Sovereign Wealth Fund Institute

Tharman Shanmugaratnam

The Government of Singapore is addressing the country’s restricted capacity for big ticket and long-tenure project financing needs in cross-border financing. To address the issue, the Government of Singapore is pushing for the creation of the Project Finance Corporation (PFC). The PFC is expected to be operational in the latter half of 2012 and will be backed by a number of stable financial institutions, including Temasek Holdings. The PFC will also include Japan’s Sumitomo Mitsui Banking Corporation, Standard Chartered Bank PLC, and Singapore DBS Group Holdings Ltd.

Ultimately, the goal of the proposed PFC is to plugs gaps in the financing of larger, long-tenure overseas projects.

From a sovereign wealth fund investor (SWF) standpoint, this is a strategic endeavor for Singapore. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Established in 2007, the China Investment Corporation (CIC) was created and originally had US$ 200 billion in registered capital from China’s Ministry of Finance.

China is deploying more reserves to the CIC to increase financial returns. After the Chinese New Year holiday, the China Investment Corporation received an undisclosed amount from the People’s Bank of China. Before the injection, the fund was around US$ 410 billion. The CIC has been seeking capital to expand its investment portfolio and generate higher returns.

The Falkland Islands, known to the Argentinians as Islas Malvinas is an island chain located in the Southern Atlantic Ocean. The Falklands comprise of two key islands and more than 700 minor ones. It lies 290 miles from the coast of mainland South America. The islands are currently under the rule of the United Kingdom. There is a possibility of a major oil windfall off the Falklands. For 2012, oil explorers are aiming for 8.3 billion barrels of oil around the Falklands. As major drilling successes come to light, it is increasing political tension between Argentina and the United Kingdom. In fact, the Argentine government is asserting political dominance through various blockade-like threats and measures.

The Falklands have a 200-mile territorial zone that belongs to them. The local government has sold exploration licensing to several companies. In return, the government will levy a 9% royalty fee on the value of all oil & gas that is produced. In addition, the government will also charge a 26% tax on corporate profits derived in this area. The surplus cash may be used to create a sovereign wealth fund to invest income for future generations.

Russia’s oil reserve fund increased to 1,863 billion rubles (US$ 61.36 billion) from 811.5 billion rubles in January. The oil reserve fund received a one-time cash injection since the Russian Government ran a fiscal surplus in 2011. The reserve fund has grown large in its early times and shrunk during the financial crisis. Russia has two major sovereign funds, the other fund is the National Welfare Fund.

This graph plots a change in the growth of the balance sheet of the Federal Reserve versus the People’s Bank of China (PBOC) in a percentage of local gross domestic product (GDP). In recent years, China has expressed serious concern about the unprecedented growth of the Federal Reserve’s balance sheet and how it can impact the value of China’s over three trillion in foreign currency reserves. It is common knowledge that Chinese trade surpluses generates major flows of dollars back to China. The PBOC purchases foreign exchange entering China. These purchases are financed with the issuance of bills denominated in renminbi.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Source: People’s Bank of China, Federal Reserve, BEA, National Bureau of Statistics, China

Updated information on the research and statistics page. We now have Major Foreign Holders of Treasury Securities up now.

To view

According to the press release, “Given the EU’s serious and deepening concerns over the Iranian nuclear programme, the Council today broadened the EU’s restrictive measures against that country. Today’s decisions target the sources of finance for the nuclear programme, complementing already existing sanctions.

The Council banned imports of Iranian crude oil and petroleum products. The prohibition concerns import, purchase and transport of such products as well as related finance and insurance. Already concluded contracts can still be executed until 1 July 2012. A review of the measures relating to oil and petroleum products will take place before 1 May 2012. In addition, the Council outlawed imports of petrochemical products from Iran into the EU as well as the export of key equipment and technology for this sector to Iran. New investment in petrochemical companies in Iran as well as joint ventures with such enterprises are also no more allowed.

The Council also froze the assets of the Iranian central bank within the EU, while ensuring that legitimate trade can continue under strict conditions. Trade in gold, precious metals and diamonds with Iranian public bodies and the central bank will no more be permitted, nor will the delivery of Iranian-denominated banknotes and coinage to the Iranian central bank. A number of additional sensitive dual-use goods may no more be sold to Iran.

Finally, the Council subjected three more persons to an asset freeze and a visa ban. It also froze the assets of eight further entities.”

Source: Council of the European Union – Press Release

According to the press release, “Saudi Aramco and China Petrochemical Corporation (Sinopec) have agreed to formation of a joint venture related to the ongoing development of Yanbu Aramco Sinopec Refining Company (YASREF) Limited, formerly the Red Sea Refining Company.

Presided over by His Excellency, Ali Ibrahim Al-Naimi, Minister of Petroleum and Mineral Resources and chairman of the Saudi Aramco Board of Directors, leaders of the two companies — Khalid A. Al-Falih, president and CEO of Saudi Aramco, and Fu Chengyu, chairman of the Sinopec Group – formally announced the agreement in Dhahran on Saturday.

The joint venture agreement follows a Memorandum of Understanding between Saudi Aramco and Sinopec, signed in March 2011. Following Saturday’s JV agreement, Sinopec will hold equity interest of 37.5 percent in YASREF, with Saudi Aramco holding the remaining 62.5 percent.

The YASREF joint venture marks another significant phase of several progressing partnerships between Saudi Aramco and Sinopec across the hydrocarbon value chain in Saudi Arabia and in China. Saudi Aramco and Sinopec both bring significant knowledge and expertise to the joint venture, which represents the strengthening of their strategic partnership to enhance the trade of transportation fuels between a major energy producer and a major consumer. In-Kingdom refineries, such as the one being built by YASREF, possess the location advantage to supply domestic and international markets to the East and West.

“Our mutually progressing partnership with Sinopec has continued to flourish across the hydrocarbon value chain from crude oil supply to refining and petrochemicals in Fujian to YASREF today, and is a testimony of our continued efforts to enhance collaboration between the two companies,” Al-Falih said. “YASREF, being Sinopec’s first international downstream investment, will definitely strengthen further the longstanding bond between the two companies, and I am confident it will also yield mutual benefits for the Kingdom of Saudi Arabia and the People’s Republic of China.

“YASREF is uniquely placed to seize market opportunities, and it demonstrates our unwavering commitment to significantly grow our downstream portfolio, and in creating win-win partnerships for us and our stakeholders,” Al-Falih added. “Among YASREF’s many contributions will be to provide training, employment and industrial and economic development opportunities for Saudi nationals and for the growth of local enterprises.”

“Sinopec and Saudi Aramco have enjoyed substantial cooperation in the fields of gas exploration, oil refining, oil trade, and engineering services. The implementation of this project will usher in a new chapter for Sinopec’s investment in refinery and petrochemical projects in Saudi Arabia,” Fu said. “It will also help to extend the strategic cooperation of the two companies in the petroleum and petrochemical value chain, and further strengthen the complementary strategic partnership of the two parties. Sinopec is very pleased to contribute to the already solid economic ties between China and Saudi Arabia, whilst furthering our commitment to social responsibility and the pursuit of green, low-carbon development.”

Sinopec has partnered with Saudi Aramco, along with ExxonMobil, in the Fujian Refining and Petrochemical Company Limited, and Sinopec SenMei (Fujian) Petroleum Company Limited in China’s Fujian Province, as well as with Sino Saudi Gas Limited, an in-Kingdom gas exploration company. Sinopec, the biggest Asian-owned refiner operating in Asia, is also Saudi Aramco’s largest crude oil buyer.”

Read more: Saudi Aramco Press Release

The long-term trend for direct sovereign wealth fund investment by sector is in. Starting in 2005 until the end of 2011, the financial sector is the most targeted for direct sovereign wealth fund investment. We calculate this from our most recent database statistic of US$134.72 billion. The financial sector is followed by the energy sector’s US$ 50.66 billion. Real estate and infrastructure sectors follow closely behind.

Latest database statistics of 12/27/2011

Click on the image to enlarge

Top sectors for sovereign wealth fund direct investment inflows 2005 to 2011

The Sovereign Wealth Fund Transaction Database is now available online for subscribers. Transaction data can now be accessed on a more frequent basis. The SWFTD now contains over 2,800 recorded transactions.

• Access Top Ten Lists
• Time-Series Charts and Graphs
• Filter Searches
• Data Guides

Access Online Website – SWFTD

Starting in 2005 until the end of 2011, the United States is the top targeted nation for direct sovereign wealth fund investment. We calculate this from our most recent database statistic of US$75.68 billion. The United States is followed by the United Kingdom’s US$ 67.68 billion. China is a major recipient of direct sovereign money inflow, with a significant portion coming from Singapore and the Middle East. Switzerland received major cash infusions during the subprime crisis.

Latest database statistics of 12/27/2011

Click on the image to enlarge

Top countries for sovereign wealth fund direct investment inflows 2005 to 2011

The Sovereign Wealth Fund Transaction Database is now available online for subscribers. Transaction data can now be accessed on a more frequent basis. The SWFTD now contains over 2,800 recorded transactions.

• Access Top Ten Lists
• Time-Series Charts and Graphs
• Filter Searches
• Data Guides

Access Online Website – SWFTD

Chile is a major copper producer; number three in the world. Chile designed its two sovereign wealth funds to draw from copper price windfalls. The Government of Chile plans to transfer $1.7 billion towards the country’s sovereign wealth funds. The two funds are called the Pension Reserve Fund (PRF), created in late 2006 and the Fund for Economic and Social Stabilization Fund (FEES), created in early 2007.

According to the Syrian Arab News Agency, “President Bashar al-Assad on Wednesday issued the law No. 2 for 2012 stipulating for establishing the National Investment Fund with the aim of contributing to supporting the stability and enhancing the confidence in the market through adopting a long-term investment policy .

The Fund also aims to achieve higher revenues and profits for the stockholders through diversifying the financial investments and providing the expertise and the suitable vocational consultation.

According to the law, the Fund will be established with a capital of SYP 2 billion.

Minister of Economy and Trade Mohammad Nidal al-Shaar said the Law will positively interfere in the financial market performance through establishing an investment sovereign fund to activate the act of the Securities’ Market.

In a statement to SANA, the Minister added that his ministry will form a board of directors for this fund that brings together those who are experts and qualified in this domain.”

Read more: SANA

Read more: Syrian Ministry of Economy and Trade

Singapore’s Temasek Holdings is stepping up investment activity in the North Asia region. It created Pavilion Capital Pte, a wholly owned company to invest in closely held companies and will focus on small and medium enterprises in China. The new entity will be run by Tow Heng Tan, its former chief investment officer and senior managing director (Investments) of Temasek Holdings covering initiatives for direct investments.. Mr. Tow Heng Tan joined Temasek Holdings in 2002 and became the chief investment officer in October 2007.

By creating this sovereign wealth enterprise, it will give Temasek additional organizational flexibility to access direct company stakes the region.

According to a statement sent out by Temasek Holdings regarding Pavilion, is that it will “complement and expand our coverage and capacity for North Asia, including China.”

In general, 2011 was a tough year for sovereign investors. A major lack of public investor confidence combined with structural economic issues coming to roost depressed valuations in capital markets. Our staff has compiled a list of the top ten game-changers that will set the tone for sovereign wealth funds in 2012.

10.) Continual Low-Yield Environment – Pushing Allocation

Central banks and sovereign wealth funds are dealing with a low-yield fixed income environment. We saw a trend of the nearly full migration out of American MBS towards safe haven sovereign debt such as the United States, Germany, and the United Kingdom. Credit funds are generating major buzz. Bottom line – Liquidity – Safety – Flight

9.) Goldbug

Gold markets stayed liquid throughout the financial crisis.

Gold is up this year and it is seen mostly as an inflation hedge. Many sovereign investors have exposure to gold in ways such as funds, investing in gold mining companies, and derivatives. A few governments have actually purchased physical gold. The Qatar Investment Authority created a sovereign wealth enterprise to invest in gold, commodities, and other metals. Some investors see gold as comparable to a bond that never matures.

8.) Real Estate (Europe & U.S.)

Norway’s GPFG pulled the trigger in real estate. Granted they look expensive, core real estate in the United States and Europe are seen as a safe inflation hedge and cash flow generator. In 2012, we might see a more substantial move out of the “popular” markets such as London and Paris to secondary markets.

7.) Private Equity and the Sovereign Investor Relationship

Co-investment deals are increasing in frequency creating indirect competition for private equity firms. Private equity firm investing is a growing strategy among larger sovereign wealth funds and public pension funds. The secondary market is appealing to SWFs allocated in alternatives. More and more governments are creating joint venture country funds.

[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

According to the U.S. Census Bureau, total assets of the largest 100 public defined benefit retirement systems declined 8.54% in the third quarter. It was the first overall quarterly loss for the U.S. public investor group in more than 1 year. The top 100 assets are ranked at US$ 2.534 trillion, a little more than half the size of the current sovereign wealth fund investor class. At the zenith in Dec 31, 2007, the top 100 public plan assets where at US$ 2.928 trillion.

Facts about the 100 largest public plans surveyed by the Census Bureau:

• Represents 90% of Total U.S. Public Plan Assets
• 81 State Plans
• 19 Local Plans

 Dollar amounts in millions

Source: U.S. Census Bureau, Governments Division
December 16, 2011

Saudi Arabia is an oil-based economy with strong state controls. The Kingdom of Saudi Arabia is the biggest exporter of petroleum in the world. When planning for their budget, they traditionally use a conservative price for oil of around $60 per barrel. If oil prices surge higher, then revenue and surplus levels next year will surpass the estimate. Saudi Arabia is forecasting a budget surplus of 12 billion riyals (US$ 3.2 billion) next year.

The Kingdom of Saudi Arabia is boosting domestic spending to create jobs, fund housing, and modernize defenses.

In 2011, the Kingdom of Saudi Arabia increased government spending sharply to fund social welfare developments. According to the Saudi Arabian Finance Ministry, King Abdullah ordered the transfer of 250 billion riyals from the 2011 budget surplus to the account of the Saudi Arabian Monetary Fund to finance the construction of 500,000 housing units that were approved in March.

On another note, the Saudi Arabian Monetary Agency (SAMA) is in discussion with several financial institutions about issuing riyal-denominated sukuks. Saudi Arabia wants to drain some liquidity from the domestic market.

The investor class of sovereign wealth funds has decreased by -1.16% to give the current total figure of US$4.755 trillion down from September 2011 of US$ 4.811 trillion. Most of the decrease can be attributed to negative public equity returns.

See Fund Rankings

Date 12/10/2011

The nations of Southeast Asia and the Gulf continue to build economic, social, and investment ties, especially due to the presence of Muslim culture embedded in both regions. Over the past few years trade between Malaysia and Qatar has increased. Malaysia and Qatar have announced a $2 billion joint investment fund that will target opportunities in both countries and bordered states. Each country will contribute around a billion into the joint fund. The prime ministers of both countries signed letters of intent on cooperation agreements in the areas of high education and tourism.

Malaysia is actively trying to increase foreign direct investment and diversify their economy. The nation has transformed itself from a raw material country to a nation with manufacturing, services, and Islamic finance. In fact, the Government of Malaysia has created economic incentive programs to develop targeted regions such as the Kuala Lumpur International Financial District (KLIFD). The KLIFD wants to be the hub for the Islamic finance industry.

Globally, sovereign wealth funds have been holding steady on direct investing. The upper quartiles of deal transaction sizes are smaller compared to 2008 and 2009. Note that the last four quarters are not complete since data is still being accumulated for the fourth quarter of 2011. According to the sovereign wealth fund direct transaction database, around $12.69 billion (last four quarters) has been directly invested in the financial sector by sovereign funds. Within the financial sector, a growing proportion has been spent on emerging market financial institutions and companies.

This is followed by $10.84 billion in the energy sector.

Other sectors that have garnered headlines in recent months are utilities & infrastructure. Combining the sectors trailing four quarters, we totaled $9.64 billion in direct investments. The sectors for utilities & infrastructure had some of the largest transaction sizes per deal.

Despite the dismal economic situation in Europe, direct investments were relatively high in Europe compared to other regions. In fact, France led the way with $11.6 billion summing last four recent quarters, followed by the United Kingdom at $9.4 billion.

In addition, we acknowledge increased real estate direct transactions by sovereign wealth funds this year, but total amounts are undercounted due to the non-transparent market.

Click Image to Enlarge

The Sovereign Wealth Fund Transaction Database is now available online for subscribers. Transaction data can now be accessed on a more frequent basis. The SWFTD now contains over 2,800 recorded transactions.

• Access Top Ten Lists
• Time-Series Charts and Graphs
• Filter Searches
• Data Guides

Access Online Website – SWFTD

The China Development Bank (CDB) is a government lender owned by the Government of China. They have been a chief source of capital for international project finance deals. The CDB has already expanded into various continents such as Africa (China-Africa Development Fund), South America, and Asia. Originally founded as a policy bank to pursue the macroeconomic policies of the Chinese government, the bank is taking a different direction. It is in the evolution of becoming more like a commercial bank by increasing its role in global finance through various segments. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Italy has a much larger economic footprint than Greece, Ireland, and Portugal. The Southern European nation is a crucial member of the European Union. Many governmental investors hold Italian debt in their fixed income portfolios, directly or indirectly. For example, as of September 30, 2011, according to their 3Q report, Norges Bank Investment Management held around US$ 7.8 billion in Italian sovereign debt. Investors are changing their view on Italian debt as capital markets are moving quicker than the drawn out labored political consensus-building process. Investors across the spectrum unloaded Italian government bonds today, since Italian government bonds moved above 7% today. In general, investors are beginning to lack confidence in the Italian bond market. This week has brought substantial political change in Europe, including Italian Prime Minister Silvio Berlusconi planning to step down. Will a Greek tragedy play out in Italy?

Printing money to buy Italian bonds might seem like a way out.

[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Africa is a resource rich continent with rapidly expanding demographics, but political risks are common in Africa. Launched in 2007, the China-Africa Development Fund (CAD Fund) has fully invested the initial US $1 billion. The CAD Fund can expand up to US$ 5 billion in capital. The initial US$1 billion was derived from the China Development Bank (CDB). The CDB is a government lender owned by the People’s Republic of China. They also finance overseas investment projects.

Currently, the CDB is looking for fund investors for its African investment fund. These investors could include Chinese companies.

Jin Liqun

In recent weeks, the China Investment Corporation (CIC) has been in the news headlines for its economic view on Europe and current investment activity in the region. It is well known over the past three decades, more importantly this last decade; China has accumulated vast foreign reserves. Created in 2007, the CIC was tasked to manage a portion of China’s financial resources.

Europe is in the midst of troubling economic times. The Chinese government has been supportive of Europe, but the real question is what will be their level of involvement in the European sovereign debt crisis? If China were to increase investment into Europe via sovereign bonds or other non-firm investments, then it must be convinced that Europe has changed.

The people in China are cognizant in where China invests and are keen for the Government of China to be a responsible commercial investor.

Europe is known for its welfare state mentality, but the world is rapidly changing and to pay for the welfare state, economies must grow by a certain percentage. Taxing and budget cuts are only short-term fixes, structural labor changes are a necessity. According to Jin Liqun, supervising chairman of the China Investment Corporation (CIC), some countries in Europe have “an incentive system totally out of whack.”[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Can sovereign wealth funds play a role in the saving of Europe? The European Financial Stability Facility (EFSF), a Luxembourg incorporated entity, has been in the news headlines in recent months. The EFSF will eventually be worth US$1.5 trillion after European leaders agreed to leverage existing guarantees 5x. Germany, France, and Italy are the three largest contributor countries to the EFSF. Supranational debt exposure is usually deemed less risky, but underlying factors make it look unattractive to some governmental investors. With all this being said, sovereign wealth fund appetite on the EFSF varies.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

The Bank of Thailand and Thailand Ministry of Finance have agreed to not use the country’s foreign reserves to create a sovereign wealth fund. There was a significant internal debate among Thailand’s governmental financial bodies on if it was feasible to create a sovereign wealth fund. Including Thailand, the majority of Asian countries intervene to lower the value of their currency. By practicing currency intervention, Thailand and other countries that follow a similar activity, usually hastily accumulate international reserves.

Central banks are known to be conservative “investors” and usually invest in assets with low default risk and high liquidity, thus yielding very low returns. This negative carry has been pushing some central banks into yearly losses.

Left and right, Thailand observes its Asian peers creating sovereign wealth funds to deal with excess foreign reserves.

Thailand Finance Minister Thirachai Phuvanatnaranubala wanted to see if it was possible to invest around US$ 180 billion in foreign reserves in higher-yielding assets. The big concern was government interference or meddling in the central bank over the excess foreign exchange assets.

[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

2010 was the comeback year for sovereign funds in terms of investments and asset value growth. We’ve seen expanded cooperation among sovereign funds in investing. Our staff has compiled a list of the top ten game-changers that will set the tone for SWFs in 2011.

10.) Sovereign Wealth Funds will continue to shed Western Financial Institutions

Sovereign funds bailed out Citigroup, Merrill Lynch, Morgan Stanley, Barclays, UBS, etc. during the dreadful financial crisis of 2007 and 2008. In 2010, several funds exited their investments in Western banks and looked toward their smaller Eastern counterparts, such as the Agricultural Bank of China.

9.) UK Infrastructure – Airport Gatwick

UK Infrastructure was an attractive sector of investment in 2010. Australia’s Future Fund and the Abu Dhabi Investment Authority own a piece of the UK’s second largest airport. Airport Gatwick is the world’s busiest single runway airport.

8.) China’s Foreign Exchange Reserves continue to grow

At the end of September, China had $2.648 trillion in gold and foreign reserves. This is a 16.5% increase from the end of September 2009. Our staff believes, China will either pump more funds into the CIC, or perhaps fund another similar entity.

7.) Some love PIIGS, some don’t want all the trimmings

Russia’s National Welfare Fund shunned sovereign debt in Portugal, Greece, and Spain. A number of the Asian SWFs lowered allocation towards these fixed income markets, while Norway’s GPFG embraced it. Did someone whisper austerity?

[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]