THE SOVEREIGN DEVELOPMENT AND INVESTMENT FUND: PROSPECTS AND CHALLENGES
With a market value of the portfolio of over USD 9.5 billion, the Romanian Sovereign Development and Investment Fund most likely would be among the top 40 of the 80 sovereign investment funds worldwide, by the market value of the assets under management. By the weight and importance of the energy sector companies in the portfolio, it can be considered a fund of ‘energy’ profile... but through its objectives it is a catalyst for the entire national economy, among other things through the support it can offer to local companies on national or even regional range. In the package with the opportunities, come along some major challenges as well.
The market value of the stock of shares held by the Sovereign Development and Investment Fund (FSDI) is more than RON 37 billion, slightly more than EUR 8 billion or USD 9.5 billion, in a relatively conservative estimate at the end of September 2017. The Fund’s market value may be significantly higher as the above-mentioned amount (of RON 37 billion) includes only the values of the stock of shares to companies for which there were credible and realistic market assessments at the end of September 2017.
FSDI, WITHIN THE SWF RANKINGS
Considering this market value, the Romanian Sovereign Development and Investment Fund could be ranked in the first half of the Sovereign Wealth Funds (SWF) rankings worldwide by the value of the assets managed; more precisely, in the vicinity of Bahrain (Mumtalakat Holding Company, with USD 10.6 billion), of Chile (Pension Reserve Fund, with USD 9.4 billion) and/or Ireland (the Irish Strategic Investment Fund, which has an asset value of about USD 8.5 billion).
According to the studies and statistics provided by the Sovereign Wealth Fund Institute (SWFI - entity specialized in collecting and analysing data and information on sovereign funds), and of the International Forum of Sovereign Wealth Funds (IFSWF - an association of institutions in the field with about 30 members), there are officially 83 investment vehicles worldwide operating as National Investment Funds. They have organizational patterns, investment, transparency policies and/or governance and management structures very different from one case to another. All the entities included in the statistics share the fact that they are set up on the initiative of the state of origin and are primarily pursuing the objectives considered to be of national interest to the concerned state.
According to the SWFI statistics released at the end of September 2017, the aggregate assets value of the Sovereign Wealth Funds worldwide was of about USD 7,418 billion. The figure, however, does not include the latest figures published by the Norwegian Investment Fund in early September, according to which the Norwegian Fund exceeded the USD 1,000 billion threshold in August. This shows that the figures in the SWFI statistics are valid at a date prior to their actual publication. Even with the value of non-updated assets, the Norwegian Sovereign Fund is by far the largest global player of this kind. It is closely followed by the Fund of the United Arab Emirates and the one of China’s sovereign funds; these ones, as well as in Russia and in the United States, are actually operating through various entities - different investment vehicles (see the table ‘Sovereign Investment Funds worldwide’ in the print edition). At the opposite end of the rankings are the investment vehicles of states such as Ghana, Gabon, Vietnam, Mauritania or Mongolia - with assets amounting to less than half a billion dollars.
FSDI ASSETS AND VALUE
According to the draft law on the establishment of the Sovereign Development and Investment Fund S.A., the FSDI portfolio includes stakes of 10% to 100% of the share capital in 27 state and private companies alike; these (direct!) stakes are joined by the indirect stakes in eight other companies in which the State is minority shareholder and which are managed through the Energy Participation Management Company (SAPE) (see the table ‘The FSDI Portfolio’ in the print edition).
Nevertheless, the assessment of these stakes is an extremely complex approach. This may be relatively easy for the listed companies (such as Transelectrica, Nuclearelectrica, Electrica, Transgaz, Romgaz, OMV Petrom, Conpet and/or Oil Terminal), by using the stock market capitalization at the end of September. This is by far the most realistic way of assessment. On the other hand, in the case of unlisted companies, the situation is complicated. Therefore, in the above-mentioned figure are included only the holdings at the companies for which, at the end of September 2017, credible and realistic assessments had been completed.
Among them, for example, are the unlisted companies having as shareholder Fondul Proprietatea! For these companies, a relatively realistic assessment of the FSDI owned holdings can be achieved by using the FP assessments in its periodic reports to investors (see Note 1) for their stakes; among the companies in the FP portfolio, which are also in the FSDI portfolio, we can mention Hidroelectrica (the most important of the companies included in the FSDI portfolio), but also companies in the SAPE portfolio (such as Enel Energie Muntenia, Enel Distributie Dobrogea, Enel Energie, Enel Distributie Muntenia, Enel Distribution Banat, Enel Energie) (see the table ‘Fondul Proprietatea assessments’ in the print edition).
Putting together the data presented above, it can be concluded that, even in a conservative estimate, the figure mentioned above (RON 37 billion, EUR 8 billion, USD 9.5 billion) can be used as a landmark for the FSDI scale. The largest stake is in Hidroelectrica, where the 80.1% share held by the Fund could be assessed at about RON 13.6 billion; the total market value of the company being estimated at about RON 17 billion, given that the 19.94% stake owned by Fondul Proprietatea was registered at a “fair value” of RON 3.4 billion (in the reports on June 30, 2017).
FSDI’s next very valuable ownership is the 70% stake in Romgaz which, at the end of September, had a market capitalization of about RON 11.8 billion - which places the value of the FSDI stake at about RON 8.3 billion. The 20.6% stake held in OMV Petrom - with a market value of about RON 3.4 billion, is one of the most valuable holdings; the 48.8% stake in Electrica (a company with a capitalization of about RON 4.5 billion) is worth about RON 2.2 billion, and the stakes in Engie Romania SA (34%) and Nuclearelectrica (82.5%) lead to a market value of over RON 1 billion.
Obviously, the figures must be regarded under the condition that a strict scientific approach would involve possible discounts (sometimes significant!) to the values of those stakes, given the impossibility of effectively settling them at the assessment prices/values.
For approximately one third of the companies in the FSDI portfolio (companies such as Cupru Min or Chimcomplex), there are no realistic and credible public assessments; they were therefore not included in the above figure (of RON 37 billion). However, the FSDI owned stakes held in these companies may have more than consistent value if we look at the financial results reported at the end of 2016... or at their assets.
Thus, some of these companies, through the value of the resources (assets) in operation, can significantly change upwards the market value of the FSDI portfolio.
The most interesting example is Cupru Min - a company that owns and operates about 60% of Romania’s copper reserves (about 750 million tons of recoverable ore - according to an assessment completed in 2012); the latest ‘market price’ for this was released in 2012 during privatisation (uncompleted!) when the Canadian company Roman Copper Corp won the auction for the 100% stake held by the Ministry of Economy for the amount of EUR 200.7 million.
Remaining in state property, Cupru Min has achieved the largest production in history in 2016. The latest financial reports available on the website of the Ministry of Finance are for 2015, when the company reported total revenues of RON 144 million and net profit of over RON 3 million. At a price of USD 6,800/ton (as it was in 2016), the value of copper deposits (recoverable ore) owned by Cupru Min amounts to the astronomical figure of EUR 5 billion.
In addition, in the case of the other companies (unlisted, for which there are no credible assessments and have no assets/resources of exceptional character), a simplistic calculation can be made using the multiples of prices at which the companies are traded on the Bucharest Stock Exchange and their application to the financial results of the companies in the FSDI portfolio. For example, we can use a level 10 PER (Price Earnings Ratio) which is common for a large number of relevant companies traded on the BVB (and also PER with a relatively acceptable value for a financial investor). Obviously, such an assessment is extremely relative and therefore these figures were not included in the previous FSDI portfolio assessment (of RON 37 billion).
FSDI, AN ‘ENERGY’ FUND
Overall, using the reports available on the Finance Ministry’s website, we can notice that the companies in the FSDI portfolio had total assets of RON 128.5 billion, equity capital of RON 96 billion and total revenues of RON 48.5 billion. Not less than RON 11.7 billion was money actually available in the accounts and cashiers of those companies, and their combined profits exceeded the EUR 1 billion (more exactly RON 5.4 billion) threshold. The calculations are based on the figures in 2016, except for Cupru Min, for which the values reported in 2015 were taken into account (the Finance Ministry’s website has not made available yet the last year’s reports) (see the table ‘Financial figures’ in the print edition).
The largest company in the FSDI portfolio is obviously OMV Petrom - with total assets of about RON 41 billion and equity capital of RON 26 billion; next are Hidroelectrica SA - with total assets of RON 18.8 billion and equity capital of RON 17.8 billion and Romgaz - with total assets of RON 11.2 billion and equity capital of RON 9.7 billion. In terms of profits, however, the rankings are altered! Hidroelectrica ranks first with a profit of about RON 1.23 billion in 2016, followed by Romgaz (slightly above RON 1 billion profit in 2016) and by OMV Petrom (slightly over RON 900 million). Another eight companies in the portfolio had profits of over RON 100 million in 2016, while only nine companies registered profits of less than RON 10 million (see the table ‘Financial figures’ in the print edition).
This outcome highlights the fact that the most important companies in the FSDI portfolio are those in the field that can be generically called energy - namely, oil, gas and electricity (regardless of the operations - exploitation/production, transport or distribution and/or supply).
In fact, a classification by sector of activity of the figures in the financial reports at the end of 2016 shows that the companies in the energy sector account for about 92.6% of the total assets of all companies in the Fund’s portfolio and 92.4% of the total equity capital. At the same time, about 88.5% (RON 4.83 billion) of the profits of all companies in the FSDI portfolio (amounting to about RON 5.46 billion) are achieved by the companies in the energy sector; the market value of companies in the energy sector (RON 69.45 billion) is about 93.2% of the market value of all companies in the Fund’s portfolio (about RON 74.5 billion) (see the table ‘FSDI, an Energy Fund’ in the print edition).
Last but not least, the value of the Fund’s stakes in energy companies (about RON 33.5 billion) is 90% of the market value of the shares held by the same Fund in all the other companies in the portfolio, regardless of the operational field (RON 37.1 billion).
Therefore, the Romanian sovereign fund has a consistent energy character in every respect. This is of particular relevance to the sector, at least in regard to the fact that the companies’ development strategies can be more integrated and more unitary by direct subordination to FSDI, obviously, within the limits of the future management’s mandates and of the legal framework and of the constitutive act.
WHAT IS THE FSDI?
Generally speaking, beyond the specificity of each entity, sovereign funds are only entities that have the capability to adopt long-term policies and investment decision and over very long-term (for decades) ... independent of the economic cycles; by contrast, almost all other types of the current investment vehicles, responding to relatively short-term commitments, are very dependent on economic cycles. This is the most important feature of Sovereign Funds! Investment vehicles of this type (SWF) therefore bring greater diversity into the investment universe, both in terms of duration of investments and as diversity of exposure, becoming actual ‘anchors’ (providing some predictability and certainty over long-term financial flows and in sectors otherwise difficult to access) for all the other investors - whether institutional or even in retail.
With this feature - the stability/certainty coming from the fact that it is a weighty investor with long-term projects and objectives - a sovereign fund can easily be a ‘catalyst’ for the financial resources of other types of investors (banks, pension funds, investment funds) that do not have the ability to maintain on their own the large-scale, long-term investments/projects.
In addition, there is the capacity to concentrate and channel the available financial resources at FSDI level, or national one, to certain projects/fields; but also, the capability to ‘multiply’ these resources, by contracting loans, bond issues, etc. - under obviously better conditions than any of the companies in its portfolio could meet.
That seems likely to be the idea behind Romania’s FSDI! At least this can be understood if we go through the provisions of Article 5 of the FSDI Constitutive Act and those of Article 2 of the Draft Law on the Establishment of the Sovereign Development and Investment Fund, which states that: “The FSDI aims both at developing and financing, from own funds and attracted funds, cost-effective and sustainable investment projects in various economic sectors, through direct involvement or through other investment funds or investment companies, alone or together with other institutional or private investors, as well as for the own assets management, in order to obtain profit.”
Even more important than the reasons outlined above, for the Romanian economy as a whole, (but mainly for the ‘energy’ sector, given that FSDI has a strong presence of such companies in the portfolio) - such a Fund can have the coordination of decision-making in certain areas/issues (in the energy sector in particular!); but also to the creation of some synergies between actors/companies that otherwise have no incentives or possibility of focusing certain operations.
In other words, with a relatively professional management and vision at the management and decision-making level within the FSDI, the companies in its portfolio could coordinate their actions much easier to achieve the strategic objectives or interests. Last but not least, through the FSDI, we would have a single “intermediary” between any such projects (of strategic importance for one or two or more companies and/or Romania) and the state, i.e. the “political decision” (that of the political factors/politicians and/or public institutions). This would ensure not only much better communication but also, above all, more chances that such projects/objectives could receive the necessary support from all channels and from all national institutions. For example, getting the support of the Romanian State apparatus abroad (the Ministry of Foreign Affairs) could be much easier for the FSDI (in the name and for the companies in the portfolio) in order to achieve some objectives on international markets.
The know-how for such complicated operations, including day-to-day business, is also easier and cheaper if it is focused at the FSDI management team level rather than trying to bring it to the level of each company. It is worth pointing out in this context that such a structure - with its know-how, financial strength and/or political support... could have probably changed the result of the sale auction of the majority stake in the Greek gas carrier DESFA... to which Transgaz ran without success.
... AND CHALLENGES
There is also the obverse side - represented by risks! The first one is precisely the concentration of such great financial power in the management of a single entity, as this control might not necessarily work exclusively in state’s interest. This risk is doubled by the risk posed by possible channels of political interference that can be used to influence the FSDI actions (and the process of allocating/investing its financial and know-how resources) to serve potential private or groups’ interests. And this risk is as real as possible, in spite of the legal framework’s provisions on the Fund’s establishment (see Note 2).
Probably we cannot have too many guarantees of compliance to the law by the members of the Fund’s management team; the assumption and/or provisions by law of the FSDI obligation to comply with certain standards of transparency and governance could significantly reduce such risks. In this regard, we can point, for example, to the so-called “Santiago Principles” - a set of rules and principles of functioning, transparency and governance agreed by the “community” of Sovereign Investment Funds and recommended for implementation and compliance by the “International Forum of Sovereign Wealth Funds” (the official meeting and decision-making forum). Placing the FSDI under the monitoring process on such institutions can be an additional safety belt! More important than the “protection against risk” brought by such an approach (including the principles of good practice and transparency and the continuous monitoring for achieving them), is the fact that this is in itself an attraction for the potential partners! This means, finally, more and cheaper money for Romania’s projects.
According to the reports published on Fondul Proprietatea’s website on June 30, 2017 (the most recent report of this kind), the unlisted companies in its portfolio are assessed according to the provisions established by the legislation specific to the capital market and investment funds, at the “Fair value/share”, in the present case at the value assessed by reports of an independent assessor; for this report, the FP used the reports completed on September 30, 2016.
For companies no longer in the FP portfolio on June 30, 2017 (such as Delgaz Grid SA - E.ON Distributie Romania SA, or E.ON Energie Romania SA) was used the last available assessment report, respectively the one on March 31, 2016.
For the assessment of the respective companies see the table ‘Fondul Proprietatea assessments’.
The documents for the FSDI setting up process include a number of provisions that counterbalance the risk of distortions caused by political influences. For example, in the draft law on setting up the FSDI, it is stated: “Article 3, paragraph (2) Decisions on the management of the FSDI assets and liabilities are to be made by the FSDI management, on commercial basis, under the law and the constitutive act, without the involvement or consent of the public authority exercising, on behalf of the Romanian State, the rights and obligations as FDSI shareholder or of any other public authority or institution; paragraph (3) the FSDI management is enforced in an independent manner, in accordance with its investment policy in order to obtain profits under market conditions, by acquiring assets and liabilities and assuming the risks associated with such commercial activities.”
The Articles of Incorporation also states the following: "Chapter VIII Principles of Governance - Article 25 The FSDI activity is governed by the following principles: (l) The FSDI investment activity criteria must be clear and consistent with the FSDI objectives, with the degree of risk tolerance, with the investment strategy approved by the general meeting of shareholders, and must be based on sound management principles of the portfolio; m) The FSDI investment decisions should aim at maximizing risk-adjusted financial return, in line with its investment policy and on sound economic and financial bases.”