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Page 1: Sovereign wealth funds - ESADEitemsweb.esade.edu/research/esadegeo/SWFsReport2012.pdf · Sovereign wealth fund investment behaviour 9 Sovereign wealth funds and ... deepwater oil,

Sovereign wealth funds

Page 2: Sovereign wealth funds - ESADEitemsweb.esade.edu/research/esadegeo/SWFsReport2012.pdf · Sovereign wealth fund investment behaviour 9 Sovereign wealth funds and ... deepwater oil,

Editor:

Dr. Javier Santiso

Professor of Economics, ESADE Business School

Vice President, ESADEgeo - Center for Global Economy and Geopolitics

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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

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Foreword

Sovereign wealth funds 2012Foreword

3

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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

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Sovereign wealth funds 2012Introduction

5

Introduction

Javier Santiso

Professor of Economics, ESADE Business School

Vice President, ESADEgeo - Center for Global Economy and Geopolitics

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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.

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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.

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Victoria Barbary

Director, Sovereign Wealth Center at Euromoney Institutional Investor

Senior Researcher, Sovereign Investment Lab at University of Bocconi

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Sovereign wealth funds 2012Sovereign wealth fund investment behaviour

9

Sovereign wealth fund investment behaviour

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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

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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

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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

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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)

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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.

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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)

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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.

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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 ($) Foreign ($)

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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)

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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

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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

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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.

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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.

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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.

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Javier Santiso

Professor of Economics, ESADE Business School

Vice President, ESADEgeo - Center for Global Economy and Geopolitics

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Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities

25

Sovereign wealth funds and Spain: (re)thinking opportunities

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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.

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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.

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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).

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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.

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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.

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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.

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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

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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.

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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/.

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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.

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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).

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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.

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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.

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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

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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

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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.

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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

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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).

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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)

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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.

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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/.

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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.

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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

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Sovereign wealth funds 2012Sovereign wealth funds and Spain: (re)thinking opportunities

49

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Javier Santiso

Professor of Economics, ESADE Business School

Vice President, ESADEgeo - Center for Global Economy and Geopolitics

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Latin american sovereign wealth funds

Sovereign wealth funds 2012Latin american sovereign wealth funds

51

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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

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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.

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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.

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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

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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.

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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.

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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).

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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.

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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.

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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).

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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.

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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.

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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

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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

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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).

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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.

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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.

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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.

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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

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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.

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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.

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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.

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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

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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.

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Ignacio Briones

International Finance Coordinator, Ministry of Finance, Chile

Francisco Vergara

Head of the Sovereign Wealth Funds Unit, Ministry of Finance, Chile

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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

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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).

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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.

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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.

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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.

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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.

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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.

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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

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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.

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Javier capapé

Researcher, ESADE Center for Global Economy and Geopolitics (ESADEgeo)

PhD Candidate, ESADE Business School

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Africa and sovereign wealth funds

Sovereign wealth funds 2012 Africa and sovereign wealth funds

87

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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.

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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.

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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.

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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.

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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.

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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

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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.

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Interview with Fabio Scacciavillani, Chief Economist, Oman Investment Fund

Sovereign wealth funds 2012Interview with Fabio Scacciavillani, Chief

Economist, Oman Investment Fund 97

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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.

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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.

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Appendix. ESADEgeo ranking - Sovereign wealth funds 2012

Sovereign wealth funds 2012Appendix. ESADEgeo ranking

101

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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*

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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*

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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

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