What Does Qatar's Change in Leadership Mean for Its SWF?

I had an unexpected holiday from teaching at Qatar University yesterday when it was announced that Sheikh Tamim bin Hamad Al-Thani was taking the reins from his father Sheikh Hamad, and a public holiday was declared to celebrate the transfer of power.   What will this mean for the Qatar Investment Authority?  I have more questions than answers:

  • QIA’s leadership structure may change.  It has just been announced that Sheikh Hamad bin Jassim Al-Thani (or “HBJ”, as he is sometimes called) is no longer Prime Minister of Qatar, and Qatar’s Minister of State for Interior Affairs, Sheikh Abdullah bin Nasser bin Khalifa Al Thani, will take his place.  It is not clear if HBJ will continue to serve as Foreign Minister, or whether he will continue to serve as the de facto head of the Qatar Investment Authority and its subsidiaries.  
  • This connection between the head of the foreign policy arm and its investment arm is significant: although SWFs have seemed to avoid the kind of baldly political investments that some worried would occur, there are a few SWFs, such as QIA, where the fund is used as part of a set of integrated foreign policy tools.  The fund is not used to, say, spy on another country or destabilize it in some way (that happens, of course, but is typically done through other means).  Rather, the fund may be used to create or reward cross-border investment with other countries.  As someone put it to me, “you buy our oil/gas, we invest in you.”  Will this kind of policy linkage continue?
  • As a more general matter, will Sheikh Tamim bin Hamad follow the same path as his father in internal and external politics?  It has been suggested in official statements and by news media here that he will likely lead the country in a similar style, but that he is going to bring some fresh perspectives to the role and, according to some, may accelerate towards a democratic constitutional monarchy.
  • How will Qatar’s Gulf neighbors react to the change, and how will this affect partnering between the QIA and other Gulf funds like KIA and ADIA?  Saudi Arabia and the UAE have been apprehensive over Qatar’s support of the Muslim Brotherhood,  and more senior leaders (and by that I just mean “the old guys”) in other Gulf states are likely not ecstatic with Qatar’s shift in power to such a young sovereign.  However, I suspect that the change will not create a significant shift in policies or relations among the funds themselves.

Finding Balance in the Regulation of Chinese Investment

As discussed in other posts, China has frequently criticized the US regulatory environment for foreign investment.  The criticism tends not to be of a general nature, but specific–that the US singles out China for particular scrutiny in its investments.

This is almost certainly the case, and it is understandable why it should be so: Chinese foreign investment presents risks not presented by investment from, say, Chile.  And yet, the Chinese criticism is important, even if it is not always framed in the right way.  Even if the regulatory structure is facially neutral, the fact that China is China and Chile is Chile means that regulators must evaluate the risks posed by each country’s investments independently, even if they are based on a set of neutral principals.

But maybe this kind of regulation gets it all wrong.  Maybe what regulators should do is explicitly create country-by-country strategic guidelines (at least for the most important trading partners), and make assurances that the regulators will provide enough transparency in the review process (which, under the present Committee on Foreign Investment in the US, is currently lacking) so that state-owned enterprises and their government minders will have some certainty in the process.  These need not rise to the level of treaties; just clear, domestic guidelines.  A recent article in The Diplomat argues something along those lines:

Washington needs to develop a strategic blueprint to avoid a rupture in ties and guide Chinese FDI toward acceptable sectors. Such a policy would clarify any differences between investment from state-owned enterprises with direct government links and that from private companies. It would balance local government needs for investment with federal government regulation and strategic considerations. It would identify opportunities and industries for joint technological development. And it would provide incentives to attract Chinese investment to those sectors in which it is wanted.

The right policy would further integrate China into the global economy and provide US jobs without threatening national security—a win-win situation that would also boost Sino-American collaboration.

 

What would these guidelines look like, exactly?  Aside from indicating what kind of investments would receive more scrutiny–although the regulatory trigger of investments involving “national security” does that to some degree, it does not do so with any real precision–the guidelines could also put in place enhanced regulatory transparency mechanisms for the benefit of Chinese state-owned enterprises.  This would go a long way to resolving the sense from state investors that CFIUS review is sometimes arbitrary and capricious.

Are "Thousands" of US Companies State-Owned Enterprises Under Canadian Law?

This fascinating question is posed in Canadian Business:

The latest revelation about U.S. government surveillance comes by way of a June 14 Bloomberg report that says “thousands” of American companies are working with U.S. intelligence agencies in a mutually beneficial arrangement where the latter secretly piggybacks on normal commercial operations. What does that mean? Potentially, it means U.S. business interests are a de facto arm of the government and vice versa. And that in turn makes the Harper government’s take on state-owned enterprises, as recently discussed elsewhere in Canadian Business, a thorny and possibly embarrassing one.

 

I recently described various changes in Canadian treatment of SOEs here.  Under the new laws, a state-owned enterprise is defined as:

a) the government of a foreign state, whether federal, state or local, or an agency of such a government;

(b) an entity that is controlled or influenced, directly or indirectly, by a government or agency referred to in paragraph (a); or

(c) an individual who is acting under the direction of a government or agency referred to in paragraph (a) or who is acting under the influence, directly or indirectly, of such a government or agency;

The Canada Business article then connects the dots to recent reports of data gathering:

Now cross reference this with the assertions in the Bloomberg story about the various American companies, which run the gamut from banks to ISPs and computer hardware/software makers:

“In some cases, the information gathered may be used not just to defend the nation but to help infiltrate computers of its adversaries.”

At the relative centre of this is Microsoft, whose operating systems dominate global computing. About its software the report says:

“[Microsoft] provides intelligence agencies with information about bugs in its popular software before it publicly releases a fix, according to two people familiar with the process. That information can be used to protect government computers and to access the computers of terrorists or military foes.

[Microsoft] and other software or Internet security companies have been aware that this type of early alert allowed the U.S. to exploit vulnerabilities in software sold to foreign governments, according to two U.S. officials.” [emphasis added]

This sounds like a security problem for any country, let alone Canada.

Go read the whole thing here.  For a variety of practical and political reasons, I doubt that Canada would treat these companies as “state-owned enterprises” under the new law.  However, this and similar laws should provide some leverage for Canada and other countries to push back against the use of data gathering by private companies for the US government.

 

[Illustration: Marc Bell, maisonneuve]

Illinois Legislators Need Political Courage

The pension crisis in Illinois continues, and the choices become more difficult as the days drag on.  From NPR’s Elise Hu:

Just how dire is the situation now? Each day without a fix digs the Illinois pension hole at least another $17 million deeper. After two recent downgrades, Illinois’ bonds are only a few steps above junk status. S&P say that only three states — California, Louisiana and Massachusetts — have ever had ratings as low as Illinois’ current level in the last half century. The low rating makes the fiscal situation even more grim, as the state will see its borrowing costs, already among the highest in the nation, rise yet again.

“Every time they want to build a bridge or new school, it’s going to make it more expensive, and possibly a lot more expensive,” [Pew researcher David] Draine says.

As I have noted before, Illinois has constitutional impediments to merely changing the benefits of Illinois state pensioners; a constitutional amendment may be required to fix the pension system.  A constitutional fix would undoubtedly create tensions between state employees and everyone else, but how else can the state get out of this mess?  This huge liability overhang casts a shadow over public bond offerings, making education, infrastructure, and many other government services much more expensive.

Courage, Illinois.

 

[Image: GPB News]

What Are "Alternative Investments"?

A colleague and I are about to embark on a research project in which we will be looking at trends in alternative investing by public pension funds.  Part of the exercise is definitional: what, exactly are alternative investments?  Obviously one thinks of hedge funds and private equity, but sometimes those funds do not fit neatly into an absolute return, alpha-generation bucket.  As a recent Institutional Investor article suggests, some funds are folding many alternatives back into other asset categories and, more generally, differentiating assets more on risk and liquidity profiles than old-fashioned “equity”, “fixed income”, “cash” and “alternatives” labels.

A follow-up question to this is, how much do these definitions matter?  The label may not matter much if you are thinking only about the risk/return calculation–call it whatever you want, but does it fill a portfolio need?  However, there are significant differences in labeling from a regulatory perspective, and, of course, there are differences in the investment vehicles and the rights (or lack thereof) associated with those vehicles.

In any event, it should be a fascinating look into how pension funds are using hedge funds and private equity funds.  Count me as a bit of a skeptic as to most funds’ ability to generate significant alpha returns.  Anecdotally, I have heard grumbling about the failure of hedge funds and private equity to deliver on their alpha promises over the last 5 years.  There is also some hard evidence of pension funds abandoning some alternative managers, particularly, the FT notes, funds of funds

If readers have any insights into the use of alternatives by pension funds, please drop me a line.  I will be blogging more lightly over the next few weeks, but I will stay connected.

 Picture1

Different Strokes for Different Folks . . .

Japan Times:

With every flight, Pakistan’s state-owned airline demonstrates the economic challenges facing the country’s new government.

Each time a plane belonging to Pakistan International Airlines takes off, odds are the aircraft is more than 25 years old and not in the best of shape. It is likely running late. It probably has a bigger crew than necessary — the airline has four, even five, times the staff per plane than a typical carrier. And ultimately, each flight is probably costing the state money instead of adding to its bottom line.

PIA loses the equivalent of around $305 million a year, and that is emblematic of the problems with Pakistan’s state-owned enterprises. Experts estimate state-owned firms lose at least $4.1 billion a year, holes the debt-ridden government plugs through cash injections, guaranteeing loans or other means. . . .

Pakistan lists dozens of entities as state-owned enterprises, covering sectors such as oil, steel, fertilizer, transport and more, although not all are intended to generate revenue. Over the years, various ruling parties have used such businesses as sources of jobs they could hand out to supporters, even as they have failed to invest in maintenance and upgrades of the infrastructure the firms needed.

Russia Beyond the Headlines:

Prime Minister Dmitry Medvedev approved a plan that should facilitate the access of Russian IT companies to the public procurement of innovative products and services. Such measures should increase the presence of Russian suppliers in state companies.

Medvedev signed a “roadmap” to expand the access of small and medium-sized businesses to infrastructure monopolies and companies with state participation.

According to the plan, the “roadmap” aims at increasing the purchase of high-tech goods and services from small and medium-sized enterprises by state-owned companies compared from 100% registered in 2013 to 300% by 2018.

imagesCAG84WFJ

 

Qatar in the News

I leave this week for Doha, where I will be teaching a course on sovereign wealth funds and other international financial institutions at Qatar University for the next few weeks.  Qatar is on my mind and in today’s news:

  • Arabian Business.com reports that Qatar is part of one of several high profile bidders battling to take buy US-based online video streaming service Hulu. The company is owned by Rupert Murdoch’s News Corp and media giants Walt Disney and Comcast  and the bidding process is set to be one of the most tightly fought deals in the US entertainment world this year.
  •  Bloomberg Businessweek reports that “Hassad Food Co., the agricultural investment arm of Qatar’s sovereign wealth fund, plans to invest $500 million in India after buying Bush Foods Overseas Ltd.”
  • And, ConstructionWeekOnline reports that “Qatari Diar, the sovereign wealth fund owned by the Qatar government, is set to buy $7.2bn worth of assets of listed Qatari developer Barwa Real Estate Company.”

The Fight Against Fees

Over on the Avenue of Giants, Ashby Monk continues to fight the good fight against the Wall Street fee machine.  Pension funds, sovereign funds, and endowment funds that are paying billions and billions of dollars in “alpha” fees–fees for management expertise that should generate real, above-market returns–are instead getting beta returns.  This is, in essence, a massive wealth transfer from pension fund beneficiaries, sovereign fund sponsors, and those who depend on endowments to Wall Street.

So why is this happening?  Ashby has detailed some of the reasons in numerous posts, and one of the most frustrating reasons is that governmental hiring policies often make it extremely difficult to hire and pay for the kind of talent that would allow these big funds to handle many of the now-outsourced investments in-house.  Add to this the ridiculous political backlash that often accompanies calls for reform, as has been occurring in NYC, where some pension trustees seem to be more willing to pay more money for less accountability (external managers) than less money for more accountability (internal managers).

Go read Ashby’s post.  He’s recruiting for the fight on fees, and if you or a person you love depends on pension or endowment returns (which should include nearly everyone!), this is a fight you should care about.

images (3)

The Double Bottom Line: Tokyo Edition

The Wall Street Journal reports that

Japan’s $1.16 trillion national pension fund said it would buy more shares at home, a move that may halt a monthlong selloff in the Tokyo stock market.

The Government Pension Investment Fund, the world’s largest, said it has raised its target portfolio allocation of domestic stocks to 12% from the current 11%. The fund also said it will increase its allocation of overseas assets and cut back on low-yielding Japanese bonds.

Of course, the GPIF could be buying up domestic shares simply because the fund thinks they are undervalued . . .

24gpif

[Photo: Reuters]

The Double Bottom Line: SASAC edition

SOEs–and, occasionally, SWFs–often have what is called a “double bottom line”, meaning that along with an expectation of financial returns there is also an expectation of some kind of social return.  An article from yesterday’s Economic Observer gives an example of how China’s SASAC is promoting a double bottom line through hiring: 

Almost 7 million students are set to graduate from China’s higher education institutions this year. In recent weeks domestic media has been full of reports about how grim the employment outlook is.

. . .  The offices of China’s Ministry of Education and the State-owned Assets Supervision and Administration Commission (SASAC) recently issued a notice instructing state-owned enterprises to recruit more university graduates than in previous years.

The notice said state-owned enterprises should lift the number of graduates they recruit by a reasonable amount in order to meet their personnel needs over the coming 3 to 5 years.

The notice also stressed that state-owned enterprises should not discriminate on the grounds of gender, hukou, qualifications or educational institution during the hiring process.

SOE were also instructed to take into consideration the employment prospects of university graduates
from national minorities and were told to offer more employment opportunities to graduates from Tibet, Qinghai and Xinjiang.