Economy

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

-Analysis-

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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Economy

Air Next: How A Crypto Scam Collapsed On A Single Spelling Mistake

It is today a proven fraud, nailed by the French stock market watchdog: Air Next resorted to a full range of dubious practices to raise money for a blockchain-powered e-commerce app. But the simplest of errors exposed the scam and limited the damage to investors. A cautionary tale for the crypto economy.

Sky is the crypto limit

Laurence Boisseau

PARIS — Air Next promised to use blockchain technology to revolutionize passenger transport. Should we have read something into its name? In fact, the company was talking a lot of hot air from the start. Air Next turned out to be a scam, with a fake website, false identities, fake criminal records, counterfeited bank certificates, aggressive marketing … real crooks. Thirty-five employees recruited over the summer ranked among its victims, not to mention the few investors who put money in the business.

Maud (not her real name) had always dreamed of working in a start-up. In July, she spotted an ad on Linkedin and was interviewed by videoconference — hardly unusual in the era of COVID and teleworking. She was hired very quickly and signed a permanent work contract. She resigned from her old job, happy to get started on a new adventure.


Others like Maud fell for the bait. At least ten senior managers, coming from major airlines, airports, large French and American corporations, a former police officer … all firmly believed in this project. Some quit their jobs to join; some French expats even made their way back to France.

Share capital of one billion 

The story began last February, when Air Next registered with the Paris Commercial Court. The new company stated it was developing an application that would allow the purchase of airline tickets by using cryptocurrency, at unbeatable prices and with an automatic guarantee in case of cancellation or delay, via a "smart contract" system (a computer protocol that facilitates, verifies and oversees the handling of a contract).

The firm declared a share capital of one billion euros, with offices under construction at 50, Avenue des Champs Elysées, and a president, Philippe Vincent ... which was probably a usurped identity.

Last summer, Air Next started recruiting. The company also wanted to raise money to have the assets on hand to allow passenger compensation. It organized a fundraiser using an ICO, or "Initial Coin Offering", via the issuance of digital tokens, transacted in cryptocurrencies through the blockchain.

While nothing obliged him to do so, the company owner went as far as setting up a file with the AMF, France's stock market regulator which oversees this type of transaction. Seeking the market regulator stamp is optional, but when issued, it gives guarantees to those buying tokens.

screenshot of the typo that revealed the Air Next scam

The infamous typo that brought the Air Next scam down

compta online

Raising Initial Coin Offering 

Then, on Sept. 30, the AMF issued an alert, by way of a press release, on the risks of fraud associated with the ICO, as it suspected some documents to be forgeries. A few hours before that, Air Next had just brought forward by several days the date of its tokens pre-sale.

For employees of the new company, it was a brutal wake-up call. They quickly understood that they had been duped, that they'd bet on the proverbial house of cards. On the investor side, the CEO didn't get beyond an initial fundraising of 150,000 euros. He was hoping to raise millions, but despite his failure, he didn't lose confidence. Challenged by one of his employees on Telegram, he admitted that "many documents provided were false", that "an error cost the life of this project."

What was the "error" he was referring to? A typo in the name of the would-be bank backing the startup. A very small one, at the bottom of the page of the false bank certificate, where the name "Edmond de Rothschild" is misspelled "Edemond".

Finding culprits 

Before the AMF's public alert, websites specializing in crypto-assets had already noted certain inconsistencies. The company had declared a share capital of 1 billion euros, which is an enormous amount. Air Next's CEO also boasted about having discovered bitcoin at a time when only a few geeks knew about cryptocurrency.

Employees and investors filed a complaint. Failing to find the general manager, Julien Leclerc — which might also be a fake name — they started looking for other culprits. They believe that if the Paris Commercial Court hadn't registered the company, no one would have been defrauded.

Beyond the handful of victims, this case is a plea for the implementation of more secure procedures, in an increasingly digital world, particularly following the pandemic. The much touted ICO market is itself a victim, and may find it hard to recover.

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