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The New Masters of the World: How SWF Petrodollars Buy (Almost) Everything


The rise in the price of gas and oil gives more investment capacity to the investment vehicles of countries rich in hydrocarbons, whose assets under management already exceed 10 trillion euros

Think of any given day in your life.

The first thing you do when you wake up is likely to check email on your

iPhone .

from Apple and that there he finds the last electricity bill from Iberdrola and the boarding pass for his next flight with Iberia or British Airways to London, where he will advance his Christmas shopping at Harrod's.

Once the e-mail has been checked, he will have breakfast and among the products he will take there will most likely be one made by Nestlé.

After regaining his strength, he will start his Volkswagen Golf to go to the office, a building owned by Colonial, and on the way he will pump gasoline at a Cepsa station.

Lunch will be paid for with your Visa card.

And at night he will meet friends to watch the Champions League game between PSG and Manchester City.

You are probably not aware, but your life increasingly revolves around companies that have a common denominator: some of their most prominent shareholders are sovereign wealth funds,

The money that these vehicles amass is scary.

At the end of 2021 there were more than 10 trillion (with b) euros;

It is two and a half times the German GDP, and seven and a half times the Spanish.

That year, the last for which there are records, they broke a record for operations on a global scale: 448, which moved a total of 120,000 million, according to the latest report prepared by IE University together with ICEX-Invest in Spain.

“These players have more and more weight in the market.

The origin of their liquidity is varied and they try to diversify the economies of their countries of origin by investing above all abroad”, explains Cord Stümke, a partner at the professional services firm EY specializing in venture capital transactions.

Its growth is exponential and everything indicates that 2022 will be another record year for

sovereign wealth funds

(SWF), as they are called in the always Anglophile financial jargon.

The recent explosion in the price of oil and, above all, natural gas has been the definitive knock for these instruments.

The disorderly exit from the pandemic and, above all, the war in Ukraine have turned the sock on the energy markets just when all eyes were focused on the ecological transition and not on fossil fuels with more past than future.

And they have caused a veritable avalanche of income for the coffers of the vast majority of sovereign wealth funds.

An extra ammunition that they did not have, and a chest that they will now have to use in new investments.

“It is quite likely that in the coming months they will redouble their activity.

We have already seen it on other occasions in which the price of raw materials skyrocketed”,

The origins

It was in the 1950s, at the dawn of the oil age, when a select group of Arab countries—led by Kuwait and Saudi Arabia—launched the first modern sovereign wealth funds with the aim of reinvesting income earnings obtained from the sale of oil.

More than 70 years later, almost a hundred SWFs reinvest the billions of euros they earn each year in assets many kilometers away.

Most owe their resources to hydrocarbons, although there are also vehicles such as those from Singapore (Temasek, GIC) that draw on their countries' fiscal and trade surpluses.

“Two out of every three euros invested in these instruments come from energy and raw materials,” explains Nuno Fernandes, a finance professor at the IESE business school and president of the Board of Auditors of Banco de Portugal.

A category that includes the many and very powerful sovereign wealth funds of the Persian Gulf —Abu Dhabi, Kuwait, Qatar and Saudi Arabia, among others—, but also those of Norway and Australia.

The remaining third corresponds, basically, to what was invested by China, Hong Kong and other Asian tigers and dragons thanks to the gains from multinational trade and finance.

Most of them try to monetize manna to stabilize their economies when the world definitively closes the faucet on fossil fuels.

A moment that, although not close - 80% of the primary energy consumed worldwide is still fossil - is not as far away as is sometimes thought.

Others, such as the Norwegian, have as a priority objective to guarantee the welfare state and the future retirement of its citizens, operating as a kind of huge 100% publicly owned pension fund.

In its commitment abroad there is also a third impulse, much more subtle and supposedly silent, but of increasing importance for many in recent years: influencing world geopolitics —and, especially, Western ones— and improving its international image.

A difficult undertaking —many of them are governed by autocratic or, at least, non-democratic regimes—, but in which their embassies find the best possible lubricant in money.

The purchase of football teams, especially in the English Premier League (Manchester City, Newcastle United), but also in the French Ligue 1 (PSG), authentic trophy assets, are the latest example of this checkbook diplomacy.

"Their main objective is usually purely financial, that is, to obtain a return on capital, although in some cases they invest in strategic assets for their economy or their objective is to achieve monetary stability in their country," explains Carlos Téllez, a partner at investment bank AZ Capital.

Last year, according to a recent study by the US fund manager Invesco, the average return obtained by sovereign wealth funds was 10%.

In his record, however, not everything is correct: the deputy prime minister of Singapore, Lawrence Wong, reported this week that one of his two funds —Temasek— had launched an internal investigation after deeming the 275 million dollars lost ( slightly more than 260 million euros).

The money was invested in the FTX cryptocurrency platform,

The preferred destination for petrodollars managed by sovereign wealth funds has traditionally been the West.

For many reasons.

The first and most obvious is stability: faced with the fluctuations of their domestic economies —much more volatile—, shares, buildings or bonds located or issued in Western countries offer an undeniable additional point of protection against turbulence.

The second is persuasion: the more money they have invested in Europe and the United States, the greater will also be their ability to convince their governments of their growing strategic importance.

And to make them see their enormous —and growing— financial power.

new latitudes

In recent years, however, there has been a twist in the script in that constant of recent years: while the West remains the priority destination for sovereign wealth funds, it is far from the only one.

They want to diversify, not put all their eggs in one basket and extend their tentacles of influence to other latitudes, with economies such as China and India growing in importance.

Europe and the US are past and present, but the future lies in the emerging world.

“The next cycle, which we have already entered, will be totally different from the previous one,” Bernardo Bortolotti, a professor at the New York University of Abu Dhabi and director of the Sovereign Investment Laboratory of the Bocconi University of Milan, outlines by phone.

“Until now, the world was flat, and the investment opportunities to transform oil wealth into financial wealth and diversify your portfolio are enormous.

But this is no longer the case: as long as geopolitics and globalization continue to brim with uncertainty, they will have to comb the market much more in search of opportunities”, adds the Italian academic, one of the leading global experts on the matter.

These new restrictions, he says, will mean that the focus is not only fixed on the US and Europe "as in the last 20 years",

The second change in the pattern in the destination of these investments has to do with a greater emphasis on their own countries, especially in the cases of the Middle East, with criteria that are not solely financial.

"They have to invest more in their own populations to mitigate the current economic challenges, which they are also facing," notes Adam Dixon, from the University of Maastricht (Netherlands), who, however, acknowledges that the US and Europe will continue to occupy a predominant place in the portfolios.

Such is the volume of capital that they have had to move in recent months —especially those who live off gas and oil—, Dixon recalls by email, that it overflows into all kinds of assets.

The change in the pattern and the destination of the investments that Bortolotti outlines begins to permeate the field of facts.

Or, at least, to that of the announcements: the Public Investment Fund (PIC), the instrument through which the world's largest oil exporter —Saudi Arabia— invests its huge oil revenues (almost 200,000 million euros last year), announced in October that it will allocate 24,000 million to its neighboring countries: Bahrain, Oman, Jordan, Iraq and Sudan.

The Saudi case

An epitome of the sector, in less than seven years the Saudi sovereign wealth fund has more than quadrupled the funds under its umbrella, going from 150,000 to more than 600,000 million euros, according to the latest figures from Bloomberg.

The havoc left by the pandemic in their accounts —and in the economy of the Desert Kingdom and of the petromonarchies as a whole— is nothing more than a remora from the past.

Suddenly, Saudi Arabia —like the rest of the hydrocarbon exporters— millions are crowding.

And you have to decide what to do with that huge volume of liquidity.

"The West is not going to disappear from their portfolios, but creating wealth in their countries has become an objective in itself for these funds, considering not only financial returns, but also social criteria," adds Fernandes on the other side of the phone line.

The change can also be seen in the type of investments chosen, with an increasing weight of basic infrastructures (water, transport...) and renewable energies, which find especially fertile ground in the Gulf countries.

With limits: "Many of these funds, especially those from oil and gas countries, are constrained by their own mandate, which does not allow them to invest in their own countries," adds Patrick J. Schena, from Tufts University (Boston, USA) and co-director of the Fletcher Network,

a sovereign wealth and global capital analysis department.

This lack of flexibility and discretion when it comes to directing investments, he says, "could lead their governments to retain a larger fraction of their income to invest directly", without the help of the sovereign wealth fund.

Norway has the largest sovereign wealth fund.

In the image, an oil platform in the North Sea. Carina Johansen (Bloomberg)

In addition to expanding their geographic scope and reinforcing investments in their own economies, sovereign wealth funds are also diversifying in the type of assets they enter.

Until a decade ago, their preference was for companies with a presence on the Stock Market and now they have accelerated investments in unlisted markets (risk capital,

venture capital,

infrastructure and real estate).

From the sectoral point of view, if technology has captured a good part of their attention in recent years, they are increasingly attracted by having exposure to renewable energies, health, food safety or education.

“One of the advantages of these funds is that they tend to prefer minority stakes, except when it comes to strategic investments, and it is very long-term capital, with no divestment horizon, which does not exclude that they eventually get out of an asset if they have another attractive opportunity or need to rebalance the risk of their portfolio”, explains Carlos Téllez.

"Sovereign wealth funds manage a huge amount of money, mainly derived from oil resources, and they need to look for new forms of investment," says Miguel Echevarría, director of Financial Advisory at Deloitte.

"It is logical, the result of a natural evolution: they have gone from investing in more liquid assets and with a lower risk profile and return to doing so in alternative assets."

Its growth in the

private equity niche

, unexplored by them until not so long ago, has been exponential: in record time they have gone from participating in co-investment operations, as one more participant and always in a minority, to doing it in a big way.

"Now we are seeing them enter, more and more, in operations leading the investment and acquiring majority stakes," adds Echevarría.

Their investments are viewed by recipient countries with a mixture of joy and suspicion.

It is brown money, as it is generated by hydrocarbons at a time when climate change is a pressing problem;

Furthermore, many of their investments are in sensitive sectors such as technology, defense or transportation;

And, as if that were not enough, those who are usually behind the largest SWFs are regimes that occupy the last positions in democratic values.

“In times of economic hardship, countries neglect their moral principles about who puts up the money.

We already saw it in 2008, when sovereign wealth funds invested 45,000 million dollars in the world banking sector, which was against the ropes”, argues Capapé.

On the other side of the barrier are the recipients of the money.

Eager for foreign investment, large European countries such as France and Italy have recently developed public bodies that co-invest with these sovereign ocean liners.

The objective is twofold: first, to make sure that this money goes to the areas in which they are most interested - where the impact and social return are greatest - and, secondly - although not least -, protect this investment in strategic sectors to avoid unwanted effects.

In Spain, this joint investment work is carried out by the public company Cofides, which among its investment vehicles has one shared with Oman (they have put 100 million euros each) to support the competitive internationalization of Spanish companies, especially towards countries of the Persian Gulf.

“We see a growing interest from sovereign wealth funds to invest in Spain.

Either for geopolitical reasons, or because our economy is transforming towards sectors in which they are especially interested, such as renewable energy, green automobiles or food safety", emphasizes the president of Cofides, José Luis Curbelo.

courtship to qatar

This renewed interest in attracting the attention of sovereign wealth funds and guiding it towards strategic sectors has been particularly clear in the recent courtship of various Western capitals to petromonarchies such as the Qatari, whose emir last spring paid a visit with honors to the main European capitals.

They put up the money, but the receivers want to guide them to where they are most interested.

This symbiosis is set to accelerate in the coming months: the withdrawal of liquidity from the markets by central banks makes foreign investments even more valuable.

Qatar is one of the largest sovereign investors.

In the image, the financial center of Doha. MARIANA SUAREZ (AFP via Getty Images)

The pairing that configures the origin of the money that swells the accounts of these sovereign wealth funds —fossil, with few exceptions— and its final destination —in which renewables have continued to gain relevance year after year— contains a powerful paradox.

Finally, there does not seem to be any problem in making cash with oil and gas;

But few want to tarnish their investing reputations in an era of widespread — and publicized — exodus of dirty assets.

In this paradox, the Norwegian fund occupies an exceptional place.

A great beneficiary of the European flight from hydrocarbons —perhaps the biggest: it is the continent's leading gas supplier—, it is also getting a significant cut from a price escalation that its managers could not even imagine in their wildest dreams.

Instead, that mana has powerful new restrictions on how it's spent.

At the end of 2019, just before the pandemic, the Nordic country decided to eliminate all traces of fossil assets from its portfolio: not one euro, not one more dollar in the capital of oil and gas companies.

The origin of that money, however, remains the same as before: the same crude oil and the same gas that he denies in his new investment criteria, but which continues to fill his wallet at a good pace.

As SWFs grow and diversify their portfolios, they need professionals, especially with experience managing large volumes of money in specialized niches.

That workforce in many cases is not at home, so a battle is being waged to attract talent from the City or Wall Street.

Whatever it takes.

And for money it will not be.

Exxon Mobil crude oil extraction operations in Guyana. CHRISTOPHER GREGORY / New York Times / ContactoPhoto

Guyana's lessons

Guyana is the protagonist of the most recent, and probably last, oil miracle after the discovery of vast crude reserves of around 10,000 million barrels.

A figure that turns this small —800,000 inhabitants— and until recently a poor nation, nestled between Brazil, Venezuela and Suriname, into a new oil power.

And that has led his Government to take good note of the successes and errors of those who have already traveled the same path.

Last January, with oil at a record high, Guyana became the latest country in the world to create a sovereign wealth fund to manage its energy and fiscal boom.

A milestone in a story, his, with many more shadows than lights: in a country where public transparency is minimal, the fact that the management of these resources falls to an independent entity is an undoubtedly better management mark.

The movement tries, to a certain extent, to guarantee that the juicy income expected for the next few years results in a better quality of life for future generations and not only for the current ones.

And that they guarantee an adequate response to a potential natural disaster in a country that is clearly at risk from climate change.

One more paradox: oil money to cope with global warming caused by fossil fuels.

Instead of falling under the umbrella of the Ministry of Finance, it is overseen by Parliament.

Again, a lesson from their predecessors: countries that had to deal with the honey and gall of the so-called commodity curse: the blessing, but also the risk of drunkenness, that follows a great discovery.

There are more lessons.

Guyana has forced the consortium that exploits its crude oil – led by Exxon – to resort to local companies to carry out its activity.

Madrid, capital of money

Baku was for two days the world capital of money.

The capital of Azerbaijan hosted the 14th annual meeting of the International Forum of Sovereign Wealth Funds, a global network of 50 sovereign wealth funds, on November 15 and 16.

“There was a lot of detailed discussion about integrating climate risks and social aspects into their investment strategies,” explains Javier Capapé, director of IE's Sovereign Wealth Research, who was present at the event.

“There was also time to discuss 'blockchain' technology and the evolution of cryptocurrencies in light of the FTX case.

Likewise, the focus was placed on Africa, due to the relevance that this continent has taken within the sovereign community, ”he adds.

In the fall of 2023, the meeting of this powerful sovereign wealth fund club will be in Madrid, organized by Cofides and coinciding with the Spanish presidency of the European Union.

"It will be a key milestone for our company and will allow investment flows to be promoted that contribute to the digital and sustainable transformation of the Spanish economy," explains José Luis Curbelo, president of Cofides, a company that manages state funds.

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Source: elparis

All business articles on 2022-12-03

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