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Libyan Investment Authority Transformation Strategy

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Libyan Investment Authority Transformation Strategy
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LIBYAN INVESTMENT AUTHORITY TRANSFORMATION STRATEGY Libyan Investment Authority Creating a world-class sovereign wealth fund to support Libya's future 1
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Page 1: Libyan Investment Authority Transformation Strategy

LIBYAN INVESTMENT AUTHORITY TRANSFORMATION STRATEGY

Libyan Investment Authority

Creating a world-class sovereign wealth fund to support Libya's future

1

Page 2: Libyan Investment Authority Transformation Strategy

Libyan Investment Authority 2

LIA has taken critical steps to transform itself into a world-class sovereign wealth fund

–  New strategy approved by the Boards in July 2013

–  Multi-year transformation program initiated in October 2013

–  Revised Law 13 will require approval, to reflect improvements in governance, investment approach and organisation

–  Complied with Isolation Law, limited board appointments to two per person and intends to comply fully with the Santiago Principles over time

EXECUTIVE SUMMARY

LIA will create three new funds for all future investments, with clearly defined mandates, governance and rules for inflows and outflows

–  Future Generations Fund (for long-term savings invested internationally)

–  Budget Stabilisation Fund (for cushioning budget shortfalls)

–  Local Investment & Development Fund (for stimulating major private sector projects in Libya)

LIA’s historic illiquid assets will be transferred to two non-permanent portfolios over the next 3- 5 years:

–  Holdings Portfolio (for performing assets)

–  Legacy Portfolio (for non-performing, dormant or non-strategic assets)

LIA faced significant challenges in repairing damage done by a long history of interference and corruption under the previous regime

Page 3: Libyan Investment Authority Transformation Strategy

Libyan Investment Authority 3

•  Funding for the new funds should come from existing LIA assets, Central Bank’s excess foreign reserves, government budget surpluses and directly from oil revenues

•  LIA UK in London will be expanded to provide support in three areas:

(1) place the investment analysis team close to the market;

(2) provide legal, audit and risk support on international investments and subsidiaries;

(3) provide training for Libyan staff

•  LIA’s organisational structure has been revised, and a hiring plan for a CEO and other senior staff is in progress

EXECUTIVE SUMMARY

•  Oliver Wyman was engaged to support and accelerate the transformation program through a number of major taskforces (13 taskforces activated as of Q1 2014)

•  Deloitte was engaged to value LIA’s portfolio as of end 2012; and provided write-downs of the expected value of LIA’s subsidiaries and illiquid holdings

•  A number of investigations have been launched into fraudulent transactions and legal action is being taken to recover some losses

•  LIA has launched a broader communications program to demonstrate to local and international communities that LIA is a reliable and transparent manager of the Libyan people’s money

•  LlA has developed its online communications by updating the website, launching a LIA Twitter account - @LIAchairman - and re-launching a public Facebook page

LIA will no longer invest internationally on its own, but will appoint best-in-class fund managers to manage funds and investment consultants to advise on asset allocation

Page 4: Libyan Investment Authority Transformation Strategy

Libyan Investment Authority 4

The Libyan Investment Authority aims to be a world-class sovereign wealth fund in terms of performance, transparency, ethics and accountability. We will play an active role over many years in improving the resilience of the Libyan economy and enhancing the well-being of the Libyan people

THE LIA’S MISSION

The Libyan Investment Authority will:

•  Create an alternative, diversified source of wealth for Libya’s future generations other than proceeds from oil reserves and by investing internationally with a sustainable, long-term view.

•  Stimulate Libya’s economy through major, transformational private sector projects, engaging international expertise through joint ventures and knowledge transfer.

•  Provide stability against volatile oil revenues and government budget shortfalls.

Page 5: Libyan Investment Authority Transformation Strategy

Libyan Investment Authority 5

As part of delivering the new strategy and transformation, in 2014 the LIA Board of Trustee endorsed the following items:

Three year Transformation plan

and objectives to address identified challenges and enable a new strategy

NEW STRATEGY AND TRANSFORMATION

New organizational structure

which aligns with the strategy and enhances control functions, leveraging hubs in Tripoli and London

Page 6: Libyan Investment Authority Transformation Strategy

1 LIA Transformation Strategy

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Libyan Investment Authority 7

•  Domestic investment for socio-economic development •  Stimulating private-sector projects in non-oil industries •  Gateway for foreign expert partnership and investment

Budget Stabilisation Fund (BSF)

•  Protection against oil revenue volatility •  Replenished when there is surplus, available to cushion shortfalls •  Cash and fixed income fund with tranches of different liquidities

Holdings Portfolio

•  Private equity portfolio for current ‘performing’ direct investments •  Assets sold over time or transferred to FGF PE allocation •  Prevents distortion of FGF asset allocation and preserves quality

Legacy Portfolio

•  Temporary portfolio for all non-core or non-performing assets of LIA; focusing on run-down or sale as profitably as possible

LIA will organise its assets into three new permanent funds and certain historic assets into two non-permanent portfolios, each with a clear purpose

Future Generations Fund (FGF)

•  Savings for the future, after oil runs out •  Investing internationally with a long-term view •  Inflows a fixed percentage of oil revenues; outflows highly restricted

Non-permanent and to be established over the next 3-5 years

LIA ASSETS: THE PLAN

Libyan Local Investment & Development Fund

The LIA’s Long-Term Strategy

Page 8: Libyan Investment Authority Transformation Strategy

Libyan Investment Authority

Current LIA holding structure

Over several years, the LIA will move from a complex holding company structure to a simpler asset management structure

The new permanent funds will represent pools of assets under LIA, not legal entities

8

Future LIA fund structure

Budget Stabilisation

Fund

LIA as asset owner & fiduciary manager

Future Generations

Fund

Local Investment & Development

Fund

Legacy Portfolio

Holdings Portfolio

Permanent funds To be

established over the next

3-5 years

The LIA’s Long-Term Strategy

FUTURE LIA FUND STRUCTURE

LIA as holding company

Securities & Alternative

Investments Subsidiaries

Libyan Foreign Investment Co.

(LAFICO)

Oilinvest (Tamoil)

Libyan African Investment

Portfolio (LAP) Dalia Advisory

Limited Company

Itren Investment Limited Co.

Libyan Local Investment &

Development Fund

Maplecross Properties Limited

Associates

First Energy Bank

Libyan Norwegian Fertilizer Co.

Menadrill Investment Co.

Libyan Oasis Energy & Water Co.

Joint Ventures

Medco International

Ventures Limited

Woodside (N.A.) Ltd.

BP Exploration Libya Limited

Long Term Investment

Portfolio (LTP)

• 3+ layers of boards • 30+ holding companies • 550+ assets and companies

Page 9: Libyan Investment Authority Transformation Strategy

Libyan Investment Authority

1. Includes Special Projects, Comm. & PR and Secretary to the CEO

LIA will implement a new organisational structure which better aligns with the strategy and enhances control functions

Control Departments Support Departments 2. Deputy CEO and COO will be introduced once phase I of the Organizational Transformation has been completed

Phase II

Investment Departments

Non-Executive Chairman

Internal Audit

Equities

Fixed Income

Alternatives

Evaluation & Research

Legacy

Holdings

Resource Management

HR Planning

HR Services

IT

Facilities & Admin

Finance

MIS & Reporting

Financial Risk

Non-Financial Risk Compliance

Legal

Libyan Development

Fund2

CIO (FGF, BSF)

Holdings & Legacy HR Finance &

Control IT & Facilities Risk Management

Legal & Compliance

Treasury

Subsidiary LLIDF integrated

over time

COO2 Deputy CEO2

CEO’s Office¹ LIA Advisory UK Ltd (London) CEO

Audit & Risk Nomination / Comp

Phase I

Investment Governance

Board of Directors Committees

9

TARGET ORGANISATIONAL STRUCTURE

The LIA’s Long-Term Strategy

Page 10: Libyan Investment Authority Transformation Strategy

Libyan Investment Authority

DUAL LOCATION MODEL HUB APPROACH

10

1

LIA – Tripoli, Libya

•  Head office (HO) location

•  Decision making & policy setting body

•  Primary base for majority of senior management, control and support staff as well as treasury and portfolios

LIA Advisory UK Ltd – London, UK

•  Investment execution, analytics and research on behalf of LIA

•  Provide services for select HO control functions as well as DR/BC site

•  Center of investment talent excellence, training

•  Primary base for investment team and specific specialised functions/individuals

1

2

The LIA’s Long-Term Strategy

2

Page 11: Libyan Investment Authority Transformation Strategy

Libyan Investment Authority 11

Key revisions to Law 13

•  Streamlined responsibilities of Board of Trustees, Board of Directors and CEO

•  Structures defined for new LIA funds and portfolios –  Purpose and mandates –  Governance –  Inflows and outflows

•  Clarification that it is a sovereign entity

not a corporation

Improved governance and transparency

•  LIA becomes a ‘manager of managers’ –  All investments to be made via best- in-

class external fund managers –  Asset allocation to be recommended

by best-in-class investment consultants

•  No LIA director or staff permitted to have more than 2 board positions

•  All LIA directors and senior executive employees have submitted the Isolation Law form

Law 13 requires revision to enshrine the vision & mission in law, and overall governance must be strengthened to increase transparency & accountability

LAW 13 REVISION

The LIA’s Long-Term Strategy

Page 12: Libyan Investment Authority Transformation Strategy

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A transformation plan outlining key objectives has been defined to address significant challenges and enable LIA’s new strategy

Measure Key Transformation plan objectives

1. Strengthen LIA Core

•  Launch clear internal and external communication at home and abroad •  Strengthen organisation, including restructuring and hiring •  Establish robust systems and operations, including IT architecture upgrade •  Develop business continuity plan

2. Strengthen LIA & Subsidiary Governance

•  Revise Law 13 for approval by the legislative body •  Roll-out best practice governance, including new Board Committees •  Strengthen controls across audit, risk and finance •  Enhance reporting & MIS, including publication of Annual Review •  Comply with Isolation Law and limitations on board memberships

3. Assign Initial Assets to Funds

•  Allocate assets across subsidiaries into new non-permanent portfolios •  Value >550 assets across subsidiaries using independent third party (Deloitte) •  Unfreeze international assets at an appropriate time when a unity government is established •  Take legal action related to past corrupt transactions

4. Establish Fund Structure

•  Create three new funds for all future investments, including definition of Strategic Asset Allocation.

•  Build-out LIA UK to support investment execution and specialized functions •  Shift investment approach towards using external fund managers •  Ring-fence historic, illiquid assets in new non-permanent portfolios

5. Align & integrate Subsidiaries with LIA

•  Improve communication & cooperation between LIA and its subsidiaries in near-term •  Integrate subsidiaries (staff, capabilities, etc.) over time and simplify structure, in a phased

approach, starting with LTP then moving on to other subsidiaries

KEY TRANSFORMATION PLAN OBJECTIVES LIA Transformation Strategy

Page 13: Libyan Investment Authority Transformation Strategy

Libyan Investment Authority 13

The 18 task forces will be aligned to the five key objectives, addressing the LIA’s main challenges.

The task forces will be activated at different times, as part of a multi-year program.

The approved board strategy provides for all taskforces: •  Review progress & interdependencies •  Oversight and steering •  Ad-hoc content injection

A strong governance structure will be established to monitor taskforce progress, rapidly resolve issues and facilitate decision making.

The Transformation, led by the CEO and his Transformation Office, will be driven through by 18 major taskforces and will be overseen by the Board.

CREATION OF IMPLEMENTING TASKFORCES LIA Transformation Strategy

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Year 1: ‘Stabilising LIA’ Year 2: ‘Integrating Subsidiaries'

Underway Next wave

1. Strengthen LIA Core

2. Strengthen LIA & Subsidiary Governance

4. Establish Fund Structure

3. Assign Initial Assets to Funds

5B. Integrate Subsidiaries into LIA 5A. Align Subsidiaries with LIA

PLANNED IMPLEMENTATION OF THE TRANSFORMATION

LIA Transformation Strategy

Page 15: Libyan Investment Authority Transformation Strategy

2 Portfolio Performance Review

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•  Allocations, benchmarks/ target at manager or investment level in line with the SAA and adjusted based on TAA

•  Defines the target allocation and relevant benchmarks or absolute targets (to be determined)

•  SAA for each of the 3 permanent funds

Strategic Asset Allocation (SAA) Risk &

investment goals in line with Strategy

Legal & regulatory requirements

Tactical Asset Allocation (TAA)

•  Shorter term investment plan, incl. tactical adjustments, to meet SAA

Portfolio Performance Review

Best practice Sovereign Wealth Funds assess performance, aligned to their Strategic Asset Allocation, at manager and fund level

proficiency of performance evaluation

Manager/ Asset Selection

Guiding principles Performance measurement framework

Defining target returns and risk profiles for distinct funds based on SAA increases

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Select External Fund Managers •  Manage assets based on the defined SAA

Description

Establish new fund structure

Select Investment Consultants (IC)

Select Transition Managers

•  Determine Strategic Asset Allocation (SAA) & target returns for the three new funds

•  Creation of three new permanent funds (FGF, Budget Stabilization Fund and LLIDF)

Revamp MIS & • Reporting

Enhance reporting to measure portfolio performance against target returns

•  Liquidate or clean up existing marketable security investments to be transferred into the new fund structure

Portfolio Performance Review

LIA is undertaking several activities to enable best practice performance measurement going forward

Activities Responsible

•  BoD – approves •  Invest. Com./ mgt

recommends

•  BoT – approves SAA •  BoD – approves IC on •  Invest. Com. / mgt advises

•  BoT – approves •  BoD – recommends

•  CEO – oversees •  COO/ Finance & IT Dept.

Heads – develops, implements

•  BoD – approves •  Invest. Com. / mgt

recommends

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40

35

0

45

30

25

20

15

10

5

Portfolio Performance Review: Marketable Securities

In the 7 month period following June 2013, LIA and LTP marketable securities increased by a CAGR of 3% to reach ~ USD 40BN in January 2014

Source: Oliver Wyman analysis, MI report for June 2013, December 2013, and January 2014

+3%

Jan-14

39.8

3.0

6.4

10.1

20.2

Dec-13

40.5

3.0

6.7

10.6

20.2

Fixed Income

Equity

Cash

Jun-13

38.5

3.4

6.6

8.9

19.7

Alternatives

LIA and LTP marketable securities By asset class in $BN

•  $1.3BN growth from June 2013 to January 2014 (3% CAGR)

•  Growth is driven mainly by fair value increase of 14% in equities

•  Fixed Income decreased by 3%, mainly due to 9 LIA bonds that matured throughout the period –  Market value of LIA bonds at expiry was ~

$256MM –  Matured fixed income portfolios

contributed to cash increase –  Market value of remaining fixed income

increased over the period (from $6.33MM to $6.40MM)

•  LIA subsidiary investments in marketable securities (LAFICO, LAP and LLIDF) have been excluded in the performance review

Note: Cash represents LIA’s position only

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