Presented at the 5th Meeting of the Working Group on Investment Zones in Iraq, MENA-OECD Investment Programme. 28 April 2013, Cairo, Egypt

1. Sovereign Wealth Funds’ (SWF’s)
Venture Capital Fund Form
Dr. Bashar Al-Zu‘bi, MENA – OECD Investment Programme
Fifth Meeting of the Working Group on Investment Zones in Iraq
28-29 April 2013, Cairo

2. Definition of SWF
Sovereign Wealth Funds (SWFs) are investment vehicles
managing portfolios on behalf of their governments.
Their investment capital is usually derived from either
petroleum revenues such as GCC region funds, Russia or
Norway; or persistent current account trade surpluses
such as China or Singapore (Dewenter et al, 2010).
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3. Growing interest
• Natural resources are finite, becoming depleted overtime. GCC
region economies are interested in developing non-oil income
based industries and markets in which SWF would be a main
catalyst.
• Unprecedented growth from US$ 500billion to 3.5trillion has
brought many managerial issues of concerns to the domain of
SWFs.
• More and more the SWFs comprise of ―alternative assets such
as property, Venture Capital Fund, infrastructure assets or other
non-bond type financial assets.
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4. Possible portfolio for Iraq
Kind of fund
SWF-Pension
SWF-Investment
SWF-VC
Goal
Provisions for future
state liabilities
Fiscal stability and
growth
Diversifying the Iraqi
economy
Percentage of
soverweign wealth
30%
50%
20%
Investment
composition
70% fixed income, 30%
equity
40% fixed income, 60%
equity
100% equity, largely
private, but some
listed
Targets
Domestic and foreign
assets
Mostly foreign assets
to diversify away from
oil risk
Domestic investments
or FDI projects
targeting Iraq
Governance
State agency
Investment division of
government
development bank
Completely
independent fund
management company
Intervention into
management of assets
None
Limited
Board-level
participation as
minority stake investor
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5. Structure plan for VCF
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6. Level of risk and return
Typology of potential investments into Iraq
Not a priority for Iraq
Key strategic bets
SW VCF
Development
banks
Market mechanisms
Support debt financing
mechanisms
Contribution to diversification
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7. Factors in designing Government Venture Capital
Target equity gap
There are type of investments – sectors which has high cost of
capital. These are the sectors to which government equity
investment should be directed. It makes sense to “subsidise” risky
investments because of the value of the social signal they give.
Fund management
Public officials should not be directly involved in the investment
process. Rather, this responsibility should be delegated to topquality venture capitalists from the private sector. While the
government should monitor programmes, its involvement in
investment decisions should be minimal and the decision-making
mechanism should be transparent.
Additionality
A programme goal should be to attract new private sector
investment and create a commercially viable market. Programmes
should seek to maximize private sector participation through
reducing the imbedded risk.
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8. Several distinct institutions needed
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9. Russian Direct Investment Fund
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The Russian Direct Investment Fund (RDIF) is a $10 billion fund established by the Russian
government to make equity investments in the Russian economy.
In all of its investments, the fund is mandated to co-invest alongside some of the largest and most
sophisticated investors globally – thus acting as a catalyst for direct investment in Russia.
The Russian Direct Investment Fund was created in 2011 under the leadership of President and
Prime Minister of Russian Federation and is managed by a highly qualified team of private equity
investment professionals with broad international and Russian experience.
In all of its investments, RDIF is mandated to co-invest alongside some of the largest and most
sophisticated global investors - thus acting as a catalyst for direct investment in Russia.
RDIF was created in June 2011 under the leadership of both President Dmitry Medvedev and
Prime Minister Vladimir Putin as part of a broader initiative to improve the investment climate of
Russia and establish Moscow as an international financial center. RDIF is managed by a highlyqualified team of private equity investors with broad international and Russian experience.
The Management Company of RDIF is a 100% subsidiary of Vnesheconombank (VEB), Russia's state
development bank.
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10. Recommendations
• Iraq has a large natural resources of oil, therefore, the government should
ensure that oil wealth advantages are invested to create non-oil dependent
economy.
• The Government of Iraq should use part of its oil income to establish
government VCF. The underlying operating principle of the fund is that, it
mainly taking minority minority equity (or quasi equity) stakes in riskier direct
investments into the economy.
• The VCF should target investments that:
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Are innovative, with a higher level of technology usage
Represent activities not present in Iraq at the moment
May lead to the establishment of new sectors of activities
May lead to a contribution of the Iraqi export basket
Would not be done without some kind of help with self-discovery costs
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11. Recommendations
• The GoI need to infuse culture of quality and developing the wealth
management skills of the fund. Public officials should not be directly involved
in the investment process. Rather, this responsibility should be delegated to
top-quality venture capitalists from the private sector.
• The fund should be part of a professional separate organizational entity
rather than belonging to the finance ministry. The fund has to be a separate
agency with complete autonomy and professional management without any
political and ministerial influence except laid down overall strategy.
• Increased transparency and accountability would increase investors‘
confidence in the country’s business climate which may attract more foreign
direct investments (FDI). This would help fund’s growth as government will
invest profitably in FDI supported projects.
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