Sometimes it pays to read footnotes and end matter, because that turns out to be where the story is.
Bocconi University’s Sovereign Investment Lab has published its latest annual report on sovereign wealth funds, and this gives us a case in point.
The report says that 2016 was far from a business-as-usual year for SWFs. They faced low commodity prices and high levels of political uncertainty. In some countries with SWFs founded on the proceeds from a single critical commodity (notably, Saudi Arabia) new funds have been created and/or mandates have been changed in the hope of diversifying the underlying economy away from that now low-priced commodity.
There has also been something of a merger wave in the SWF world of late. For example, Abu Dhabi’s Petroleum Investment Company and its Mubadala Development Company have combined into the Mubadala Investment Company.
The Shift to Risk
One of the themes of the paper is that SWFs are not synonymous with sovereign investment vehicles. Sovereign investment vehicles range from very conservative operations such as public employee pension funds to very speculative entities such as development funds with risky and sometimes illiquid assets. SWFs properly speaking are in the middle of this spectrum, although in the last year they have been edging toward the riskier side of it.
The paper says that recent macro developments have made it difficult for SWFs to achieve their assigned goals while being conservative. They have responded by shifting away from safe assets (such as real estate, infrastructure, utilities) into more speculative plays, particularly in information technology. Indeed, SWFs invested more in the IT sector than they had in all of the previous ten years combed.
In 2016 Saudi Arabia’s Public Investment Fund acquired a stake of nearly $3.5 billion in Uber, the cyber ride-hailing company.
“Whether they will succeed or fail” in such investments “will depend largely on their execution capabilities to source the right deals, and in-source the right talent,” said the director of the SIL, Bernardo Bortolotti, in an accompanying statement.
Capability, a Case Study
This brings us back to the value of reading stuff that doesn’t get into the abstract. The end matter of the Bocconi report includes a paper by Jurgen Braunstein of the London School of Economics and Mattia Tomba of the National University of Singapore, about “building in-house capacity.” It asks whether SWFs will be successful in bringing many functions in-house so as not to rely on intermediaries.
The Braunstein Tomba paper looks in particular at the history of GIC Private Limited, an SWF established by the government of Singapore in 1981. The GIC began in a turbulent time, a time when the world was feeling the consequences of Paul Volcker’s interest rate shock at the U.S. Federal Reserve. From its beginnings onward “the careful recruiting of international talent [at the GIC] went hand in hand with the creation of specialist in-house departments.”
By the late 1980s broad scale corporate restructuring provided the GIC with opportunities and it availed itself of them, for example by purchasing (in conjunction with the Singapore food conglomerate Yeo Hiap Sing) 50% of Chun King, a U.S. food company.
Though it may sound a little on the paradoxical side, partnering with the right institutions can be critical to the creation of in-house capability. Braunstein and Tomba quote the GIC itself, which has said that partnerships such as that with Yeo Hiap Sing have “helped us gain insights into high-quality investment ideas and research, as well as industry best practices in the areas of investments and operations.”
These authors conclude with three findings that are of especial interest to “market practitioners engaging with SWFs.” First, they say, “capacity building is not solely an outcome of governance and internal factors but also a product of opportunity and external circumstances.”
Second, there may be a sequence at work, where the exposure to debt securities makes way for equities and those help build up capacity for the third step, into alternatives. But the “may be” is important here. The authors are aware that one cannot divine general rules from single cases, so they call for more research into “sequencing across SWFs.”
Finally, and perhaps most important for practitioners, co-investment and partnering were critical to GIC’s acquisition of in-house investment capacity. Here, too, the case study suggests further research into “the SWF industry at large.”