Guest Blog: Libya’s Loss-Making SWF

Peter Cole just completed his Master’s thesis at Oxford on the Libyan Investment Authority. Since I’m on the road again today, I’ve asked Peter to comment on the recent revelations about LIA’s investment activities. Over to Peter!

Peter Cole

The leaked LIA presentation, if genuine, is a pretty remarkable event in the SWF world. It’s by far the most explicit and detailed exposition of that authority’s workings I’ve ever seen. The portfolio spread, subsidiary spread and names of companies/banking partners all ring true. It’s interesting that the presentation is in English, though. There are few foreign audiences for LIA to whom it would have been inclined to present such a detailed synopsis of its operations.

The report shows that LIA by Q2 2010 had roughly $20bn held in deposits with various banks (mostly Libya’s Central Bank), just over $5bn in equities, $3.4bn in bonds and around $3.5-4bn in various ‘alternative’ financial products such as hedge and private equity funds. Then there is another $17bn managed by subsidiaries like the well-known African investment portfolios and Oilinvest (which owns ‘Tamoil’ and is responsible for the LibyaOil brand you see at petrol stations in Europe and Africa), plus Dalia, LIA’s London office.

The total reported assets of around $53-55bn are a far cry from the fund’s oft-quoted size of $65bn. What happened to the extra cash, if it ever existed? Well, there have been reports circulating for a while that LIA had lost significant sums on externally-managed funds. This new document seems to verify that, showing a remarkable loss of around $1.2bn in externally-managed equity derivatives. There’s a further $1.5bn loss on externally managed private equities and other structured products, and another $1.6bn lost on equity purchases made (it seems) directly by LIA. Those are quite major losses.

Then there’s the question of the Economic and Social Development Fund (ESDF), technically considered part of LIA and which received somewhere in the region of $10-$12bn from the Libyan government for a Qadhafi-inspired Wealth Redistribution Programme. A major embezzlement scandal was breaking around that fund when this report was produced. For whatever reason, it doesn’t show up on the report at all.

The scale of LIA’s losses doesn’t seem to come down to the fund’s ‘strategic’ outlook (i.e., consideration of political priorities rather than pure economic returns) simply because LIA apparently differentiated between its ‘strategic’ and ‘non-strategic’ investments, and the former only account for around $450m of losses. It’s still not clear to me what the difference between strategic and non-strategic is, by the way; ‘strategic’ investments seem generally larger and at first glance include companies that were active in Libya’s economy and/or companies where investment mattered to diplomatic relations. But then the same could be said of several of the companies deemed as ‘non-strategic’.

Instead, the scale of the losses through external relationships and high-risk equities and financial products mirrors some of the (unverified) anecdotal reports circulating about how some of those relationships were brokered informally by point-men who stood inside or outside the fund and ‘pushed through’ decisions on behalf of political allies (rather than for financial merit).

However they were selected, though, LIA’s confidence in its external partners that collectively lost around $2.7bn of LIA’s money must have taken a knock. As too must have its appetite for engaging in direct equity purchasing. LIA’s Central Bank and Foreign Bank also wielded a strong influence within the organisation which circumscribed the damage done by LIA’s riskier adventures – but its attempts to get its own house in order after these losses were uncovered cannot have been straightforward. For one thing, the external consultancies that worked with LIA on governance issues themselves had a complicated relationship with the country’s political authorities. For another, there is the thorny question of those subsidiaries, whose activities were apparently outside the purview of this report. There may be more revelations to come about LIA’s African and internal investment activities.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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