Sovereign Funds: Latin America's Hidden Investment Potential

With its abundant raw materials and growing digital economy, Latin America has real potential for national investment funds.

In Sao Paulo, Brazil
In Sao Paulo, Brazil
Javier Capapé


MADRID — Sovereign wealth funds are no longer a mystery. A decade ago, names like the Qatar Investment Authority, Abu Dhabi Investment Authority or China Investment Corporation were entirely unfamiliar. Yet these and another 88 funds like them had assets worth $8 trillion by late 2018. That is equivalent to the annual GDPs of Brazil, Mexico, Argentina, Colombia and Chile combined.

These former strangers are emerging in countries not currently considered for their state investments. Cities like Doha, Abu Dhabi, Riyadh, Moscow, Oslo and Beijing have come to accumulate an unprecedented level of financial power. The 2018 report by Sovereign Wealth Research at Madrid's IE University, compiled in collaboration with Spain's investment promotion agency ICEX-Invest, showed some relevant trends.

1. Sovereign funds are many though a much smaller number of active funds have now taken a leading position. In 2018 these were Singapore's Temasek and GIC funds, and Abu Dhabi's ADIA and Mubadala. The latter is known in Argentina for absorbing the ADIC fund and recently investing $55 million in the public-sector oil firm Vista. These are followed by the Australian sovereign fund and Malaysia's Khazanah. These six together accounted for 80% of all operations in 2018.

2. Funds will typically engage in 180 operations a year, or just over three a week, with the total average value of investments reaching around $80 billion a year. That equaled to 2% of all the world's mergers and acquisitions in 2018. Talking about sectors, over the past three years funds mostly favored real estate. In 2018 their preference shifted to large-scale operations in chemicals, retail and e-trading/Fintech. The decline in real estate was in part for the relative scarcity of attractive investment options at a time of rising prices and fierce competition for a limited supply of assets.

3. Sovereign funds remain attracted to technology and recent (and not so recent) startups. In fact, 2018 was a record year for sovereign venture operations — meaning funds investing as venture capital firms, with venture capital money. Sovereign funds participated in 77 funding rounds last year, more more than one operation a week. It was the crest of a wave that began in 2014. Over this period, sovereign funds participated in 220 funding rounds, mostly in the United States and China. Today they are going beyond classical tech markets like the UK, Singapore and India, and Latin American startups are catching their attention. Mubadala has been investing in Brazil (99Taxis and Loggi), while Temasek took a share in Neoway, a Brazilian data analysis firm.

In March 2019, Japan's SoftBank decided to create the biggest venture capital firm focused on Latin America, with a $5-billion-dollar investment target. Its head is Marcelo Claure, a Bolivian entrepreneur, currently president of Sprint and head of Operations for SoftBank.

4. Sovereign funds have been growing, but also changing their investment strategies. They are now mature investors, as their portfolios show diversification by sector, location and asset. Portfolios with a classical or conservative selection of investments (60% equities, 40% fixed-income securities) have now expanded to include alternative assets including risk and venture capital projects, real estate and hedge funds.

Those that tend to venture into illiquid markets (like real estate) are funds with long-term missions (Abu Dhabi Investment Authority, Qatar Investment Authority) or development funds with controlling stakes in the country's main public firms (Khazanah in Malaysia or the Emirates, or Mumtalakat in Bahrain). Funds with stabilization objectives (Russia, Chile or Botswana) keep more than 60% of their portfolios in liquid assets.

5. Co-investments. In 2018, we carried out an exhaustive analysis of sovereign funds' co-investment operations over the past 10 years. The main conclusion is that co-investment is not easy. The high amount of funds needed explains why only 22 of 91 funds have made co-investment operations on a big scale over a decade. The 2018 report reveals, however, that the funds do know how to operate jointly, and it was precisely a consortium led by Brookfield, with CIC and GIC participation, that acquired Petrobras gas transportation stakes worth over $5 billion in 2017. That was one of the five biggest operations that year.

6. Responsible investment and climate change remain fund objectives. The recent COP24 summit in Katowice, Poland, has added pressure and highlighted the importance of private capital to cover the needs of sustainable investment. Sovereign funds are not indifferent to this reality, which prompted the creation of the One Planet Sovereign Wealth Fund Working Group in December 2017. Its mission was to accelerate the integration of financial risks and opportunities relating to climate change into mass-scale asset management. Paradoxically, five of the Working Group's six founders are sovereign funds of leading oil and gas exporters. It is precisely these funds that have the most to both lose and gain from the opportunities and risks associated with climate change.

7. In Latin America, new, operative sovereign funds manage total assets of some $43 billion, 60% of which are handled by two Chilean funds. Presently there is particular regional interest in forming funds to manage the extraction and exploitation of natural resources (Suriname for example has voted to establish a sovereign fund to manage oil and gold extraction).

A notable development in the region is a near-20% fall in the value of Peru's fiscal stabilization fund. The reason was the withdrawal of monies needed for reconstruction efforts after flooding in March 2017. Chile made similar use of sovereign assets the year before, this time to tackle devastating fires. Both examples show the funds' potential stabilizing role in extreme weather events, but also the dramatic volatility in commodities prices.

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In Argentina, A Visit To World's Highest Solar Energy Park

With loans and solar panels from China, the massive solar park has been opened a year and is already powering the surrounding areas. Now the Chinese supplier is pushing for an expansion.

960,000 solar panels have been installed at the Cauchari park

Silvia Naishtat

CAUCHARI — Driving across the border with Chile into the northwest Argentine department of Susques, you may spot what looks like a black mass in the distance. Arriving at a 4,000-meter altitude in the municipality of Cauchari, what comes into view instead is an assembly of 960,000 solar panels. It is the world's highest photovoltaic (PV) park, which is also the second biggest solar energy facility in Latin America, after Mexico's Aguascalientes plant.

Spread over 800 hectares in an arid landscape, the Cauchari park has been operating for a year, and has so far turned sunshine into 315 megawatts of electricity, enough to power the local provincial capital of Jujuy through the national grid.

It has also generated some $50 million for the province, which Governor Gerardo Morales has allocated to building 239 schools.

Abundant sunshine, low temperatures

The physicist Martín Albornoz says Cauchari, which means "link to the sun," is exposed to the best solar radiation anywhere. The area has 260 days of sunshine, with no smog and relatively low temperatures, which helps keep the panels in optimal conditions.

Its construction began with a loan of more than $331 million from China's Eximbank, which allowed the purchase of panels made in Shanghai. They arrived in Buenos Aires in 2,500 containers and were later trucked a considerable distance to the site in Cauchari . This was a titanic project that required 1,200 builders and 10-ton cranes, but will save some 780,000 tons of CO2 emissions a year.

It is now run by 60 technicians. Its panels, with a 25-year guarantee, follow the sun's path and are cleaned twice a year. The plant is expected to have a service life of 40 years. Its choice of location was based on power lines traced in the 1990s to export power to Chile, now fed by the park.

Chinese engineers working in an office at the Cauchari park


Chinese want to expand

The plant belongs to the public-sector firm Jemse (Jujuy Energía y Minería), created in 2011 by the province's then governor Eduardo Fellner. Jemse's president, Felipe Albornoz, says that once Chinese credits are repaid in 20 years, Cauchari will earn the province $600 million.

The Argentine Energy ministry must now decide on the park's proposed expansion. The Chinese would pay in $200 million, which will help install 400,000 additional panels and generate enough power for the entire province of Jujuy.

The park's CEO, Guillermo Hoerth, observes that state policies are key to turning Jujuy into a green province. "We must change the production model. The world is rapidly cutting fossil fuel emissions. This is a great opportunity," Hoerth says.

The province's energy chief, Mario Pizarro, says in turn that Susques and three other provincial districts are already self-sufficient with clean energy, and three other districts would soon follow.

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