Saturday, February 15, 2014

Part 11: Italy Strategic Fund--Reimaging the State in the Global Sphere: An Inventory of Sovereign Wealth Funds as Regulator and Participant in Global Markets

(Pix (C) Larry Catá Backer 2014)

This Blog Essay site devotes every February to a series of integrated but short essays on a single theme. For 2014 this site introduces a new theme:  Reimaging the State in the Global Sphere: An Inventory of Sovereign Wealth Fund as Regulator and Participant in Global Markets.

There have been a number of studies that have sought to provide an overarching structure for understanding SWFs. The easiest way to to this is to find the largest and most influential funds and then extrapolate universal behaviors or characteristics from them.  This is a useful enterprise, it may erase substantial nuance that itself might provide the basis for a deeper understanding of SWFs within globalization and in the context of a state system in which not all states are created equal.  In this sense, while the large SWFs are better known, they do not define the entire field of emerging SWF activity. This study provides a brief critical inventory of the emerging communities of sovereign wealth funds. Each post will consider a different and less well known SWF.  Taken together, these brief studies might suggest the character and nature of the emerging universe of SWFs, and their possible rationalization.

This Post considers the Italian Strategic Fund.

The Italian Strategic Fund ( Fondo Strategico Italiano (FSI)) is one of the more curious newer funds.  It was created in July 2011 with the announcement by the Italian state of the €4 billion funding of a strategic development sovereign wealth fund. (Sovereign Wealth Fund Institute Italy).   Like many funds of middle income states, the object of the FSI is inward rather than outward investment.  In this case, the government has pooled a substantial amount of money to invest in targeted Italian companies. (Ibid)  And in the process to avoid cronyism, favoritism and corruption.   

Of the announced €4 billion, only €1 billion (described as an initial capitalization) was initially funded, the largest portion of which was funded by the Cassa Despositi e Prestiti, "a joint-stock company under public control, with the Italian government holding 80.1% and a broad group of bank foundations holding 18.4%, the remaining 1.5% in treasury shares." (Cassa Depositi, Mission).  Effectively, the FSI is treated as an investment subsidiary of the Cassa Depsositi.  "CDP is the controlling shareholder of Fondo Strategico Italiano (FSI) which acquires stakes in firms deemed to be of “significant national interest” that are financially stable and offer significant growth and profit - generation prospects." (Ibid).

"FSI operates by acquiring mainly minority holdings in companies of “significant national interest” which have economic-financial stability, adequate income-earning prospects and significant growth prospects." (FSI Homepage).  To date, FSI has invested around € 2.6 billion in 8 companies, of which 7 are in its investment portfolio and 1 remains to be finalized. (Ibid).  "Consistent with the concept of the non-operating investor, FSI operates by acquiring mainly minority holdings in companies of “significant national interest” which have economic-financial stability, adequate income-earning prospects and significant growth prospects." (FSI How we Operate).  It seeks to be an active shareholder.  "The FSI investment policy envisages active involvement in the governance of the investee companies, aimed at ensuring the pursuit of the aims of the investment." (Ibid).  
FSI participates in the corporate governance of its portfolio companies following the principle of the non-operating investor with a patient, medium/long-term view in line with the best market practices.

Given its timescale, FSI defines agreements with the other shareholders of the investee companies with the aim of: (i) ensuring an adequate level of representation and active governance; (ii) ensuring a constant information flow; (iii) identifying options for the development and liquidation of the investment at market conditions.

When exiting the investment, FSI sets itself the objective of leaving the company larger and more competitive, capable of prospering on global markets and continuing to generate sustainable employment and wealth. (FSI Governance Within the Investee Companies).

And, of course, such investment, public and state driven for internal development will likely run up against European Union limitations on national subsidies in a regime of free movement of capital, investment, goods and services.  (CF: Backer, Larry Catá, The Private Law of Public Law: Public Authorities as Shareholders, Golden Shares, Sovereign Wealth Funds, and the Public Law Element in Private Choice of Law. Tulane Law Review, Vol. 82, No. 1, 2008).

The ISF is organized as a state owned enterprise. It is operated through a board of directors, "and is subject to the control of a Board of Statutory Auditors. Alongside these bodies, the Articles of Association envisage the presence of an Investments Committee and a Strategic Committee." (FSI Corporate Bodies).
FSI is subject to the management and co-ordination activities of Cdp and has drawn up a series of procedures representing its corporate regulatory system, in line with the best market practice for companies operating in the investments sector.

In accordance with the best market practices, FSI has adopted a series of compliance procedures including: (i) a conflicts policy; (ii) a procedure for the establishment and keeping of the register of individuals who have access to confidential information; (iii) a procedure relating to personal transactions by significant parties; (iv) a procedure for related party transactions; (v) a procedure for dealings with the press.

Lastly, FSI has approved operating procedures aimed at ensuring management efficiency and transparency, including: (i) expense reimbursement procedure; (ii) entertainment expenses; (iii) sponsorships and donations; (iv) staff assessment and incentive procedure; (v) procedure regarding the fulfilment of administrative, accounting and tax requirements and audits pursuant to Italian Law No. 262/2005. (FSI Corporate Documents).
The organization chart may be accessed HERE.

All in all the FSI represents a curious throwback.  While it may be operated in sovereign wealth form, and even adopt the long term shareholder language of SWF master narratives, it remains, at its core, a means of providing strategic resources to enterprises that the state would like to favor.  But it is presented in new form,.  As a strategic development fund it funnels money from the Italian state to the Italian private sector.  And it hopes, like a bank, to make money in the process.  But it is a very different organization from SWFs with the aim to project their economic power abroad directly through fund investment. 

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