Show Me the Money: ySovereign Wealth Fund in a Rebalanced World

ESADE Business SchoolJavier Santiso, Professor of EconomicsDirector, ESADE Centre for Global Economy & Geopolitics (ESADEgeo)

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S i W lth F d l ki t d i1.

Sovereign Wealth Funds: looking towards emerging markets

Sovereign Wealth Funds: looking towards Spain and Latin America

2.and Latin America

ESADEgeo: An agenda of activities on Sovereign3 ESADEgeo: An agenda of activities on Sovereign Wealth Funds.

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The rebalancing of world is happening today

Ten years ago the world was so different: the BRIC decadeGross domestic product based on purchasing-power-parity (PPP) share of world totalS IMF E i O tl k (A il 2011)Source: IMF Economic Outlook (April, 2011)

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Shifting away from OECD? South South FDI

South South FDI surpasses for the first time South North FDI, in 2010South South Cross border M&A deals got a new record by 2010

FDI outflows from developing countries, by destinationSource: World Bank (2011) based on Thomson-ReutersFDI outflows from developing countries, by destinationSource: World Bank (2011) based on Thomson-Reuters

Cross border M&A deals from emerging markets, by destinationSource: World Bank (2011) based on Thomson-ReutersCross border M&A deals from emerging markets, by destinationSource: World Bank (2011) based on Thomson-Reuters

South South Cross border M&A deals got a new record by 2010

Source: World Bank (2011), based on Thomson ReutersSource: World Bank (2011), based on Thomson Reuters Source: World Bank (2011), based on Thomson ReutersSource: World Bank (2011), based on Thomson Reuters

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Shifting away from OECD? South South FDI

Growth in cross-border deals will ouptpace expected emerging-market GDP annual growth rates of 4.9 percent over 2010–20 and 4.1 percent over 2020–25

Selected bilateral M&A flows from home to host economies, 2007Source: World Bank, 2011

Projected emerging-market outbound cross-border deals through 2025Source: World Bank, 2011

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Shifting away from OECD? South South FDIChinese booming FDI in Latin America

2010 single-year results are more than doubling the last 20 years of FDI Source: Economic Commision for Latin America and the Caribbean (ECLAC), estimates on the basis of information from Thomson Reuters, fDi Markets [online]

http://www.fdimarkets.com/ and interviews with representatives of the respective companies.

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Shifting away from OECD? South South FDIShifting away from OECD? South South FDIChinese booming FDI in Latin America

Latin America and the Caribbean: Cross-border acquisitions over 3,000 million dollars, 2010S ECLAC (2011)Latin America and the Caribbean: Cross-border acquisitions over 3,000 million dollars, 2010S ECLAC (2011)Source: ECLAC (2011)Source: ECLAC (2011)

In 2011, Export-Import Bank of China (China Eximbank) will launch a yuan-denominated fund to invest in developing infrastructure. China Eximbank will partner with the Inter-American Development Bank. The fund amount will be US$ 1 billion.

In 2011, Export-Import Bank of China (China Eximbank) will launch a yuan-denominated fund to invest in developing infrastructure. China Eximbank will partner with the Inter-American Development Bank. The fund amount will be US$ 1 billion.

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Shifting away from OECD? The case of SWF flowsThe crisis reversed the trend, but it is back again

Value of SWF Deals by Location of Target: OECD vs. Emerging MarketsValue of SWF Deals by Location of Target: OECD vs. Emerging MarketsSource: Monitor-FEEM SWF Transaction Database (2011)Note: Publicly available data for SWF equity & real estate deals, joint ventures and capital injectionsSource: Monitor-FEEM SWF Transaction Database (2011)Note: Publicly available data for SWF equity & real estate deals, joint ventures and capital injections

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Shifting away from OECD? The case of SWF flowsA good reason: Massive Hit in their OECD Investments…

Performance of Notable Sovereign Funds Investments

Source: Financial Times, March 2009.

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Shifting away from OECD? The case of SWF flows

SWFs invested $200 billion or 10% of their total assets in the financial sector since 1953

A good reason: Massive Hit in their OECD Investments…

Finance

SWF investments by sectorSWF investments by sector Investment performanceShare prices of major banks with SW F investment 01 Jan 07=100

SWFs invested $200 billion or 10% of their total assets in the financial sector since 1953.

Services

Energy

Real estate

Finance

0

20investment, 01 Jan 07=100

Industry

Infrastructure

Technology

EU

US-40

-20

Agriculture

Defence

OtherUS

Asia

Others -80

-60 DB MLMS CGBA CSUBS

0 60,000 120,000SW F investments by sector of investment target and region, reported and completed transactions, 1995-2008, in USD bn

-10007 08

Note: DB=Deutsche Bank, ML=Merrill Lynch, MS=Morgan Stanley, CG=Citigroup, BA=Barclays, CS=Credit Suisse, UBS

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y, g p, y , ,Source: Based on DB Research.

Shifting away from OECD? The case of SWF flowsA good reason: Massive Hit in their OECD Investments…

Source: ESADE Business School 2011 Based on Setser and Ziemba “GCC Sovereign Funds: Reversal of Fortune” WP Council for Foreign Relations

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Source: ESADE Business School, 2011, Based on Setser and Ziemba GCC Sovereign Funds: Reversal of Fortune , WP Council for Foreign Relations.

Shifting away from OECD? The case of SWF flows …more reasons: The home and public equity biases

SWF Asset AllocationSource: Dyck and Morse (2011)

…more reasons: The home and public equity biases

Benchmark Allocation

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Shifting away from OECD? The case of SWF flowsBrazilian BTG Pactual case

U d li th hift i th f d ’ f f t i d t dUnderlines the shift in the funds’ focus away from western economies and towards emerging markets. It is the main joint SWF operation in emerging markets so far.

$1.25bn (13%)

$700m = after-tax profits (2011, expected) $2bn = existing capital base 30 % = Return on Equity

$200m and $300m (each)

13Source: Financial Times (December 6, 2010)

An increased interest for frontier markets:An increased interest for frontier markets:The Example of China Africa Development Fund

CADF’s Projects include the Shenzhen Energy 500 megawatt thermal power project in Ghana; the China Union iron ore deal in Liberia, rehabilitating the Bong Mine; thein Ghana; the China Union iron ore deal in Liberia, rehabilitating the Bong Mine; the Angel Yeast $51 million project in Egypt which values the Fund’s high-level backing, useful for winning permits, perhaps more than its $2 million investment.

The UAE already has ambitious plans to establish agricultural production centresinSudan and Pakistan. The Abu Dhabi Fund for Development intends to develop 70,000 acres of land for food production in Sudan.

The China Investment Corporation might be working with Vallar, the UK coal holding company run by Nat Rothschild, on a joint investment. Where might this investment take place? Mongoliap g

Temasek Holdings is in talks to pump funds in an attempt to resurrect Sri Lankanairlines and some of the loss making public enterprises including Ceylon Electricity Board.

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Sources: China Development Bank’s Website, African Capital Markets News, Reuters, Emirates 24|7

An increased interest for frontier markets:An increased interest for frontier markets:Temasek bet on Africa’s telecommunications sector

5% 100%

I 2007 T k i t d $2 billi i Bh ti Ai t l th bi t bilI 2007 T k i t d $2 billi i Bh ti Ai t l th bi t bilIn 2007, Temasek invested $2 billion in Bharti Airtel, the biggest mobileoperator in India, with a Market Capitalization of $27.1 Bn, and #453 inForbes Global 2000 list in 2011.Bh ti Ai t l t d th l t t k i Af i $9 b f Z i

In 2007, Temasek invested $2 billion in Bharti Airtel, the biggest mobileoperator in India, with a Market Capitalization of $27.1 Bn, and #453 inForbes Global 2000 list in 2011.Bh ti Ai t l t d th l t t k i Af i $9 b f Z iBharti Airtel operated the largest takeover ever in Africa : $9 bn for ZainAfrica.Bharti Airtel operated the largest takeover ever in Africa : $9 bn for ZainAfrica.

So rce ESADE B siness School 2011 based on Temasek reports 2011 And Re ters (2011)

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Source: ESADE Business School, 2011, based on Temasek reports, 2011. And Reuters (2011)

Sovereign Wealth Funds: looking towards emerging1. Sovereign Wealth Funds: looking towards emerging markets

Sovereign Wealth Funds: looking towards Spain 2.

and Latin America

3ESADEgeo: an agenda of activities on Sovereign Wealth Funds

3.

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Sovereign Wealth Funds Looking to Spain or to Latin America?N B k I t t M t CNorges Bank Investment Management Case

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Looking towards Spain or Latin America?N B k I t t M t CNorges Bank Investment Management Case

Where is it investing its $bn 5,5 Spanish portfolio?Source: NBIM (million dollars)Where is it investing its $bn 5,5 Spanish portfolio?Source: NBIM (million dollars)

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A two-step approach to emerging marketsA two-step approach to emerging marketsGoing through Spain in order to reach Latin America

5%

6.2%

100%%

71%*

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* Still in process operation

… A two-step approach to emerging marketsQatar Holdings and IberdrolaQatar Holdings and Iberdrola

6.2%

Win-Win StrategyThe Qataris and Spaniards aim to tap opportunities in emerging markets' power sectors including

100%

markets power sectors, including Qatar's. Iberdrola will place its regional headquarters and research facilities in Doha, and the Spanish company will use theSpanish company will use the Qatari capital to finance several transactions (Elektro acquistion among others).

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A two-step approach to emerging markets… A two-step approach to emerging marketsgo Spain to reach Latin American markets (potential new investments)

43 % (1) 57 % (2) 78 % (3)

82 % (3) 34 % (3)

(1) LatAm Revenue / Total Revenue (%)(1) LatAm Revenue / Total Revenue (%)(2) Gross Income Americas & Asia / Total Gross Income (%)(3) Net Profit LatAm / Net profit Total (%)Source: ESADE Business School 2011, based on 2010 Company Reports.

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1.Sovereign Wealth Funds: looking towards emerging markets

Sovereign Wealth Funds: looking towards Spain d L ti A i

2.

and Latin America

3ESADEgeo: an agenda of activities on Sovereign Wealth Funds

3.

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Business Case Studies: Best Practices and Network Mappingspp gMubadala Aerospace Hub

High capital intensityHigh-tech industries

High energy requirementsLow labor intensity

Which are our main strengths?Low labor intensity

High logistics dependencystrengths?

Which industries are the most suitable given our strenghts?

Metals industry (Aluminium Raw Materials, Alloys and Ingots)y ( , y g )Aerospace industry (Composite, Carbon Fiber and Titanium

Production)

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Business Case Studies: Best Practices and Network Mappingspp gMubadala as an Strategic Wealth Fund: The Aerospace Hub

36%

In 2006, Mubadala became shareholder in Piaggio, a leading aeronautics firmspecializing in the production of executive aircraft, engine parts and structuralcomponents.

In 2006, Mubadala became shareholder in Piaggio, a leading aeronautics firmspecializing in the production of executive aircraft, engine parts and structuralcomponents.

It also owns top composite producers (STRATA) and MRO global firms (SRTechnics), and recently acquired Spanish global aerostructures company(Aernnova )

It also owns top composite producers (STRATA) and MRO global firms (SRTechnics), and recently acquired Spanish global aerostructures company(Aernnova )

70%100%

71%

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Business Case Studies: Best Practices and Network MappingsTemasek: A Key Driver of Singapore DevelopmentTemasek: A Key Driver of Singapore Development

$37 bn (# 1)54%55%

$13 bn (# 7) ( )$13 bn (# 7)

28%

$26 bn (# 3)

41%

$11 bn (# 8)

6% 100%21%

Source: ESADE Business School, 2011, based on Temasek reports (2011) and Forbes (2011)

$8 bn (# 10)$15 bn (# 6)

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Temasek reports (2011) and Forbes (2011).

Note: Arrows: equity stake hold by Temasek; Rectangles: total company market value (# rank in Singaporean companies by Forbes, 2011)

Business Case Studies: Best Practices and Network MappingsKhazanah Nasional: A catalyst of Malaysia Corporate DevelopmentKhazanah Nasional: A catalyst of Malaysia Corporate Development

Market value Equity stake (%)

$20 bn (# 2) 29 %

$11 bn (# 3) 36 %

$13 bn (# 6) 39 %

Source: ESADE Business School, 2011, based on Khazanah reports (2011) and Forbes (2011)

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Khazanah reports (2011) and Forbes (2011).

Note: (# rank in Malaysian global companies by Forbes, 2011)

Business Case Studies: Best Practices and Network Mappingspp gTemasek: Moving away from OECD investments towards emerging countries

Portfolio in 2010

Portfolio growth and geographic allocation (%)Source: Temasek Holdings Report (2010&2011)

S$186b

1Mexico is classified under “OECD Economies” in 2004 and under “Latin America and Others” in 2009.2Excluding Singapore and Japan

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Excluding Singapore and Japan3Excluding Korea, Mexico and Chile

More research on SWF How are institutional issues affecting asset allocation decisions?How are institutional issues affecting asset allocation decisions?

Brazil’s Government Indicators have improved substantially, and it is attracting a lot of SWF investments is it a direct implication? (Then China size effect?)Brazil’s Government Indicators have improved substantially, and it is attracting a lot of SWF investments is it a direct implication? (Then China size effect?)

Worldwide Governance Indicators Source: World Bank, 2011Worldwide Governance Indicators Source: World Bank, 2011

Value of SWF Deals in 2010 (by target country) Source: Monitor, 2011 ($ millions)Value of SWF Deals in 2010 (by target country) Source: Monitor, 2011 ($ millions)

investments… is it a direct implication? (Then, China size effect?)investments… is it a direct implication? (Then, China size effect?)

VA=Voice and AccountabilityPV= Political Stability No ViolenceGE= Government Effectiveness

RE= Regulatory QualityRL= Rule of LawCC= Control of Corruption

* Estimated value: real data is probably higher

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GE Government Effectiveness CC Control of Corruption

Worldwide Governance Indicators Note: Each area is valued from 1 to 100

Business Case Studies: Ethics on SWFLibyan Investment Authority: Dangerous liaison

$830 m $590 m$480 m$335 m $300 m

$500 m $500 m$1000 m

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LIA’s equity stakes as of June, 2010Source: Global Witness, 2011

Long Term Investors Annual Conferenceg

• Proposed discussion issues:Proposed discussion issues:

• Africa and Latin America on the RiseS th S th P L i A i /Middl E t t d Af i /L ti• South-South Peer Learning: Asia/Middle East towards Africa/Latin America

• Best practices from the South: Chile; Singapore; United Arab Emirates.

• Peer to Peer Style meetings: Annual Conference and Executive Program

• Keynote speakers: from in-making arena to theorists, from public to private, from developed to emerging countries, from strategic to financial funds…

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