Nigeria’s sovereign wealth fund has made its first ever investment, handing over $200m to UBS, Credit Suisse and Goldman Sachs to manage a fixed income portfolio.
(The Nigerian SWF, which is the brainchild of former Minister of Finance and current Minister of Trade and Investment, Olusegun Aganga, was signed into law via the Nigerian Sovereign Investment Authority Bill on Thursday, May 26, 2011, by President Jonathan. And based on the Santiago Principle, the SWF comprises three investment baskets – the Nigeria Infrastructure Fund; the Future Generations Fund and the Stabilisation Fund. Specifically, the Infrastructure Fund is expected to be used in bridging the nation’s infrastructure gap by investing in the development of critical facilities across the country. Notably, 10 per cent of this fund will be devoted to agriculture and regional government-sponsored development projects that will promote economic development in under-served sectors or regions in Nigeria. Whereas the Future Generations Fund will be used to build an inter-generational savings base by investing in longer term assets that generate returns to accumulate wealth for future generations of Nigerians, the Stabilisation Fund will be used to protect the country’s budget by providing a stable, last-resort source of finance during periods of fiscal deficit. Also, the Stabilisation Fund will ensure the smooth functioning of government and delivery of key services during periods where revenues from petroleum sales are less than the level anticipated and approved by the National Assembly. Explaining his reason for initiating the establishment of the SWF, Aganga had said that, as a fundamental component of Nigeria’s macro-economic management framework, the SWF, which will be managed by the NSIA, would help to reduce Nigeria’s susceptibility to the unintended consequences that might arise from the volatility of crude oil price at the international market.)
The first investment, even if relatively small, adds Nigeria to the small cadre of commodity-rich countries that over the past decade have become one of the most powerful forces in global financial markets through their sovereign wealth funds.
Uche Orji, chief executive of the $1bn Nigerian Sovereign Investment Authority (NSIA), told the Financial Times the fund gave UBS $50m last week to invest in US Treasuries. A further $150m is being transferred this week to Credit Suisse and Goldman Sachs to build a US corporate bond portfolio.
“This is a major milestone for us,” Orji, a former banker who was recruited to set up the fund last year, said in an interview in Abuja, the country’s capital.
Orji said in June that he had delayed making any initial investments due to the volatility in global markets. But on Monday he said that he felt the bond market was now “fairly valued”. The first investment comes ahead of this week’s crucial meeting of the Federal Reserve. The US central bank is likely to start phasing out its bond buying programme that has kept interest rates at ultra-low levels. “There is more optimism now,” Orji said.
The Nigeria sovereign wealth fund is the third largest in sub-Saharan Africa, after the $6.9bn Botswana and $5bn Angola funds, though tiny compared to those of oil producers such as Saudi Arabia, Norway and Abu Dhabi, which have more than $600bn in assets each.
The sovereign fund was set up to safeguard oil revenues for future generations, provide a buffer against external shocks and spur infrastructure development in Nigeria. Despite decades of oil production, the country has never previously had a sovereign wealth fund or any ring fenced method of saving. Nigeria’s government wants to grow the fund by about $1bn a year, but faces opposition from state governors, who receive a share of national revenues. Orji acknowledged that new inflows were not guaranteed, but said that the seed capital was enough for now. “$1bn is not inconsequential,” he said. “Not many sovereign wealth funds have started out with that amount.”
Under the investment policy approved by the NSIA earlier this year, the fund is split into three pools. The stabilisation fund has a 20 per cent share – the $200m handed over to banks this week. Capital preservation is the main aim, with the fund acting as a buffer against short-term economic instability.
The future generations and infrastructure funds will each receive 32.5 per cent, or $325m, with 15 per cent unallocated. The NSIA has drawn up a long list of financial institutions to manage the future generations fund, which aims for a long-term return of US inflation plus 4 per cent. Investment options include listed stocks, hedge funds, private equity and real estate.
Orji said he hoped this fund would be running by the end of March 2014. But he expressed concern about rising valuations in the developed world stock markets. “We find quite a few asset classes, such as US equities, to be a bit rich at the moment,” he said. “We see more value in emerging markets.”
For the infrastructure fund, which will invest in Nigerian projects in sectors including power, healthcare, transport and agriculture, the NSIA has signed memorandums of understanding with the Africa Finance Corporation and International Finance Corporation to work together on transactions. It also has an agreement with GE, and is in talks with Power China about a possible electricity investment.
- FT.
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