Tuesday, February 25, 2014

Part 13: Kuwait Investment Authority --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 Kuwait Investment Authority.

The Kuwait Investment Authority (KIA) is among the oldest sovereign wealth funds, and at one point the template for the SWF model. Over the course of the last 20 years, however, it has increasingly cease to serve as a model of emerging SWEF structures and roles. As a member of the International Forum of Sovereign Wealth Funds, the KIA shares some characteristics with a number of the other largest SWFs in their conformity to the Santiago Principles.  It is among the largest funds, and one heavily invested in equities, real estate and other securities abroad. It has a blended character as a public fund that operates mostly as a private player in markets. It tends to operate on fairly conservative investment principles. (KIA Overview Investment Principles).

Kuwait is home to the first national sovereign wealth fund in today’s traditional sense of the term. Founded in 1953 while Kuwait was still a territory of the United Kingdom the Kuwaiti Investment Authority (KIA) manages an estimated $386 billion in assets and is ranked 6th globally (Sovereign Wealth Fund Institute Rankings). The purpose of the fund was supplemental income for Kuwait following the use of its nonrenewable resources. 
The Kuwait Investment Authority (KIA) is an autonomous government body responsible for the management and administration of the General Reserve Fund (GRF), and the assets of the Future Generations Fund (FGF), as well as any other funds entrusted to it by the Minister of Finance for and on behalf of the State of Kuwait. KIA invests in the Local, Arab and International Markets with its main office located in Kuwait City,China Office and a branch office in London, UK. (KIA, In Brief)
The Kuwaiti Government has dedicated 10% of the revenue received as a result of petroleum sales towards the fund (KIA, About-Overview). 

Governance: Structurally the KIA falls under and is chaired by the Ministry of Finance and has board members appointed representing the Ministry of Oil, Central Bank of Kuwait Governor, Under the Secretary of the Ministry of Finance, and five private sector appointees (KIA Mission Principles).  The Executive Committee, chaired by the managing director, is appointed by the Board of Directors and tasked with assisting the Board of Directors with the strategic goals and objectives of the KIA, namely that of focusing on commercial investments as opposed to geopolitically based motives.

Finance Strategies: KIA annually reports to the Council of Ministers and the Emir but outside of the government, transparency in the investment portfolio, rate of return, and benchmarks is lacking. This is interesting deficiency given KIA's adherence to the Santiago Principles, but may reflect the cultures of politics in Kuwait. What little is known about the investing activities of the KIA relate to KIA's equity holdings.  
“(KIA) does not seek to purchase majority or controlling interests in the companies in which it invests, other than shares in real estate investment entities and in investment holding companies that it establishes for particular transactions… In June 2005, KIA’s Board of Directors approved KIA’s Strategic Asset Allocation along with a series of recommendations made by the consultant, including establishment of a Target Rate of Return and a Risk Profile that would seek to enable KIA to double AUM within ten years. The adopted recommendations included relaxing the quality of fixed income instrument investments from AA to BBB+, purchasing High Yield and Emerging Market Debt and purchasing small and mid-cap as well as Emerging Market equities. The Strategic Asset Allocation also recognized the importance of Alternative Investments, including Private Equity, Hedge Funds, Funds of Funds and Real Estate investments. The Strategic Asset Allocation reduced exposure to traditional asset classes and increased exposure to non-traditional asset classes" (KIA Overview). 
External Fund managers are expected to adopt a conservative investment strategy, "to invest in prime quality marketable securities and to follow a conservative investment strategy while preserving capital in real terms and achieving optimum long term growth." (KIA Portfolio Management). The KIA has investment offices in both London and Beijing. The KIA seeks to hedge its reliance on EMFs. "There are strict guidelines, set by the Executive Committee of the Board of KIA, which govern the amount of funds held with each EFMs. Therefore, the Department employs a number of EFM’s in order to adhere to the guidelines and further enhance diversification." (KIA Portfolio Management).  

Investment Objectives:  In addition to its primary role as a wealth generator for Kuwait, the KIA is also used for internal macro economic planning.  It effectively seeks to use soem fo its funds to develop the internal Kuwaiti economy.
KIA maintains an active involvement with economic and financial developments in Kuwait. It promotes and supports institutionalization of the market through setting up funds and companies to promote and finance local business, and participates in the launching of local investments that have feasible economic returns.

KIA helps develop the role of local financial companies by giving them the opportunity to manage some of their investments locally and abroad. The private sector’s regeneration will be maintained through privatization programs that KIA is committed to undertake. Additionally, KIA provides liquidity to the State's Treasury when needed. And, as detailed in the role of the Local Investment Department, KIA has set up several companies in the last few years, primarily to promote investment in Kuwait. (KIA Role in Local Economy).
Unlike the Norwegian and Australian SWFs, the KIA avoids active shareholding, except to protect its economic interests in its investment. "KIA exercises its voting rights, if at all, in the manner that it believes will protect the financial interests of KIA, and to the extent KIA votes for the election of any Board members of a portfolio company, such Board member will be subject to all the obligations of Board members under applicable laws." (KIA, Voting Rights).

Reporting Structures & Transparency: As stated above, there is little in the way of outside transparency in the investments that Kuwait makes. Clauses 8&9 of Law 47 of 1982 dictate the penalties for public disclosure of the investments held by the KIA (KIA Transparency).  In the last decade and on their own accord “KIA undertook a comprehensive review of its strategy in order to align itself with industry best practices in all aspects of asset and investment management. During this review, the consultants undertaking the study found that KIA had one of the best corporate governance structures within its peer group and within the industry as a whole" (KIA Overview). . In regards to transparency the KIA has been given a rating of a 6/10 on the Linaburg-Maduell Index, similar to both Singapore and Botswana (SWF Institute).

Criticisms: There is little evidence to suggest that Kuwait continuously acts as an active investor in the companies which it holds equity. In the early stages of the 2007-09 credit crises Kuwait, like many other sovereign wealth funds took positions in U.S. financial companies. The largest known investments combined to a total of $10 billion USD in Citigroup (MarketWatch) and Merrill Lynch (Bloomberg).  In addition Kuwait owns just under 7% of the German company Daimler (Daimler).  In May of 2013 the Government of Kuwait lost a landmark arbitration case by the International Chamber of Commerce granting Dow Chemical $2.48 billion for Kuwaiti lawmakers decision to cut short a joint venture between Kuwaiti owned Petrochemical Industrial Company and Dow Chemicai (Dow Chemical). Following the cancelling of the decision to move forward with the joint venture Dow Chemical was forced to cut its dividend and issued $4 billion in preferred shared to Berkshire Hathaway and the Kuwaiti Investment Authority (Bloomberg). Finally Kuwait has consistently maintained its position on keeping the majority of its investment decisions secret.

No comments: