Its been an important week for two funds at different ends of the sovereign investment risk tolerance spectrum – Nigeria and Qatar, both of which have sparked a series of headlines and have intentionally or not taken some new strides.
The Nigerian governors breaking the deadlock on the country’s new US$1 billion fund and Qatar Holdings contribution to deadlock on the Glencore/Xstrata deal have little in common, as the funds investment approaches will be very different, as the countries’ political economies, wealth level and economic challenges diverge. All this is true, but both countries are set to feel some element of a pinch as fuel prices remain under pressure, and fuel demand grows more slowly. Moreover, both funds and the governments that sponsor them will face a series of questions about how far they are willing to go in their approaches.
First Qatar – Qatar’s involvement in the Xstrata deal has been widely reported in the press, but the real details are only known to those involved. From what is reported, it seems that Qatar’s involvement is similar to that of other institutional investors who are pushing to maintain the strongest value for their assets, to unlock the most value. Other Sovereign investors have been activist investors, most notably sovereign development funds, state holdings companies (e.g. the likes of Dubai funds, Temasek as well as public pension funds) and Qatar’s fund has rarely shied away from controversy, but the public involvement in the merger does seem somewhat new. It is not new for other institutional investors, from whom many of Qatar’s managers have been plucked. There is some evidence that Qatar has attracted the greatest share of public interest due to its sovereign status as well as the share of its holdings in Xstrata. How it will play out remains to be seen, but we should not assume a) that all sovereign funds will take on such investment roles b) Qatar will choose to take strategic stakes in all companies or c) that it is a bad thing for a sovereign to be an active institutional investor.
I have long believed that when sovereign funds abdicate their voting rights and role in governance it is a disservice to broader markets, to the sponsors of the funds, the other stakeholders domestically and other investors. While a small fund like Qatar’s or even the CIC does not necessarily have expertise to play a major role in all the companies that they invest in, still abdicating rights raises the risk of a vacuum in financial markets. As sovereign investors remain key players in global markets, while also being called on to invest more at home, we will need to watch carefully the balance. See this piece from the beginning of the month for more on Qatar’s investment strategy and why it is different from other GCC funds.
Nigeria’s new fund is just starting out and will face a number of political hurdles as it prepares to begin deploying its small amount of capital. Nigeria, unlike Qatar, has a large, population, is poor on a per capita basis, even though there are probably almost as many rich people as in Qatar, and has a low oil (and gas) output per person. This implies there is a greater capacity to absorb the resources domestically. As such, it will likely be hard for the Nigerian authorities to maintain the approved tripartite structure of the fund – saving, investing and infrastructure. In fact, in the concession from the state governors, the odd compromise implies that the Excess crude account, the extraconstitutional piggybank, might remain in operation. The state governors are loath to give up an institution that helped them fund projects and shared revenue. This adjustment will thus be gradual.
The drop in the price of oil, as well as adding pressure on the naira and Nigerian assets (and likely eventually feeding through to inflationary pressure) will crystallize some of the choices for Nigeria, which is approaching some of the fiscal break-even points of the higher spenders in OPEC – or around US$80 per barrel. We thus expect Nigeria will have little scope for saving. Tougher global conditions likely triggered not only this breakthrough, but also the urgency in trying to stop the siphoning (or bunkering) of crude to the black market, which is weighing on government revenues and economic activity. This bunkering also implies that Nigeria has been little able to capitalize on higher production from the vacuum opened up by Iran and increase in demand from countries like South Africa. The Nigerian oil company is starting with a new management team, as are the civilian heads of security. Ultimately the creation of new institutions like the SWF is a step in the right direction, but the tricky part is enshrining them in the domestic policy environment.