Angola’s Sovereign Wealth Fund Passes Start Line At Last

FT BeyondBrics, September 2014

Six years after it was announced, Angola’s sovereign wealth fund is fully underway. It has received the final instalment of its $5 billion initial endowment and has begun to take its funds out of cash and put them into longer-term investment.

In an interview with FT BeyondBrics, José Filomeno Dos Santos, Chairman of Fundo Soberano de Angola (FSDEA), said that one third of the fund’s assets would be allocated to highly liquid securities such as cash, bonds and listed equities, one third into alternative investments in sub-Saharan Africa, and one third into what he called “opportunistic investments internationally: distressed assets that the fund could take advantage of, spin around and refocus.” He added: “All the cash is invested. But it’s not fully deployed as per the strategy: the portfolio is being diversified into different classes of assets and obviously that takes time, especially in the alternatives sphere.”

Angola’s sovereign fund was announced by President José Eduardo Dos Santos – the father of the FSDEA chairman – in November 2008, legally ratified in 2011 and officially established in 2012. Its formation, with a mandate to generate sustainable long-term returns for the future while investing in domestic social and economic development, was hailed as another step forward for a once war-ravaged nation that is now seen as one of Sub-Saharan Africa’s brightest hopes, buoyed by oil wealth and a gradually diversifying economy.

Progress since the fund’s inception has at times appeared slow, but Mr Dos Santos said that considerable time had been spent in preparation. “Our task when we began was to develop in more depth the strategy of the fund,” which became a formal investment policy that was evaluated by the government and approved in June 2013. “Following that we started to implement the policy. Being a state institution, and running an account of the treasury, requires a lot of reporting.” Several layers of supervision and management have been set up, with a board of directors, a fiscal committee, an advisory council and the appointment of Deloitte as auditors, which signed off on the fund’s first audited accounts, released yesterday. “Once the foundations were in place, the endowment started to be transferred last year. As soon as that began, we started to deploy this capital.”

Since the initial deployment was largely into liquid assets, the sense now is that the fund is pretty much at the starting line for making the long-term alternative investments it hopes to focus on. “Our approach is a private equity approach,” Mr Dos Santos said. “We start off by creating specialist funds in limited liability structures, within which we as investors are a limited partner. We approve basic policy and the target returns the entities should achieve, and these entities go and deploy the strategy with a high level of independence.” Mr Dos Santos would not be drawn on how far along these vehicles are with making investments, saying it would become clear each year as their accounts are audited.

Naturally, the international aspirations of the fund will require external advice, and the fund has already raised eyebrows with the one external appointment it has made to date: Quantum Global, a Swiss-domiciled asset manager which, while highly regarded, is not one of the heavyweight names in global funds management.

“From the beginning, we scanned the market for potential manager,” Mr Dos Santos said. “Our focus was to find an asset manager to be aligned with our policy, and one of our principle objectives is to invest domestically and regionally. Sincerely speaking, we’ve had quite a difficult time finding asset managers already operating in that part of the world.” Quantum had already worked with the Angolan state on other mandates, which clearly helped its selection as the first hire, “with the view of widening the selection of asset managers as we go along,” Mr Dos Santos said, adding that the sovereign fund is trying to build its internal capability to supervise third party managers.

“When we looked at supernational institutions and what their activity has been in the continent, it was very little,” Mr Dos Santos continued. “We became aware that some of them do have funds for emerging markets, but they have very limited activity, mostly focusing on debt in Latin America and Asia. Africa has its own challenges: it’s a new continent for some of these entities.”

Early priorities will be infrastructure, real estate with a focus on hotels, agriculture, mining and soft commodities. Hotels are understood to be the most advanced area of investment so far. “Our approach has been to invest in commercial real estate more than residences for the time being,” Mr Dos Santos said. “We see big potential there to generate employment in the Sub-Saharan region, and we see these as potential platforms for a supply chain to be established. It’s the type of investment we believe can spur growth in the region. The hotels themselves will attract investors – it’s important for foreign investors to have a secure hotel to stay in in a new region they are visiting. Because there aren’t very many international-standard hotel rooms in the continent, that’s an area we see a lot of potential in.” This typifies the fund’s likely dual approach of seeking returns and spurring growth. “We are looking to earn returns as well as generate benefits for the wider economy.”

Much has been made of the fund’s governance structures, but it does not appear to have quite the degree of autonomy of some sovereign funds: leaving aside the family link between the President of the country and the chairman of the fund, it is incorporated in such a way that the President appoints the board, and the government approves the investment strategy. “Well, it is a state entity, not a corporation that is owned by the state,” Mr Dos Santos said. “We are called an autonomous state fund. Our investment decisions are taken by the board, but our investment policy is defined by the government.” So a future government could change its direction? “Yes, if it changes the investment policy. It’s a state entity at the end of the day.”

Depending on what happens with the oil price, the fund could find itself growing very big very quickly. There is another state institution called the Strategic Financial Oil Reserve Account for Infrastructure which is a fiscal stabilization fund, accruing the financial equivalent of 100,000 barrels of oil per day. The government sets its budget based on a fixed oil price; where the oil price falls and there is therefore a budget shortfall, the stabilization fund is used as needed. But where there is a surplus, this will be passed on to the sovereign wealth fund. Predicting these numbers is clearly difficult. “But we know that this account has been accruing for some time now, since 2009, and that the budget has had surpluses for most of that time,” Mr Dos Santos said, although last year was a rare deficit. Unsurprisingly, the fund is expected to act as a diversifier away from oil; 95% of holdings must be uncorrelated to oil price volatility (and at least 20% must be in liquid assets at all times).

With $5 billion in assets already, a likely steady source of additional funds, a stated interest in international assets and just one mandated manager to date, it is likely that Luanda is going to become an increasingly important place for international fund managers to visit.