In Africa, the Kenya and Nigeria sovereign wealth funds are interesting case studies. The government of Kenya introduced legislation in early 2019 to establish a sovereign wealth fund – apparently as a result of the discovery of significant oil fields in 2012. The aim of the legislation is to create a sovereign wealth fund to ensure effective management of the proceeds from oil and other mineral exports. It is early days for the Kenya oil sector and the future of the proposal remains to be seen. Its appearance, nonetheless, reinforces the trend in sub-Saharan Africa – so evident elsewhere – to create sovereign funds to manage resource windfalls and diversify the economy.
Nigeria is the largest economy in Africa, and the Nigerian Sovereign Investment Authority (NSIA), established in 2011, is favorably cited by the IMF as seeking to comply with the Santiago Principles on transparency, good governance, accountability, and prudent investment practices. NSIA consists of three separate, ring-fenced funds representing the three different functions of savings, stabilization, and development (see Figure 1.2), namely: (a) the Fiscal Stabilization Fund, to provide relief to the economy in times of financial stress; (b) the Future Generations Fund, which undertakes growth investments; and (c) the Nigeria Infrastructure Fund, which undertakes investment in domestic infrastructure projects.
Figure 1.2 NSIA Divided into three Ring-fenced Sub-Funds
Finally, the public pension funds (PPFs). As illustrated by the name of the Norwegian fund, the term “pension” could mean multiple things. There are mainly two types of PPFs. For one, pension reserve funds, which can be understood as pension-fund-type sovereign wealth funds. These funds, such as Australia's Future Fund, the New Zealand Superannuation Fund (NZ super), and Chile's Pension Reserve Fund, typically invest budget surpluses in global markets to help defray their sponsoring government's future pension obligations.
Unlike orthodox pension funds, the assets they manage remain the property of the government and no individual has any claim on them. The liability stream goes to the government and then the government deploys the capital on behalf of the people. As a result, these funds can remain long-term investors even as they are drawn upon. Proceeds from a government privatization may conveniently be parked in a fund to provide funds for specified future needs or simply to keep them out of the hands of the politicians. They can feature among the most transparent funds.
For two, sovereign pension funds. The difference from the former is the liability stream. With a sovereign pension fund, the liability flows directly to the constituents of the fund. The Canadian government employee pension funds like CPPIB are good examples of the latter. They seek a rate of return that will enable them to meet their pension obligations to their members. They balance outflows to fund pension payouts with employer and employee contributions supplemented by their returns from investments. While longer term investors than private equity or venture capital funds, they must take into account actuarial liabilities, hence are often more limited than the intergenerational or pension guarantee funds such as NZ Super or Future Fund.
In North America, one sovereign fund with the management of pensions assets among its assigned tasks has taken on its superhero rescue mission. Dealing with the impact of the pandemic on the local economy, Quebec's Caisse de Depot et Placement du Quebec (CDPQ) in early 2020 created a C$4 billion fund to support Quebec companies adversely affected by the corona virus, whether or not they are in its portfolio. This program was quickly introduced to enable the recipient companies to survive the pandemic and underpin the recovery of the local economy. Before that, CDPQ was already deeply involved in Quebec's development; one major project is a C$6 billion high-speed, light-rail network in Montreal connecting with existing transport.
Such innovation – here seen in response to the coronavirus pandemic – is not out of character for public pension funds. Despite being increasingly subject to governance and regulatory obligations – like the global sovereign wealth funds (SWF) – public pension funds (PPF) have constantly braved new territories. Canadian funds are often acknowledged to be among the leaders in new asset classes, such as infrastructure and venture capital, in growing in-house capabilities rather than relying on outside managers, in opening outposts abroad, and in paying competitive compensation to attract talent.
Adding to the rapid ferment of ideas in the world of sovereign investors, PPFs frequently actively co-invest with the sovereign wealth funds. Sovereign Wealth Funds 2018, the report of the IE Foundation, provides a representative sampling of recent PPF/SWF co-investments of $1 billion or more (see Table 1.3).
Four Canadian PPFs, CPPIB, British Columbia Investment Management Company (BCI), Ontario Teachers' Pension Plan (OTPP), and Public Sector Pension (PSP) rank high on the league table of sovereign wealth fund co-investors, ahead of others such as Morgan Stanley and Macquarie (the banks having rated only three each). Kuwait's sovereign investor teamed with OTPP and AIMCo (also Canadian) to acquire London's City airport; CPPIB has joint ventured with GIC to acquire and manage student housing; with Temasek, CPPIB also joined in the investment into South Korea's Homeplus, just to name a few. Therefore, this book will cover the sovereign wealth funds (SWF) and public pension funds (PPF) together as “sovereign investment funds” (SIF) and “sovereign investors.”
Table 1.3 Representative Volume of PPF/SWF Co-investments
Data Source: IE Sovereign Wealth Research 2019.
| Pension Fund | Co-investments with SWFs |
| CPPIB | 6 |
| OTPP | 3 |
| BCI | 3 |
| PSP | 3 |
| (deal size $1 billion minimum) |
Big Spenders, ESG Promoters
For decades, sovereign investment funds preferred to remain in the shadows. Little was known about them and their nature as long-term passive investors helped keep it this way. In recent years, however, the nature of sovereign investors has begun to evolve. Alongside accumulating a large and growing pool of capital, once very passive holders of government wealth, sovereign investors have transformed operations in three critical ways: attracting better talent, adding more asset classes, and expanding into active investment strategies.
The Canadian pension funds, for example, have rebalanced to favor direct investments into alternative assets, including tech startups traditionally viewed as out of SIF's comfort zone. For example, at the end of the 1990s, CPPIB invested close to 100% in Canada; today, that figure is only 15%. The fund is global in its pursuit, placing tech bets in India from its office in Mumbai, among overseas offices in multiple continents. Also headquartered in Toronto,