Sovereign Wealth Fund Institute

High world oil prices greatly contribute to Nigeria’s currency reserves. Nigeria’s foreign exchange reserves slightly moved down from $34.57 billion on July 13, 2011, to $33.54 billion on July 22. This amounts to around a $1 billion drop. At the same time last year reserves were at $37.86 billion.

Even though the United States is facing a large deficit issue and a debt ceiling conundrum, the decline in reserves were most likely attributed in the growth in demand for U.S. dollars in the domestic market.

The press release states, “the report presents the performance of the funds under GIC’s management. The 20-year annualised real rate of return is the key focus for GIC as it is our mission to preserve and enhance the international purchasing power of the reserves. Starting this year, GIC is also publishing the 5-year and 10-year nominal rates of return to provide a sense of the on-going medium-term investment performance, even while GIC maintains its sights on the long term.”

Read more: GIC Press Release

The press release states, “On 26 July 2011, with the approval of its Board of Directors, China Investment Corporation (CIC) released Annual Report 2010 (hereafter referred to as “annual report”), the third annual report by CIC since its inception.

The annual report, consisted of Overview, Culture and Core Values, Corporate Governance, Investment Strategy and Management, Risk Management, Human Resources, Outreach Activities and 2010 Financials, provides comprehensive information on CIC’s operation and major progress in the year of 2010.

In 2010, CIC reduced its cash holdings as a proportion of total portfolio and further diversified its investment portfolios. The return on its global investment portfolio was 11.7% in 2010 and the cumulative annualized return was 6.4% since its inception.

Mr. Lou Jiwei, Chairman & CEO of CIC said in his message for the annual report that 2010 was a year of substantial growth and accomplishment for CIC. As CIC fully deployed the investible capital in its global portfolio, it continued to develop its organization and build its institutional capabilities. CIC earned a satisfactory return for its shareholder and continued to manage the risk profile of its invested portfolio effectively.”

Read more: China Investment Corporation Press Release

Uncertainty is the breeding ground for greater risk and volatility; behemoth conservative investors adore certainty. Sovereign funds have the distinct advantage of being long-term investors; however, short-term risk is increasing as uncertainty looms around deficit and debt ceiling issues. The August 2nd debt ceiling deadline is creeping up. No official deal has been approved by all parties involved. The major rating agencies have continued to project concerns on U.S. sovereign ratings for certain scenarios. With regards to sovereign wealth funds, there is a tremendous issue of macroeconomic concern for their investment portfolios and holding companies.

At the Sovereign Wealth Fund Institute, we predict that there is a 50% chance of a downgrade in the remaining part of 2011 for the United States.

A high probability remains that the United States will not sufficiently address long term deficit issues. Raising taxes or trimming beloved entitlement programs in the midst of a period of high unemployment is politically dangerous. Thus the downgrade could fall into the AA category. There is a slight chance of a debt ceiling rupture. This could possibly lead to a technical default on U.S. treasuries or a default on other U.S. financial obligations. This would be a disastrous scenario that would impact all financial markets.

United States – Gross External Debt Position: March 31, 2011 – Currency Composition of Gross External Debt

Source: U.S. Treasury – Millions of U.S. Dollars – 6/30/2011

With all this talk, a downgrade to AA for the United States will result in more of an embarrassment, than catastrophic depression. Sovereign funds and other large institutional investors will continue to buy U.S. treasures, but maybe not at the rate of the past five years. In addition, SWFs will perceive U.S. treasuries as no longer a riskless asset, if they haven’t already. The process of diversification from U.S. treasuries would accelerate dramatically whether in countries like Germany or Canada, or gold.

Mumtalakat Holdings, Bahrain’s sovereign wealth fund will continue to support Gulf Air financially. Gulf Air is the national air carrier in the Kingdom of Bahrain. Unfortunately, Gulf Air will be a strain on the fund’s 2011 earnings. Gulf Air was negatively affected by the political unrest that swarmed the country. Management at Mumtalakat Holdings sees Gulf Air as a challenging asset; however, airlines are a strategic industry for the Kingdom of Bahrain.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Deep in Mongolia lies Tavan Tolgoi, otherwise known as Five Heads. It is located 550 kilometers from Mongolia’s capital Ulaanbaatar. Tavan Tolgoi is one the largest deposits of coal in the world. Sovereign wealth funds and other investors have been investing in several coal mining operations.

Now that Mongolia has opened up Tavan Tolgoi allowing private companies to develop mining operations, the country is contemplating ways to best utilize its mineral revenues.

Chinese, Russian, and American companies are developing parts of the block. The estimated value of the mineral deposits is a bit greater than US$ 1 trillion. The Government of Mongolia is trying to figure out a way to best serve its citizens. Dutch disease can be a curse and crush ailing industries. The Government has publicly stated it wishes to avert that scenario.

The Prime Minister of Mongolia sees promise in how the Norwegians, Canadians, and Chileans handled their resource surpluses.

The press release states, “The SAFE recently released China’s International Investment Position for year-end 2010.

The statistics reveal that at the end of 2011 China’s external financial assets reached USD4126 billion, up 19 percent over that at the end of 2009; external financial liabilities reached USD2335.4 billion, up 20 percent over that at the end of 2009; and external financial net assets reached USD1790.7 billion, up 19 percent over that at the end of 2009.

Among the external financial assets, direct investments abroad totaled USD310.8 billion, portfolio investments totaled USD257.1 billion, other investments totaled USD643.9 billion, and reserves assets totaled USD2914.2 billion, accounting for 7 percent, 6 percent, 16 percent, and 71 percent respectively of the external financial assets. In terms of external financial liabilities, foreign direct investments totaled USD1476.4 billion, portfolio investments totaled USD221.6 billion, and other investments totaled USD637.3 billion, accounting for 63 percent, 10 percent, and 27 percent respectively of external financial liabilities.

The International Investment Position (hereinafter referred to as the IIP) is a statistical statement reflecting the stocks of financial assets and liabilities of one country or region to other countries or regions in the world at one specific point; together with the Balance of Payments Statement (BOP Statement) it constitutes the complete international accounts system, indicating the trade flows of the country or region.

The SAFE revised its IIP for year-end 2009 according to the latest data.”

Read more: SAFE Press Release

The Dodd-Frank Wall Street Reform and Consumer Protection Act is now a U.S. federal statute and signed into law by U.S. President Barack Obama.  Now that the law is in place, U.S. agencies such as the Commodities Futures Trading Commission (CFTC) and the Federal Reserve Board are drafting proposals under newly minted regulatory powers, especially in the area of swap margin requirements and classifying swap participants.  Counterparty risk cannot be understated and it furthered the slogan “too big to fail”.  The agencies are proposing to include sovereign funds as “financial end users” or “financial entities”.  If this proposal passes, this will increase their margin requirements, essentially mandating sovereign wealth funds to pledge their assets to back American financial institutions.   This brings further issues to light, since some sovereign funds may need legislative or committee action to enlarge the amount of pledged assets to meet margin calls.  There is also political risk that foreign governments might counteract by providing similar legislation against the U.S. government.

Under the proposal, they state:

“The Commission notes that these types of sovereign counterparties do not fit easily into the proposed rule’s categories of financial and nonfinancial entities. In comparing the characteristics of sovereign counterparties with those of financial and nonfinancial entities, the Commission preliminarily believes that the financial condition of a sovereign will tend to be closely linked with the financial condition of its domestic banking system, through common effects of the business cycle on both government finances and bank losses, as well as through the safety net that many sovereigns provide to banks.

Such a tight link with the health of its domestic banking system, and by extension with the broader global financial system, makes a sovereign counterparty similar to a financial entity both in the nature of the systemic risk and the risk to the safety and soundness of the covered swap entity. As a result, the Commission preliminarily believes that sovereign counterparties should be treated as financial entities for purposes of the proposed rule’s margin requirements.”

Source: U.S. Commodities Futures Trading Commission

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Many South American countries are facing the stress of unwanted appreciation in their currencies. Colombia is joining the chorus with Brazil. The Colombian President Juan Manuel Santos is against added interest rate increases by the Banco de la República de Colombia (Central Bank). The Colombian peso is gaining tremendous ground on the US dollar. The pesos appreciation could spur a move to have government regulators limit the amount of foreign investment. Colombia wants to balance demand between its export market and demand of direct foreign investments.

Sovereign wealth funds are attracted to South America with its burgeoning middle class and lush natural resources. Such a reversal in foreign direct investment policy could hinder future investment opportunities and be harmful to local workers.

One way to help lower demand for the Columbian peso would be to create a sovereign fund to invest abroad. Colombia is another Latin American country fortunate to have significant amounts of oil and other precious metal deposits. Mr. Santos is fully aware of the issue of Dutch Disease and how it can affect a fragile country that is trying to diversify into a number of industries. To prevent rapid currency appreciation and the harming of other industries, Mr. Santos is seeking legislation to create a sovereign fund. The sovereign fund would save excess oil and mining revenue.

When properly implemented, leverage can be a financial tool to enhance total return. A number of sovereign wealth funds employ the use of leverage in a variety of investment strategies. AIMCo (Alberta Investment Management Corp), which manages a number of governmental funds including the Alberta Heritage Fund would like more control on the amount of money it can borrow to make investments. AIMCo also manages public pension money and the Government of Alberta limits the amount of leverage pension funds can utilize in investing. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

This interview appears in the 2Q Y2011 issue of the Sovereign Wealth Quarterly.

ISRAFIL MAMMADOV IS CHIEF INVESTMENT OFFICER OF THE STATE OIL FUND OF THE REPUBLIC OF AZERBAIJAN (SOFAZ). Currently, SOFAZ ranks a 10 in the Linaburg-Maduell Transparency Index.

1. Is the current global market providing a positive investment environment for SOFAZ, and what type of changes would you like to see?

Similar to other investors whose portfolios consist mainly or entirely of fixed-income securities, SOFAZ suffers from the current low-yield environment in the financial markets. Therefore, SOFAZ reduces duration and favors higher coupon bonds in order to avoid negative return. Moreover, credit spreads remain wide and there are still some good values in lower credit rating securities. SOFAZ takes advantage of these opportunities by shifting towards lower credit rating securities. Additionally, considering the current environment in some emerging markets and southern European countries, SOFAZ also benefits from the current investment opportunities in these markets.

It goes without saying that, the best possible way to benefit from the current environment would be the introduction of equities and alternative investments to current portfolio, which SOFAZ is planning to start investing in soon.

2. Will 2010 go down in history books as a good year or bad year for sovereign wealth funds, and why? How did 2010 impact SOFAZ?

In general, 2010 has been a good year with significant upward trends in SWFs’ assets under management. SWFs gained positive returns from their investment portfolios, even though these returns were comparatively lower than 2009 levels. Recovery in global financial markets continued with a slow pace in 2010.

2010 has also witnessed post-crisis tendencies, one of which was the shift of geographical focus of investments. High level of unemployment and economic slack faced in developed countries has made investments unattractive in these countries. On the contrary, investments in the emerging markets have seen significant rise during the course of 2010. Another tendency was a shift towards equities and alternatives, since fixed-income markets have not provided high returns over 2010 due to low yields and high volatility of prices. However, the opposite is true for equities, which demonstrated decent level of growth (5-7%).

SOFAZ investment portfolio faced 1% return in 2010 – the lowest return since inception. This level of return is characterized by several reasons. Firstly, it was due to the ultra-low yield environment dominating the market. Another reason is that a large portion the investment portfolio consisted of short-term maturity bonds. Finally, unexpected sovereign debt crisis observed in some European economies also contributed to the level of returns of the SOFAZ investment portfolio in 2010. From the beginning of 2010, SOFAZ started investing in securities with lower credit rating, in order to increase returns without taking high interest rate risks, as well as to diversify its investment portfolio.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Chile’s President Sebastian Pinera stated during a televised national address about the proposed fund, “It’s time to stop the protests and recover the paths to dialogue and agreements.”

There are several key reasons why countries create sovereign wealth funds. Sovereign wealth money can provide countries with a lifeline of benefits in times of need, whether it’s stabilizing the budget, providing the public economic dividends, or capitalizing banks or state owned corporations. Luckily for Chile, it is the world’s largest copper producer.   Chile’s President Sebastian Pinera has proposed a $4 billion fund for higher education, following weeks of massive protest over education costs and standards. Access to quality education and financing remain a nettlesome challenge for Chile and other countries.

The proposed education fund will receive money from a combination of sources including, the public treasury and savings held in Chile’s Economic and Social Stabilization Fund.

In the aggregate, Chinese bank stocks have fallen ever since Moody’s Investors Services released information that Chinese banks might have higher than expected exposure to local government debt.  There is tremendous concern that Chinese lenders will be incapable to absorb losses on defaults; however, a Chinese government plan to clean up the problem could alleviate the situation.  [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Sovereign Wealth Quarterly Q2 Y 2011 will be shipped out to subscribers at the end of this current week.

If you are not a subscriber, now is your chance to subscribe.

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Shale gas is becoming a conventional source of energy; however, it is much more expensive than convention oil and gas drilling. Sovereign wealth funds such as Temasek Holdings have been investing in companies that are involved with the process called hydraulic fracturing.  Japan’s Mitsui has already been investing in shale projects in Poland.

Europe may have another local commodity-based sovereign wealth fund on its hands. Poland’s domestic energy needs are largely dependent on coal power and Russian gas imports.

Luckily for Poland, big deposits of shale gas have been discovered in the country. First, this could dramatically reduce the need of Poland importing energy from Moscow, which currently provides around 64% of Poland’s total gas imports. Second, it can provide for windfall profits to be taxed and moved into a sovereign investment vehicle.

Poland would most likely model the prospective SWF after Norway’s Oil Fund.

Poland has already given 87 licenses to companies to explore for gas trapped in shale rocks. According to the United States Energy Information Administration, Poland’s recoverable reserves of shale gas may amount to 5.2 trillion cubic meters, which could supply more than 300 years of domestic consumption.

Recently, Chinese Premier Wen Jiabao made an official visit to several European countries as the continent struggles on how it should handle Greece’s dire economic quagmire. China views Europe as a strategic region and is continuing to invest in government debt across the continent. China is prepared to invest in European government bonds to assist the EU wave over their current predicament. In fact, China holds 12% of Spanish government debt.

China has made a compelling case that it wants to see a strong euro.

Laurence Lau, Chairman of the Hong Kong office of the China Investment Corporation believes the euro will not fall apart. He feels that the Greek sovereign debt crisis will be brought under control and solved.

Other institutional investors are not as optimistic, as Greece is facing a political divide on top of a sovereign debt mess. Some feel that countries will begin to flee the euro currency.

The Securities and Exchange Commission (SEC) has requested information from select companies that might have dealt with the Libyan Investment Authority (LIA). The SEC requested information from Conoco Philips, Exxon Mobil Corp, and Occidental Petroleum Corp. The SEC is asking to see any type of communications they had with the Libyan Government since 2008.

The Libyan SWF probe is widening as the SEC requested information from the Goldman Sachs Group and private equity firms earlier.

When sovereign funds invest overseas they can be exposed to legal risk. With increasing interaction with investment funds, sovereign wealth funds can be under the scrutiny of governmental investigations, if there are any perceptions of a violation of the United States Foreign Corrupt Practices Act. The Securities and Exchange Commission (SEC) is undergoing a series of inquiries on sovereign wealth funds and investments firms. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

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 2,700 recorded transactions.

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SWF Direct Investments by Quarter – Billions USD

According to the press release, “President Goodluck Ebele Jonathan has said that his Administration was fully committed to making Nigeria’s oil assets a vehicle for wealth creation, economic diversification and development.

In his remarks after signing the 2011 Appropriation (Amendment) Bill and the Nigerian Sovereign Investment Authority (NSIA) Bill into law at the Presidential Villa, Abuja, on Friday, May 27, President Jonathan said that the new NSIA will provide the country with a “strong, transparent and effective tool for the management of our nation’s petroleum wealth for the good of all Nigerians.”

The President announced that apart from its One Billion US Dollars seed capital, the NSIA will be funded every month by the excesses of budgetary revenue from oil coming into the Federation account.

He said that revenues accruing to the authority will be invested by it through three special funds – the Nigeria Infrastructure Fund, the Future Generations Fund and the Stabilisation Fund.

According to President Jonathan, the infrastructure fund will be dedicated to investments in the development of critical national infrastructure, with ten percent of it going to agriculture and government-sponsored projects that promote economic development in under-served sectors or regions of the country.

He said that the future generations fund will build an inter-generational savings base by investing in longer term assets that generate returns to accumulate wealth for future generations of Nigerians while the stabilization fund will help to protect annual national budgets by providing a stable, last resort source of financing during periods of fiscal deficit resulting from a sustained fall in oil prices.

President Jonathan commended the leadership and entire members of the National Assembly for the passage of the two bills.

He also applauded the committed efforts made by the Minister of Finance, Mr. Olusegun Aganga towards the passage of the NSIA Bill.

The signing of the two bills into law was witnessed by the Senate President, Chief David Mark, the Speaker of the House of Representatives, Mr. Dimeji Bankole, the Secretary to the Government of the Federation, Alhaji Yayale Ahmed, the Attorney General of the Federation, Mr. Mohammed Adoke, the Minister of National Planning, Dr. Shamsudeen Usman and the Minister of Finance.”

Source: Nigeria First – Official Website of the Office of Public Communications

Georgia is a country with ripe agricultural land and located strategically by the Black Sea. The country’s soil and climate has made farming a very productive sector for the overall domestic economy. Crops such as corn, wheat, hazelnuts, citrus fruits, and grapes are dominant. Hassad Food, the sovereign wealth enterprise of the Qatar Investment Authority is on the lookout for agricultural investments. They recently made a visit to meet with the Finance Minister of Georgia. In addition, they also discussed about Qatari Diar’s possible investment in developing hotel properties in the country.

It might be a strategically convincing idea to partner with Qatar, as Georgia imports nearly all its required materials for gas and oil products.

We have updated the profile on the Oman Investment Fund.
Click here to see the updated profile.

In November 2007, the Emirates Investment Authority (EIA) was created by Emiri decree. They are the United Arab Emirates’s federal sovereign wealth fund. The sovereign fund has characteristics of a strategic development sovereign wealth fund, similar to that of the Mubadala Development Company and Bahrain’s Mumtalakat Company. This marks a stark contrast in style to the Abu Dhabi Investment Authority. The sovereign entity is even debating whether to raise debt to enable more acquisitions.

The EIA controls positions in several UAE firms such as Etisalat (Emirates Telecommunications Group) and du.  Etisalat operates in over 18 countries and services over 100 million customers in Asia, the Middle East, and Africa.  The EIA holds around 60% in Etisalat.  In terms of direct investments, they are allocated towards telecommunications; however, they see possibilities of jumping more into financial services, education, food production companies, and healthcare. The EIA does not only invest in just direct stakes in companies. They are also active in bonds and private equity funds.

Nigeria is Africa’s largest oil producer and is in the midst of creating a commodity-based sovereign wealth entity. The bill would be comprised of three segregated funds which are the Future Generations Fund, Nigerian Infrastructure Fund and Stabilization Fund. The Nigerian House of Representatives passed the sovereign wealth entity creation bill.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

The China Investment Corporation has not received the proposed capital injection from the Chinese Government. It will take some considerable time and analysis.  Some members of the press and media reported the CIC already received the funding; however, the CIC is making progress on its goal of managing more funds for the Chinese Government. The CIC and other governmental stakeholders are working on a mechanism to allow the CIC to receive continued funding. Will the China Investment Corporation be the official manager of diversified governmental Chinese sovereign wealth?

Many sovereign wealth funds, especially the commodity-based sovereign funds have an orderly process of receiving fund injections in an ongoing basis. On the other hand, non-commodity-based funds often receive funds to manage through one-time transfers, not so much on a constant frequency.

Lou Jiwei, Chairman of the China Investment Corporation said that he supports greater transparency for sovereign funds; however, it comes with certain caveats.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

In 2006 and 2007, the Investment Corporation of Dubai was building a large acquisitive portfolio. Priorities have changed since the financial crisis. The Investment Corporation of Dubai has put forward a US$2.8 billion, 5-year loan refinancing. This is a significant milestone since this is the largest loan to originate in Dubai since the financial crisis. Even though the Investment Corporation of Dubai is a sovereign entity, it does face higher borrowing costs. The loan refinances US$ 6 billion in existing debt.

On December 4, 2008, the Government of Australia signed the Convention on Cluster Munitions. The Convention on Cluster Munitions is an international treaty that prohibits the development, use, transfer, and stockpiling of cluster weapons. Australia’s Parliament has not yet passed the bill to ratify the international treaty.

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Syria is undergoing domestic unrest and the current regime is heavily cracking down on dissenters. The security situation has made it thorny for foreign developers to continue investment projects. Qatari Diar is the real estate arm of the Qatar Investment Authority. They have temporarily stopped investment projects in Syria until the security situation clears up.

When the security situation improves Qatari Diar will resume real estate development operations in Syria. In the Syrian seaport city of Latakia, Qatari Diar is developing the Ibn Hani Bay Resort project which will cost around US$ 350 million. The luxury real estate project began in January 2010 and it stretches over 244,000 square meters on the Ibn Hani coast.

Hillary Rodham Clinton

Talks have been held on what to do with Gaddafi’s frozen assets. The Libyan rebels are in dire need of financing, while a number of participating countries are hesitant to lend their own money to aid them. In April, the leadership in Libya’s opposition sent a letter to U.S. Treasury Secretary Timothy Geithner. The letter had a simple mission. The opposition wants a creation of a trust fund that is composed up of frozen Gaddafi assets. The trust fund would be audited and co-managed by the opposition and participating foreign governments.

U.S. Secretary of State Hillary Rodham Clinton was in Rome today discussing Middle East political issues with Italian Foreign Minister Franco Frattini and other diplomats. The Obama administration is supporting the opposition in Libya and agrees to the trust fund idea. The frozen assets that could support the rebels could be around $4.5 billion.

Ireland’s National Pensions Reserve Fund has helped partially stabilize and capitalize Irish financial institutions. Unfortunately, the money was not enough and the European Union and International Monetary Fund advanced more funds around November 2010. To meet the demands of the loans, the NPRF has had to sell off huge positions in its portfolio. The fund considered selling portions of its private equity portfolio.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

This 3 page report is available for download for SWFI subscribers.  This report gives a brief overview on the proliferation of sovereign wealth funds.

Around the globe, policymakers have viewed sovereign wealth funds through a variety of lenses. Some political leaders perceive SWFs as foreign raiders purchasing national brand name companies, trophy office properties, or creating monopolies within their country. Other countries welcome sovereign investment and capital to help preserve their constituents’ way of life. In the post-crisis period, welcoming sovereign investment has been the greater, illuminating trend.

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Tan Jee Say

Many sovereign wealth funds have the visible stress of managing overseas investments while properly communicating to the local citizenry on relevant updates. Most of the time, local citizens want to ensure the money is spent on reliable investments. This is why a number of sovereign funds become hesitant or have name-brand-selection bias when choosing investments. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

According to an interview by Reuters, Gita Wirjawan, Chairman of the Badan Koordinasi Penanaman Modal (BKPM), says the China Investment Corporation is planning to offer $4 billion in infrastructure project loans. The BKPM is an investment board that coordinates business between businesses and government. Its aim is to increase foreign direct investment in Indonesia. Another goal is for the agency to improve the lives of its citizens by creating domestic jobs. The types of Indonesian infrastructure projects were not specified. Indonesia is an Asian emerging economy with a growing middle class in desperate need of infrastructure. If the proper infrastructure is not built in a timely fashion, it can harm economic growth and decrease country competitiveness.

Most sovereign wealth funds prefer to invest in developed infrastructure in Western economies. Developed infrastructure is less risky and cash flows do not vary as much as infrastructure projects. In addition, regulation and government transparency are key planks for SWFs to plunk down significant amounts of capital. Indonesia is at an economic crossroads. The country is aiming to build over 20,000 km of roads and provide at least 15,000 MW through power plants in the next few years. Indonesia is also ripe with natural resources in oil and gas. Lastly, Indonesia is fortunate enough to be able to reap the benefits of hydroelectric power, a renewable source of energy that contributes to an overall low carbon economy.

Read more Linaburg-Maduell Transparency Index

Tax considerations influence sovereign wealth fund investment behavior.  Australia does not want to deter passive foreign investment, especially in a challenging economic environment. Australia is already a favorite destination for many SWFs due to its vast natural resources, mature real estate market, and transparent capital markets.  The Government of Australia is contemplating tax exemptions for sovereign wealth funds that possess passive investments in Australian assets.

Most nations agree that passive governmental investment is a plus for the economy.  When sovereign investors engage in commercial activity, most of the time, they lose their exemption with that source of income.  Other Western nations have already adopted exemptions for sovereign investors.  Tax exemption laws for sovereign wealth funds (foreign governmental investors) vary by country.  In the United Kingdom, foreign governments have sovereign immunity from UK tax, except in the case of commercial income.  [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Historically, investment access to India’s equity markets has created several problematic issues and headaches for sovereign wealth funds. Currently, sovereign wealth funds are grouped under the category foreign institutional investor or FII defined by the Securities and Exchange Board of India (SEBI).

A few current sovereign-entity FIIs registered include:

• Abu Dhabi Investment Authority
• Abu Dhabi Investment Council
• Australian Future Fund
• Provincial Government of Alberta (AIMCo)
• China’s National Social Security Fund
• Fullerton Fund Management Company LTD (SWE of Temasek Holdings)
• Kuwait Investment Authority
• New Zealand Superannuation Fund
• Norges Bank
• Queensland Investment Corporation
• Singapore’s GIC

Sovereign entities can also invest as a Foreign Venture Capital Investor. FII’s are under strict regulation and cannot hold large positions in listed Indian companies. Times have changed, India wants to increase foreign investment in companies and attract foreign capital. There is a heavily-debated plan underway to create a new defined class of investor for sovereign funds which will be fundamentally different from the FII classification. This new proposal for sovereign funds would allow them to hold a much larger stake at 20% compared with 10% for a publicly traded Indian firm. The plan must be approved by SEBI and receive permission from the Reserve Bank of India. India’s fear was that foreign governments could create numerous sovereign entities to bypass the 10% rule and thus effectively control the company for geopolitical reasons.

Recently, the Government of Singapore Investment Corporation opened up an investment office in Mumbai. This was after India and Singapore signed a Comprehensive Economic Co-operation Agreement (CECA). The Indian Government would also treat Temasek Holdings and GIC as separate investors, not acting in concert in potential large stake undertakings. Sovereign wealth funds are warming to investing in the Indian equity markets as the Government of India begins to warm up to foreign investments.

Strategic Development Sovereign Wealth Fund (SDSWF) – It is a sovereign wealth fund that can be utilized to promote national economic or development goals.

It is commonly accepted that most sovereign funds have a commercial objective which is to earn a positive risk-adjusted return on their pool of assets. There are some SWFs known to promote national economic or development goals.

Common Scenarios (SDSWF)
Domestic Stabilizer Scenario
SWF invests in domestic asset(s) or domestic firm(s) to stabilize aggregate asset pricing, create domestic jobs, and/or prevent entity insolvency.

Industry Job Creator Scenario
SWF acquires a direct stake or total control of Firm A. Firm A owns proprietary technology, controls a unique process, or has access to materials. Firm A opens a factory, sets up an operation, creates a subsidiary or JV, or research facility in SWF home country. This enables strategic knowledge transfer to the SWF home country, while providing potential employment opportunities for the SWF home population.

Country – Corporate Alliance Scenario
SWF signs a memorandum of understanding (MoU) with Country A. Select companies domiciled in Country A receive direct investment from SWF, while those companies sell to the SWF home country government. Those companies may also set up operations in the SWF home country.

Resource Transfer Scenario
SWF acquires a direct stake or total control of Firm A. Firm A controls resources in which SWF home country needs for economic or development purposes.

Australia and Italy are two occidental nations in the latest conversation on sovereign fund creation. In recent news, Italy wants to follow an identical path like France in creating a defensive sovereign wealth fund. In fact, the proposed state fund will most likely be modeled as a strategic investment fund to knock off potential takeovers by foreign entities. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Tony Tan

The press release states, “GIC officially opened its India office in the city of Mumbai on 31 March 2011. This is GIC’s eighth overseas office outside Singapore. GIC’s India office will be headed by Mr Kishore Gotety. The office will be made up of more than 10 investment and asset management professionals. The team aims to foster close relationships with key Indian partners who share GIC’s values as a responsible and long-term investor.

GIC Deputy Chairman and Executive Director, Dr Tony Tan, said, ‘GIC has been amongst the earliest institutional investors in emerging Asian markets. In India, GIC has been investing across the public and private markets since the early 1990s. The setting up of the India office demonstrates GIC’s commitment to secure a larger role in the Indian growth story.’”

Read more: GIC Press Release

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The United Arab Emirates is engaged in an aggressive campaign to diversify their reliance from the petroleum industry, a common problem for many MENA nations. South Korea’s Presidential Council for Future & Vision signed a memorandum of understanding (MOU) with the Government of Abu Dhabi for a strategic partnership in getting rights to develop oil fields. Bottom line, South Korea needs the energy resources to sustain GDP growth, while the UAE needs additional technical resources to achieve partial economic diversification. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

The letter states, “To whom it may concern:

We wish to provide key facts about Temasek for your readers.  As affirmed in our previous letter to the Australian media on 31 October 2010, Temasek plays no part in the governance, operations or investment decisions of the Singapore Exchange (SGX).

While Temasek owns SEL Holdings, a special purpose entity which holds a 23.5% stake in SGX, this stake is held by Temasek for the benefit of the Financial Sector Development Fund, with no control or influence over SGX.

By law, SEL is not permitted to exercise or control the exercise of votes attached to the SGX shares, and therefore cannot vote in any shareholder vote on the ASX-SGX proposal. Temasek is in effect a non-voting trustee for the SEL shares in the SGX, and plays no part in the SGX offer for the ASX.”

Read the Full Letter: Temasek Holdings

Around the globe, the majority of sovereign wealth funds have remained somewhat hopeful on Japan’s recovery and economic resiliency.  [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

According to the press release, “Financial highlights of the results are:

• Revenue increased 22% year-on-year from AED 13.1bn to AED 16bn, as a result of a number of assets reaching operational milestones
• Net profit for the year was AED 1.1bn and total comprehensive income for the year was a negative AED 315m, resulting from mark-to-market on investments
• Total assets increased by 14% to AED 101.5bn
• Total equity increased by 26% to AED 62.1bn in line with the approved contributions from the Government of Abu Dhabi
• Total interest bearing liabilities remained flat while total debt to capitalization decreased from 37% to 30%
• Strong liquidity position of AED 6.3bn
• Credit ratings remain among the top corporate ratings in the region at Aa3/AA/AA by Moody’s, Fitch and S&P”

Read more: Mubadala Press Release

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Japan’s nuclear crisis will have a lasting impact on existing and future nuclear infrastructure projects globally. Last year, sovereign funds began an aggressive campaign to bid on energy infrastructure, mostly in conventional energy assets.  [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

The Kremlin wants to make Moscow into a global financial center to compete against other centers like London and New York. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Al-Saadi al-Gaddafi, son of Mr. Gaddafi, who is a former soccer player is a Juventus fan. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

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To read the background paper written by Brian Gibson for the SWF Summit 2011, click here

This interview appears in the 1Q Y2011 issue of the Sovereign Wealth Quarterly.

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A small number of European CEOs who have governmental investors from Libya are coming out against Gadhafi’s regime and are analyzing the effects of the sovereign wealth fund’s stakes. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Read more Linaburg-Maduell Transparency Index

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Libya has tremendous oil wealth which is one of the key reasons why it created a sovereign wealth fund. Around 80% of government revenue comes from the Libyan oil industry. Created in 2006, the estimated $70 billion sovereign wealth fund has investment stakes in a variety of European and North African companies.  A few of these firms include: UniCredit, Juventus, Pearson, and Wienerberger.

Having a sovereign wealth fund is a positive for the current Libyan Government, as it gives the current administration options.  Egypt and Tunisia did not have a sovereign wealth fund to tap.  The Libyan Investment Authority (LIA) is at risk of being partially liquidated regardless if Moammar Gadhafi’s regime is toppled. If Gadhafi’s regime retains power and control, he will most likely liquidate a significant portion of assets in the LIA to disburse to the general population. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Another United States defense contractor, Raytheon Co is in developmental discussions with Mubadala Development Co about constructing a missile maintenance facility in the United Arab Emirates. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

According to the press release, “Abu Dhabi –Mubadala Development Company (Mubadala) today announced that the Advanced Technology Investment Company (ATIC) has become a wholly owned business of Mubadala. “With common executive leadership and the Government of Abu Dhabi as shareholder of both organizations, ATIC’s integration into Mubadala will further drive the creation of innovative industries for the benefit of Abu Dhabi and the UAE,” said Waleed al Muhairi, COO of Mubadala.

“The development of an advanced technology ecosystem in Abu Dhabi, anchored by the semiconductor sector, is a critical aspect of the Abu Dhabi Economic Vision 2030 framework that guides the Emirate’s development.”

Mubadala played a key role in launching ATIC in 2008 as an element of Abu Dhabi’s long-term strategy to diversify its economy through investments in high-technology sectors. In less than three years, ATIC has transformed the competitive landscape of the semiconductor manufacturing industry through the creation of GLOBALFOUNDRIES, which has emerged as one of the top three semiconductor manufacturers in the world.”

Read more: Mubadala Press Release

Sovereign wealth funds are constantly examining investment opportunities across the globe. Investment in public infrastructure by foreign investors has been in the news headlines for months. Now, we are seeing state governments market their securities overseas in hopes to lure investors in their bonds. State governments across the United States are in dire fiscal shape. According to the Center on Budget and Policy Priorities, a US policy organization, New Jersey will have a $10.5 billion projected FY 2012 shortfall.

Selected States with FY 2012 projected shortfalls include:

• California – $25.4 billion
• Illinois – $15.0 billion
• New York – $9.0 billion
• Florida – $3.6 billion

Source: Center on Budget and Policy Priorities

As residential home foreclosures increased and values plummeted in the United States, it significantly lowered taxable revenues to the government. This lower tax base has starved the growing beast of state government. State politicians are scratching their heads. Some leaders want to raise taxes and fees, while others want to cut services and reform pensions. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

This interview appears in the 4Q Y2010 issue of the Sovereign Wealth Quarterly.

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