On the Gulf's frontline in the pandemic battle, the UAE's Mubadala Investment Company (Mubadala) was reported to be in discussions to invest in a rescue package for a troubled local healthcare company, NMC Health, the UAE's largest healthcare provider. While the AI and biotech companies in the portfolios of Mubadala and other SIFs search for cures and preventatives around the world, Mubadala is being called upon to keep the healthcare system afloat at home. In Southeast Asia, oil producer Malaysia is also turning to its sovereign fund, Khazanah, to aid the discount airline Air Asia. Khazanah has been called upon to guarantee loans to the discount airline, which is suffering from the dire effects of the coronavirus on the travel industry.
Norway's Oil Fund, the world's largest sovereign fund, is also at the ready to stabilize its domestic economy. Started in 1996 as a budget stabilization vehicle, the fund has grown to well over twice the country's GDP, hence it is viewed more as an intergenerational savings fund (see Box: Transparency at its Core). However, to cover the massive costs to Norway of coronavirus-induced shock, the fund will be called upon to provide cash directly to fund its government – anywhere from $13 billion to as much as $25 billion or more, as the price of oil, its sole funding source, drops to record lows in 2020.
Transparency at its Core
Norway's Oil Fund could be the dictionary definition of “transparent.” It even once displayed on its website a constantly changing calculation of its market value, spinning like the numbers on a gas pump – or a slot machine. With population statistics, each Norwegian could immediately calculate his or her “share.” And that share is not insignificant. At $1.1 trillion, for a country Norway's size, that works out to over $200,000 per person.
Its dedication to transparency has limited it largely to public markets, unlike its more opaque peers that allocate heavily to private markets for better returns. Initially, bonds comprised the entire portfolio, with the fund moving into a 60/40 allocation in favor of equities just at the dawn of the global financial crisis a decade ago. It promptly lost 23% of its value. During the crisis, the fund doubled down on its equities bet, buying $175 billion of listed shares, representing 0.5% of the world market (and enjoyed a long bull market run). The same tactic may not work in 2020, as the fund will be called upon to perform its budget stabilization function amid the coronavirus pandemic and record low oil prices. The government will call upon 4.8% of the fund's assets to fund pandemic costs.
Despite the nickname, the fund has also long been a leader in ESG principles. As an oil-based fund, that may seem odd. But there is a prudent rationale behind the bias. Norway's wealth is derived from oil and an intergenerational or budget stabilization fund has a mandate to mitigate the risk of that concentration. Looked at that way, the focus on sustainability makes for prudent investment management for a fund destined to support future generations even after the oil runs out.
ESG leadership and dedication to transparency nonetheless did not prevent an embarrassing misjudgment. The fund's retiring head failed to disclose his accepting a ride home from the United States in a private jet belonging to the hedge fund manager who was then a candidate to replace him. The succession remained in question for the scheduled September 1, 2020 start date over conflicts of interest. Living in a glass house is not easy.
But even this heightened Nordic obsession with transparency does not prevent some window dressing: also known as the Government Pension Fund of Norway, the fund name misleads with the inclusion of the term “pension,” since the fund has no obligations to any pensioners. But it apparently could not forgo the friendly, easily marketed, and non-threatening nature of the term. In practice, nonetheless, it is commonly called “the oil fund.”
Third, development funds. For a world economy frequently in and out of recession, this SIF group is expanding rapidly. Instead of prioritizing the fund's growth with international investments, development funds – like Irish Strategic Investment Fund (ISIF) or Russia's RDIF – focus on boosting a country's long-term productivity. They do so by investing in physical infrastructure (roads, railways, etc.), social infrastructure (education, healthcare, etc.), and, increasingly, digital infrastructure (telecom networks, data centers, etc.). They also promote strategic industries to diversify their domestic economies, often partnering with outside institutions (for example, peer SIFs) to attract foreign capital.
During the global financial crisis of 2008–2009, ISIF's core function was suspended, another example we see again and again when a crisis hits. The same fund was drafted in to play an out-of-character superhero role, as the bulk of the fund assets were morphed into the source of funding to bail out the Irish banking sector. Once it had saved the day and dropped off its pot of gold in the banks' coffers, it started to focus on economic development. By 2019, ISIF was credited for spurring over $3.5 billion inward investment into the Republic of Ireland through co-investments.
Also within the EU, Spain has taken an interesting approach with its “cooperation” sovereign fund model. The Spain–Oman Private Equity Fund (SOPEF) was created in 2018 as a 50/50 venture of Oman's State General Reserve Fund (SGRF) and Spanish state entities Compania Espanola de Financiacional al Desarrollo (Cofides) and its Fund for Foreign Investment (FIEX). Each country contributed €100 million and they jointly selected a private sector PE manager to run the new fund.
The fund's focus is developmental: to support and enhance the overseas expansion of Spanish firms with a focus not only on Gulf countries but also on the wider region, including the Gulf, portions of Africa, India, and even Latin America. The arrangement contemplates investments in the €15 million range, with Oman the source of capital and Spain providing deal flow. Oman expects to benefit domestically, as well, from Spanish expertise in infrastructure, logistics, healthcare, and tourism. Later chapters will include more instances of this interesting “cooperation” fund trend in Europe, including France, Ireland, and Italy.
The “cooperation” trend has legs and is not unique to Europe. Indonesia and the UAE have announced a $23 billion commitment by the UAE to invest in Indonesia. The investment is to be made through Indonesia's new sovereign fund (set to be launched in mid-2020) which is designed to support local startups and boost growth. Indonesia's fund is reportedly modelled on Singapore's sovereign funds, Temasek and GIC. Indonesia lacks the foreign reserves of Singapore; the UAE funding appears to overcome that impediment and should enable Indonesia to foster further its already vibrant startup market, on which both the Singapore giants have placed multiple large bets. Indonesia itself, and the UAE, will now be joining Temasek and GIC in the hunt for tech unicorns (private startups with $1 billion valuation) in the archipelago nation.
Some SIFs are both a global investor and a domestic development fund. For example, Mubadala has a tech investment focus, maintaining offices in Silicon Valley and London; however, the stated objective of the fund is to “accelerate economic growth for the long-term benefit of Abu Dhabi.” This is achieved by simultaneously investing in domestic infrastructure and tech sectors, such as the innovation accelerator program Hub71 launched in early 2019. The Hub71 initiative includes both a fund of funds component as well as a direct investment portfolio, aiming to drive the economic development of Abu Dhabi and the Middle East by stimulating tech innovation. Chapter 5 delves into Hub71 in detail.
In a context very different from the wealthy Gulf, Africa has been fertile ground for sovereign investment funds. There's