
Sany Heavy Industry
China Development Bank
9,000
8,100
5,040
1,500
1,220
140
2,700
140
3,510
1,800
1,660
ThesectoraldistributionofChineseinvestmentsinEuropeshowsaclearinterestforcompanieslinkedtotheenergysector(mostlyoil):entitiesasAddax,BP,TotalandEDPbeingfundedbysovereignwealthfundsandChinesestate-ownedentities.Atasecondlevel,thefinancialindustryremainsimportant:concentratedontheoperationsoftheChinaDevelopmentBank(inBarclays)andPingAn(inFortis).Finally,thetransportsectoralsohasanimportantweightduetoCoscooperationsinGreeceandGeelyAutowiththepurchaseofVolvofromFordinSweden.
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities
39
Oficinas internacionales de CICChinese investments in the EU-15 (by sectors)to 2012
US$ millions
Chart 16
Source: ESADEgeo based on data of sovereign funds and annual reports, 2012.
SWF / National Companies Countries
UK
France
Spain
Italy
Austria
Belgium
Netherlands
850
970
13,450
7,790
7,120
3,140
700
800
Sectors
Agriculture
Real Estate
Energy
Finance
Transport
Technology
Chemical
Metals
Portugal
Sweden
Greece
Germany
CIC 5,120
5,510
3,840
1,020
3,510
880
2,700
370
4,910
1,800
140
140
130
1,000
970
670
500
250
140
130
480
700
SAFE
CITIC
Wolong Holding
Geely Auto
ChemChina
Bluestar
Sinochem
CNPC
BCEGI
Lenovo
China Unicom
Huawei
Three Gorges
Ping An
COSCO
LinkGlobal Logistics
China Int. Marine Containers
Unicom
Zoomlion
Sany Heavy Industry
China Development Bank
9,000
8,100
5,040
1,500
1,220
140
2,700
140
3,510
1,800
1,660
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities 40
4. SovereignwealthfundsandSpain:(re)thinkingopportunities
Otherfunds,suchasMalaysia’sKhazanahNasional(KN),are
venturingforthetimebeingintoChinaandIndia,buttheyarealso
lookingmorecloselyatEurope:in2011KNmadeafirstsubstantial
investmentinTurkey,anditislookingoutforopportunitiesin
Europe,includinginthenewtechnologiesandtelecommunications
sectors(itpartlyownsMalaysianoperatorAxiata)andhealthcare.
TheGSMAMobileWorldCongress,whichwillcontinuetobeheldin
Barcelonaforatleastthenextfewyears,couldbeusedasacatalyst
forestablishingaEuropeanHQforAxiatainSpain.Similarly,the
Spanishprivatehealthcaresectorofferssignificantopportunities
thatcouldbeexploitedwiththistypeofplayer.TheSpanishhospital
landscapehaschangedrecently,withthemergerofUSPHospitales
andtheQuirónGrouptoformthebiggestoperatorbymarket
share,accountingfor9.2%oftotalrevenuesinamarketwhich
isnonethelessstillhighlyfragmented,andthisofferssignificant
investmentopportunities.UnlikeBrunei,whichalreadyhasoffices
inParisandLondon,theMalaysianfundhasyettoopenanofficein
Europe.ThismaybeanopportunityforSpain.
Mumbai
Beijing
KHAZANAH NASIONAL BERHARD
BRUNEI INVESTMENT AGENCY
London
Paris
Chart 17
Source: Khazanah National Berhard and Brunei Investment Agency, 2012.
International offices of Khazanah Nasional Berhad and Brunei Investment Agency
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities
41
ThecaseofIPIC,whichacquiredCEPSA,isaninterestingone,which
couldsetaprecedent.IPIChasoperationsinCalgary,Canada;
Vienna,Austria;Cairo,Egypt;Karachi,Pakistan;andTokyo,Japan,
asshowninthefollowingchart.In2011ittookasignificantstep
intoEuropebyacquiring100%ofSpain’sCEPSA,whichaswellas
operatinginitshomemarketisalsoactiveinAlgeria,Brazil,Canada,
Colombia,Egypt,Panama,PeruandPortugal,andsellsitsproducts
worldwide.IPICmakesnosecretofitsplayoninternationalisation,
orofthefactthatCEPSAwillserveasalevertoopenupexploration
andproductionbusinessinregionssuchasLatinAmerica.TheArab
fundhasalsosetitselftheobjectiveofseekingsynergiesbetween
CEPSAandthevariousotheroilcompaniesinwhichitholdsstakes,
whichincludeOMV(20%),CosmoOil(30%),EDP(4.1%),Parco
(30%)andSumed(15%).FollowingitsIPO,theSwissgiantGlencore
(whichhasaSpaniardonitsboard)alsojoinedthelistofIPIC
holdings,andisnowthesubjectofrumoursaboutanalliancewith
CEPSA,whichcouldthusbecomeIPIC’sinternationalspearhead.So
whynotthinkintermsofMadrid’sbecomingIPIC’sEuropeanbase
(IPICalsohasoperationsinGermanyandinvestmentsinPortugal)
orevenitsinternationalheadquarters(withaviewtoLatinAmerica
andNorthAfrica)?.
INTERNATIONAL PETROLEUM INVESTMENT COMPANY
Madrid
CalgaryVienna
KarachiCairo
Dubai
Tokyo
International offices of IPIC
Chart 18
Source: International Petroleum Investment Company, 2012.
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities 42
4. SovereignwealthfundsandSpain:(re)thinkingopportunities
ThecordialrelationsbetweentheSpanishroyalhouseholdand
manyoftheMiddleEasternemirs,sultansandsheikscouldalso
helpinimplementingastrategyaimedatpersuadingArabfunds
toestablishtheirEuropeanheadquartersinSpain.Fundssuchas
theGulfInvestmentCorporationandOmanInvestmentCorporation
(OIC)donothaveEuropeanbases.Theyareinterestedinthe
region,ascanbeseenfromtheirinvestments,forexamplethose
oftheOICinPortugueseandUKcompanies(SilvaCorporation
andUltraElectronicsrespectively)18.QatarDiar,asubsidiaryofthe
QatarInvestmentAuthority(QIA),specialisingintherealestate
andconstructionsectors,hasaEuropeanofficeinLondonaswell
asasignificantpresenceinMorocco,Egypt,Mauritania,Sudan,
Tajikistan,Yemen,SyriaandCuba.ItsinterestsinEuropeandNorth
Africaarethussignificant.Whynotthinkintermsofaheadquarters
fortheminMadrid,wherethereisalsoasubstantialclusterof
constructionandcivilengineeringgroups?.
18SeeannualreportofOIC,Oman’ssovereignwealthfund:http://www.omaninvcorp.com/new/images/Brochure.pdf.
QATARI DIAR
Tangiers
London
Havana
Cairo
Nouakchott Khartoum
Damascus Dushanbe
Sana’a
International offices of Qatar Diar
Chart 19
Source: Qatar Diar, 2012.
Asalreadymentioned,oneofthesovereignwealthfundsmostactive
inSpainhasbeenQatarHolding,theinvestmentarmoftheQatar
InvestmentAuthority.Whynotthinkintermsofestablishingabasein
MadridtocoverEuropeandLatinAmerica?Thisfundhasembarked
uponamajorexpansionstrategy.Attheendof2011itopenedan
internationalofficeintheIndonesiancapitalJakarta,withacapital
of$1billionfortransactionsinSoutheastAsia,particularlyinthe
commoditiesandnaturalresourcessectors.InGermany,itholds
10%ofPorscheand17%ofVolkswagen,aswellasjustover9%of
Hochtief,whichisnowcontrolledbySpanishconstructioncompany
ACS(51.1%).In2012,thisGermancompanyappointedFrancisco
JavierGarcíaSanztoitssupervisoryboard.GarcíaisExecutive
Vice-PresidentofVolkswagen,ChairmanoftheBoardofSEATand
chairmanofANFAC,theSpanishautomakersassociation.
TworegionsdeservingspecialattentionareLatinAmericaand
Africa.Manyofthesovereignwealthfundscreatedoverthepast
tenyearscomefromthesetworegions.AsfarasLatinAmericais
concerned,Venezuela,TrinidadandTobago,Mexico,Chile,and
recentlyBrazil(2008)andColombiaandPanama(2011)haveallset
upsovereignwealthfunds,andinPanamá,Peru,Guatemala,and
Boliviadiscussionsareunderwayonsettingupvehiclesofthistype.
Noneofthesecountrieshasopenedinternationaloffices.Inthecase
ofBrazil,themightyBNDES(BrazilianDevelopmentBank)opened
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities
43
19OntheChileanmodel,seealsoJavierSantiso,SWFs:TheChileanModel,FinancialTimes,September23rd2011,seehttp://blogs.ft.com/beyond-brics/2011/09/23/guest-post-swfs-the-chilean-model/#axzz1r9QbMH9Q.20OnNigeria’ssovereignwealthfund,seetheFletcherSchoolTuftsUniversityreport:http://fletcher.tufts.edu/SWFI/~/media/Fletcher/Microsites/swfi/pdfs/2012/NigeriaSWFFinal.pdf.
anofficeinLondonin2011.Thisisanimportantmove,sinceBNDES
iscurrentlyamajorshareholderinmanyofBrazil’smultinationals,
includingPetrobras,Vale,JBSandEletrobras.
ThecircularLatinAmericanconnectioncouldbecompletedby
thinkingofSpainintermsofaEuropeanbaseforLatinAmerican
sovereignwealthfundsseekingopportunitiesinEuropeorwishing
tomaintainarepresentativeofficehere.Someofthem,suchas
Chile’shavebecomebenchmarksandmodels(seealsoarticle
ontheChileanfundinthisreport).AdmittedlytheChileanmodel
doesnotcontemplate(fornowatleast)investingmuchbeyond
internationalbonds,althoughrecentlyitopenedthedoortothe
possibilityofequities,includingforeignones19.
Africanfundshavealsoproliferated.Angola,forexample,set
oneupin2011.Ithasbecomethesecondbiggestoilproducer
onthecontinent,behindNigeria,whichhasalsoestablisheda
sovereignwealthfund20.Angola’stieswithPortugalhavegrown
notablycloseroverthepastfewyears,butthecrisishasbrought
aboutatransformationintherelationship,withmassPortuguese
emigrationtoAngola(therearenowmorethan91,000Portuguese
livinginAngola,comparedwith26,000Angolanslivingin
Portugal);andAngolaninvestmentsinPortugalhavesoared,
reachingmorethan€2billionin2011,with4%oftheLisbonstock
exchangecontrolledbyAngolanentities.
AndsoitisthattheoilcompanySonangolhasbecomethemajor
shareholderinMillenniumBCP,oneofPortugal’smajorlistedbanks,
whileAngola’sBancoBIC,controlledbyIsabeldosSantos,theeldest
daughterofPresidentJoséEduardodosSantos(inpowerinAngola
since1979),holds10%ofBancoBPI,anothermajorPortuguesebank.
SalesofstateshareholdingsinTAPAirPortugal,ANAAeroportosde
PortugalorGalpEnergycouldprovidefurtherfootholdsinthefuture.
Inotherwords,AngolaislookingintenselytowardsEurope,focusing
forthemomentonPortugal.Whynotthinkintermsofdrawingits
attentiontowardsSpain,too,wherethefinancialsectorisbeing
redesigned?.ThecrisisinEuropeisattractingtheattentionofmany
sovereignwealthfunds,includingAfricanones.AswellasAngola,
GhanaorNigeria(whichestablishedSWFsin2011),Namibia,
Mozambique,Uganda,Tanzania,Botswana,andothers(upto
12fromthe21SWFsnowunderdiscussion)areontheirwayto
establishsovereignwealthfunds.Notallofthemareabletoinvest
abroad,buttheywillbecomesoastheydevelop.Exceptinthecase
ofLibya,nonesofarhasaninternationaloffice.Someofthemhave
lookedtoEuropefortheirmodelofgovernance,asinthecaseof
GhanaandNigeriawithNorway.
Andthatisnotall:wecouldalsolooktowardsCentralAsia,which
hasseenmanypowerfulsovereignwealthfundsspringup,such
asAzerbaijan’sSOFAZ,withUS$33billioninAUM,orKazakhstan’s
Samruk-Kazyna,whoseAUMatUS$78billionareequivalentto
40%ofthecountry’sGDP.In2011SOFAZredesigneditsinvestment
strategytoencouragemoreinvestmentsininternationalequities
andrealestateassets.
Table10
EquityholdingsofBNDES(Q42011)
Petrobras 22,898
Vale 6,027
JBS 3,998
Electrobras 2,959
Fibria Celulose 1,581
Copel 1,354
Brasiliana 1,157
CPFL Energia 1,132
Light 474
Others 11,699
TOTAL 53,278
Company $ millions
Source:ESADEgeo(2012)withdatafromBNDES(2012).
Table11
Angolaninvestors’holdingsinPortuguesecompanies(March2012)
Sonangol MilleniumBCP 14.59% Banking
Sonangol BancoFomentoAngola 49% Banking
Sonangol TottaAngola 25% Banking
Banco BIC BancoPortuguês 100% Banking deNegocios
Banco Internacional de Crédito ZON 10% Telecommunications
Sonangol & Isabel Dos Santos AmorimEnergia 45% Telecommunications
Isabel Dos Santos BancoPortuguês 10% Banking deInvestimento
Isabel Dos Santos Condis-Sonae N/A Supermarkets
Investor (Angola) Company (Portugal) % Sector
Source:ESADEgeo(2012).
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities 44
4. SovereignwealthfundsandSpain:(re)thinkingopportunities
Football clubs and business schools
Spain’sfootballclubs,particularlyRealMadridandFCBarcelona,
havehugefollowings,notjustinEuropebutinAsia,theMiddleEast
andLatinAmericatoo.The“clásicos”encountersbetweenthetwo
rivalsattractmanyheadsofsovereignwealthfunds,whichsometimes
traveltoMadridorBarcelonafromKualaLumpurorAbuDhabijustto
seeamatch.JustasChinaonceunleasheditsping-pongdiplomacy
ontheUnitedStates,sowecouldimagineSpaindeployingfootball
diplomacyandleveragingtheprestigethatbothteamshavein
theworld,andinparticularintheemergingcountriesandamong
sovereignwealthfunds.
Infactrelationsbetweenemergingcountriesandfootballclubs
areoftenverydirect(Chart20).SeveralEuropeanclubshavebeen
acquiredbyArabsheikhsorRussianoligarchs,allfromcountrieswith
sovereignwealthfunds.Forexamplein2008ManchesterCitywas
acquiredfor€250millionbyAbuDhabiUnitedGroupforInvestment
andDevelopmentLtd.(“ADUG”),whichisownedbySheikhMansour
binZayedAlNahyan,amemberoftheAbuDhabiroyalfamily.
Sincethen,inlessthanthreeyears,thenewownerhasspentmore
than€480milliononsigningnewplayers.Thisgambleisnotmere
caprice:onthecontrary,itisdictatedbyinvestmentlogic:in2011
theclubannouncedthelaunchofanurbandevelopmentplanonits
land,valuedat£1billion(morethan€1.12billion).Moreover,since
itsarrivalinManchester,ADUGhasincreaseditsinvestmentlines,
amongotherthingslandingan€800millioncontracttoproduce
filmsinHollywood.
In2011Qatar’ssovereignwealthfundacquired70%ofParisSaint-
Germain(PSG)foranamountestimatedat€50million,towhich
mustbeaddedthenewowners’commitmenttotakechargeof
theclub’sdebts,whichamounttomorethan€30million.Inthe
UK,footballisalmostdominatedbypowerfulmultimillionaires.
ManchesterUnitedandLiverpoolarebothAmerican-owned,Chelsea
isownedbyRussiantycoonRomanAbramovich,andManchesterCity
isownedbySheikhMansour.Muchmediacoveragewasalsogiven
totherecentinvestmentinItalianfootballbyLibya’ssovereignwealth
fund(LIA),whichholds7.5%ofJuventus.
Table12
Investmentinandsponsorshipoffootballclubs(MiddleEastandsovereignwealthfunds)
1 RealMadrid 438.6 x 2009:SaudiTelecomCompany(InternationalSponsor) 2012:RAKInvestmentAuthority(RealMadridResortIslandthemeparkinUAE:Revenues€25m,investment€758m)
2 FCBarcelona 398.1 x 2010:QatarSportsInvestments(SponsorshipofQatarFoundationuntil2016:€165m) 2009:Etisalat(Four-yearagreement:€16m)
5 Arsenal 274.1 x 2004:Emirates(15-yearagreement,nameofstadiumandadvertisingonshirts:€146m)
7 ACMilan 235.8 x 2010:Emirates(Sponsorshipforfiveseasons:€60m)
10 Juventus 205 x 2010:Lafico(LibyanArabForeignInvestmentCompany,partofLibyanInvestmentAuthority:7.5%ofcapital
11 ManchesterCity 152.8 x 2008:AbuDhabiUnitedGroupforDevelopmentandInvestment-ADUG(Purchaseof90%ofthecapital:€251m) 2009:EtihadAirways(Sponsorfor10years:€400m,EtihadStadium) 2009:AAbuDhabiTourismAuthority(Commercialagreement) 2009:Etisalat(Three-yearagreement) 2009:Aabar
13 HamburgerSV 146.2 x 2012:Emirates(Sponsorshipforthreeseasons:€21m)
20 AstonVilla 109.4 2008/09:Acquisitionrumours(QatarInvestmentAuthority)
N/A Málaga x 2010:SheikhAbdullahbinNasserAl-Thani(Purchaseofcapitalanddebt:€36m)
N/A RacingdeSantander x 2010:AhsanAliSyed(Purchaseofcapitalanddebt:€16-26m)
N/A Zaragoza x 2011:RumoursoftakeoverbyRoyalEmiratesGroup
N/A ParisSaint-Germain(PSG) x 2011/12:QatarSportsInvestments(70%capital:€100m) 2011:QatarNationalBank(Sponsorshipfortwoseasons) 2008:Emirates(Sponsorshipforsixseasons:€36m)
N/A OLYMPIACOS x 2011:Emirates(Sponsorshipfortwoseasons)
N/A EvertonFC x 2008:RumoursoftakeoverbyQatarInvestmentAuthority(€252m)
Ranking* Team Revenues (€m) SWF Investment
Source:ESADEgeo(2012).*Teamsrankedbyrevenue(Deloitte,2011)
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities
45
(Numbers in Euro millions)
PARIS SG136
MANCHESTER CITY651
AC MILAN60
ARSENAL FC146
2008 2004 2011/12
2011
2008
2010
2009
2009
2009
2009
JUVENTUS
HAMBURGER SV21
OLYMPIACOS
2012
2010 2011
Oficinas internacionales de CICArab investments in major football clubs
Chart 20
Source: ESADEgeo, 2012.
Emirates (15-year agreement: stadium name and advertising on shirts)
Qatar Sports Investments (100% capital: €100m)
Qatar National Bank (Sponsorship for two seasons)
Emirates (Sponsorship for six seasons: €36m)
Abu Dhabi United Group for Development and Investment - ADUG (Acquisition of 90% of the capital: €251m)
Etihad Airways (Sponsor for 10 years: €400m, Etihad Stadium)
Abu Dhabi Tourism Authority (Commercial agreement)
Etisalat (Three-year agreement)
Aabar
Emirates (Sponsorship for five seasons: €60m)
Emirates (Sponsorship for three seasons: €21m)
Lafico (Libyan Arab Foreign Investment Company, part of the Libyan Investment Authority: 7.5% of capital)
Emirates (Sponsorship for two seasons)
InSpaintootherehavebeeninvestmentdealsofthistype,
particularlyin2011.TheMalagawasacquiredbySheikhAbdullah
binNasserAl-Thani,amemberoftheQatariroyalfamily:hepaid
€36million.Heretooinvestmentlogicapplies.In2011theregional
governmentofAndalusiaannouncedtheawardofthecontractfor
theextensionandoperationoftheportofMarbellatononeother
thanNasirBinAbdullah&Sons,oneofthesheikh’scompanies.The
extensionisestimatedtobeworth€84million,andwillallowthe
porttobeoperatedfor40years.
SoMalagaisthesecondSpanishclubinthehandsofforeign
investors,followingRacingdeSantander,whichisownedbyIndian
entrepreneurAhsanAliSyed,whopaidbetween€16millionand
€26millionforcapitalanddebt.
However,inSpain’scasethelinkswithemergingcountriesand
sometimestheirsovereignwealthfundsarenotconfinedtothese
acquisitions.In2012RealMadridandthegovernmentofthe
EmirateofRasAlKhaimah(UAE)presentedtheRealMadridResort
Island,atouristcomplexandthemeparktobebuiltintheUAE.This
complex,whichwillbelocateda45-minutedriveawayfromDubai
airport(theworld’sfourthbiggestintermsofvolumeoftraffic)
willcostapproximately€760million.Therearealsosignificant
sponsorshiplinkswithfootballclubs,asinthecaseofSaudiTelecom
withRealMadrid,asinternationalsponsor.FCBarcelonahas
QatarSportsInvestmentsasasponsor,viatheQatarFoundation,
foranamountof$235millionoverfiveyears,andithasanother
sponsorshipwithUAEtelecommunicationsoperatorEtisalat,foran
amountof€16millionoverfouryears.Thesesponsorshipscanalso
becomparedwiththoseoftheairlineEmirateswithArsenal($160
millionfor15years)andACMilan($83millionforfiveyears).In2011
Emiratesalsosignedafive-seasonsponsorshipagreementwithReal
Madrid.
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities 46
4. SovereignwealthfundsandSpain:(re)thinkingopportunities
Thesefootballclubsconstitutepowerfulleversforforgingcloserlinks
withsovereignwealthfunds.Theirmanagersoftentraveltosee
matches,someinvestinthem,whileothersaresimplyfans.Inany
casefootballwouldenableasystematicstrategyofrapprochement
tobedeployed,buildingsustainable,long-term,trust-based
relationships.ThefinancialsuccessofbothRealMadridand“Barça”
(pronounced“Barsa”,thefamiliarSpanishabbreviationforFC
Barcelona)isshownbytheirheadingupthelistoffootballclubs’
annualrevenuescompiledbyconsultantsDeloitte(Table12).In2010
forthefirsttimeSpanishFirstDivisionteamsheadedtheranking
withtotalrevenuesofapproximately€190millioninsponsorships,
merchandisingandlicensing,accordingtoconsultantsSport+Markt,
withnearly80%ofthisrevenueaccountedforbyjusttwoclubs:Real
MadridandFCBarcelona.
ButSpaindoesnothaveonlyfootballclubswithwhichtoattract
funds.UniquelyforEurope,italsohasawiderangeoffirst-class
businessschools,withnofewerthanthree(IESE,ESADEandIE)
rankedattheverytopworldwide.Wecouldimaginedevelopingad
hoctrainingprogrammeswithandforexecutivesandcivilservants
fromemergingcountrieswithSWFs.IESEandESADEalreadyhave
programmesforCEOsboundforChinaorIndia.Whynotdesign
programmestotrainexecutivesfromsovereignwealthfunds?.
Thistypeoftrainingcouldbeparticularlyattractiveinthecasesof
LatinAmericaandAfrica,bothofwhichareseeingaproliferation
ofsovereignwealthfundswithaneedfortechnicaltrainingina
neutralenvironment(i.e.not“offered”byinvestmentbanksorasset
managers).
Onecouldalsothinkintermsofscholarshipprogrammessponsored
byQatar,BrazilorChina,enablingtheirnationalstostudyfor
MBAsandMaster’sdegreesattheseSpanishinstitutions,whichin
turncouldstepuptheirinformationcampaignsandroad-shows
inthosecountries,orevensetupbasesincountrieswithSWFs(as
theIESEhasdonewithGhanaanditscooperationwiththeCEIBSin
Shanghai).ThisissomethingthatESADEtooislookingtopromote.
ESADEincreasedthenumberofChinesestudentsby30%in2011(to
morethan40intotal).Onthecourseof2001-2002therewerejust
fourChinesestudentsinESADE.Inthisway,overthepasttenyears,
thenumberofstudentshasincreasedby89%,andoverthepastfive
years,by69%.ESADEnowhas180Chinesealumniwhohavepassed
throughitsclassroomsinthelasttenyears.
Spanishbusinessschools’commitmenttoandpresencein
emergingcountrieshasbeengroundbreaking.In1994,IESE
respondedtotheEuropeanUnion’scallforChinaEurope
InternationalBusinessSchool(CEIBS)tobeestablished.Adecade
later,itisChina’smostprestigiousbusinessschoolandoneof
themostinfluentialintheworld.In2012theCEIBSandtheIESE
alsolaunchedadoctoratetrainingprogramme,withclassesin
BarcelonaandShanghai.
Development banks and sovereign wealth funds
Anothersignofthetimesisthebreakneckspeedofgrowth
ofemergingcountries’developmentbanks.In2011,China
DevelopmentBank(CDB),withalmost$700billionincreditlines,is
twiceasbigastheWorldBank.In2009itstarteditsinternational
expansionwithanofficeinHongKong.By2010CDBalreadyhad
morethan35projectsinAfricainwhichitinvestedmorethan$5.6
billionbywayofinternationalcooperation.
Brazil’sBNDESforitspartdoubleditslendingfrom2007to2010,
bringingthetotaltomorethan$230billion(equaltotheGDP
ofFinland).In2011itsignedanagreementwiththeJapanBank
forInternationalCooperation(JBIC)foranamountof$3billion,
andisplanningtoopenanofficeinAsiatosupportBrazilian
multinationalsintheirexpansion.In2011CDBandBNDESthus
cameinaheadoftheWorldBankintermsofinternational
developmentbanks.TheagreementbetweenJBICandBNDESalso
illustratesagrowingtrend:emergingcountriesandOECDcountries
joiningtogethertoinvestindevelopmentprojectsinthirdcountries.
Theresourcesaretobeusedforinfrastructureprojects,especiallyin
thetransportsector,seekingtosupportprojectsofmutualinterest
toBrazilandJapan.RelationsbetweentheBrazilianbankandJBIC
arenotnew,indeedtheygobackmorethanhalfacentury,butthe
newagreementinvolvescooperatinginAsiaandotheremerging
markets.
China’sandBrazil’sdevelopmentbankshavecontinuedtobecome
evermoreactive.In2011Brazilsignedanagreementwiththe
AfricanDevelopmentBanktostrengthenitssupportfortheAfrican
continent.Inall,Brazilcontributed$12milliontotherecently
createdSouth-SouthCooperationTrustFundtopromotetechnical
cooperationandtechnologytransfer,particularlyintheareasof
agro-industry,healthcareandrenewableenergy.Theseamountsare
stillmodestincomparisonwiththosecommittedbyChinatothe
Africanmultilateralbank(morethan$122million),buttheyshow
Brazil’sgrowinginvolvementinAfrica.ChineseinitiativesinAfrica
havecontinuedtoproliferate,witnessforexampletheChinaAfrica
DevelopmentFundandmanymoreothers21.Attheendof2011,CDB
donated$1.5millionfortheChinaEuropeInternationalBusiness
School(CEIBS)todevelopaneducationalprojectinGhana.In2011,
alsoinGhana,itopeneditsAfricanrepresentativeoffice,thefourth
inthecontinentfollowingSouthAfrica,EthiopiaandZambia.
21OnChinesecooperationinAfrica,seethereportpublishedin2010bytheOECD:http://www.oecd.org/dataoecd/34/39/45068325.pdf;andthatpublishedin2011bytheAfricanDevelopmentBank(AfDB):http://www.afdb.org/en/news-and-events/article/china-africa-relations-scrutinized-in-afdbs-new-book-8375/.
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities
47
Thisriseoftheemergingcountries’developmentbanksisan
opportunityforSpaintorethinkitsinternationalcooperation
strategy.The2012budgetmadedeepcutsinthatofAECID(Agencia
Española de Cooperación Internacional para el Desarrollo,the
SpanishAgencyforInternationalDevelopmentCooperation),a
totalofmorethan71%,leavingjust€240million.Thebudgetsfor
theFundforthePromotionofDevelopmentandtheWaterFund
werealsocutby72%comparedwiththepreviousyear,leaving
bothat€300million.Thesecutbacksareperhapsthecuetodeploy
anewinternationalcooperationstrategythatseekstoactivate
andpromoteinvestmentinstrumentsforjointdevelopmentwith
countrieslikeChina,BrazilorQatar,forexample.
Inthisrespectonecouldimagineusingthe€300millionofthe
cooperationfundsreferredtoinordertocreatebinationalfunds
withthesecountries:
• TheSino-Spanish FundforLatinAmericacouldstartwithacapital
of€100millionfromeachcountry,ChinaandSpain,andthen
grantventurecapitalmandatesinandforLatinAmericaand
thuspromoteproductivesectorsintheregion’scountries.
Thesesectorscouldcoverinfrastructureandagro-industry,but
alsothenewtechnologiesandnewsourcesofenergy.Wecould
alsoimaginethatprivatebusinesssectorsinthecaseofSpain
andstateonesinthatofChinamighteachcontributeafurther
€100million.
Theinstrumentthuscreated,afundoffunds,wouldhaveatotal
capacityof€400million.Itwouldbeapublic-privatefundof
fundssetupbyoneOECDcountryandoneemergingcountry,
fordevelopingcountries.
• TheBrazil-Spanish FundforLatinAmericawouldfollowthesame
logicastheSino-Spanishfund,withcontributionsof€100
millionfromeachcountry.Privatesectorswouldalsobeable
tocontributeandparticipatewith€100millionfromBrazilian
companiesandanother€100millionfromSpanishcompanies.
Thefundwouldalsobeabletoinvestinsimilarsectorstothe
Chinafund.
• TheQatar-Spanish FundforLatinAmericawouldbeanother
possibleexampleofcooperationinvolvinganArabcountrythat
isveryinterestedinLatinAmerica,asshownbyQatarHolding’s
transactionswithIberdrolaandSantanderBrazil.Thecaseof
Qatarisjustbywayofillustration,becauseonecouldequally
wellimaginepromotingsomethingsimilarwiththeUAEor
SaudiArabia.
ThesefundsoffundscouldbemanagedbyteamsbasedinMadrid,
whowouldselecttheentrepreneurialandriskcapitalfundsthat
wouldthenexecutethemandates,inasimilarwaytotheCDC
Group,theUK’sdevelopmentfinanceinstitution,NorfundinNorway,
orSIFEMinSwitzerland.Thesedevelopmentfinanceinstitutions
constitutethespearheadofmoderncooperation.Herewecould
alsoimagineincludingdevelopmentbanksandemergingcountries
intheequation.
TheIFC,asubsidiaryoftheWorldBank,hasinfacttakensomesteps
inthedirectionheresketchedout.ItcreatedIFCAssetManagement
Company,whichin2011hadjustover$4.1billioninAUM,ofwhich
$3billioninequityinvestments.Sinceitsestablishmentithasmade
disbursementsofnearly$1billioninninecountries,rangingfrom
ParaguaytoVietnam.Also,in2010itsetuptheIFCAfrican,Latin
AmericanandCaribbeanFund,with$1billion,whichhasalready
carriedoutinvestmentsinBrazil,TrinidadyTobago,Mexicoand
Nigeria.ThisfundwasestablishedwithcontributionsfromtheIFC
itself,butalsofromtheSaudiArabian,SouthKoreanandAzerbaijani
sovereignwealthfunds.
conclusion
Overthepastfewyears,sovereignwealthfundshaveproliferatedas
emergingmarketshaveprospered.Somecountries,suchasIndia
andTunisia,arestillthinkingaboutwhetherornottosetupafund
ofthiskind.Others,likeSyriaorColombia22,havealreadytakenthe
plunge.Somecountries,suchasMalaysia,China,Singapore,Saudi
ArabiaandtheUAE,havecreatedmorethanonefund.
IntheWest,SWFshavegonefrombeingregardedasvillainsto
beinghailedassavioursformanybanksandOECDcountries.Inany
casetheynolongerarousethesuspicionofbeingdrivenbypolitical
ratherthanfinancialmotivesintheirinvestmentstrategies23.Also,
manyofthemhaveproventobeexamplesofbestpracticesof
institutionalgovernanceandofthequestforexcellenceinterms
ofreturnsontheirinvestmentstrategies.Inanycase,theamounts
thattheymanage(almost$5trillionin2012)arenotinsignificant,
foranyOECDcompanyorcountry.Theseassetsrepresentjustpart
ofthe$20trillionmanagedbyofficialpublicinstitutionsinfixed
income,equities,cashorgold24.In2012itisstrikingthat80%of
worldcentralbankreservesareinthehandsofemergingcountries;
andthesameistrueofsovereignwealthfunds.
22SeeOECDeconomicreports:http://www.oecd.org/dataoecd/38/45/49165941.pdf.23Onthissubject,seeRolandoAvendañoandJavierSantiso,“AreSovereignWealthFundsPoliticallyBiased?AComparisonwithotherInstitutionalInvestors”,InternationalFinanceReview,Vol.12,2011.24SeeestimatesandthereportofassetmanagerBlackrock:http://www.blackrock.co.uk/literature/whitepaper/sept-2012-the-future-of-sovereign.pdf.
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities 48
4. SovereignwealthfundsandSpain:(re)thinkingopportunities
Thegoodnewsfromthepastfewyearsisthatemergingcountries’
sovereignwealthfundshaveturnedtheirsightsonSpain.In2010
and2011therewasasharpincreaseinthenumberofdeals,some
ofthemsubstantial,whichcontributedtotheincreaseinforeign
directinvestmentinSpainin2011(nearly€28.5billion,representing
anincreaseofmorethan18%onthepreviousyear.)Inthisregard
theinvestmentsmadebyQatarHoldinginSpainwereparticularly
noteworthy,constitutingthebiggestinvestmenttodatefroman
Arabcountry.InlessthantwoyearsChina,QatarandAbuDhabi
haveinvested€18.5billioninSpain’smajormultinationals,making
animpactontheircapital.
Howeverwecouldimaginerollingoutabroaderstrategyand
seekingtopersuadesovereignwealthfundstoestablishEuropean
officesinMadridorBarcelona.Wecouldalsoimaginemaking
activeuseoffootballclubsRealMadridandFCBarcelonaina
strategyofrapprochement,justaswecouldalsodevelopadhoc
programmesatthecountry’sleadingbusinessschools.Lastly,
Spanishinternationalcooperationcouldderiveaboostfrom
workingtogetherwithemergingcountries’banksandbilateral
funds,designinginstrumentsforco-investinginthirdcountries,in
particularinLatinAmerica,whereSpainhaspresence,experience
andstanding.
Table13
Strategiestoincreaserelationswithsovereignwealthfunds
Hub for European corporate HQs TomakeSpainabaseforEuropeancorporateheadquartersofsovereignwealthfundsfromLatinAmerica,theMiddleEastandAsia.ConsideringthenewlycreatedAfricanfundsintheirexpansionintoEurope.
Football clubs (Real Madrid and FC Barcelona) Tostrengthenlong-termrelations.Maintainingregularcontactwiththemanagersandownersofsovereignwealthfundstodeveloplong-termrelationships.Possibilityofholdingface-to-facemeetingswithSpanishcompaniesseenascandidatesforsovereignfinancing.
Business schools (ESADE, IE, IESE) TomakeSpain’sbusinessschoolsabenchmarkforthetrainingofSWFmanagers.Takingadvantageoftheprivileged positionofthesethreeschoolsintheworldrankingstoattracttheinternationaltalentthatsovereignwealthfundswillseektostaffthemselvesandtraintheirmanagers.
Cooperation funds ToestablishrelationsinthefieldofinternationalcooperationbetweenSpanishinstitutionsandsovereignwealthfundsinordertocarryoutcoordinatedoperations.PerhapscentredonLatinAmerica,whereSpainhasinternationallyacknowledgedexpertise.
Strategy Objective
Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities
49
Javier Santiso
Professor of Economics, ESADE Business School
Vice President, ESADEgeo - Center for Global Economy and Geopolitics
Latin american sovereign wealth funds
Sovereign wealth funds 2012Latin american sovereign wealth funds
51
Oficinas internacionales de CICWorld map of sovereign wealth funds (2012)
Chart 21
Source: ESADEgeo (2012) with information obtained in the reports and websites of each fund. When it is not present, we have come, among others, estimates of Ashby Monk (Oxford Project, now in Institutional Investor), Sovereign Investment Lab (Bocconi University), Monitor Group and geoeconomic.
Angola
Liberia
Namibia
4
Papua New Guinea
Ghana
Tanzania
India
JapanTunisia
Uganda
Mozambique
South Africa
Zimbabue
Zambia
Ruanda
Sudan
Lebanon
Palestina
Mongolia
ASSETS UNDER MANAGEMENT
1,6
10 10,6Timor-Leste
5,9Botswana
1,6Congo
20,5
3
Mauritius
10,06Nigeria
0,4Gabon
1,2
Guatemala
Kiribati
0,80,7
0,6Vietnam
0,4
63
10
21
0,3
Indonesia
0,3
Mauritania
0,08Equa. Guinea
0,01São Tomé and Príncipe
0,2
0,8
4,2
Kenya
0,05
Aum (US$ billions)
PRE-2010 SWFs
NEW SWFs (2010-2012)
COUNTRIES CONSIDERING SWFs
Bolivia
Trinidad and Tobago
Mexico
Brazil
Chile
Panama
VenezuelaColombia
Peru
Italy
92,9
United States
15,9
Canada
25,9
13,9
654
France
Ireland
Norway
56,7
Argelia
Eslovenia
63
Libya
32,6Azerbaijan
23
IranSyria 0,04
290
KuwaitIsrael
581,6
Bahrain
Saudi Arabia
9639,2
8,2
135
Qatar
Oman
UAE
119,6
Kazakhstan
85,9
Russia
China
947
Hong Kong
497,6
39Brunei
25,2Malaysia
418,7
Singapur
Australia
77
42,8
South Korea
19,7
New Zealand
5. latIn amErIcan SoVErEIgn wEalth FunDS
Sovereignwealthfundsaremoreinstylethanever.InSpain,
QatarHolding,Qatar’ssovereignwealthfund,recentlymadean
impactwithsignificantinvestments,particularlyinSantanderand
Iberdrola(seethechapteronSpaininthisreport).Ineachcasethe
investmenttotalled€2billion,andineachcaseinterestinLatin
Americalaybehindtheinvestment.Arabfundsinparticularare
seekingtoincreasetheirexposuretothisemergingregion.
Therearecurrently73sovereignwealthfundsinexistence,and
afurther21countriesareconsideringestablishingone.From
UgandatoIndia,throughSouthAfrica,IsraelandJapan,thereare
ahostofcandidatesforthiskindofinstrument.InLatinAmerica,
somecountriessuchasChile,TrinidadandTobagoandVenezuela
alreadyhavetheirs.Brazil,withmorethan$250billionofreserves,
joinedthemin2008,togetherwithColombiaandPanama.Peru,
GuatemalaandBoliviarecentlystarteddiscussionsonsettingone
up.
Allthesecountriesnowhaveabundantreserves,andarefaced
–particularlytheAndeancountries–withthechallengeof
managingtherawmaterialsbonanza.Theirinvestmentsand
exportsarestillhighlyconcentratedinthisarea,whichisoflow
intensityintermsofaddedvalueandemployment.Consequently
theyarekeentofindbetterwaysoftakingadvantageofthis
abundancetomakeaproductiveleapanddiversifytheir
economies–somethingtheyhavenotyetbeenabletodo.
Sovereignwealthfundscanbeastrategicvehicleforthis,
providingtheinstitutioniswelllookedafter,mannedbyfirstclass
professionalsandequippedwiththeproperprocesses.
Inthischapterweshallseehow,beyondthesovereignwealth
funds’interestininvestinginotherregions(theMiddleEastin
particular,butalsoAsia),LatinAmericahasalsobeenremarkable
overthepastfewyearsforitsincreasinglyproactivestanceas
regardssovereignwealthfunds.Thesehavesofartendedtobe
morelikestabilisationfunds,withrelativelyconservativestrategies,
withwhichtheyachievedthelevelofbestpractices(theshining
examplebeingthatofChile).Therearealternativeshowever;
sovereignwealthfundsthatareaboveallstrategic,where
countrieslikeBrazilorColombiacouldgaininspirationbylooking
towardstheUAE’sMubadalaorMalaysia’sKhazanahasexamples
toemulate.
5. Latinamericansovereignwealthfunds
Sovereign wealth funds 2012Latin american sovereign wealth funds 52
Oficinas internacionales de CICWorld map of sovereign wealth funds (2012)
Chart 21
Source: ESADEgeo (2012) with information obtained in the reports and websites of each fund. When it is not present, we have come, among others, estimates of Ashby Monk (Oxford Project, now in Institutional Investor), Sovereign Investment Lab (Bocconi University), Monitor Group and geoeconomic.
Angola
Liberia
Namibia
4
Papua New Guinea
Ghana
Tanzania
India
JapanTunisia
Uganda
Mozambique
South Africa
Zimbabue
Zambia
Ruanda
Sudan
Lebanon
Palestina
Mongolia
ASSETS UNDER MANAGEMENT
1,6
10 10,6Timor-Leste
5,9Botswana
1,6Congo
20,5
3
Mauritius
10,06Nigeria
0,4Gabon
1,2
Guatemala
Kiribati
0,80,7
0,6Vietnam
0,4
63
10
21
0,3
Indonesia
0,3
Mauritania
0,08Equa. Guinea
0,01São Tomé and Príncipe
0,2
0,8
4,2
Kenya
0,05
Aum (US$ billions)
PRE-2010 SWFs
NEW SWFs (2010-2012)
COUNTRIES CONSIDERING SWFs
Bolivia
Trinidad and Tobago
Mexico
Brazil
Chile
Panama
VenezuelaColombia
Peru
Italy
92,9
United States
15,9
Canada
25,9
13,9
654
France
Ireland
Norway
56,7
Argelia
Eslovenia
63
Libya
32,6Azerbaijan
23
IranSyria 0,04
290
KuwaitIsrael
581,6
Bahrain
Saudi Arabia
9639,2
8,2
135
Qatar
Oman
UAE
119,6
Kazakhstan
85,9
Russia
China
947
Hong Kong
497,6
39Brunei
25,2Malaysia
418,7
Singapur
Australia
77
42,8
South Korea
19,7
New Zealand
Sovereign wealth funds 2012Latin american sovereign wealth funds
53
Theworldcurrentlyhas73activesovereignwealthfunds.MiddleEast,China,SoutheastAsiaandNorwayarethefourmostactivecentersofSWFs.Assetsundermanagedsumupto4.98trilliondollars.ThephenomenonofSWFshasarecentwidediffusion:inthelasttwoyears10newfundswerecreatedand21othercountriesareconsideringimplementation.DebatesfornewSWFsareincreasinginEasternandSouthernAfricaandLatinAmerica.
Sovereign wealth funds 2012Latin american sovereign wealth funds 54
latin america and the sovereign wealth funds
Amongthechangeswearewitnessing,onethingthatstandsoutis
theintensificationofeconomicrelationsamongemergingcountries.
Chinaisobviouslyatthecentreofthesechanges,asweshallsee,
butnewcommercial,financialandindustrialnetworksarealso
springingupamongregionsthatuntilrecentlyhadonlylow-density
links.OneoftheseemergingnetworksisthatbetweenLatinAmerica
andtheArabworld.Buttheselinksarenotnew.
ThehistoricalMiddleEasterndiasporasalsoreachedLatinAmerica.
ThesemigrationsaresymbolisedbytheSyrianandLebanesetraders
whosettledinLatinAmericaandinsomecasesbuiltupempires.It
isestimatedthattherearesome20millionLatinAmericansofArab
originintheregion,includingsevenmillioninBrazil).Thehighest
profileoneisprobablyCarlosSlim,thecontinent’srichestperson,
ownerofGrupoCarso,TelmexandAméricaMóvil,amongmany
othercompanies.However,untilrecentlyrelationswiththeArabian
Peninsulawerelessdeveloped.
Intheyears2000-2010linksproliferatedwithunprecedented
intensity,inparticularduetotheactivitiesofthesecountries’
sovereignwealthfunds.Inall,MiddleEasternfundsinvestedmore
than$26billionintheregion,morethanAsianfunds(nearly$18
billion)andEuropeanandUSfunds(nearly$8billion,themost
activebeingNorway).
5. Latinamericansovereignwealthfunds
MIDDLE EAST
($ billions)
ASIA
EUROPE
OTHERS
26.1
17.8
7.5
5 10 15 20 25 300
2.14
Chart 22
Stock of sovereign wealth fund’s investments in Latin America (December 2011)
Source: ESADEgeo, 2012.
Sovereign wealth funds 2012Latin american sovereign wealth funds
55
Table14
MaininvestmentsofchinesestateentitiesinlatinAmerica(2005-2011)
2009 July ChinaRailways 7,500 Venezuela VenezuelanState(JV) Transport Railway 40%
2010 October Sinopec 7,100 Brazil Repsol Energy Oil 40%
2010 November CNPC 5,990 Cuba (CienfuegosProject) Energy Oil N/A
2011 November Sinopec 4,800 Brazil GalpEnergy Energy N/A 30%
2010 March CNOOC 3,100 Argentina Bridas Energy N/A 50%
2010 May Sinochem 3,070 Brazil Peregrinofield Energy Oil 40%
2010 October Minmetals 2,500 Peru (GalenoProject) Metals Copper N/A
2010 October Sinomach 2,490 Argentina (BelgranoProject) Transport Railway N/A
2010 December Sinopec 2,470 Argentina OccidentalArgentina Energy OilandGas 100%
2010 June Sinohydro 2,300 Ecuador (Coca-CodoSinclairProject) Power Hydroelectric N/A
2008 May Chinalco 2,160 Peru (Toromochoproject) Metals Copper N/A
2005-2011 TOTAL 69,300
Year Month Investor $ millions Country Partner/Target Sector Subsector %
Source:ESADEgeo(2012)withdatafromtheHeritageFoundation(2012).
Source:ESADEgeo(2012)withdatafromGallagheretal.(2012).
Theseinvestmentsareonlypartoftotal“sovereign”investments:
wedonotcount,forexample,investmentsmadebyChinese
statecorporationsinLatinAmerica,whichareestimatedtohave
reachedarecordofalmost$70billionduringtheperiod2005-2011,
accordingtotheHeritageFoundation.
NordoweincludeherethefinancingmadeavailablebyChinese
(sovereign)statebanks,whichreached$75billionduringtheperiod
2005-2011,i.e.morethantheamountsgrantedbytheWorldBank
ortheIDBintheregion25.In2010,Chineseloanstotheregion($37
billion)actuallyexceededalllendingbytheIDB,theWorldBankand
theUSEximbankcombined26.
25OnrelationsbetweenChinaandLatinAmerica,seeKevinP.GallagherandRobertoPorzecanski,TheDragonintheRoom:ChinaandtheFutureofLatinAmericanIndustrialization,Stanford,StanfordUniversityPress,2010.26SeereportofUSTuftsUniversity:http://www.ase.tufts.edu/gdae/policy_research/AnalysisOfChineseLoansInLAC.html.
Table15
ChineseandmultilateralfinancinginLatinAmerica(2005-2011),$millions
Venezuela 44,528 N/A 6,028 38,500
Brazil 39,628 15,338 12,559 11,731
Mexico 27,410 14,739 11,671 1,000
Argentina 26,774 7,164 9,610 10,000
Colombia 12,118 6,241 5,877 N/A
Ecuador 8,914 153 2,457 6,304
Peru 6,113 3,045 2,868 200
El Salvador 2,954 1,196 1,758 N/A
Guatemala 2,887 1,176 1,711 N/A
Panama 2,811 591 2,220 N/A
Costa Rica 2,741 698 1,743 300
Dominican Republic 2,555 854 1,701 N/A
Others 14,079 2,169 6,730 5,180
TOTAL 193,512 53,365 66,933 73,215
Country Total World Bank IDB China
Sovereign wealth funds 2012Latin american sovereign wealth funds 56
5. Latinamericansovereignwealthfunds
FromtheUAE,ADIA(AbuDhabiInvestmentAuthority),theworld’s
biggestsovereignwealthfund,togetherwithChinesefunds
SAFEandCIC,recentlystartedtoinvestinLatinAmerica,through
managedLatinAmericanfundssuchasSouthernCrossGroup
andotherglobalassetmanagers.In2010,theprivateequityfund
SouthernCross,closedthebiggestinvestmentvehicleofthistype
onnearly$1.7billion.Itwasmadepossibleinpartbythesupportof
localpensionfunds,butalso,andaboveall,thatofsovereignwealth
funds,amongotherMiddleEasternfunds.ADIAhaspropertiesin
RiodeJaneiro,holdingsintheSãoPaulostockexchange(Bovespa),
andBraziliangovernmentbonds.AlQudraHoldingforitspartis
interestedintheBrazilianagro-industrialsectors,whileAbuDhabi’s
privateequityfundMubadala(20%ofwhoseinvestmentsare
outsidetheUAE)isalsoplanningtodiversifyintoBrazil.In2009,
adelegationfromAbuDhabivisited14countriesintheWestern
hemisphere,seekingtobroadentherangeofpossibleinvestments.
InJanuary2010theEmirofQatar,SheikhHamadAl-Thani,visited
Argentina,BrazilandVenezuela,insearchofopportunities.Arab
investorssuchasportoperatorDPWorldhavealsoparticipated
intheconstructionoftheportofCallaoinPeru.DPWorldisalso
planninga$250millioninvestmentinCuba,withtheaimof
transformingtheportofMarielintoaworld-classport.Othershave
alsomadesignificantinvestments,approximately$330million,for
exampleinBancoSantanderinBrazil,byAabarInvestments,also
fromAbuDhabi.InOctober2010QatarHoldingacquired5%ofthis
sameBraziliansubsidiaryoftheSpanishbankforanamountclose
to$2billion.MiddleEasterninvestorsandsovereignwealthfunds
suchasADIA,ADIC(nowInvestAD),Mubadala,AICandKIA,are
studyingagri-businesses,food,oilandgas,commercialproperty,
hotels,renewableenergysourcesandmininginLatinAmerica.
InDecember2010Brazilsawnineinvestors,threeofthemsovereign
wealthfunds,investmorethan$1.8billionininvestmentbankBTG
Pactual.Thisdealwasledbythreesovereignwealthfunds,onefrom
China(CIC),anotherfromSingapore(GIC)andthethird(ADIC)from
theUAE.Eachoneinvestedbetween$200millionand$300million,
makingitthebiggestinvestmentdealtodatebyfundsofthiskindin
LatinAmerica.In2012theUAE’sMubadalaclosedoneofthebiggest
investmentsevermadebyasovereignwealthfundofthiskind,
takingastakeinBrazil’sEBX,controlledbymagnateEikeBatista.The
totaldealamountedto$2billionforjustover5.6%ofthecompany.
TheEBXGroupcomprisesBatistacompaniessuchastheoilcompany
OGX,shipbuilderOSX,miningcompanyMMX,logisticscompanyLLX
andenergycompanyMPX,all‘opencapital’companies.TheAbu
DhabifundwillalsotakestakesinBatistacompaniesthatarenot
‘opencapital’,suchasgoldminerAUX,propertycompanyREXand
sportingandentertainmentcompanyIMX.
Theagro-industrialsector,andanythingtodowithwater(a
scareresourceintheArabianPeninsula),isofparticularinterest.
CompaniessuchasHassadFood(asubsidiaryofQatar’ssovereign
wealthfund)andAlDahraAgriculturalCompany(fromAbuDhabi)
areseekingtoextendtheirpresenceintheregion.Cosan,the
world’sbiggestproducerofcanesugarandethanol,established
asubsidiaryspecialisinginlocatingandvaluingagriculturalland,
RadarPropiedadesAgrícolas,whichhasArabcountriesamongits
investmentclients.Thisinterestintheregionshouldnotsurpriseus:
LatinAmericahasnearly30%oftheworld’stotalwaterreserves,
andBrazilalonehasjustover13%.Ifoilis“blackgold”,thenwateris
“bluegold”,andbecomingjustasvaluable.
TheArabfundsarenotinfactaloneintakinganinterestinLatin
Americanlandandproperty.Inmid-2010forexampleSingapore
sovereignwealthfundTemasekinvested$200millioninMexico’s
ImpulsoraMexicanadeDesarrollosInmobiliarios,anagricultural
landdeveloperinQuerétaroState.Atthesametimecommodities
traderOlamInternational,alsofromSingaporeand14%heldby
Temasek,spentnearly$80milliononacquiringNZFarmingSystems
UruguayLtd.,aUruguayancompanywithitsrootsinNewZealand.
SovereignwealthfundChinaInvestmentCorp(CIC)spent$850
milliononbuying15%ofthesharesinHongKong-basedgraintrader
NobleGroup,whosebusinessconsistsofextractioncommodities
fromSouthAmerica(BrazilandArgentina)tosupplyEastandSouth
Asiandemand(ChinaandIndia).SouthKoreaforitspartinvested
nearly$26millioninbuyinglandinUruguayandParaguay,where
companiessuchasAlliedVenturespecialiseinfacilitatingthistypeof
transaction.
SofaronlytwoLatinAmericanbanks,BancoItaúandBancodo
Brasil,havesmallrepresentativeofficesinDubai,whileBrazilian
mininggiantValehasestablisheda$1billionironorepelletizing
plantinOman.EmiratesAirlinesrecentlystarteddailydirectflights
betweenDubaiandSãoPaulo,andsinceJune2010QatarAirways
hasoperateddailyflightsconnectingDohawithSãoPauloand
BuenosAires.In2010ArabcountriesbecameBrazil’sthirdbiggest
tradingpartnergroup,takingmorethan$10billioninBrazil’s
exports,nearly11%ofthetotal.
Withaviewtofurtheringrelationsbetweenthetworegions,in
2009agroupofLatinAmericanentrepreneurscreatedtheGulf
LatinAmericanLeadersCouncil27.InApril2010,agroupofabout
25LatinAmericanbusinesspeopletravelledtoanumberofArab
countries.In2005,throughofficialchannels,Brazilpromotedthe
firstASPA(SouthAmerican-ArabCountries)Summit,whichwasheld
onceagainin2009inDoha,Qatar28.Athirdsummitwasscheduled
27Seehttp://www.gllc.org.28Forahistoricalaccountoftheserelations,seehttp://www2.mre.gov.br/aspa/history.html.
Sovereign wealth funds 2012Latin american sovereign wealth funds
57
forFebruary2011inthePeruviancapitalLima.ThemagazineLatin
Financestartedorganisingeventsbetweenthetworegions,andin
2010inAbuDhabiitheldasecondeditionoftheLatinAmericaMid-
EastInvestorsForum29,inwhichAbuDhabisovereignwealthfunds
InvestADandADIAtookpart.Argentinahasalsomademoves,
hostingaconferencewiththeUAEattheendof2010.In2010,
theUAEannouncedtheirintentionofextendingtheirnetworkof
embassiesinLatinAmerica,withtheopeningofarepresentationin
Chile.InJulyofthatsameyeartheprimeministerofKuwaitwenton
athree-weektourofthewholeregion.
ThisshowofinterestinLatinAmericaisactuallylinkedtoawider
trend,inwhichweseemanysovereignwealthfundsseekingto
boosttheirinvestmentsinotheremergingcountries,overand
abovethoseinOECDcountries.OneexampleofthisistheKuwait
InvestmentAuthority,whichinashortspaceoftimehasreducedits
EuropeanandUSportfoliofrom90%to70%ofthetotalinorderto
pushinvestmentsinemergingmarkets,whichhavegonefromjust
3%tomorethan9%ofthetotalportfolio.
EquallynoticeableishowbothLatinAmericanandArabcountries
areseekingtointensifytheirrelationswithAsiaingeneral,beyond
justChina.ThemostrecentexamplewasVenezuela’soffertoset
upa$100billionfundforjointinvestmentintheenergysectorwith
India,anothercountrythatisseekingtosecureitssuppliesofraw
materialssoastobeabletosustainitsgrowthandcontinuetofeed
itshugepopulation30.Anotherdemonstrationofsovereignwealth
funds’appetiteforinvestinginLatinAmericawastheparticipation
byseveraloftheminthebiggestprivateequityfundeverraisedfor
theregion(nearly$1.7billion),byAdventInternationalin2010,as
aresultofwhichthisglobalprivateequityfirmnowhasmorethan
$5billionunderitsmandate.WealsofindSouthernCrossGroup,
anotherprivateequityfirm,withasimilaramount,inthecreation
ofwhichseveralemergingcountrysovereignwealthfundswere
involved.
29Seehttp://latinfinance.com/event.aspx?ArticleID=2311715.30OnrelationsbetweenIndiaandLatinAmerica,seehttp://induslatin.com.
Sovereign wealth funds 2012Latin american sovereign wealth funds 58
5. Latinamericansovereignwealthfunds
latin american funds
Relationsamongemergingcountriesareintensifying.Thespeed
withwhichtheyaretakingshapeisremarkableinitself.Inthis
regardthetiesbetweenLatinAmericaandthecountriesofthe
ArabianPeninsulaareanotherillustrationofthisglobaltrend
towardsamuchlessfragmentedworld.ApartfromtheArabfunds,
wearealsoseeinghowAsianinterestintheregion,fromChinato
Singapore,hasbeengrowing,largelydrivenbystate-ownedbanks
andsovereignwealthfunds.
However,LatinAmericaisremarkablenotonlyasaninvestment
targetforforeignSWFs,butalsobecause,togetherwithAfrica,itis
oneoftheregionsinwhichthistypeofinstitutionhasproliferated
most.LatinAmericanSWFsarestillrelativelymodestinsize,with
Chile’smainfundscarcelyreaching$15billion,whichisalmosta
thirdmorethanBrazil’s.ThatofTrinidadandTobagoisonlyabout
$4billion.ThoseofPanamaandColombiawouldalsostartwith
modestamounts,butarelikelytoseehighgrowthratesoverthe
remainderofthepresentdecade.Theregionisbuildingupreserves
atanall-timerecordrate:in2011totalforeignreserves(excluding
gold)almostreached$700billion,seventimesmorethanin2001,
whentheybarelysurpassed$100billion.
Table16
LatinAmericansovereignwealthfunds($billions)
Chile 2007 FondodeEstabilizaciónEconómicaySocial(FEES) 14,8 41,3 66.5%sovereignfixedincome
30%moneymarketinstruments
3.5%inflation-indexedsovereignbonds
Brazil 2008 FundoSoberanodoBrasil(FSB) 10 357,9 Fixedincome(BondsclassedasInvestmentgrade)
Venezuela 1998 FondoparalaEstabilizaciónMacroeconómica(FEM) 5,7 29,9 Nationalstabilization,non-commoditysectors
Chile 2006 FondodeReservadePensiones(FRP) 4,5 41,3 48%sovereignfixedincome
17%inflation-indexedsovereignbonds
15%equities
20%corporatebonds
Trinidad and Tobago 2000 HeritageandStabilizationFund 2,9 9,9 62%fixedincome
31%equities
7%cash
Mexico 2000 FondoparalaEstabilizacióndelosIngresosPetroleros(FEIP) 1,6 149,3 Correccióndeingresospresupuestarios
Inversionesfinancierasdecoberturasobreelpreciodehidrocarburos
Panama 2011 FondodeAhorrodePanamá(FAP) 1,2 3
Colombia 2011 FondoSoberanodeColombia 0,7* 32,3
Perua N/A N/A N/A 53,3 Foreignassets
Boliviab N/A N/A N/A 10,8
Guatemalab N/A N/A N/A 6,1
Country Year Name AuM Reservesc Strategy
aAnnouncementoftheMinisterofEconomyinMarch2011.bTalksonthecreationofthefundstartedin2011.cForeignexchangeandgoldreserves(CIAWorldFactbook,2012).Source:ESADEgeo(2012).
Sovereign wealth funds 2012Latin american sovereign wealth funds
59
31InPeruthedebateintensifiedfromtheendof2011;seeinparticularthepresentationbythedirectoroftheCentralBanktoCEPLAN(Peru’sNationalCentreforStrategicPlanning)reportingtothePresident:http://www.ceplan.gob.pe/conferencias;jsessionid=4B46782D18670A4BBAB169C9741791EC.32Seehttp://www.caf.com/view/index.asp?ms=19&pageMs=75400.33Togetherwithotherpartners,thesetwosetupaglobalconsultancyonthesesubjects:SCLPartners,seehttp://www.sclpartners.com/en/.34TakingpartinthiseventwereChileanfinanceministerFelipeLarraínandIgnacioBriones,whowasinchargeofChile’ssovereignwealthfundsundertheSebastiánPiñeraadministration.Seehttp://www.minhda.cl/sala-de-prensa/archivo-audiovisual/fotografias-de-las-noticias/ministro-larrain-en-la-conferencia.html.35OnPanama’ssovereignwealthfundandnationaleconomy,seethepresentationbytheFinanceMinistertotheAmericasSocietyandtheCouncilofAmericasinNewYork:http://www.as-coa.org/files/Presentation_FrankdeLima.pdf.
Somehavebeeninexistenceforseveralyears,whileotherswere
establishedorremaintobeestablishedinthisdecade,Braziland
ColombiaheadingthelisttogetherwithPanama.Brazilsetupits
ownsovereignwealthfundin2008withaviewtointerveningin
theforeignexchangemarket.In2010thenPresidentLulacreated
theDeliberativeCouncilontheSovereignWealthFund,anecessary
stepforthefundtobeabletotradeonthelocalforeignexchange
market.Brazil’ssovereignwealthfundstartedoutasacurrency
stabilisationfund,withover$10billion.
OneyearlaterColombiaandPanamaenteredthefray,and
Peru,GuatemalaandBoliviastarteddebatingwhethertocreate
instrumentsofthistype31.Inanindicationofthegrowinginterestin
thesubject,theCAF(Corporación Andina de Fomento,Development
BankofLatinAmerica)heldaregionalseminaronthesubjectof
sovereignwealthfundsinthepresentdecade32.Someoftheregions’
leadingexpertsonsovereignwealthfundshavebecomeadvisers,
muchsoughtafterbycountriessuchasColombia,Mongoliaor
Nigeriatohelpdesigntheirsovereignwealthfunds,asinthe
particularcaseofAndrésVelasco,formerChileanfinanceminister,
andEricParrado,formerlyinchargeofChile’ssovereignwealth
fund33.Attheendof2011theLatinaAmericanandCaribbean
EconomicAssociation(LACEA),togetherwithESADEgeo,organiseda
paneldiscussiononthesubjectofsovereignwealthfunds,withinthe
frameworkofitsannualmeeting,heldinSantiagodeChile34.
Colombiahassetupasovereignwealthfundinwhichtosave
royaltiesfromoilextraction.Approvedinmid-2011,thefundis
partlyinspiredbytheChileanfunds,inthatitwasenactedinaFiscal
ResponsibilityLaw.Infactseveralfundsandinstrumentshavebeen
createdtopromotesavingandstabilisation,scienceandinnovation
andregionaldevelopment.Between2012and2020theColombian
governmentwillapparentlyberollingoutastrategytogalvanise
manufacturing,technologyandinnovationbasedonstructures
derivingfromsovereignwealthfunds,emulatingbestpractices
intheareaasexemplifiedbytheUAE’sMubadalaorMalaysia’s
Khazanah.
Attheendof2011PanamanianpresidentRicardoMartinelli
indicatedthattherewereplanstosetupasovereignwealthfund
withtherevenuesgeneratedbythePanamaCanal,tobeusedfor
investinginfuturesocialprojects.In2012,FinanceMinisterFrank
DeLimasaidthatthesovereignwealthfundmightbecreatedby
takingasitsinitialcapitaltheentire$1.3billionofassetsoftheFFD
(Fondo Fiduciario para el DesarrolloorDevelopmentTrustFund),
whichisconsideredPanama’ssavings35.Accordingtohisministry’s
projections,savingscouldbuilduptobetween$3billionand$7
billion.Aswellastheadditionalincomegeneratedbywidening
theCanal,theauthoritiesarealsoconsideringincludingmining
royalties.Eachyear,partoftherevenuegeneratedbytheCanal,the
equivalentof3%ofGDP,willgototheNationalStateTreasury,and
thesurpluswillbeearmarkedassavings.Thefundcouldaccumulate
nearly$12.5billionby2025.In2011Panamascarcelyfelttheeffects
oftheEuropeancrisis,anditseconomygrewby10.5%,oneofthe
highestgrowthratesintheworld.
Sovereign wealth funds 2012Latin american sovereign wealth funds 60
5. Latinamericansovereignwealthfunds
the chilean model
TheexistenceofsovereignwealthfundsinLatinAmericaisnotnew,
however.Insomecases,suchasthatofVenezuela,fundswereused
forpoliticalendsthatdifferedfromtheinitialobjectives.Atthe
sametime,however,therearesovereignwealthfundsintheregion
thathavebecomeworldbenchmarksthankstotheirexemplary
performanceandtrackrecord.
ThisisexactlywhatChileachievedinamasterlymanner(seethe
chapteronChileinthisreportformoredetail)36.Mid-waythrough
thefirstdecadeofthiscentury,itsetuptwosovereignwealthfunds,
withrigorousrulesandfirst-classhumanandinstitutionalcapital.
ThishasmadeChileaworldbenchmark,onaparwithNorway,in
thefieldofsovereignwealthfunds.InthecaseofChile,thefunds
areframedbyastrictFiscalResponsibilityLaw,passedin2006,
whichstatesthatthe0.5%ofthepreviousyear’ssurplusmustbe
transferredtothefirstfund(thePensionReserveFund);thenext
0.5%offiscalsurplusbeusedtocapitalisetheCentralBank,andany
furthersurplusabovethatgoestothesecondsovereignwealthfund
(FEES,theEconomicandSocialStabilisationFund).
AnumberoflessonscanbedrawnfromthissuccessfulLatin
Americanexperience.Thefirstisthatthistypeofinstrumentis
indissociablefromfiscalpolicy.Thesecondisthatveryrigorous
regulatoryandinstitutionalframeworksareneeded,particularly
inthecaseofemergingcountries.Lastly,itisequallyessentialto
ensurethattheinstitutionhastherighthumanresources.Inthe
caseofChile,whetherunderthepreviousgovernmentorthepresent
one,wearetalkingaboutfirstclassprofessionalsandeconomists,
startingwiththetwoFinanceMinisterswhohavesupervisedthe
funds,firstAndrésVelascoandnowFelipeLarraín,bothofwhom
holddoctoratesineconomicsandhavelongprofessionaltrack
records.
TheChileanfundshoweverarenotstrategicfunds,i.e.theyare
notaimedatpromotingbusinessdevelopmentanddiversification.
Someemergingcountries,suchastheUAE,Singaporeand
Malaysiahaveestablishedstrategicfundswiththeclearobjective
ofcontributingtobusinessdevelopmentandthediversificationof
manufacturing.OnecanimaginethatChilemightwellestablish
athirdsovereignwealthfundwiththisobjective.Thebeautyof
theChileanstructureisthatitofferswhatispotentiallytheright
incentivestructureforthis:itisnothardtoimaginethat,ontopof
thethreeexistingsuccessivelayersforfiscalsurpluses,afourthcould
bedesignedforastrategicfund.Thiswouldonlybeactivatedonce
thefirstthreelevelswerecovered,i.e.onlyaboveasignificantfiscal
surplus.Thestrategicfundcouldthenoperateasafundoffunds,
acceleratingdiversificationofproductiontowardstechnological
sectorsorevenindustrialsuppliersoftheminingindustry,for
example.
Itisindeedstrikingthat,despitebeingtheworld’sleadingproducer
andexporterofcopper,Chilehasnoworld-scalemultinational
ofitsownassupplierofvehicles,excavatorsorexplosivesforthis
sector.Theyareallforeign:CaterpillarandJoyGlobalarelistedin
NewYork,KomatsuinTokyo,AtlasCopcoandSandvikinStockholm,
BoartLongyear,LeightonandOricaareAustralian,WeirGroup
ScottishandHatchCanadian.Allofthemgeneratelarge-scaleand
highvalueaddedemployment.Chile’sCodelco,theworld’sbiggest
copperproducer,employslessthan20,000people,farfewerthan
SwedishmultinationalsSandvik(44,000employees)orAtlasCopco
(30,000).ItsrevenuesarejustoneseventhofthoseofCaterpillar,
whichalsoemploysnearlyfivetimesasmanypeople.
36OnChile’strackrecordanditsexemplarystandingevenforOECDcountries,seethestudybyHarvardprofessorJeffreyFrankel:Frankel,JeffreyA.,“ALessonFromtheSouthforFiscalPolicyintheUSandOtherAdvancedCountries”,HKSFacultyResearchWorkingPaperSeriesRWP11-014,February2011.Seehttp://web.hks.harvard.edu/publications/workingpapers/citation.aspx?PubId=7646.
Sovereign wealth funds 2012Latin american sovereign wealth funds
61
37Onsovereignwealthfunds’investmentstrategiesandstrategicfundsinparticular,seepapersbyShaiBernstein,JoshLernerandAntoinetteSchoar,“TheInvestmentStrategiesofSovereignWealthFunds”,HarvardUniversityandMIT,WorkingPaper,2009http://www.people.fas.harvard.edu/~bernst2/papers/SWF0811.pdf;andaboveallthepaperbyAlexanderDyckandAdairMorse,stressingthedimensionofstrategicfundswithfinancialandeconomicdevelopmentobjectives,“SovereignWealthFundPortfolios”,UniversityofTorontoandUniversityofChicago,WorkingPaper,December2011(unpublished).See:http://faculty.chicagobooth.edu/adair.morse/research/DyckMorse_2012AFA_SWF.pdf.
Stabilisation funds or strategic funds?
LatinAmericahasnoshortageofnaturalresources,andthisis
undoubtedlyablessing.However,withtheexceptionsofMexicoand
Brazil,whichhaveabroadrangeofindustries,productdiversification
hasbeenlimited.Overall,morethanhalfthesubcontinent’sexports
arestillcloselylinkedtorawmaterialsorcommodities,andover
thenextfiveyearsitisexpectedthatmorethan$150billionwillbe
investedinthesesectors.
Havingrawmaterialsisnotacurse,butitalldependswhatyoudo
withthem,asisshownbyeconomiesthatarehighlydependenton
rawmaterialsyetalsohighlydeveloped,suchasNorway,Australia
andCanada.Ultimately,thequestionforacountrythathas,for
example,lithium(asdoChile,ArgentinaandBolivia)iswherethey
wishtobepositionedintheaddedvaluechain:inthelithiumraw
materialmarket,whichisestimatedatover$1billion;inthelithium
batterymarket,whichisputatover$25billion;orwanttobeinthe
marketforelectriccarsthatuselithiumbatterieswhosemarketis
estimatedat200billiondollars?.
Itispossiblethatpartoftheanswertothisquestionliesinsetting
upstrategicfunds.Theexperienceofothercountries,particularly
thoseoftheArabianPeninsulaandSoutheastAsia,mayprovidea
pointofreference37.IntheUAEforexample,theMubadalafundis
AbuDhabi’sstrategicvehiclefordiversifyingitsoil-basedeconomy.
Withsome$48billioninassets,thisinstitution,establishedin
2005,istheownerofMasdar,acitythataimstobecometheSilicon
Valleyofrenewableenergysources.Ithascarriedoutinvestments
andenteredintostrategicagreementswithmultinationalssuchas
America’sgiantGeneralElectric(inwhichitholdsa0.7%stake),
whichsetupR&DcentresintheMasdarcomplex.MubadalaandGE
jointlypromotedaninvestmentfundwhichnowmanages$2billion.
TheUAEiskeentopositionitselfasanaerospacehub,andtothis
enditmanagedtoassociateitselfwiththeEuropeanmultinational
EADS(Airbus),inwhichanotherArabsovereignwealthfund,
DubaiInternationalCapital,holdsastakeofjustover3%.Strategic
agreementswithmultinationalssuchasFrance’sVeoliaWater
and,attheendof2010,SpanishtechnologyfirmIndra,havealso
proliferatedthankstoMubadala,whichin2010alsoembarked
uponastrategyofaggressivediversificationintoemergingmarkets,
signingagreementswithMalaysia’ssovereignwealthfund($7
billion).
Sovereign wealth funds 2012Latin american sovereign wealth funds 62
5. Latinamericansovereignwealthfunds
Oficinas internacionales de CIC
Source: ESADEgeo, 2012.
Abu Dhabi
Qatar
Dubai
Kuwait
EADS Airbus
MUBADALA
M346 - JV
GE
Engine Serv. JV Etihad
Arianespace
Strata
SR technics
ATR
Soge
ade
United Airc. Gr.
Piaggio Aero
SEPI
Laga
rder
e
QATAR
FOUNDATIO
N
Qat
ar A
irway
s
KIA
Daim
ler
Aaba
r
Saned
Carlyle GroupYahsat
S. HAMDAN
(Prince)
DFC Investmts
Zaveel Inv.
GSEF
ADIA
IPIC
ADNOC
Rolls Royce
Dassa
ult Av
QIA
Dubai Hold.
Dubai Int.Capital
INVESTMENTCORP. OF DUBAI
Emirates (air)
DAE Capital
DubaiWorld
Istithmar
World
Dubai Aero.
Enterprises
ARM
YUA
E
Mubadala's strategic interest around EADS
Chart 23
COUNTRY / EMIRATE
SOVEREIGN WEALTH FUND / STATE CAPITAL
COMPANY IN THE EADS ENVIRONMENT
EADS AIRBUS
Proximity degrees: Mubadala Company 1 Company 2 (or more) EADS
MRO Engines Finance
Satcom Airline Components Leasing
Assembly
10 to 50% <10% >50% Mubadala participation:
Mubadalahasdevelopedastrategicinvestmentpolicyinnon-oildependentsectors:aerospaceandrenewableenergy,predominantly.Intheaerospacesectorithasachievedthroughinvestmentsinkeyvalue-chaincompanies.Thus,wefindasignificantJointVenturewithGE,theacquisitionofStrata,andSRTechnics:engines,componentsandassembly,respectively.WithattentiononMubadala,wenotethatotherSWFshavealsoinvestedincompaniesinvolvedinthissector,inwhosecenteristheEuropeangiantEADS.Qatar,KuwaitandtheemirateofDubaihavealsoinvestedinthissector.
Sovereign wealth funds 2012Latin american sovereign wealth funds
63
SingaporeandMalaysiaalsoofferinterestingexamplesofsuccessful
strategicsovereignwealthfunds.Temasekwascreatedin1975by
Singapore,andhasplayedacrucialroleintheislandstate’sindustrial
growth.Ithas380employees,manyofthemforeign(ithastwo
presidents,oneAmericanandoneFrench)and,asatJuly2012,it
managednearly$160billion.Itsportfolioisstillheavilycentredon
Singapore(32%oftotalassets),whereithasoperatedasaprivate
equityfirm,contributingtothedevelopmentofnationalgiants:
in2010Temasekheldequityinsixofthecountry’stenbiggest
multinationals.Forexampleitisashareholderanddriver,andhas
beensince1993,ofmultinationalssuchasSingTel,oneofthegiants
ofthetelecommunicationssector,withoperationsinAustraliaand
India(whereitisthesecondbiggestshareholderinBhartiAirtel,the
leadingIndianmultinationalinthesector).Ithasalsoplayedakey
partinthedevelopmentofKeppelCorporation(shareholdersince
1975),aglobalsupplierofinfrastructurefortheoilindustrywith
nearly40,000employees.Ithascontributedtotheroll-outofHyflux,
amultinationalinthewatertreatmentsectorestablishedbarely
twentyyearsagoandnowpresentinSoutheastAsia,theMiddleEast,
NorthAfrica,Europe,China,IndiaandtheUnitedStates.
Foritspart,Khazanah,Malaysia’ssovereignwealthfund,with$22
billioninAUM,alsocarriedoutstrategicinvestmentsinsomefifty
companies,includingthetelecommunicationsgroupAxiata,aworld
leaderinwhichithasa45%stake,andautomakerProton,currently
SoutheastAsia’sbiggest,ofwhichitholds42%.Ithasinterestsin
airports,airlines,hospitalsandbanksthroughoutMalaysia,where
90%ofitsportfolioisconcentrated.Ithasalsoembarkedupona
processofinternationalexpansioninaccordancewiththecountry’s
industrialstrategyofpositioningitselfasaregionalhealthcarehub.
Thusin2010ittookcontrolofParkwayHoldings,Asia’sleading
privatehospitaloperator,forarecordamountofnearly$3.5billion.
Basedonthesesuccesses,attheendof2009Malaysiaestablisheda
secondsovereignwealthfund,1MalaysiaDevelopmentBerhad,and
concludedvariouscooperationagreementswiththeQatarsovereign
wealthfund(creatinga$5billionco-investmentvehicle)andwiththe
oilcompanyPetroSaudiInternational(investing$2.5billion).
Theseexamplesshowtheextenttowhichsovereignwealthfunds
canbestrategicplayersinthediversificationanddevelopmentofan
economy.InthecaseofLatinAmerica,Brazil,throughBNDES,has
operatedde factoasaninstrumentofthistype,producinggiants
likeValeandPetrobras,inrawmaterialsectorsbutalsoinleading
edgesectorslikeaerospace,withEmbraer.NowcountrieslikePeru
andColombia,heavilydependentonnaturalresources,aredebating
whetherornottosetupsovereignwealthfunds.Theycouldlookto
Chiletodesignstrategies,buttheycouldalsolookbeyond,towards
theUAE,SingaporeorMalaysia,andthinkaboutstructuresthat
wouldalsoallowthemtohaveastrategicfund,somethingthatChile
itselfcouldalsoconsider.
conclusion
LatinAmerica,liketherestoftheemergingmarkets,isgoing
throughamajortransformation.Theriseofsovereignwealthfunds
intheregionisjustonemoreconfirmationofthis.Equally,the
attractionsofLatinAmericaareconfirmedbytheinterestaroused
inSWFsofothercontinents.Proofoftheregion’sattractivenessis
thatin2011,whileEuropecontinuedtoslidedeeperintocrisis,Latin
Americareceivedrecordforeigndirectinvestmentofmorethan$138
billion.
Thesefunds,intheirstrategicversion,alsoconstituteapowerful
leverforeconomicdevelopment,asisshownbythehistoricalcases
ofSingaporeand,morerecently,Qatar,theUAEandMalaysia.
TheseArabandAsianexamplesdeserveLatinAmerica’sclose
attention.Admittedlythehistoryofindustrialpolicyintheregion
invitescaution.ButastheexampleofChileshows,morerecent
historyhasalsoproducedbetterinstitutionalpractices.Chilehas
becomeaworldreferenceforfiscalpolicyandgoodpracticesin
termsofSWFs,asconfirmedbyitsadmissionin2010totheselect
cluboftheOECD.SowhynotthinkintermsofChile’ssettingupa
strategicSWFinadditiontothefundsthatitalreadyhas,withbuilt-
inincentivesforvirtuouseconomicpolicies?.
Thisfundwouldbeaddedtoonlyifacertainthresholdoffiscal
surpluswerereached,andwecouldimaginethat,likeMubadala,
itwouldinvestonlyinforeigncompanies,thusalsoavoiding
localconflictsofinterest,topromoteindustrialdiversification.In
parallel,theChileangovernment’sholdings,likemininggiant
Codelcoandothers,couldperhapsbegroupedtogetherina
holdingcompany,asovereignwealthfunddrawingitsinspiration
fromMalaysia’sKhazanah.AcountrylikeColombia,whichhasthe
necessaryinstitutionalbackbone,alsoasanexampleofinstitutional
governance,couldfollowthissameroute.
LatinAmericastandsatacrossroads.Inthedecade2010-2020ithas
auniqueopportunitytodiversifyitseconomyandraiseittohigher
levelsofaddedvalue,i.e.toleverageitsrawmaterialstodevelop
industrialdiversification.Inthis,thesovereignwealthfundscanbe
powerfulinstruments.TheexampleofBrazilanditsdevelopment
bank(BNDES)provesit:nowadaysthebulkofthecontinent’s
multinationalsarefromBrazil,manyofthemdrivenandpromoted
byBNDESwhichactsasadefactostrategicfund.
christopher Balding
Associate Professor, HSBC Business School at Peking University Shenzen Graduate School
Ellen campbell
Research Assistant, HSBC Business School at Peking University Shenzen Graduate School
Sunken treasure: Brazil, deepwater oil, and Brazil’s sovereign wealth fund
Sovereign wealth funds 2012Sunken treasure: Brazil, deepwater oil,
and Brazil’s sovereign wealth fund 65
Sovereign wealth funds 2012Sunken treasure: Brazil, deepwater oil, and Brazil’s sovereign wealth fund66
6. Sunkentreasure:Brazil,deepwateroil,andBrazil’ssovereignwealthfund
6. SunkEn trEaSurE: BrazIl, DEEpwatEr oIl, anD BrazIl’S SoVErEIgn wEalth FunD
Introduction
In2007,theTupioilfieldwasdiscoveredbyBritishGasGroupoffthe
coastofBrazil,revolutionizingthefutureoftheBrazilianeconomy.
ThenPresidentLuladaSilvawentsofarastocallthiswindfall“proof
thatGodisBrazilian”38.Brazilianreservesaboveandbelowthesalt
layerinthedeepwateroffitscoastshavesubsequentlyincreasedto
morethananestimated14billionbarrels.Theenormousdiscoveries
indicatethatthesereservesrivalinquantitythetotalintheNorth
Sea,makingBrazilamajorplayeringlobaloilandincreasing
itsgeopoliticalimportance.Countriesstrewnthroughouthistory
thatviewedoildiscoveriesasapathtoeconomicdevelopment
andfinancialwealthshouldprovidecautionarytalestoBrazilian
dreams.Mostcountrieswithlargeoilreservesextractlargeresource
rentswithindustrialoverdependence,stagnantnon-oilsectors,
andexcessivebureaucraticpublicsectors.TheabilityofBrazilto
prudentlymanageitsoilwealthwilldetermineitseconomicfatefor
manyyearstocome.
OuranalysisofthenascentFondoSoberanodoBrasil(FSB)andits
abilitytomanageitsoilbountyfocusesonanumberofeconomic
andfinancialfactorsuniquetoBrazil.First,duetostructuralfactors
withintheBrazilianeconomy,theexpectedgrowthinoilproduction
withoutproperpolicymayactuallyworsentheBraziliancurrent
accountdeficit.Second,giventhelackofastructuralcurrent
accountsurplusandlengthytimeframeforproductionincreases,
theexpectedwealthmaynotmaterializeformanyyears.Third,
giventheovertlypoliticalnatureoftheFSB,itsmanagement,policy
pronouncements,andoversight,Brazilwouldbewellservedto
placestrictandtransparentlimitsonitsinvestmentmandateand
regulationsforfundcapitalwithdrawals.Economichistoryisreplete
withexamplesofcountriesthatsufferedfromnaturalresource
windfallsandBrazilwouldbewisetolimititsrelianceontheoil
extractionindustryorthetemporarywealthitbrings.
38DescobertadeTupiprovaque‘Deusébrasileiro’,dizLula”November21,2007(onlineatwww.ambiente.sp.gov.br/proclima/noticias_novas/2007_4/noticiasnovembro2007/21112007f.htm).
Sovereign wealth funds 2012Sunken treasure: Brazil, deepwater oil,
and Brazil’s sovereign wealth fund67
39Additionally,thesuccessindexfor2011was59%.40Petrobras,4Q2011EarningsCallTranscriptandPresentation.(onlineatwww.petrobras.com.br/ri/Show.aspx?id_materia=eh3z4UjiieY+nPVYitYTKQ==&id_canal=wyqR1+3aDC/Y0tv/TRNk3g==&id_canalpai=/zfwoC+leAQcwFyERVZzwQ==)(hereinafter“Petrobras4Q2011EarningsCallTranscriptandPresentation”).41InterviewwithGabrielli,http://www.worldoil.com/April-2011-Petrobras-builds-technology.html.42Economist,“Fillingupthefuture”,Nov5th,2011.Onlineathttp://www.economist.com/node/21536570.43“However,weseeitsexplorationsuccessandlargedomesticoilreservesbeingoffsetbylimitedfinancialandengineeringresourcestodevelopthem,whichmayleadtodelayedprojectexecution”S&PreportonPetrobras,March24,2012.https://research.sharebuilder.com/uploadhandler/z03ae110azf3c511e8619c464ba5f522af20af6957.pdf.44Forexample,infourthquarter2011,Petrobrasplannedtoopensixteennewproducingwellsbutonlysucceededinopeningnine.Unplannedmaintenanceneedsfurtherreducedproductionby33thousandbarrelsperday.Petrobras4Q2011EarningsCallTranscriptandPresentation.45Reuters,“Petrobrascutsgoalfor2012Braziloiloutput”,Feb14th,2012.Onlineathttp://www.reuters.com/article/2012/02/14/petrobras-idUSL2E8DE20R20120214.46U.S.EnergyInformationAdministration.(onlineathttp://www.eia.gov/countries/country-data.cfm?fips=BR).
rio of oil?
Brazil’sprovenoilreservesreached14.0billionbarrelsin2012
accordingtotheEIA,althoughthelargelystate-ownedPetróleo
Brasileiro(Petrobras)aloneclaims15.71barrelsofprovenreserves
inBrazilianwaters.Furthermore,discoveriesareongoing.Regular
announcementsofnewreservesmeancurrentestimatesare
aninadequatemeasureoffutureactivity.Petrobras’sreserve
replacementratiowas152%in2011,meaningtheydiscoveredone
andahalftimesmoreoilthantheyproduced39.Theyforecastthat
continuingdiscoverieswillcostnomorethan$2perbarrelin2012,
duetotheirhighsuccessrateinlocatingnewfieldsandimproved
expertiseindeepwateroperations40.Accordingly,duetoreduced
explorationrisk,theBraziliangovernmentrecentlyinstitutedhighly
preferentialtreatmentforthemainlygovernment-ownedPetrobras.
Brazilianlawnowrequiresthatallfutureproductionintheregion
haveproduction-sharingagreementswithPetrobras.Petrobras
canadditionallyclaim30%ofanyprojectinthese‘pré-sal’fields.
Requirementsforlocalsourcingofproductioninputshavealso
beenimplemented,althoughlocaltechnologyisnotyetadvanced
enoughtomeettherequirementsfordeepwaterproduction41.
TheexplorationriskforBrazilianoilmaybelow,butthe
developmentriskishigh.Oilinthepré-sallayersislocatedinvery
deepwaterandthroughmultiplelayersofoceanfloor.While
NorthSeadepositsfrequentlylielessthan1kilometerbelowthe
surface,pré-saloilcanbedeeperthansix42.S&PpredictsPetrobras
mayhavedifficultyovercominglimitedfinancialandengineering
resourcesinordertodevelopitshugeoilreserves43.Thiswouldresult
indelays,whicharealreadybeingseen44.Mostrecently,Petrobras
cutitsplannedproductionfor2012by30%inFebruary,citingdelays
inshipbuilding45.However,giventhenatureofBrazil’sdeepwater
oilreserves,Petrobrasisuniquelysituatedtotakeadvantage.With
only3%ofglobaloilproduction,Petrobrasproduces22%ofthe
world’sdeepwateroil,aspecializationthatwillbenecessaryto
exploittheTupi,Guara,Lula,andmostotherBrazilianoilfields.
Agreaterconstraintfortheoilindustryandnationalfinances
concernsthelackofrefiningcapacitytoprocessincreased
production.Brazilianoilproductionreached2.6millionbarrels
ofcrudeperdayin2012whilerefiningcapacityisonly1.9million
barrelsperday46.Nationalconsumptionin2009hadalready
reached2.5millionbarrelsperday–fargreaterthanwhatthey
canrefinethemselves.Thismeanstomeetnationaloildemand,
Brazilmustexportcrudeandthenre-importrefinedoilproducts.
Exacerbatingthisdeficit,Brazilproducesaheavierbrandofcrude
thatishardertorefineandtradesata$6-$10perbarreldiscount
fromBrent.Initsinvestmentbudgets,Petrobrascontinuesitsfocus
ondiscovery,withaprojectedinvestmentbudgetofonly38%for
downstreamactivitiescomparedto48%forupstreamactivities.
AlthoughtheEIAexpectsrefinerycapacitytoincreaseto3.1million
barrelsperdayby2020,Brazilexpectstocontinueimportingrefined
oil.
6. Sunkentreasure:Brazil,deepwateroil,andBrazil’ssovereignwealthfund
Sovereign wealth funds 2012Sunken treasure: Brazil, deepwater oil, and Brazil’s sovereign wealth fund68
Chart 24
Current account
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
-4
-3
-2
-1
0
1
-0.745
1.441
-0.282
-2.798
-3.972 -3.771
-1.527
1.755
1.248
-1.703
-2.266-2.544
-3.140 -3.246
Imports and exports of oil
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
0
10
20
30
40
(Billions USD)
(As % of DGPD)
Value of oil imports Value of oil exports
4.735 4.141 4.069
6.527
4.319
7.6576,.208
9.955
15.365
30.505
33.077
25.344
38.186
44.136
.
0.586 0.5281.042 1.344
2.207
4.1125.45
3.991
5.727 5.9666.835
Oil imports and exports by value with the current account deficit, 1990-2016
Source: IMF, World Economic Forum, 2012.
WhileBrazilsitsatopenormousoilreservescatapultingitintoone
ofthemostimportantproducersintheworld,manysignificant
obstaclesremainevenwithintheextractionandprocessingphases.
Intheabsenceoflargeinvestmentsinrefiningcapacity,importing
higherpricedrefinedproductstomeetprojecteddemandcould
eliminateamajorportionfromtheexpectedstructuralsurplus
generatedbyoilproduction.Brazilneedstomeetthesechallenges
torealizethefullextentoftheoilbounty.
Sovereign wealth funds 2012Sunken treasure: Brazil, deepwater oil,
and Brazil’s sovereign wealth fund69
the Brazilian Economy Should avoid petroleo gras
Braziloperatesasmalloilnetexportsurplusvolume.However,
theexportofcrudeandimportofrefinedproductsresultsinBrazil
spendingcurrentlyapproximately$27billiondollarsmoreonoil
importsthanitearnsonitsexports,withthedifferenceexpected
toincreasemarkedlyasBrazil’sdevelopmentleadstoincreasesin
domesticconsumption47.Thequestionis,inthelongerterm,can
Brazilincreaseitsrefinementcapacityorexportsufficientcrudeoilto
overcomethegapbetweenthemoreexpensiveimportedrefinedoil
anditsexportedcrudeoil?.Otherwiserevenuefromincreasedcrude
productionwillstokedomesticdemandforhigherpricedrefined
products,perverselyworseningtheBraziliancurrentaccountdeficit.
47IMFWEODatabaseSeptember2011.U.S.EnergyInformationAdministrationdata.
Chart 25
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
9.190
-7.876
0.025
1.169 1.441
-3.771
-1.703
-2.544
5.307
0.264
-8
-6
-4
-2
0
2
4
6
8
4.306
5.7145.162
3.625
-3.246
4.160
1.755
-2.798
2.150
GDP Growth (%) Current acct as % GDP
-0.544
Estimate
GDP growth and the current account, 1980-2016
Source: IMF, World Economic Forum, 2012.
GiventheenormouspotentialofBrazilianoilreserves,prudent
managementcouldpromotelongtermsustainabledevelopment
oftheBrazilianeconomy,orlongtermstagnationwithGDPgrowth
subjecttogyrationsintheglobalpriceofoil.Thedevelopment
recordofoilrelianteconomiesisnotencouraging.Thepotential
forasustainedstructuralsurplusdrivenbyoilexportstofinance
developmentandhigherlevelsofsocialspendingintriguesmany
inBrazil.However,givencurrentandprojectedbudgetdeficitsand
thehistoryofpoorfiscalmanagement,theexpectationofoilwealth
shouldcauseasmuchconcernashope.Brazil’sgovernmentruns
sizeabledeficitsdrivenbyrapidincreasesinspendingparticularly
onsocialprograms.Recentbig-ticketinitiatives,suchasPresident
Roussef’s“BrasilsemMiseria”,donotindicatetherewillbea
reversalinthistrend.Brazilmaynotbeabletoorevenbeinterested
inrestrainingitsinclinationtotryandspendawayitsdevelopment
problems.Theseprogramshavereceivedmuchacclaiminthe
developmentcommunity,butifBrazilexpectstofinancethem
throughoilsales,theyneedtobewarethevolatilityofthisincomeas
wellastheproductionchallenges.
Chart 26
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
38.980
0
5
10
15
20
25
30
35
40
45
39.486
33.565
42.311
34.920
35.287
31.912
35.108
37.653
34.78135.936
37.717
36.32737.514
36.380 36.454
38.989
36.603
General government net lending/borrowing(As % of GDP)
39.524 40.40439.186 38.921
-5.415
-7.391
-2.890 -2.806-2.467 -2.386
-5
0
-4.416
-3.375 -2.872-3.550
-1.390
Income and expenses
(As % of GDP)General government expenditure General government revenue Estimate
Public revenues, expenditures, and debt
Source: IMF, World Economic Forum, 2012.
6. Sunkentreasure:Brazil,deepwateroil,andBrazil’ssovereignwealthfund
Sovereign wealth funds 2012Sunken treasure: Brazil, deepwater oil, and Brazil’s sovereign wealth fund70
Sovereign wealth funds 2012Sunken treasure: Brazil, deepwater oil,
and Brazil’s sovereign wealth fund71
Therearetwospecificrisksforthewindfallfromoilmoney.First,
increasedspendinglevelscouldincreaseinflationarypressuresand
delayneededreform.Second,astructuralsurplusandreallocation
ofdomesticresourcescouldincreaseappreciationpressuresonthe
BraziliancurrencyandalossofcompetitivenessfortheBrazilian
economy.Duetoitslevelofdevelopmentandthetendencyofoil
economiestofixtheircurrencytopreventappreciation,Brazilwill
facebothpressures.Brazilhasalongandongoinghistoryoftrying
tomanageitscurrencyvalue.Withcommentsindicatingthatthe
FSBmayengageincurrencyspeculation,thisshouldcauseconcern
aboutitsinvestmentmandate48.Furthermore,giventhepoortrack
recordofpublicinterventionsdesignedtotargetspecificcurrency
values,itwouldseemapoorinvestmentstrategyfortheFSB.
Chart 27
0
50
100
150
200
250
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
Mexico Norway Russia Saudi Arabia Oil prices index Estimate(GDP deflator)
Oil prices and inflation
Source: IMF, World Economic Forum, 2012.
48WallStreetJournalMarketBeatBlog,“BrazilWinsRound1ofCurrencyWars”,accessedathttp://blogs.wsj.com/marketbeat/2012/03/22/brazil-wins-round-one-of-currency-war/onMarch26,2012.
6. Sunkentreasure:Brazil,deepwateroil,andBrazil’ssovereignwealthfund
Sovereign wealth funds 2012Sunken treasure: Brazil, deepwater oil, and Brazil’s sovereign wealth fund72
TheeconomichistoryofBrazilpresentsamixtureofpoormonetary
policyanddelayedreformsthathavedepressedeconomicgrowth
levelstothelowestofthemajoremergingmarketeconomiesin
thepastdecade.AdherencetothestrictFiscalResponsibilitylaw
passedin2000remainsimperfect,though,acombinationoffiscal
prerogatives,restrictions,andtheeffortsoftheTribunaisdeContas
improvedpolicymakingefficacy49.Inflationremainsaveryreal
concernespeciallygiventhecloselinkinoildependenteconomiesto
inflationandoilpricesasshowninChart28.WhilelowbyBrazilian
historicstandards,interestratesremainhighandwellabovethe
averageofotheremergingmarketinflationtargetingregimes50.
Suchhighinterestrateschokeprivateborrowingthatwouldlead
tolong-termgrowthwithsomecallingthisBrazil’smostbinding
constrainttogrowth.Publicinvestment,whichcouldfillsomeofthe
gap,remainslowanddoesnotcounterthistendency.
49http://siteresources.worldbank.org/EXTLACREGTOPPUBSECGOV/Resources/PANEL4-SCARTASCINI.pdf.50SeeSegura-Ubiergo,“ThepuzzleofBrazil’shighinterestrates”,IMFWorkingPaper,February2012,availableathttp://www.imf.org/external/pubs/ft/wp/2012/wp1262.pdf.
Chart 28
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
0
-5
5
10
15
2018.870
16.446
12.938
22.001
18.780
14.243 14.490
18.877
20.546
18.783
20.686
12.731
18.399
15.315
17.040
18.250
17.117
17.641
22.338
18.977
-2.424
0.207
3.602 3.465
-2.797
-3.76
1.760
-1.709
-2.905-3.555
Public savings as % GDP Total investment as % GDP Spread Estimate
Savings and investment in Brazil
Source: IMF, World Economic Forum, 2012.
Sovereign wealth funds 2012Sunken treasure: Brazil, deepwater oil,
and Brazil’s sovereign wealth fund73
Brazilwillneedtomaintainstrongandcrediblemacroeconomic
policiesthatbenefitfromdomesticmicroeconomicreforms.They
cannotdependonoilprosperityalone.ThoughBraziliansconsider
thiswindfallstrongproofGodsharestheirnationality,without
propermanagementtheywillbecomeanothercautionarytale
onhowbesttosquanderopportunity.Inacountrywithsomany
citizenslivinginpoverty,thetemptationtospendthefundson
immediatesocialspendingexists.Furthermore,inauthoritarian
states,governmentsspendlavishlytoeasepublicdiscontent.In
ademocracysuchasBrazil,politicianswillwishgarnerfavorwith
constituentstoreapelectoralbenefitbyincreasingspending.
However,sucheffortsarenotonlyunsustainable,butlinkthe
country’swellbeingtovolatileoilprices.Brazilianpoliticiansmust
restraintheirinclinationtospendasthekeytoBrazilianprosperity.
the Fondo Soberano do Brasil: the Fund from Ipanema
TheBraziliansovereignwealthfund,theFondoSoberanodeBrasil
(FSB),wasinauguratedin2008andpresentlyholdsamere$10
billion.Thisamounthowever,willincreaseastheoilfieldsenter
production.Currentlythegovernmenttakesabout21%oftheprofits
fromoilproduction,aboveandbeyondcorporateincometaxes.This
meansthatunliketheSWFsincountrieswhoseassetsgrewrapidly
becauseofoilpriceappreciation,theBrazilianSWFwillincrease
graduallyasproductioncapacityisadded.AstheTupifieldsarenot
expectedtobeinfullproductionuntil2020,thereremainsalengthy
periodduringwhichtheFSBwillgrowslowly.However,giventhe
globalsupplyconstraintsandBrazilianfieldscomingintoproduction
assomeolderfieldswinddown,theFSBalsostandstobenefit
frompriceappreciationandhigherproductionlevelsfromongoing
discoveries.
Unlikemostothercountrieswithsovereignwealthfunds,Brazilruns
currentaccountdeficitsnotprojectedtoimproveinthenextfew
years.IMFestimatesindicatetheywilldosoforatleastthenext
fouryears,bringingintoquestionBraziliansuitabilityforasovereign
wealthfund.Coupledwiththeirrelianceonmoreexpensive
importedrefinedoilwhichexacerbatestheircurrentaccountdeficit
andthetimehorizonpriortolargescaleexportproduction,this
shouldcauseconcernaboutwhetherthesovereignfundiscoming
beforethewealth.
Chart 29
30
20
10
0
-10
-20
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
Brazil Norway Russia Saudi Arabia United Arab Emirates Estimate
Current accounts of major sovereign wealth fund countries
Source: IMF, World Economic Forum, 2012.
6. Sunkentreasure:Brazil,deepwateroil,andBrazil’ssovereignwealthfund
Sovereign wealth funds 2012Sunken treasure: Brazil, deepwater oil, and Brazil’s sovereign wealth fund74
51WallStreetJournal,2010andThomson,2007.52JonathanWheatley,TherisingBRL:Brazil’ssovereigndebt,sorry,wealthfundtotherescue,FinancialTimes,September21,2010;verhttp://blogs.ft.com/beyond-brics/2010/09/21/the-rising-brl-brazil%E2%80%99s-sovereign-debt-sorry-wealth-fund-to-the-rescue/.53Bain&Co,2009,“OilandGasIndustrialDevelopmentandProductionChaininBrazil”,SaoPaulo.54ThiswasfirstdemonstratedtheoreticallyinGintschel,A.,&Scherer,B.(2008).Optimalassetallocationforsovereignwealthfunds.JournalofAssetManagement,9,215–238andthenempiricallyinBalding,C.andYao,Y.,(2011).PortfolioAllocationforSovereignWealthFundsintheShadowofCommodityBasedNationalWealth.InternationalFinanceReview.12,293-312.
FutureexcessoilrevenuewillaccrueintheFSBimprovingaccessto
capitalavailableduringdownturnsinthebusinessoroilpricecycle.
TheFSBshouldhaveaclear,non-politicizedinvestmentmandate.
FSBfundreturnshavethespecificallypoliticalpurposetoreduce
economicdownturns.ResearchonSWFfindsapoortrackrecord
ofreducingmacroeconomicvolatilityduetooilpricefluctuations.
SWFhowevercanassistatsmoothingoutpubicconsumptionover
thebusinesscyclewiththeexistenceofstrongandtransparent
limitstoaccessingfundcapitalremovingpoliticaltemptations.
However,withtheFinanceMinister,PlanningMinister,andcentral
bankpresidentassolemembersoftheadvisoryboard,theFSBcan
beexpectedtoplayaquasipolicyrolemorethanothersovereign
wealthfunds.Forexample,oneinvestmentstrategyopentothe
FSBisthepurchaseofUnitedStatesdollarsinthelocalmarketto
preventtheBrazilianrealappreciation51.ThecounciloftheFSB
hasmadestatementsquestionableforacountryrunningacurrent
accountdeficitsuchas“therearenolimitsforthefundtobuy
foreignexchange”and“theinvestmentswillnotaffectthebudget,
sincethesearefundsofNationalTreasuryanddonotconstitute
publicspending”52.Thepublicownershipandpoliticaloversight
belietheseassertionstothecontrarybutevenmoreworryingisthe
lackofunderstandingofwhatcausesoildependenteconomiesto
stagnateandtheimportanceforfiscalrestraint.TheFSBneedsto
resisttheurgetooperateasacurrencycontroloperationorengage
inprofligatespending,whileworkingtobalancethedestabilizing
effectsoftheoilboom.
Oilrevenuesshouldbemanagedunderclearrules,inorder,
amongotherthings,topreventpoliticalinterferenceandprovide
budgetarytransparency.Forinstance,Norwayimplicitlylinks
fundcapitalwithdrawalsandpublicbudgetgrowthtothenon-
oileconomybylimitingthegovernmentdeficitto4%.Thisboth
limitswithdrawalsoffundcapitalandlinksgrowthinthepublic
budgettothenon-oileconomyratherthanthemorevolatileglobal
priceofoil.Conversely,inRussiawhicheschewedtheexpenditure
constraintsandrestraintsonfundcapitalwithdrawals,since2006
publicspendinghasgrownatanannualizedrateof18%andrisen
from31%ofGDPto38%.Brazilwouldbewisetoplacestrictand
transparentlimitingrulesonpublicspendinglinkedtothenon-oil
economyandrulesaboutcapitalwithdrawalsfromtheFSBtolimit
politicallymotivatedandwastefulspending.Regularspendingbythe
FSBshouldbelinkedtogrowthinthenon-oileconomytoreduceoil
dependencyandunsustainablegrowthinpublicspending.
ManyoilproducerslikeSaudiArabiaandtheUAE,asrelativelysmall
countries,maintainde factodollarizedeconomies.Brazilistoolarge
todothesame,butalsowillwanttopreventcurrencyappreciation
thatresultsfromsustainedsurpluses.Buyingforeigndenominated
assetswithSWFcapitalwouldsterilizecurrencyappreciation,
andisnotastroublingasthecurrentpolicyofpurchasingforeign
reserveswithdebttodeflatethereal.Additionally,thestatedpolicy
ofpreferringfixedincomeandcurrencypurchaseswillhelpact
asabuffertolargefinancialchangesthroughincreasedexports.
TheprimaryriskoftheBrazilianstrategystemsfromitsincreased
dependencyonoilexportsasamacroeconomicstrategy.Data
indicatestheeconomymaybeheadingthatway,asthecorrelation
betweenBrazilianGDPpercentgrowthandoilpricesthrough2006
wasmerely7%,butroseto20%inthe2007-2012timeperiod.Even
so,theBrazilianeconomyisfarmorediversifiedthanthatofother
countrieswithcommodity-basedSWFs,whichwillhelpdiffusethis
risk53.UsingFSBcapitaltopurchaseforeigndenominatedassets
sterilizinganystructuralsurpluswilllimitappreciationpressureson
therealandencouragenon-oilexportgrowth.Whilegovernments
andcentralbankhaveapoorrecordofcurrencypricetargeting,
usingFSBcapitaltopurchaseforeigncurrencyassetswillimplicitly
limitappreciationpressures.
TheFSBislimitedlegallybythereturnsitmustearnwithboth
overseasanddomesticallybeingpeggedtoLIBORandtheBrazilian
LongTermInterestRate.IfBrazilianinterestratesremainas
relativelyhighastheyarenow,earningthisratewillbedifficulton
internationalmarketswithouttakingonanunacceptableamount
ofrisk.Itremainstobeseenhowthiswilloperateinpractice,
specificallywithregardstoanyequityinvestments.AnidealBrazilian
SWFwouldacttohedgecommoditypriceandvolatilityriskand
minimizeliquidityrisk.Asanoilexporterthatmightexperience
currencyappreciationdependingonthesizeofthesurplus,the
Brazilianswouldbewelladvisedtoallocateahigherpercentageof
theirportfoliotohighcreditqualityinternationalfixedincome.As
hasbeendemonstratedtheoreticallyandempirically,aportfolio
heavyinhighcreditqualitymajorcurrencyfixedincomeassets
willactasanimplicithedgeagainstoilpricevolatility,while
internationalequitieswouldkeepportfoliovolatilityhigh54.A
certainamountofhedginginthefuturescommoditymarkets
willlimitcurrencyriskandsmooththehighlevelsofvolatility
associatedwithoilprices.TheBrazilianSWFneedstomaintainhigh
qualityliquidinvestments.Thepurposeofthesefundsistoreduce
Sovereign wealth funds 2012Sunken treasure: Brazil, deepwater oil,
and Brazil’s sovereign wealth fund75
publicexpenditurevolatilitysmoothinggovernmentrevenues
andmacroeconomicvolatilitywhenoilpricesdrop.Itdefeatsthe
purposeofthefundtoinvestinotherhighrisk,highvolatility
investmentstypicallyhighlycorrelatedwithoilpricesandtheglobal
macroeconomicenvironment.
conclusion
Brazilsuffersthegreatestofcursestryingtomanageawindfallof
wealth.Inordertoavoidbecominganothercountryinthelistof
stagnantoildependenteconomiesandbenefitlong-termfromtheir
oilwindfall,Brazilmustrestraintheurgetospendonunsustainable
socialspendingmisguidedpoliticalmotivatedcurrency
manipulationattemptsorinvestments.Countriesthatdependon
oilrentstoincreasepublicspendingormaintainstabilitysuffer
significantlongtermdeclinesintheireconomies.Wehaveidentified
anumberoffactorsthatcouldcausesignificantproblemsinthe
prudentmanagementofBrazil’soilwindfall.First,duetostructural
factorswithintheBrazilianeconomy,theexpectedgrowthinoil
productionwithoutproperpolicymayactuallyworsentheBrazilian
currentaccountdeficit.Second,giventhelackofastructuralcurrent
accountsurplusandlengthytimeframeforproductionincreases,
theexpectedwealthmaynotmaterializeformanyyears.Third,
giventheovertlypoliticalnatureoftheFSB,itsmanagement,policy
pronouncements,andoversight,Brazilwouldbewellservedto
placestrictandtransparentlimitsonitsinvestmentmandateand
regulationsforfundcapitalwithdrawals.Economichistoryisreplete
withexamplesofcountriesthatsufferedfromnaturalresource
windfallsandBrazilwouldbewisetolimititsrelianceontheoil
extractionindustryorthetemporarywealthitbrings.
Ignacio Briones
International Finance Coordinator, Ministry of Finance, Chile
Francisco Vergara
Head of the Sovereign Wealth Funds Unit, Ministry of Finance, Chile
Principal factors justifying the existence of Chile’s sovereign wealth funds
Sovereign wealth funds 2012Principal factors justifying the existence
of Chile’s sovereign wealth funds 77
Sovereign wealth funds 2012Principal factors justifying the existence of Chile’s sovereign wealth funds78
7. PrincipalfactorsjustifyingtheexistenceofChile’ssovereignwealthfunds
7. prIncIpal FactorS JuStIFyIng thE ExIStEncE oF chIlE’S SoVErEIgn wEalth FunDS
Introduction
Chilehastwosovereignwealthfunds,theFEES(Fondo de
Estabilización Económica y SocialorEconomicandSocial
StabilisationFund)andtheFRP(Fondo de Reserva de Pensionesor
PensionReserveFund).Theyareusedtosavetheresourcesderiving
fromtheapplicationofthestructuralbalancedbudgetrulewhich
cameintoforceatthebeginningofthepreviousdecade.Thetwo
fundshavedifferentobjectives.InthecaseoftheFRP,theobjectiveis
tocontributetothefinancingoffuturefiscalobligationsforpension
payments.InthecaseoftheFEES,theobjectiveistoaccumulate
resourcestofinancefiscaldeficitsoramortisepublicdebt.Attheend
ofJanuary2012,theFEEShadassetsof$14.786billionandtheFRP
hadassetsof$5.760billion.
Severalfactorshavejustifiedtheexistenceofthesesovereignwealth
fundsinChile.Possiblythemainfactorhasbeenthesuccessof
fiscalpolicythatenabledChiletofacethefinancialandeconomic
crisisof2008-2009betterthanmanydevelopedcountries.This
isparticularlytrueoftheFEES,giventhatasignificantpartofits
resourceswereusedtocushiontheimpactofthecrisis.Thiswas
accompaniedbyinvestmentpoliciesthatweredesignedtobe
consistentwiththeobjectivesofthefundsandwhichproduced
goodresults,andallthiswasfurtherreinforcedbysolidinstitutional
foundationswhichmadeitpossibletoadministerthemwithaview
tothelongtermandtoresistanypoliticalpressurestheremight
havebeenastohowtousetheresourcesandhowtoinvestthe
funds.Finally,Chile’sactiveparticipationininternationalinitiatives
toimproveitsadministrativepracticesandtransparencyplaced
Chile’ssovereignwealthfundsamongthemosttransparentinthe
world,whichalsohelpedtoendorsetheminthemindoftheChilean
andworldpublic.Wewillnowgoontodiscusseachofthesefactors
ingreaterdetail.
the success of fiscal policy
Chile’sfiscalpolicyanditssovereignwealthfundsarereputational
assets.Chile’sfiscalpolicyoverthecourseofthepastdecade,and
itssovereignwealthfunds,areconsideredsuccessfulbothnationally
andinternationally.Athome,theirprestigeledtothecross-
sectionalsupportofbroadsectorsofthecountry.Internationally,
theyenabledChiletoestablishitselfasabenchmarkformany
countriesatdifferentlevelsofdevelopment.Chilehasbenefited
considerablyfromitsreputationinthisregard.Oneofthemost
importantbenefitstothecountryhasbeenitsabilitytoreducethe
volatilityoffiscalspendingandoftheeconomyasawhole,increase
publicsavingsinexpansivecycles,andreduceriskperceptionsof
theChileaneconomy.Ithasalsoenabledittoreduceinterestrate
volatilityandhashelpedinmaintainingamorecompetitiveandless
volatilerealexchangerate,whichinturnenabledittosafeguard
theexportsector’scompetitivenessinspiteoftheincreasein
thepriceofcopperoverthesepastfewyears55.Inthissectionwe
describethemaincharacteristicsofChileanfiscalpolicyandhowthe
sovereignwealthfundsrelatetothis,andweexplainsomeofthe
abovementionedbenefitsinmoredetail.
Chile’sfiscalpolicyisbasedonarulethattargetsstructural
budgetbalance.Therule’saimistoestablishalevelofannual
fiscalexpenditurethatisinkeepingwiththecentralgovernment’s
structuralrevenues.Bymeansofthisrule,fiscalexpenditureis
insulatedfromcyclicalfluctuationsineconomicactivity,thepriceof
copperandotherfactorsthatdetermineeffectivefiscalrevenues.
ThisisparticularlyimportantforChile,wherethevolatilityofitsfiscal
revenuesdependsinlargepartonthepriceofcopper(seeChart
30).
55LarraínF.,CostaR.,CerdaR.,VillenaM.andTomaselliA.(2011).“UnapolíticafiscaldebalanceestructuraldesegundageneraciónparaChile”(‘asecond-generationfiscalpolicyofstructuralbalanceforChile’),StudiesinPublicFinance,BudgetDirectorate,MinistryofFinance,Chile(page7).
Sovereign wealth funds 2012Principal factors justifying the existence
of Chile’s sovereign wealth funds79
Theruleonstructurallybalancedbudgetisexplicitlycountercyclical.
Thismeanssavingsaresetasideintimesofsurplus,thusavoiding
drasticfiscalcutbacksinperiodsofadverseeconomicconditions.
Atthesametimeitsupportsthemonetarypolicyinanatural
way,sinceitsavessurplusfiscalrevenueswhenmonetarypolicy
isrestrictiveandusesthemwhenitisexpansive.Inthisway,and
throughthispolicy,thevolatilityoffiscalspendingandGDPhas
beensignificantlyreduced.
Itisimportanttostressthatstructuralrevenuesareestimatedusing
thelong-termtrendsofthemainvariablesthatinfluencethem.
Thesevariablesaredeterminedbyindependentexperts,affording
continuityandcredibilitytothestructuralbalancedbudgetrule.
Thestructuralbalancedbudgetrulewasfirstappliedtothebudget
for2001,andhassincebeenadjustedinlightofexperiencegained
andtheinternationaleconomicsituation.Themethodusedto
calculatestructuralbalancehasundergonecontinuousfine-tuning,
mainlyassociatedwiththecyclicaladjustmentsthathavetobe
consideredinordertoobtainstructuralrevenues.Forexamplethe
latestchanges,introducedinthe2011budget,involvedeliminating
adjustmentsfortransitionaltaxmeasureswithlegalexpirydates,
cyclicaladjustmentstothe“otherrevenue”headingandcyclical
adjustmentstointerestincomeontheTreasury’sfinancialassets.
ThesechangesweremadebasedonastudyentrustedtoanAdvisory
CommitteebytheMinistryofFinance.Thestructuralbalancetarget
hasalsochangedovertime.In2001,thetargetwasinitiallysetat
1%ofGDP.Subsequently,inthe2008budget,itwasloweredto
0.5%ofGDPinviewofthesubstantialresourcesbeingaccumulated
inthesovereignwealthfunds.Later,in2009,theexantetargetwas
cutbacktozero,tofacethecrisisexistingatthetime.Finally,asa
Chart 30
0
1
2
3
4
0
5
10
15
20
Fiscal revenues from CODELCO
Price of copper
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
(US$ / lb)
(Total fiscal revenues )
Fiscal revenues from copper (CODELCO) as a percentage of total fiscal revenues
Source: Budget Directorate of the Chilean Government.
7. PrincipalfactorsjustifyingtheexistenceofChile’ssovereignwealthfunds
Sovereign wealth funds 2012Principal factors justifying the existence of Chile’s sovereign wealth funds80
resultofthechangeinmethodpreviouslyreferredto,thetargetfor
2009waschangedtoastructuraldeficitof3%,andsincethenithas
beenadjustedeachyeartoconvergetoastructuraldeficitof1%in
2014.
Theinstitutionalarrangementsforfiscalpolicyhavealsobeen
enhancedovertheyears.Atfirst,thestructuralbalancedbudgetrule
reliedonthepoliticalwillofthegovernmentatthetime.However,
asitbecamemoreandmoreacceptedamongthecountry’svarious
sectors,itbecamepossibletosetformalrulesforaccumulatingthe
savingsthatwerebeinggenerated.Thusthesecondhalfof2006
sawthepromulgationofLawNo.20,128,theFiscalResponsibility
Law,whichestablishedtherulesandtheinstitutionalframework
fortheaccumulation,administrationandoperationoffiscal
savings.TheLawcreatedtheFRPandempoweredthePresident
oftheRepublictocreatetheFEES,whichwasofficiallyestablished
inFebruary2007.ThesameLawobligeseachgovernmentto
announce,initsfirstyearinoffice,whatitsobjectivewillbeas
regardsthestructurallybalancebudgetrule.Additionally,in2011,
theMinistryofFinanceannouncedthecreationofaFiscalCouncil,
themainroleofwhichwillbetoensureindependenceinthe
estimationofthestructuralvariablesandtovalidatetheestimates
ofstructuralbalance56.
Theresourcesderivingfromapplicationofthestructuralbalance
ruleareaccumulatedinthesovereignwealthfunds.Therulesfor
accumulation,illustratedinChart31,wereestablishedbytheFiscal
ResponsibilityLaw.TheFRPisincreasedeachyearbyaminimum
amountequivalentto0.2%ofthepreviousyear’sGDP.Ifthe
effectivefiscalsurplusismorethan0.2%ofGDP,theFRPreceivesa
contributionequivalenttothissurplus,uptoamaximumof0.5%of
GDP.TheFEESisincreasedeachyearbythebalance(onlyifpositive)
resultingfromsubtractingthecontributiontotheFRPfromthe
effectivefiscalsurplus,notcountingamortisationofpublicdebt
oranyadvancecontributionsmadetothefund.Asattheendof
January2012,totalcontributionsmadetotheFEESstoodat$21.162
billionandthosemadetotheFRPat$3.867billion.
Thefiscalpolicyandtheresourcessavedinthesovereignwealth
fundshaveenabledChiletoshowoneofthebestfiscalpositions
intheworld.Thankstothestructuralbalancerule,since2006
Chilehashadanetcreditorposition,whichasofSeptember2011
amountedto10.5%ofGDP(seeChart32).ThishaspositionedChile
favourablyrelativetomanydevelopedcountries(seeChart33).
56TheFiscalCouncilwilltakepartinmeetingsoftheconsultativecommitteesonTrendGDPandReferencePriceofCopper,andwillverifytheestimatesofthestructuralvariables;itwillbesupportedbyaTechnicalSecretariatbasedintheBudgetDirectorate,forthevalidationoftheexpostcalculationsofstructuralbalance,andwillforwardanychangesinmethodproposedbytheauthoritytoatechnicalbodyfordiscussion.ItmayalsobecalleduponbytheMinisterofFinancetostudyspecificmattersrelatingtostructuralbalance.
Chart 31
-0.50
0,5
1
1,5
2,0
2,5
3,0
0 0.5 1 1.5 2 2.5 3.0
FRP FEES(as percentage of GDP)
CON
TRIB
UTI
ON
S
EFFECTIVE FISCAL RESULT
Contribution rules for Chile’s sovereign wealth funds
Source: Ministry of Finance, Government of Chile, 2012.
Sovereign wealth funds 2012Principal factors justifying the existence
of Chile’s sovereign wealth funds81
(As percentage of GDP)
0
-10
-20
10
20
30
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Gross Net
Chart 32
Central Government Debt
Source: International Monetary Fund and Ministry of Finance, Government of Chile, 2012.
Chart 33
(As percentage of GDP)
-40
-20
0
20
40
60
80
100
120
140
-14.6
SWEDEN CHILE DENMARK CZECH REP. POLAND THE NETHERLANDS SPAIN AUSTRIA GERMANY USA UK IRELAND HUNGARY FRANCE PORTUGAL BELGIUM ITALY JAPAN GREECE
-7.5
0.94.8
21.427.5
48.8 49.853.8 64.8
69.4 69.473.4 74.6
79.1 81.5
99.6
117.5
142.0
Net Central Government Debt, 2010
Source: International Monetary Fund and Ministry of Finance, Government of Chile.
7. PrincipalfactorsjustifyingtheexistenceofChile’ssovereignwealthfunds
Sovereign wealth funds 2012Principal factors justifying the existence of Chile’s sovereign wealth funds82
Inturn,theresourcessavedintheFEESenabledChiletofacethe
financialandeconomiccrisisof2008-2009betterthanmany
developedcountries.Consistentwiththepurposeforwhichthefund
wascreated,asubstantialportionoftheresourcesoftheFEESwas
withdrawnduring2009tofinancea$4billionfiscalstimulusplan
andtofinancetheeffectivebudgetdeficitcausedbythefallintax
revenueandinrevenuesassociatedwithcoppermining.Forthe
latter,anadditional$4billionwerewithdrawnstartinginthethird
quarterofthatyear.Additionally,$441millionfromtheFEESwere
usedtoamortisepublicdebt,and$837millionwereusedtomake
thecapitalcontributiontotheFRP.Thustotalwithdrawalsfromthe
FEESin2009amountedto$9.28billion.Thiscanbeseenreflected
inthedecreaseinthecreditorpositioninChart32.
Theprudentmacroeconomicmanagementresultingfromthefiscal
policyandthecapacityforeconomicandfinancialrecoveryhave
beenreflectedincontinualupgradesinChile’screditratings.For
exampleinJune2010Moody’sraisedthegovernment’sdebtrating
fromA1toAa3,andinFebruary2011FitchraiseditsratingfromAto
A+inforeigncurrencyandfromA+toAA-inlocalcurrency.
ThishasalsoenabledChiletosuccessfullyaccessforeigncapital
markets.In2010,afterasix-yearabsence,theChileangovernment
returnedtotheinternationalcapitalmarketswithtwobondissues:
oneinUSdollars,for$1billionand,forthefirsttimeinChile’s
history,anotherdenominatedinpesos(CLP),foranamount
equivalenttoapproximately$520million.InthistransactionChile
obtaineditsbesteverborrowingconditions,butthesewereonce
againbetteredbyfurtherissueslaterthatyear,oneofwhichactually
achievedthelowestrateeverobtainedbyanyLatinAmerican
country.
Additionally,thereareotherbenefitsthatstemfromthefiscalpolicy.
Forexample,therealexchangeratehasbeenkeptcompetitive,
giventhatthemoneysavedinthesovereignwealthfundsisinvested
abroad.Inthiswaytheeffectthatfiscalrevenuefromcopperexports
mighthaveonotherexportsectors,especiallyinthepastfewyears,
hasbeenkepttoaminimum.Also,giventhatthefiscalpolicyis
countercyclical,itindirectlysupportsthemonetarypolicypursued
bytheCentralBank,whichhasledtoareductionininterestrate
volatility.
Investment policy consistent with fund objectives
Theinvestmentpoliciesofthesovereignwealthfundshavebeendefinedinconsonancewiththepurposesforwhichtheywerecreated,andrelymainlyonthecharacteristicsoftheirunderlying“liabilities”.Asisexplainedinthissection,theinvestmentpolicydesignedfortheFEESisconsistentwithitsobjectiveofaccumulatingresourcestofinancefiscaldeficitsoramortisepublicdebt.FortheFRP,thebeginningof2012sawtheimplementationofapolicythatismoreinlinewithitsobjectiveofcontributingtothefinancingoffuturefiscalobligationsforpensionpayments.Wenowgoontodescribethemaincharacteristicsofbothfunds’investmentpoliciesandtopresentasummaryoftheresultsobtained.
ThemainobjectiveoftheFEES’investmentpolicyistomaximisethecumulativevalueofthefundsoaspartlytocoverthecyclicalshortfallsinfiscalrevenues,subjecttoalowlevelofrisk.Thisriskaversionisreflectedintheselectionofahighlyliquidinvestmentportfoliowithlowcreditriskandlowvolatility,allowingreadyaccesstotheresourceswhentheyareneededtofinancedeficitsandavoidingsignificantlossesinthevalueofthefund.Specifically,thepolicy’sstrategicassetcompositionis30%moneymarketinstruments,66.5%sovereignbondsand3.5%inflation-indexedsovereignbonds,withacurrencycompositionof50%indollars,40%ineurosand10%inyen.Thusitspolicyistoinvestinfixedincomesecuritiesinreservecurrencies,whichtypicallyholdupwellintimesofcrisis.Thisnotonlyallowsthecumulativevalueoftheseresources,measuredinforeigncurrency,tobemaximised,butalsofacilitatestheirconversionintopesos(inwhichthebulkoffiscalspendingtakesplace)attimeswhenitismostnecessarytomakeuseoftheseresources.
TheFRP’sinvestmentobjectiveistogenerateresourcestocontributetothefinancingoffiscalobligationsinrespectofpensions.Thespecificobjectivesetistomaximisetheexpectedreturn,subjecttoarisktoleranceestablishedasa95%probabilitythatthefundwillnotsuffer,inanyoneyear,lossesinexcessof10%ofitsvalueindollars.Theinvestmenthorizonisconsideredtobemediumtolongterm,inviewofthesizeandtimingoftheobligationstobefinanced.Atthebeginningof2012astartwasmadeonimplementinganinvestmentpolicymoreinlinewithitsobjectives,whichestablishesaportfoliocompositionof48%innominalsovereignbonds,17%ininflation-indexedsovereignbonds,15%inequitiesand20%incorporatebonds.ItisimportanttomentionthatallresourcesareinvestedoutsideChile.Inthelongterm,thisstrategyisexpectedtoproducebetterresultsthanthoseobtainedwiththepolicyinforceuntiltheendof2011.IfwecomparethenewinvestmentpolicywiththoseofChile’spensionfundadministrators(AFP),asfarasassetclassesandriskprofileareconcernedtheFRPwouldbeinvestedinaverysimilarwaytoapensionfund,whichwouldbemoreconsistentwithitsinvestmentobjectives57.
57InChilethe“AFund”isthemostaggressiveandthe“EFund”isthemostconservative.
Theimportanceofconsistencybetweentheinvestmentpolicyand
thefunds’objectiveshasbeenclearlyshown,especiallyinthecase
oftheFEES.Duringthecrisisof2008-2009thisfund’sperformance
benefitedconsiderablyfrombeinginvestedinfixedincome
securitiesinreservecurrencies.Thisaffordedprotectiontothe
fund’sresourcesjustatthetimewhenitwasnecessarytowithdraw
themtofinancethedeficit.Thisperformancewasincontrastto
thoseofothersovereignwealthfundsaroundtheworld,which
sufferedconsiderablelossesatthattime.InthecaseoftheFRP,
theinvestmentpolicyinplacefrominceptionuntiltheendof2011
wassimilartothatoftheFEES,mainlybecausethecrisisdelayed
implementationofthenewpolicy.Aspreviouslyexplained,from
2012on,thefundwillhaveapolicymoreinconsonancewithits
long-termobjective,whichistocontributetowardsthefinancingof
futurefiscalobligationsrelatingtopensions.InTable17wepresenta
summaryofreturnsonthefundsasattheendofJanuary2012.
Increasedemphasishasbeenplacedonthepassiveaspectofthe
sovereignwealthfunds,avoidinganykindoftacticaldeviations.
Thiswasmadeclearforexamplewhenin2010,amongmuch
speculationastowhatwouldhappeniftheUSCongressdidnot
approvetheraisingofthegovernment’sdebtceiling,andthe
possibledowngradingofitscreditrating,Chile’sFinanceCommittee,
incoordinationwiththeMinistryofFinance,evaluatedthesituation
andrecommendedleavingtheinvestmentpolicyunchanged,which
isconsistentwiththelong-termviewneededtodefineinvestment
policies.
Solidly institutional
TheinstitutionalstructureofChile’ssovereignwealthfundshas
helpedfulfilthepurposesforwhichthefundswerecreated.Thishas
beenachievedmainlybymeansof:(i)alegalframeworkensuring
clearrulesforcontributionstoandwithdrawalsfromthefunds;
(ii)anorganisationalstructureensuringappropriateseparation
ofrolesandresponsibilities,whichinturnfacilitatesreporting
andoperationalindependenceand(iii)aprocessforestablishing
investmentpoliciesthatensurestheirconsistencywiththefunds’
aims.Wenowgoontodescribethesefactorsindetailandtoexplain
howtheinstitutionalstructurehasmadeitpossibleforthefundsto
beinsulatedfrompoliticalpressuresandhowitinturnprotectsthe
MinisterofFinancefromcriticismsthatcouldarisewhenanyoftheir
investmentssufferlosses.
Therulesoncontributionsandwithdrawalsaresetoutinthe
legislationapplyingtothefunds.Asalreadyexplained,therules
oncontributionsareclearlydefinedintheFiscalResponsibilityLaw.
TheirusesareestablishedinthatsameLaw,inDecreeLawNo.1of
2006oftheMinistryofFinanceandinthe2008PensionsLaw58.
Thislegalframeworkhasenabledthesovereignwealthfundstobe
protectedfromanypoliticalpressurethatmightbeexertedwhen
examiningfinancingalternativesforfacingnewpriorities.Thiswas
madeclearforexampleintheaftermathofthe2010earthquake,
whenallthefinancingforthereconstructioneffortcamefrom
sourcesotherthanthesovereignwealthfunds.Weshouldpoint
outthatanyuseofthefundsthatisnotpermittedwithinthe
abovementionedframeworkrequirestheapprovalofCongress.
Themainentitiesformingpartoftheorganisationalstructureofthe
sovereignwealthfundsareestablishedintheFiscalResponsibility
Law.Thislawstipulatesthatthefunds,whichareownedbythe
ChileanTreasury,aretobemanagedinaccountsthatareseparated
fromtheownershipoftheGeneralTreasuryoftheRepublic.Atthe
sametimeitassignstheMinisterofFinancetheresponsibilityof
decidingontheirdirectorsandinvestmentpolicies.Thislawalso
envisagestheMinisterofFinancerelyingontheadviceofaFinance
Committeeinestablishinginvestmentpolicies.ThisCommittee
wassetupin2007.Furthermore,itgrantstheMinisterpowerto
delegatetheoperationalmanagementofthefunds’resources
Sovereign wealth funds 2012Principal factors justifying the existence
of Chile’s sovereign wealth funds83
Table17
ProfitabilityofChile’ssovereignwealth(inpercentages)
FEES 0.72% -1.25% 0.72% 3.57% 3.97% 5.13%
FRP 1.18% -0.80% 1.18% 4.04% 4.07% 5.17%
Past 3 FromReturns Past 3 Past 12 years launchin dollars January months YTD months (annualised) (annualised)
58Accordingtothislegalframework,inthecaseoftheFEES,itsresourcescanbeusedatanytimetocomplementthefiscalrevenueneededtofinanceauthorisedpublicspendingintheeventofafiscaldeficit.Theymayalsobeusedfortheregularorextraordinaryamortisationofpublicdebt(includingBonosdeReconocimiento,formerpensionsystembonds)andtofinancetheannualcontributiontotheFRPwhentheMinisterofFinancesodecides.InthecaseoftheFRP,atpresentanduntil2015onlytheincomeonthefund’sinvestmentsfromthepreviousyearmaybewithdrawntocomplementthefinancingofthefiscalobligationsderivingfromthestateguaranteeofthebasicoldageanddisabilitypensions,aswellastheforecastcontributionstothesepensions.From2016onitwillbepossibletowithdrawboththecapitalandthecumulativegains.Itisimportanttomentionthattheannualamountofresourceswithdrawnfromthisfundmustnotexceedonethirdofthedifferencebetweentheexpenditureoftheyearinquestiononforecastobligationsandtheforecastexpenditurefor2008,adjustedforinflation.
7. PrincipalfactorsjustifyingtheexistenceofChile’ssovereignwealthfunds
Sovereign wealth funds 2012Principal factors justifying the existence of Chile’s sovereign wealth funds84
toChile’sCentralBank59,whichhedidfromtheoutset,inMarch
2007.Itisimportanttopointoutthat,untiltheendof2011,the
CentralBankwassolelyresponsibleforinvestingtheresourcesof
bothfunds.However,from2012on,asaresultofanewinvestment
policyforFRP,theCentralBankhasappointedexternalmanagers
toinvestthatfund’sequityandcorporatebondportfolios.Lastly,
thecustodianperformstheworknormallyassociatedwiththis
roleandalsocarriesoutcertainmiddle-officefunctionswhichare
complementedbyMinistryofFinancepersonnel(seeChart34).
Thefunds’organisationalstructurelendsitselftoeffectiveoperation
andappropriatereporting.PolicyissetbytheMinistryofFinance,
withadvicefromtheFinanceCommittee.TheCommittee’smembers
areindependentoftheMinistryofFinance.TheMinistryissues
investmentguidelineswhichdefineinvestmentobjectivesandlimits.
TheseguidelinesareusedbytheCentralBank,and,inthecaseof
theFRP60,itsdelegatedexternaladministrators,ininvestingthe
fund’sassets.ThissystemhasmadeitpossibletousetheCentral
Bank’stechnicalknow-howanditsoperationalinfrastructure
developedtoadministerthecountry’sforeignreserves.Italso
ensuresthatallinvestmentsareexecutedusingpurelyfinancial
criteria.Monitoringofcompliancewithinvestmentguidelinesonthe
partoftheCentralBankanditsexternaladministratorsiscarriedout
byanindependententity,theCustodian.TheFinanceCommittee
inturnissuesperiodicreportsonitsactivities.TheMinistryof
Financeissuesmonthly,quarterlyandannualreportsonthestatus
ofthesovereignwealthfunds.Additionally,theTreasury,whichis
responsibleforaccountingandfordrawingupthefunds’financial
statements,publishesinformationonthemonitswebsite.Lastly,the
ControllerGeneral’sOffice,anautonomousbody,hascompetence
toauditthesovereignwealthfunds.
Theinvestmentpolicyofthesovereignwealthfundsisbased
ontechnicalaspects.Startingoutfromparameterssetbythe
MinistryofFinance,suchasrisktoleranceandtargetreturns,and
bearinginmindthefunds’objectives,theFinanceCommittee
issuesrecommendationsonhowtoinvestthefunds.Sofarallthe
Committee’srecommendationshavebeenacceptedbytheFinance
Ministers.Furthermore,thefundsinvestpassively,inaccordance
withthebenchmarksdefinedineachpolicy.Thishasmadeiteasier
tokeepalong-termperspectiveandtoavoidanytemptationto
deviatefromtheguidelineswhencertainissuersrunintoshort-term
economicdifficulties.
Thisstructureprotectsthefunds’investmentsfrompolitical
pressures,andtheMinisterofFinancefromcriticismsthatarebound
toariseatnegativetimesintheinvestmentcycle.Maintaining
aFinanceCommittee,independentoftheMinistryofFinance,
composedofhighlyreputedexpertsandprimarilyresponsiblefor
designingtheinvestmentpolicies,hasprovidedcontinuitytothe
sovereignwealthfunds’investment,insulatingthemfromthe
shiftingprioritiesofthegovernmentoftheday.Italsoenablesthe
MinisterofFinancetosharewiththeCommittee,atleastfroma
reputationalpointofview,expectedshort-termnegativeresults
inaccordancewiththerisktolerancedefined.Thisinturnenables
theinvestmentstobekeptinlinewiththeirinvestmenthorizon,
avoidinghurried,short-termdecisionsthatcouldhavesignificant
financialconsequences.
59 y 60ForthenewpolicyoftheFRP,theCentralBankhasappointeddelegatedadministratorsforthenewassetclasses.TheFiscalResponsibilityLawalsoallowstheMinisterofFinancetodelegatetheadministrationdirectlyuponexternaladministratorsortoadministeritdirectly.
Chart 34
Institutional structure of Chile’s sovereign wealth funds
MINISTRY OF FINANCE
InvestmentGuidelines
EXECUTIONCENTRAL BANK
FINANCE COMMITTEE
CUSTODIAN
DEFINING THE INVESTMENT POLICY
Sovereign wealth funds 2012Principal factors justifying the existence
of Chile’s sovereign wealth funds85
61http://www.hacienda.cl/funds-soberanos.html.
Santiago principles and transparency
ThecommitmentofChile’ssovereignwealthfundstotheSantiago
Principlesandtoimprovingthequantityandqualityofinformation
availableonthemhasenhancedthelegitimacyofourfundsinthe
eyesofthepublicinChileandinternationally.Wenowgoontogive
abriefdescriptionofChile’sactiveparticipationinactivitiesrelating
totheSantiagoPrinciples,theenhancementstothepublished
informationonthefundsandtheinternationalrecognitionofthese
practices.
AspartofChile’scommitmenttobestinternationalpractices,
thegovernmenthastakenanactivepartintheinternational
initiativesaimedatestablishinganoperationalframeworkfor
sovereignwealthfundsandpromotingtheirtransparency.Thiswas
demonstratedforexamplebyChile’sparticipationinthedrawingup
ofalistofprinciplesandgenerallyacceptedpractices,endorsedby
theworld’sleadingsovereignwealthfunds,which,afteraseriesof
meetings,wereagreedinSantiagodeChilein2008(theSantiago
Principles).Subsequently,ithascontinuedtoplayanactiverole
intheInternationalForumofSovereignWealthFunds,themain
vehiclefortheworld’svarioussovereignwealthfundstomeetand
sharetheirexperiencesinadministeringandimplementingthe
SantiagoPrinciples.
Chile’ssovereignwealthfundshaveimplementedanumberof
improvements,particularlyrelatingtothequalityandfrequencyof
theinformationmadeavailabletothepublic.Forexamplesince
2008anannualreporthasbeenproduced,withcomprehensive
detailsofthefunds’investments.Since2010thereturnsontheir
investmentshavebeenpublishedmonthly.Aself-assessmentof
thedegreeofcompliancewitheachoftheSantiagoPrinciples
waspublishedforthefirsttimein2011.In2012auditedfinancial
statementswillbepublishedforthefirsttime.Nearlyallthis
informationispublishedinbothSpanishandEnglishandisreadily
availableonthewebsite61.ThisispartoftheChileangovernment’s
systematicefforttoimprovetheinformationitdeliverstothepublic
bothathomeandabroad,thebetterforthemtounderstandthe
resultsobtainedfromtheirinvestment.
Theseeffortshavebeenreflectedininternationalrecognition
regardingtheleveloftransparencyofourfunds.Inparticular,since
thethirdquarterof2009,theSovereignWealthFundInstitutehas
awardedChiletopmarksinitsLinaburg-Maduelltransparencyindex,
whichmeasuresthetransparencyofthemajorsovereignwealth
funds.
conclusion
Thesuccessofthefiscalpolicy,thefunds’investmentpolicies,
theirinstitutionalframeworkandalltheeffortsmadetoimprove
theirtransparency,havehelpedtoconsolidateChileanandworld
publicopinionaboutwhetherChile’ssovereignwealthfunds
shouldbemaintained.However,challengesremain.Manyofthese
achievementswillbeputtothetestinthefuture,possiblywith
theFRP’snewinvestmentpolicywhich,unlikethatoftheFEES,
includesequitiesandcorporatebonds,andtheresultsofwhich
willbesubjecttogreatervolatilityintheshortterm.However,the
long-termviewtakenindefiningthefunds’investmentpolicy,the
institutionalframeworkdescribedabove,theiradministrationand
transparency,togetherwithanongoingpubliceducationprocess,
shouldenabletheChileanfundstocontinuetoenjoyanexcellent
reputationathomeandabroad.
Javier capapé
Researcher, ESADE Center for Global Economy and Geopolitics (ESADEgeo)
PhD Candidate, ESADE Business School
Africa and sovereign wealth funds
Sovereign wealth funds 2012 Africa and sovereign wealth funds
87
Sovereign wealth funds 2012Africa and sovereign wealth funds88
8. Africaandsovereignwealthfunds
8. aFrIca anD SoVErEIgn wEalth FunDS
In2010,duringthelastsessionofColumbiaGlobalThoughtdevoted
tosovereignwealthfunds,JamesWolfensohn,formerWorldBank
President,spokeoftheneedtotakeaccountofacontinentwhichby
2050willbehometoaquarteroftheworld’spopulation:“Thisis
notagroupthatyoucanjustforgetabout”hesaid.
Sovereignwealthfunds,stimulatedbyRobertB.Zoellick’s“One
PercentSolution”,representanopportunityandachallengefor
thecontinent.WilltheybecapableofmakinggooduseofAfrica’s
potential?.WillAfricansbecapableofgrowingwithinvestmentfrom
thefunds?.
Africahasbeforeitafundamentaldecadeinwhichtoachieve
integrationintheworldeconomy.Thefirstdecadeofthiscentury
sawAfricagrowatanaverageannualrateof5.2%intermsofreal
GDP62.China’sphenomenaleconomicgrowth,LatinAmerica’s
positivedevelopmentandtheexpectedadventofgiantIndiaand
otheremergingmarketsfromSoutheastAsia(Malaysia,Indonesia
andThailand)placeAfricainanewlyadvantageouspositioninview
ofthegrowingSouth-Southflows.
Africa’seconomyisbasedessentiallyonrawmaterials,andithas
“benefited”fromthesubstantialincreasesincommodityprices
since2009.Whilethistrendundoubtedlyhasapositiveeffecton
countriesthatexportoilandothercommodities,manyfurthersteps
needtobetakenbeforeitcanbeaffirmedthattheseincreases
reallyhaveafar-reachingandlastingimpactontheeconomy.Itwas
preciselyafallincommodityprocessthatledtotheregion’sserious
recessionafterthecrisis.Inordertoescapethisdependency,which
ispotentiallyveryharmfultoAfricaneconomiesasawhole,acrucial
factorwillbebetterdistributionoftheprofitsobtainedfromthese
naturalresources,leadingtoeconomicdiversification.
The“paradoxofabundance”thatpotentiallyaffectsmanyAfrican
countriescanbeovercomebymeansofsovereignwealthfunds,
iftheyaresetupandusedproperly.AlmosthalfofallAfrican
countries’economiesarehighlyconcentratedinexportsof
commodities(oilandminerals);exportsofcommoditiesalone
exceed25%oftotalexports63.Theappreciationofcurrenciesdueto
thisexportactivityleadstoadeteriorationinthecompetitivenessof
othersectorsoftheeconomy;thevolatilityofrevenuesfromthese
commodities,andthecorruptionassociatedwiththissourceofeasy
winnings,leadsmanycountrieswithpotentialtoseetheirgrowth
prospectsfade.
Asovereignwealthfund,ifproperlysetup,canservetoavoid
theappreciationofnationalcurrenciesbyaccumulatingforeign
currency.Moreover,aproperlydesignedcorporategovernance
systemallowsthefund’sactivitytobeinsulatedfromopportunistic
politicaldecisionsandcanlimittheabilityofthepeopleinpowerto
influencetheusetowhichtheprofitsobtainedareput64.
Sovereign wealth Funds in africa
ArecenteventinCapeTownwithsomeofAfrica’sbestknown
institutionalinvestorsmightprovideuswiththeanswerastowhere
Africansovereignwealthfundsareheaded.
Inthecourseofthelecturesandamongtheparticipants,two
apparentlyoppositeapproachestookshape.Ontheonehand,the
Westernapproachproposesa“Norwegian-style”modelthatwould
followtheguidelinesoftheGovernmentPensionFund,investallits
capitalabroadandhaveasitsultimategoalthefinancialreturnsthat
servetoincreasethatcapital.Ontheotherhand,theAfricanapproach
callsforthefundstobecomemoreinvolvedinthedomesticeconomy,
focusingondevelopmentobjectives.
AsproposedbyAshbyMonk65,wecanfindanintermediatesolution.
ThiswouldbeasimilarmodeltowhatMubadalaintheUAEorTemasek
inSingaporehavedoneinachievingadifficultbalancebetween
financialreturnsanddevelopmentcriteria.Thepoliticalauthority
wouldfirstestablishaseriesofobjectivesorareasofspecialinterestfor
development.Thefundmustthenbeleftentirelyfreetoactbasedon
exclusivelycommercialconsiderations.Inotherwordsateamofexperts
issetuptoseek,inapurelybusiness-orientedway,afinancialreturn
onkeyareasforthecountry’sdevelopment,suchasinfrastructure,
agricultureandprivateequity.Thusweproposeamixedmodelthat
couldworkinAfrica.
TheAfricanfundsarecharacterisedbyalackoftransparencyand
reputation.AccordingtoTriki(2011),thefourAfricanfunds(Botswana,
Libya,AlgeriaandNigeria)areamongthelowestrankedintermsof
acceptabilityofinvestments.Thissituationcanbeattributedtothese
countries’poorreputationforstandardsofgovernanceratherthanto
defectivemanagementofthefunds(Balding,2012).
62AfricanEconomicOutlook,2010.Availableathttp://www.africaneconomicoutlook.org/en/data-statistics/.63Atleast12sub-Saharancountries’exportsare75%concentratedinthreenaturalresourcesorfewer.64TheDirectoroftheAfricaDepartmentintheIMF,intherecentConferenceonManagementofNaturalResourcesinsub-SaharanAfrica,wonderedwhethersovereignwealthfundswerethesolutiontothisproblem.Inanycase,thisshowsthatitisessentialtoimprovetechnicalknowledgesoastobeabletoimplementthesesavingsinstrumentsinthelongterm.Seehttp://www.institutionalinvestor.com/blogarticle/2999994/Blog/Behind-the-Scenes-at-the-Timor-Leste-Petroleum-Fund.html?ArticleID=2999994&LS=EMS628994.65AshbyMonkathttp://www.institutionalinvestor.com/blogarticle/2989922/Blog/Fascinating-Roundtable-in-Cape-Town.html?ArticleID=2989922&LS=EMS621374.
66Seehttp://worldwtrade.blogspot.com.es/2012/02/la-alargada-sombra-de-sonangol-angola.html.
Sovereign wealth funds 2012Africa and sovereign wealth funds
89
Angola
TheIMFhasrecommendedthecreationofasovereignwealth
fundinAngolainordertoseparatefiscalexpenditurefromshort-
termfluctuationsinoilprices.Angoladoesnothaveanofficial
sovereignwealthfund,althoughSonangol(SociedadeNacionalde
CombustíveisdeAngola)functionsasadefactosovereignwealth
fundwithacapitalfordomesticandforeigninvestmentsofbetween
$4billionand$5billion.In2011Sonangolobtainedmorethan$33
billionfromoilsales.
Sonangolisnowaholdingcompanywithbusinessinsectorssuch
asoildistributionandrefiningaswellasanairlineandashipping
company.ThisgiantbusinessgrouphasinvestmentsinBanco
AfricanodeInvestimentos,MillenniumBPC(15%),BancoCaixaGeral
TottaAngola(25%),BancoPrivadoAtlânticoandESCOM(Espírito
SantoGroup).Itholds20%ofconstructioncompanyMota-Engil
Angola,asubsidiaryofoneofPortugal’sleadingconstruction
companies.ItfinancedtheClinicaGirassolprivatehospital,andthe
listgoeson.
In2004itsetupajointventure,ChinaSonangolInternational
Holding(CSIH),basedinHongKong.Thepurposeofthisinstitution
istoinvestinsectorslinkedtooilandgas,aswellaslarge-scale
infrastructureprojects.InAngola,itfocusesontherealestateand
infrastructuresectors66.
Table18
AfricansovereignwealthFunds
Libya NorthAfrica LibyanInvestmentAuthority(LIA) 62,9 SovereignFund 2006
Algeria NorthAfrica FonddeRegulationdesRecettes(FRR) 56,7 StabilizationFund 2000
Botswana Sub-SaharanAfrica PulaFund 5,9 StabilizationFund 1994
CEMAC Sub-SaharanAfrica FondsdeStabilisationdesRecettesBudgétaires 3,1 BankFund 2006
Mauritius Sub-SaharanAfrica MauritiusSovereignWealthFund 3 StabilizationFund 2010
Republic of the Congo Sub-SaharanAfrica FondsdeStabilisationdesRecettesBudgétaires 1,64 BankFund 2005
Nigeria Sub-SaharanAfrica NigerianSovereignInvestmentAuthority 1 SovereignFund 2011
CEMAC Sub-SaharanAfrica Fondspourlesgénérationsfutures 0,5 BankFund 2006
Gabón Sub-SaharanAfrica FondsSouveraindelaRépubliqueGabonaise 0,4 DevelopmentFund 1998
Mauritania NorthAfrica FondsNationaldesRevenusdesHydrocarbures(FNRH) 0,3 StabilizationFund 2006
Sudan Sub-SaharanAfrica OilRevenueStabilizationFund(ORSF) 0,2 StabilizationFund 2008
Equatorial Guinea Sub-SaharanAfrica Fondspourlesgénérationsfutures 0,08 BankFund 2002
Ghana Sub-SaharanAfrica GhanaStabilizationFund 0,05 StabilizationFund 2011
Ghana Sub-SaharanAfrica GhanaHeritageFund 0,01 SovereignFund 2011
São Tomé and Príncipe Sub-SaharanAfrica NationalOilAccount 0,01 SovereignFund 2004
Namibia Sub-SaharanAfrica MineralsDevelopmentFund N/A DevelopmentFund 1995
Angola Sub-SaharanAfrica ReserveFundforOil* N/A StabilizationFund N/A
Kenya Sub-SaharanAfrica KenyaSWF* N/A SovereignFund N/A
Liberia Sub-SaharanAfrica LiberiaSWF* N/A SovereignFund N/A
Mozambique Sub-SaharanAfrica MozambiqueSWF* N/A SovereignFund N/A
Namibia Sub-SaharanAfrica NamibiaSWF* N/A SovereignFund N/A
Rwanda Sub-SaharanAfrica RwandaSWF* N/A SovereignFund N/A
South Africa Sub-SaharanAfrica SouthAfricaSWF* N/A SovereignFund N/A
Tanzania NorthAfrica TanzaniaSWF* N/A Sovereignfund N/A
Tunisia Sub-SaharanAfrica TunisiaSWF* N/A Sovereignfund N/A
Uganda Sub-SaharanAfrica UgandaSWF* N/A Sovereignfund N/A
Zambia Sub-SaharanAfrica ZambiaSWF* N/A Sovereignfund N/A
Zimbabwe Sub-SaharanAfrica ZimbabweSWF* N/A Sovereignfund N/A
Country Region Fund Name AUM ($bn) Fund type Founded
Source:ESADEgeo(2012)basedonanoriginalworkofVictoriaBarbary(mimeo).*Potentialnewfundsnowunderdiscussion.
8. Africaandsovereignwealthfunds
Sovereign wealth funds 2012Africa and sovereign wealth funds90
GabonandNamibia
Anothersub-Saharancountry,Gabon,recentlyannouncedthe
establishmentofanewsovereignwealthfund,FSRG(Fonds
Souverain de la République GabonaiseorSovereignFundofthe
RepublicofGabon),whichwillhaveacapitalofnearly500million
dollars.Gabonisthefourthbiggestcountryinsub-SaharanAfricain
termsofoilreserves,and60%ofstaterevenuecomesfromtheoil
sector.Thefundwillfocusonfinancingmajordevelopmentprojects,
soitsinvestmentwillbepredominantlydomestic.Itseemstherefore
thattheideaisthatthisfundshouldinjectprofessionalismintolocal
investmentmadewithfundsfromthenationalbudget.Inorderto
achievethisitwillbenecessaryforthefund’scorporategovernance
tobecorrectlyestablished67.
Namibiahasafund(MineralsDevelopmentFund)withastrongly
localcharacterandcentredontheminingsector.Thefundassists
smallandmediumenterprisesinvolvedinmining,facilitating
improvedresearchandplanningtoraiselocalminers’standard
ofliving.Thisfundisstillfarfrombeingconsideredasasovereign
wealthfund,duetoitsdefinitionandinvestmentstrategy.
Libya
TheLibyanfund(LibyanInvestmentAuthority,LIA)isinquitea
differentsituation.SincetheArabSpringandtheoverthrowofthe
Gaddafiregime,thesituationinthecountryhastendedtoreturn
towardsnormal,ashasthefunctioningofthesovereignwealth
fund.
InMay2011somepreviouslyconfidentialinformationwasmade
public,withananalysisofthefund’sportfolio.Thuswediscovered
thatLIAhelddepositsofmorethanabilliondollarswiththeUK’s
HSBC.InSeptember2011anotherdeclassifiedreportshowedthat
LIAalsohadamongitsexternalmanagerstheBankofNewYork
Mellon,NomuraandWesternAsset,withinvestmentmandatesof
$500million.
ThecaseofLIAdemandsamorein-depthexplanationofwhatwent
sowrongwithcorporategovernancesystemsastoleadnumerous
EuropeanandAmericaninstitutionstoestablishfinancialtieswitha
fundcontrolledbythedictatorGaddafi.Weknowthattherelationship
betweenthefundandtheLondonSchoolofEconomicscostthethen
directoroftheinstitution,HowardDavies,hisjobin2011.
ThesituationinLibyaisstillfarfromnormal.Despitetheliftingof
sanctionsonTripolibytheUnitedStates,theUnitedNationsandthe
EuropeanUnion,thefund’sinvestmentsinEastandWestAfricaas
yethavenosolution.LIAhasasubsidiaryinvestmentvehiclecalled
LibyanAfricanInvestmentPortfolio(LAP),withassetsinEastand
WestAfricancountries.TheUnitedNationsSecurityCouncil’sdoubts
relatetotheultimatebeneficialowneroftheseinvestments:do
theybelongtoGaddafifamilymemberslinkedtothefund,ortothe
Libyangovernment?
LIA,throughitssubsidiaries,isoneofAfrica’smostactivefunds:
ithasassetsintelecommunicationsinUganda,Rwanda,South
Sudan,Zambia,SierraLeone,Côted’Ivoire,Niger,Guineaand
Benin;italsoownshotels,textilefactoriesandafoodprocessing
plantinUganda;aswellasoilfieldengineeringandretailbusinesses
inKenyaandUganda68.
Mauritius
MauritiusisanotherAfricancountrywiththeintentionoflaunching
itsownsovereignwealthfund.ThisIndianOceanarchipelagomay
becomethefirstcountryoftheAfricancontinenttoestablishafund
thatisnotfedbycommodities.Intheperiod2006-2010Mauritius
succeededinattractingmoreforeigndirectinvestmentthaninthe
previous40years.Thisaccumulationofforeignexchangereserves
hasledthecountry’sgovernmenttodecidetoestablishafundin
ordertodiversifytheriskbeyondthecountry’sborders.Thefundwill
haveaninitialcapitalofnearly$3billion69.
Nigeria
Nigeriaestablishedasovereignwealthfundin2011.Withthe
promulgationofthelawestablishingtheNigeriaSovereign
InvestmentAuthority(NSIA)inMay2011,thegovernmentsetaside
$1billionfromtheoldExcessCrudeAccounttoconstitutethenew
fund,whichisscheduledtobeginoperationsinMay2012.Nearly
700applicationswerereceivedforthethreetopmanagement
positions(CEO,CIOandCRO).NigeriahadbeenoneofthreeOPEC
countrieswithnosovereignwealthfund(theothersbeingIraqand
Ecuador).
Thenewinvestmentbody(NSIA)willberesponsiblefordistributing
oilrevenuesamongthreesub-funds:theFutureGenerationsFund,
theNigeriaInfrastructureFundandtheStabilisationFund.Thislast
fundwillhavearoleaslenderoflastresortinperiodsofcommodity
priceslumps.Theintentionofthesethreefundswillbetoreduce
theeconomy’sdependencyonoilinthelongterm,toinsulatethe
economyfromthevolatilityofoilpricesintheshorttermandto
serveasacatalystforinvestmentininfrastructure70.
67AshbyMonkathttp://www.institutionalinvestor.com/Article/2974610/Welcome-Gabon-To-The-Club.html?ArticleId=2974610.68SeeAllAfricaathttp://allafrica.com/stories/201202190127.html.69Mauritiusadvertisedforaninternationalexperttosupervisethelaunchofthecountry’ssovereignwealthfund.Seehttp://www.thecommonwealth.org/job/191203/167709/243027/pg_mus_0569.htm.70http://allafrica.com/stories/201106061200.html.
Sovereign wealth funds 2012Africa and sovereign wealth funds
91
71CenterforGlobalDevelopment,2011.Seethesetwoarticlesondirectdistributionofrevenues:http://www.cgdev.org/doc/Initiatives/Oil2Cash/EG_Goldman_Formatted_Version_Final.pdfyhttp://www.cgdev.org/content/publications/detail/1424714.72Informationobtainedonthefund’swebsitehttp://www.1mdb.com.my/news-2/mega-deals-abu-dhabi.
Twofailures:EquatorialGuineaandChad
Notallisgoodnews;somefundshavefailed.Suchisthecaseofthe
fundsestablishedinEquatorialGuineaandChad.
EquatorialGuineaisthesecondrichestcountryinAfricaintermsof
percapitaincomemeasuredinpurchasingpowerparity,andahead
ofsuchcountriesasArgentina,OECDmemberChile,Lithuaniaor
Croatia.Oilaccountsfor77%ofthecountry’sexports.Andyet77%
ofEquatorialGuinea’spopulationlivesbelowthepovertyline.
EquatorialGuineahasanopaquefundcalledtheFondspourles
générationsfutures(fundforfuturegenerations).Thevolumeofassets
undermanagementiscloseto$80millionandtiestotheObiang
familyarestrong.EquatorialGuineahasnotfoundawaytotransferthe
wealthofitssubsoiltoitsinhabitants,andtherearenoclearsignsthat
asovereignwealthfundcanmeetthesechallenges.Nordothepolitical
conditionsexistinwhichtomakeadirecttransferofincometothe
populationtoenableittoescapefromthepovertyinwhichitistrapped,
asproposedbytheCenterforGlobalDevelopment71.
ThecaseofChadissimilar.Acountrythatwasbrandedthemost
corruptonearthdidnotstartoutwiththebestconditionsformaking
independentmanagementofthefundareality.Andsoitwas,justas
predicted:theoil-fedfundthattheIMFimposedasaconditionfora
loantofinancetheconstructionofapipelinewassoontakenoverby
thepoliticalauthoritiesanditsimpactseverelydiminished.
NewFunds
Wearecurrentlyseeingaveritableboomintheestablishmentand
planningofnewsovereignwealthfundsinAfrica.Angolaisplanning
toestablishafundseparatelyfromtheSonangolconglomerate,
anditseemsthatnewbornSouthSudanintendstocapitaliseits
oilreservesinthelongterm,formingasovereignwealthfundwith
technicalsupportfromtheNorwegianfund.Ghanaestablished
recently(2011)twonewSWFs.Discussionsfornewfundsisheating
upintwelveAfricancountries(Table18).CountriessuchasZambia,
SouthAfricaandKenyaaredebatingthebenefitsandrisksfor
implementingthesekindsofinvestmentvehicles.Concretely,more
thanhalfofthenewfundsprojectsareAfrican.Recentoildiscoveries
inNamibia,Mozambique,UgandaandTanzaniaopenuppossibilities
fornewfundsintheregion.Asanintriguingcase,Rwandacreatedin
2010afundcalled“diasporafund”(AgaciroDevelopmentFund),it
intendschannelingremittancesfromRwandansacrossthisfund.We
willseeifthisinnovationcomestofruition.
South-SouthCooperation
Onetrendthatmightbeseeninthenextfewyearsisaconvergence
ofinvestmentobjectivesbetweenAfricanandothersovereignwealth
funds.Oneareainwhichbothgroupsmightfindwhattheyare
lookingforisinfrastructure.AccordingtoWorldBankinformation,
Africahasaninfrastructuregapofmorethan$93billionayear.
Toplugthissubstantialgap,onecouldthinkintermsofthree-tiered
financingtransactionsinwhichtheIFCwouldactasacatalyst.The
localsovereignwealthfundcouldprovidetheexpertiseneededto
undertakethetransaction,theforeignsovereignwealthfundcould
contributestablefinancing,andathirdplayer,fromtheprivate
sector,couldcarryouttheexecutionoftheinfrastructureproject.
Thistypeofjointtransactioninvolvingmorethanonefund(South-
South)hasnotbeenmuchinevidencetodate,butitisagrowing
trend:thetransactioncarriedoutinBrazilwithBTGPactualwith
theinvolvementoffundsfromtheUAE(ADIC),Singapore(GIC)and
China(CIC);therecentcollaborationbetweenMubadalaoftheUAE
and1MalaysiaDevelopmentBerhadofMalaysia:withthecreation
ofan$8billionjointventure72whichwillservetoattracttheglobal
financesectorwithinterestsinSoutheastAsia,aswellasaluminium
productionandderivativeindustriesinMalaysia.
Infrastructures
Africahasaninfrastructuregapestimateat$93billionayear.This
isafundamentalnecessityforAfrica,whichalsorepresentsoneof
themajorbarrierstoinvestment.Despitethedownturnthatledto
thecrisis,theinfrastructuregapexertsanattractiononpotential
investors.TheUNCTADestimatesthatreturnsonAfricanFDIarethe
highestamongemergingcountries,which,ifweaccepttherisk/
returntrade-offtheory,impliesthattheinvestmentsareriskier.
Specifically,sovereignwealthfundshaveanidealinvestorprofilefor
anAfricaninfrastructureplanbasedontheprivateequityindustry:
theyhavealongtimehorizonandlimitedorsometimesevennon-
existentliabilities.
Theinvolvementofsovereignwealthfundsinsomeofthese
transactionswouldimplyanassuranceofsolvencyinthefinancial
executionoftheprojects.Itmightprovetobethesupportneededto
persuadetheprivatesectortotakepartintheseprojects.
Sovereign wealth funds 2012Africa and sovereign wealth funds92
8. Africaandsovereignwealthfunds
Sovereign wealth funds’ investments in africa
Towardstheendof2011,ChinaInvestmentCorporationinvested
nearly$240millioninShandukaGroup.ShandukaGroupisaSouth
Africanconglomeratewithinvestmentsinnon-renewableresources,
financialservices,realestate,energyandothersectors.
Fromalistofnearly70investmentscarriedoutbysovereign
wealthfundsinAfrica,wefindthatthesectorthathasreceived
themostinvestmentsisthatofrealestateandhotels,followedby
industrialandthenextractiveindustries.Aregionalanalysisshows
thatthemajorpartofsovereignwealthfunds’investmentsinthe
continentiscarriedoutinsub-SaharanAfrica,centredonthethree
abovementionedsectors.TheNorthforitspartreceivesinvestment
mainlyinthebankingandfinancesector.
During2011TemaseksetupajointventurewiththeE.Oppenheimer
family-officetoinvestintheAfricancontinent.Withaninitial
capitalof$300million,TanaAfricaCapitalfocusesmainlyonthe
consumerandagriculturalsectors,althoughitisalsoopentonew
opportunitiesinthisyoungcontinent.
Thisjointventureisnotanisolatedcaseofinvestmentthispastyear:
inMarch2011theUSfinancialgroupCarlyledecidedtoventureinto
sub-SaharanAfricainsectorssuchasconsumergoods,financial
services,agricultureandinfrastructure,whileGermangiantSiemens
planstoinvest$254millioninAfricain201273.
Chart 35
(Number of operations)
0 5 10 15 20
Sub-saharan AfricaNorth Africa
CONSTRUCTION/ENGINEERING
1
1
8
8
5
2
2
1
2
3
4
6
21
EXTRACTIVEINDUSTRIES
INDUSTRIAL
INFRASTRUCTURE
FINANCIAL
BANKING
REAL ESTATE/HOTELS
4
1
OTHERS
Sovereign wealth fund’s investments in Africa; breakdown by sector and region
Source: Thouraya Triki and Issa Faye, 2011. Africa’s Quest for Development: Can Sovereign Wealth Funds help? International Finance Review 12, pages 263-290.
73Reuters,2011.Seehttp://af.reuters.com/article/investingNews/idAFJOE7740DV20110805.
Sovereign wealth funds 2012Africa and sovereign wealth funds
93
74Since2006Chinesecompanieshavewoncontractsworth$7.8billioninoverlandtransportinfrastructure(TheHeritageFoundation,“ChinaGlobalInvestmentTracker”,2012,availableathttp://www.heritage.org/research/reports/2012/01/china-global-investment-tracker-2012).75FinancialTimes,2011,athttp://www.ft.com/intl/cms/s/0/d2863ade-bc49-11e0-80e0-00144feabdc0.html#axzz1pUq3LUC0.76FinancialTimes,availableathttp://www.ft.com/intl/cms/s/0/9f85e210-5960-11e1-abf1-00144feabdc0.html#axzz1pUq3LUC0.
china, a new emerging partner
RelationsbetweenAfricaandChinaweregivenaboostin2006
bytheForumonChina-AfricaCooperationheldinBeijing,where
48headsofstate(theonlyonesmissingwerethefivethatstill
maintaineddiplomaticrelationswithTaiwan)cametogetherto
studypossibilitiesforgreaterintegrationbetweenthetworegions.
ChineseinvestmentinAfricaisslatedtogrowto$50billionby
2015,accordingtoestimatesmadebyStandardBank,theleading
bankinSouthandsub-SaharanAfrica.Thisinvestmenthasanew
characteristic:itfocusesessentiallyonpublic-privateconcessions.
Chinahaswon50%ofthepublicworksinitiatedinAfricainthepast
fewyears.Chinesecompaniesdominatethehighwayinfrastructure
throughoutthecontinent74.InthisareaSWFChinaAfrica
DevelopmentFundplaysacrucialrole,asweshallseepresently.
BilateraltradebetweenChinaandAfricaisexpectedtoreach$300
billionin2015,doublethefigurefor2010.
CompaniessuchasAluminiumCorp.ofChinaandChinaNational
PetroleumCorp.arelookingtomakeacquisitionsinminingsectors
likeironore,oilandcopper.ThisisdrivenbythegrowthofChina’s
economyanditsdemandforrawmaterials.
Between2006and2011,47%-morethan$39billion–ofthe
investmentsmadebyChinesecompaniesontheAfricancontinent
wentintoenergyormetals(mainlyiron,steelandcopper).Oilis
thesectorwiththebiggestdeals:in2010ChinaStateConstruction
EngineeringCorporationsignedacontractwithNigeriaNational
Petroleumforavalueinexcessof$28billionfortheconstruction
andfinancingofthreerefineriesinNigeria.
In2011fourtransactionsofoverabilliondollarseachwerecarried
out.Thefirstone,worthabout$1.5billion75,wasChinesestate-
ownedShangdongIronandSteelGroup’spurchaseofa25%stake
inAfricanMinerals,ofSierraLeone,foranironoreprojectinthe
countryandtheassociatedconstructionofarailwaylineanda
porttosupportgrowthinexportstoAsia.Secondly,CNOOC(China
NationalOffshoreOilCorporation)acquired33%ofTullowOil’s
Ugandanoilexplorationandproductionoperation,withFrench
giantTotaltakinganother33%.
Thethirdandfourthtransactionsconcernedcopper.InSouthAfrica,
China’sJinchuanGroupacquiredMetorex,thecountry’sleading
copperproducer,for$1.4billion.Thelastmajordealoftheyear
tookplaceinSeptember,withChina’sMinmetals’acquisitionof
Canada’sAnvilMiningfor$1.3billion.ThemainassetofthisToronto-
basedcompanyisitscoppermineintheDemocraticRepublicofthe
Congo76.
Alongwiththesefinancialinvestments,investmentsarealso
oftenmadeininfrastructuretoallowtheAfricaneconomiesto
increasetheircapacity,andthisrepresentsalegacyofpotential
development.TowhatextentcanAfricaleverageitscommoditiesto
plugtheinfrastructuregapthatishavingsuchabrakingeffecton
growth?.Africa’spathtogrowthwilldependontheanswertothis
unknown.
AnothersectorinwhichAfricaparadoxicallyhasgreatpotentialis
agriculture.Chinahasjust9%oftheworld’sarableland,but16%of
itspopulation;Chinaisnowdependentonfoodimports.
Thisaccountsfortheincreasingnumberofprojectsaimedat
securingfoodsupplies:inMozambique,havingleasedlandinthe
Zambezivalley,Chinahopestoprovideworkformorethan3,000
Chinesefarmworkers.Withaviewtoboostingagriculture,an
evaluationisunderwayoftheregion’shydrographicalcharacteristics
aimedatlinkingLakeMalawiwiththeriversofMozambique.
InUganda,Chinahasacquiredmorethan10,000acresforfarm
production,whileinZambiaithasappliedtoacquiretwomillion
hectares(roughly4.9millionacres)fortheproductionofbiofuels.
2011sawthecompletionoftheAfricanUnion’sheadquartersin
AddisAbaba,whichwasofficiallyopenedon24January2012.With
aninvestmentde$200million,this20-storeyhigh-risesymbolises
thepowerofChineseinvestmentonthecontinent.
In2006,duringtheForumonChina-AfricaCooperationtowhich
wehavepreviouslyreferred,PresidentHuJintaoannouncedeight
measurestostrengthenthenewstrategicalliancewithAfrica.The
thirdoftheseeightmeasures,whichseektopromotegreaterand
closerbilateralcooperation,wasthecreationoftheChina-Africa
DevelopmentFund(CADFund).
CADFundhasbeenoperatingsince2007.Itsmissionistopromote
economiccooperationbetweenChinaandAfrica,andtofacilitate
Africa’seconomicdevelopment.Thefundrecentlyreceivedan
injectionof$2billion((bringingtotalAUMto$5billion)fromthe
Sovereign wealth funds 2012Africa and sovereign wealth funds94
8. Africaandsovereignwealthfunds
ChinaDevelopmentBanktoincreaseitsinvestmentsinAfrica.
ThiscooperationtakestheformofdirectinvestmentinChinese
companieswithoperationsinAfrica.Manyofthecompaniesthat
havewoncompetitivepublicbiddingprocessesforinfrastructure
projectsinthepastfewyearshavereceivedinvestmentfrom
CADFund.
Thefund’sinvestmentpolicyfocusesonfoursectors:agriculture,
manufacturing,infrastructureandrelatedindustries(electrical,
transport,telecommunications,etc.)andnaturalresources.The
fundalsoinvestsintheindustrialestatesestablishedbyChinese
companiesinAfrica.Investmentsareundertakenwithaviewto
makingaprofit,andtothisendthefund’sgovernanceisinline
withmarketstandards.CADFundinvestsincompaniesatalllevelsof
development:fromstart-upstomaturecompanies77.
Fiveyearsonfromitsinception,thisprivateequityfundhasyetto
completeasuccessfuldisinvestment.InvestinginAfricaisproving
moredifficultthanthefundmanagersinitiallyforesaw.New
complicationshavearisen,withworkersbeingkidnappedand
therecentexpulsionofamanagingdirector.Tofaceuptothese
situations,Chinesecompanieshavestartedtooperateintandem
withentitiesofothernationalitieswithexperienceintheregion;
suchisthecaseofCNOOCwithTotalinUgandaandofChinalcowith
RioTintoinGuinea78.
ThefundhashelpedChinesecompaniestobuildapowerplant
inGhana,aportinNigeriaandcottonfarmsinMalawiand
Mozambique.Inallthesetransactionsthefundtookanon-
controllingstakeinthecompany.Thefundplanstoreceivean
additional$2billionfromChinaDevelopmentBankatthenext
ForumonChina-AfricaCooperation,whichwilltakeplacebeforethe
endof2012.
conclusion
ThesovereignwealthfundsandAfricahavebeforethemadecade
(2010-2020)ofpotentialinteraction.Sovereignwealthfunds
fromotherregionsoftheworldarelookingtoAfricainsearchof
resources(energyandfood,mainly)thattheircountriesneedin
ordertomaintainhighgrowthratesintheireconomies.Butwehave
alsoobservedthatsectorssuchastourism,telecommunications
andrealestatearestartingtoarousetheinterestofthesenew
globalinvestors.Africancountrieshavebeforethemthechallenge
ofmakinggooduseoftheinfluxoffinancialresourcestodiversify
theireconomies.Theyneedtobuildmodelsforsustainedgrowthto
liftthemoutoftheparadoxofabundanceinwhichtheymayfind
themselvestrappedduetotheirdependenceonnaturalresources.
Africansovereignwealthfunds,bothpresentandfuture,haveother
challengesbeforethem:adoptingrulesofcorporategovernance
thatensurerealindependencefromshort-termpoliticalinterests
andpromoteappropriateincentivestructures(inthis,certainfunds
havebeenadvisedontheirdesignandimplementationbyexperts
fromhighlyregardedfundssuchasthoseofChileandNorway);
trainingofinvestmentheads;interactionwiththedevelopment
banks,privatefundsandsovereignwealthfundsfromotherregions
topromotelarge-scaleinfrastructureprojects(inthisregard,the
infrastructurefacilitatingintegrationofAfricaneconomiesisofvital
importance).Similarly,Africancountriesreceivinginvestmentmust
seekgraduallytomoveupthevalueladder,rungbyrung.Indoing
sotheycanlookatwhathasbeenachievedbyothersovereign
wealthfunds,suchastheUAE’sMubadalafund,tohaveaneffective
impactonthedevelopmentoftheireconomies.
77ChinaDevelopmentBank,2011:http://www.cdb.com.cn/english/Column.asp?ColumnId=176.78Reuters,2011:http://www.reuters.com/article/2012/02/24/us-china-africa-idUSTRE81N06J20120224.
Sovereign wealth funds 2012Africa and sovereign wealth funds
95
Interview with Fabio Scacciavillani, Chief Economist, Oman Investment Fund
Sovereign wealth funds 2012Interview with Fabio Scacciavillani, Chief
Economist, Oman Investment Fund 97
Sovereign wealth funds 2012Interview with Fabio Scacciavillani, Chief Economist, Oman Investment Fund98
9. InterviewwithFabioScacciavillani,ChiefEconomist,OmanInvestmentFund
9. IntErVIEw wIth FaBIo ScaccIaVIllanI, chIEF EconomISt, oman InVEStmEnt FunD
FabioScacciavillani,aPh.D.inEconomicsfromtheUniversityof
Chicago,istheChiefEconomistandmemberoftheInvestment
CommitteeoftheOmanInvestmentFund.Inhiscareerheservedas
DirectorofMacroeconomicsandStatisticsattheDubaiInternational
FinancialCentre,ExecutiveDirectoratGoldmanSachs,Senior
EconomistandAdviserattheEuropeanCentralBankandheld
severalpositionsattheInternationalMonetaryFund.
In2012,hepublishedwithMasimilianoCastelli“TheNewEconomics
ofSovereignWealthFunds”(Wiley).Thebookmakesadetailed
analysisoftheSWF’sactivitiesandtheirrelationwithglobalfinance.
Fromtheeconomicsoftheirfundingsourceandthefearsraisedin
Westernpoliticians,thebookexplainstheinfluenceofSWFsintoday
andfutureglobaleconomy.
OIFwasestablishedin2006toinvestinlong-andmedium-term
projectswithinandoutsideOman.TheOmanInvestmentFundisa
SWFwithamandatetotransfertherevenuesfromOmanoilexports
tofuturegenerations.OvertheyearstheOIFhasbuiltaglobally
diversifiedinvestmentportfolioincludingRealEstateandPrivate
Equityassetsacrossvarioussectors.Thereisnotestimationabout
theassetsundermanagementOIFholds.
proposed questions
AsthisreportismainlyfocusedinSpain’srelationshipwithSWFs,whichistheimageSpainhasinMiddle-East’scountriesasapotentialtargetforinvestment?
Atthemoment,viewedfromoutsideEurope,thesituationnotonly
inSpain,butalsointherestofEuroland,includingthesocalledcore
countries,raisesseriousconcerns.Inessencethediagnosisonthe
causeofthecrisisiscompletelymissingandthereforenocoherent
setofsolutionsisemergingbeyondperiodicsquabblesandhalf
bakedmeasures.WeobservedismayedanendlessstreamofEU
summitsthatatbesttrytoreacttotheincreasinglygraverevents,
butareunabletoforgeaconsensusonalongtermstrategy.
ThecrisisinEuropestemsfromthepoliticalfollyoftryingtocounter
alongtermeconomicdeclinebyraisingpublicandprivatedebt
wellbeyondasustainablelevel.BailoutsfromtheEUandthe
IMFareboundtofailastheydidinGreece,unlessgovernments
re-establishtheconditionsforareturntoefficiencyandproductivity
gainsintheprivatesectoranddrasticallycutwasteinthepublic
sector.Unfortunatelypoliticianscontinuetorefrainfromharshly
confrontingpowerfulinterestgroupsamongcivilservantsandinthe
bankingsector.
Europeissufferingadeepcrisis,whichinvestmentopportunitiesmayariseforaSWFasOIFinthiscontext?
AtpresentperspectivesinEuropearedim.A global asset manager
can find more attractive opportunities in emerging markets rather
than in mature economies.Furthermore,fromseveralquarters
demagoguesofallstripesaremountingahatecampaignagainst
“finance”whichisextremelyworrisomeforforeigninvestorsfearful
ofbeingexposedtoexpropriationrisk(asSpainhaspainfully
learnedinthecaseofYFP)orpoliticalbacklash.
Somefunds,e.g.MubadalaintheMiddleEast,havebeenembarkedintoanationalstrategictransformationoftheireconomies.AreotherSWFalsopursuingstrategicnationalobjectivesintheirinvestments?
SWFshavedifferentmandates.Somefocuspredominantlyon
domesticdevelopment,othersmoreonintergenerationalwealth
transfer.The demarcation line between the two approaches is often
blurredandmightchangedependingoncircumstances.OIFhasa
verybroadmandateandingeneralevaluatesopportunitiesbased
ontheirmerit,irrespectiveofthelocation.
Sovereign wealth funds 2012Interview with Fabio Scacciavillani, Chief
Economist, Oman Investment Fund99
ItisoftenunderscoredthatstrongerSouth-Southrelationshipsaretakingplaceintheglobaleconomy.HowdoesthisprocessaffectSWFs?
SWFs are one of the main vehicles for South-South relationships.
Ingeneraltheyareapowerfulelementbehindtheemergenceofa
multipolarworldandatransitiontoadecentralizedfinancialsector
(asopposedtotheHubandSpokemodelwithLondonandNewYork
astheirpinnacles).SinceSWFsfocusonlongtermdriversofgrowth,
suchasdemographics,naturalresources,urbanizationofthemiddle
class,logisticandinternationaltrade,theyaremoreinclinedto
exploreopportunitiesincornersoftheworldwherethesefactors,
demographyinprimisarestrongestandwillhavealonglasting
impact.
Giventhehighdemandfornaturalresourcesinthelastyearsandthereforehigherpricesincommodities,regionsasLatinAmericaorAfricaareestablishingSWFs.Doyouconsiderthemaspotentialpartnersintheirhomecountries?
Yes.SWFstendtohaveasimilarinvestmenthorizon,donotface
redemptions,andarewillingtoventureintoilliquidmarkets.
A partnership among SWFs would be an excellent vehicle for
tapping opportunities that would be hard to detect from afar.
Furthermore,closerandstablerelationshipscouldbeinstrumental
instrengtheningbroaderbilateralrelationshipsbetweencountries.
GiventhosegrowingSouth-Southlinkages,haveyouco-investedwithotherSWFs?Doyouhavetheintentiontodoso?Whichdifficultiesshouldbeovercome?
WehavehadcontactswithotherSWFs,butweareataninitial
stageofamuchbroaderprocess.IknowthatotherSWFsareon
oursamewavelength,butIguessthata major obstacle so far has
been the coordination of decision procedures.WithtimeIexpect
thisnottobeanoverridingimpediment.It would also be beneficial
to establish a Forum where SWFs could share experiences and
analyses.Sofartherehavebeenseveraloccasionalinitiativesinthis
sense,butamorestructuredapproachwouldbedesirable.
ItissaidthatAfricarepresentsthenextinvestmentfrontier.Specialattentionfrominternationalinvestorshasreceivedtheinfrastructuresector.Also,fromtheirlong-terminvestmentprofile,SWFsfitwellwiththeseinvestments.Wouldyouagree?
Yes Africa is in the mind of many the last frontier. China’s
demographicwaveisebbing,India’sisabout15-20yearsbehind
China,whileAfrica’spopulationisstillexpandingstrongly.Thiswill
bethelastdemographicwavebeforetheworldpopulationwill
stabilizearoundthemidofthecentury.SoAfricaisamajorfocus
forinvestorswithhighrisktolerance,althoughthegovernance
shortcomingandthebackwardnessofthefinancialsystemare
holdingbackitspotential.
Youusedtheexpression“barbariansatthegates”torefertoSovereignWealthFundsimageintheWest;so,whatchallengesSWFshavefaced,orwhichstrategieshasbeenused,inbuildingitsreputationintheWest?
IperceivethattheattitudeintheWesthaschangedfromafew
yearsago.Thehysteriaandnationalisticovertoneshavesubsided
especiallybecausethepublicopinionhasrealizedthattheactivity
oftheSWFsbroughtbenefitstocompaniesandeconomies.Now
SWFsareopenlycourtedbygovernmentsandfirms,hencesucha
betteratmosphereshouldbeconducivetoprogressalsoonopen
issuessuchastransparencyandreciprocityofforeigninvestments
treatment.
Appendix. ESADEgeo ranking - Sovereign wealth funds 2012
Sovereign wealth funds 2012Appendix. ESADEgeo ranking
101
1 GovernmentPensionFundGlobal 654,00 Norway 1990
2 SAMAForeignHoldings 577,70 SaudiArabia 1952
3 ExchangeFund 497,60 HongKongSAR,China 1993
4 ChinaInvestmentCorporation 482,00 China 2007
5 AbuDhabiInvestmentAuthority 450,00 UAE 1976
6 SAFEInvestmentCompany 324,00 China 1997
7 KuwaitInvestmentAuthority 290,00 Kuwait 1953
8 GovernmentofSingaporeInvestmentCorporation 260,00 Singapore 1981
9 TemasekHoldings 158,70 Singapore 1974
10 NationalSocialSecurityFund 136,00 China 2000
11 QatarInvestmentAuthority 135,00 Qatar 2005
12 NationalWealthFund 85,85 RussianFederation 2008
13 Samruk-Kazyna^ 78,00 Kazakhstan 2008
14 AustralianFutureFund 77,01 Australia 2004
15 InvestmentCorporationofDubai^ 70,00 UAE 2006
16 LibyanInvestmentAuthority 62,96 Libya 2006
17 RevenueRegulationFund^ 56,70 Algeria 2000
18 InternationalPetroleumInvestmentCompany 49,00 UAE 2000
19 MubadalaDevelopmentCompanyPJSC 48,20 UAE 2002
20 KoreaInvestmentCorporation 42,80 Korea,Rep. 2005
21 AlaskaPermanentFund 42,40 UnitedStates–Alaska 1976
22 KazakhstanNationalFund 41,60 Kazakhstan 2000
23 BruneiInvestmentAgency 39,00 BruneiDarussalam 1983
24 StateOilFundofAzerbaijan(SOFAZ) 32,60 Azerbaijan 1999
25 TexasPermanentSchoolFund 26,90 UnitedStates–Texas 1854
26 StrategicInvestmentFund^ 25,89 France 2008
27 OilStabilisationFund 23,00 Iran 1999
28 KhazanahNasionalBerhard 22,02 Malaysia 1993
29 NewZealandSuperannuationFund 19,60 NewZealand 2001
30 HeritageFund 15,90 Canada 1976
31 NewMexicoStateInvestmentCouncil 15,20 UnitedStates–NewMexico 1958
32 FondodeEstabilidadEconómicaySocial(FEES)^ 14,79 Chile 2007
33 NationalPensionsReserveFund 13,90 Ireland 2001
34 Timor-LestePetroleumFund 10,60 Timor-Leste 2005
35 SovereignFundofBrazil 10,05 Brazil 2008
36 EmiratesInvestmentAuthority 10,00 UAE 2007
37 AbuDhabiInvestmentCouncil 10,00 UAE 1999
38 BahrainMumtalakatHoldingCompanyBSC 9,00 Bahrain 2006
39 StateGeneralReserveFund 8,20 Oman 1980
40 PulaFund 5,90 Botswana 1994
41 FondodeReservadePensiones 5,76 Chile 2006
42 PermanentWyomingMineralTrustFund 5,60 UnitedStates–Wyoming 1974
43 China-AfricaDevelopmentFund 5,00 China 2007
44 HeritageandStabilizationFund 4,19 TrinidadandTobago 2000
45 ItalianStrategicFund^ 4,00 Italy 2011
46 PublicInvestmentFund 3,90 SaudiArabia 2008
47 1MalaysiaDevelopmentFundBhd(1MDB) 3,20 Malaysia 2009
48 MauritiusSovereignWealthFund 3,00 Mauritius 2010
49 AlabamaTrustFund 2,48 UnitedStates–Alabama 1985
50 RasAlKhaimah(RAK)InvestmentAuthority 2,00 UAE 2005
51 FondsdeStabilisationdesRecettesBudgétaires^ 1,64 DemocraticRepublicoftheCongo 2005
52 FondoparalaEstabilizacióndelosIngresosPetroleros(FEIP)^ 1,60 Mexico 2000
53 FondodeAhorrodePanamá(FAP) 1,20 Panama 2011
54 NigerianSovereignInvestmentAuthority 1,00 Nigeria 2011
55 FondoparalaEstabilizaciónMacroeconómica(FEM)^ 0,80 Venezuela 1998
56 PalestineInvestmentFund 0,80 Palestine 2003
Ranking Sovereign wealth funds AUM ($bn) Country Founded
Sovereign wealth funds 2012Appendix. ESADEgeo ranking 102
Appendix.ESADEgeoranking-Sovereignwealthfunds2012
Table19
Appendix.ESADEgeoranking-Sovereignwealthfunds2012*
Table20
Appendix.ESADEgeoranking-Potentialnewsovereignwealthfunds
57 FondoSoberanodeColombia 0,70 Colombia 2011
58 StateCapitalInvestmentCorporation 0,60 Vietnam 2006
59 RevenueEqualizationReserveFund 0,40 Kiribati 1956
60 SovereignFundoftheGaboneseRepublic^ 0,40 Gabon 1998
61 NationalFundforHydrocarbonReserves^ 0,30 Mauritania 2006
62 NorthDakotaLegacyFund 0,30 UnitedStates–NorthDakota 2011
63 GovernmentInvestmentUnit^ 0,30 Indonesia 2006
64 OilRevenueStabilizationFund(ORSF) 0,15 Sudan 2008
65 FundforFutureGenerations^ 0,08 EquatorialGuinea 2002
66 GhanaStabilizationFund^ 0,06 Ghana 2011
67 HumanDevelopmentFund^ 0,05 Mongolia 2008
68 NationalInvestmentFund 0,040 Syria 2012
69 GhanaHeritageFund^ 0,014 Ghana 2011
70 PermanentFundforFutureGeneration 0,009 SãoToméandPríncipe 2004
71 StabilizationFund^ 0,003 Mongolia 2011
72 OmanInvestmentFund N/A Oman 2006
73 OmanInvestmentCorporation N/A Oman 2005
Total (Trillions of dollars) 4.981,64
74 SloveniaSWF N/A Slovenia N/A
75 PapuaNewGuineaSWF N/A PapuaNewGuinea N/A
76 JapanSWF N/A Japan N/A
77 IndiaSWF N/A India N/A
78 IsraelSWF N/A Israel N/A
79 PeruSWF N/A Peru N/A
80 SouthAfricaSWF N/A SouthAfrica N/A
81 LebanonSWF N/A Lebanon N/A
82 FundoSoberanoAngolano N/A Angola N/A
83 BoliviaSWF N/A Bolivia N/A
84 TunisiaSWF N/A Tunisia N/A
85 KenyaSWF N/A Kenya N/A
86 UgandaSWF N/A Uganda N/A
87 ZambiaSWF N/A Zambia N/A
88 MozambiqueSWF N/A Mozambique N/A
89 NamibiaSWF N/A Namibia N/A
90 ZimbabweSWF N/A Zimbabwe N/A
91 RwandaSWF N/A Rwanda N/A
92 TanzaniaSWF N/A Tanzania N/A
93 LiberiaSWF N/A Liberia N/A
94 GuatemalaSWF N/A Guatemala N/A
Ranking Sovereign wealth funds AUM ($bn) Country Founded
Ranking Sovereign wealth funds AUM ($bn) Country Founded
*Thislistincludes63activeSWFsatMay2012.
^FollowingthedefinitionsetbyCapapé,AguileraandSantiso(2012),theseSWFswouldbeexcludedfromthisranking(i.e.,fundsfullydevotedtostabilizationduties;thosefocusedsolelyindomesticassetsorjustinrisk-freeassets).
Source:ESADEgeo(2012).Wehavecompiledthisinformationlookingfirstatthereportsreleasedbyeachfundthroughtheirwebsites.Whenweneedtoestimateweuse,amongothers,thefollowingreliablesources:AshbyMonk(OxfordProject,nowatInstitutionalInvestor),SovereignInvestmentLab(BocconiUniversity),MonitorGroupandGeoEconomica.
Note:These21fundswerenotactiveattheendofthisedition.Theyarenowunderdiscussionineachcountry.
Sovereign wealth funds 2012Appendix. ESADEgeo ranking
103
Table19(Cont.)
Appendix.ESADEgeoranking-Sovereignwealthfunds2012*
ThisreportwasdevelopedbyINVESTINSPAINinitiativeby:
• Victoria Barbary.Director,SovereignWealthCenteratEuromoneyInstitutionalInvestorSeniorResearcher,SovereignInvestmentLabatUniversityofBocconi.
• Javier Santiso.ProfessorofEconomics,ESADEBusinessSchool;VicePresident,ESADECenterforGlobalEconomyandGeopolitics(ESADEgeo).
• Christopher Balding.AssociateProfessor,HSBCBusinessSchoolatPekingUniversityShenzenGraduateSchool.
• Ellen Campbell.ResearchAssistant,HSBCBusinessSchoolatPekingUniversityShenzenGraduateSchool.
• Javier Capapé.Researcher,ESADECenterforGlobalEconomyandGeopolitics(ESADEgeo)PhDCandidate,ESADEBusinessSchool.
• Ignacio Briones.InternationalFinanceCoordinator,MinistryofFinance,Chile.
• Francisco Vergara.HeadoftheSovereignWealthFundsUnit,MinistryofFinance,Chile.
Graphic design
EstudioGráficoCasamayor
Chart 15, 16, 20, 21 y 23
SamuélGranados