Some of the over-large cash component of Libya's $65-billion (41-billion pound) sovereign wealth fund will be put to work financing post-Gaddafi reconstruction, leaving time for a full review of its less liquid investments.
I expect an immediate shrinkage of the size of the fund, Rafik Nayed, acting chief executive of the Libyan Investment Authority (LIA), told Reuters in an interview on Wednesday.
My feeling is that there will be large investments required in the near future and international reserves will be used to do that, especially as the oil production has not fully recovered.
He gave no details of how much of the fund would be used for infrastructure, education, health and rehabilitation projects. To access the cash -- about $29.5 billion of the fund -- Libya will need sanctions on its total foreign assets of $170 billion to be lifted.
Cash and equities and fixed income products...make up about 77 percent of the total assets under management, said the 43-year-old Nayed, who is leading a team of Libyan financial experts tasked by the ruling National Transitional Council (NTC) with a review of the fund's investments made under the Gaddafi regime.
As at the end of June 2011, (the fund) was $64.9 billion, he said. We will come up with recommendations after our work with the World Bank and the IMF on the most ideal size for a Libyan sovereign wealth fund.
According to end of June unaudited figures shown to Reuters by Nayed and his team, 45.5 percent of the fund is in cash.
The fund also includes, according to a document obtained by Reuters, $10.8 billion in equities, $9.7 billion in bonds, $8.3 billion in strategic shareholdings, $4 billion in hedge funds, structured products and derivatives, and the remainder in other investments.
This is the first time the LIA released detailed figures on its investments, in what Nayed described as a transparency drive by the new Libyan leaders to handle public funds.
Nayed said since the fund was created in 2006 to manage the country's oil revenues, it has received $62.9 billion from the government.
It is hard to imagine how you could make much more with half of your portfolio in cash, generating the lowest type of returns, he said.
No investment decisions are expected to be made before a new management takes over. The fund's board of directors and chairman would be appointed by the new cabinet, which has yet to be named.
Among LIA's assets are stakes in Italian bank Unicredit, British publisher Pearson and Juventus Football Club in Italy.
There has been speculation that Libya will sell off its assets in the rest of Africa to help fund reconstruction but Nayed said no decision on divestment would be made until his team has finished their valuation exercise.
Nayed said that of $8.3 billion invested in strategic shareholdings, $5 billion sit in a fund known as Libyan African Investment Portfolio (LAP).
LAP Green Network, a telecom company operating in six African countries, is the fund's weakest link, he said. Hit by UN sanctions, the nearly $1 billion investment is in default with some creditors and its assets are frozen by some countries, including Zambia.
This one company is right now the top priority in terms of concern, he said. We do expect a haircut on it and we hope it can be minimised...I expect a loss here of at least 20 percent.
Other Africa investments are doing better.
Nayed expected the Libya Africa Investment Company (LAFICO), which owns hotels in North Africa and Europe, to gain at least 50 percent of its $2 billion book value.
Another company in the fund he said was in good shape is Libya Oil, an African fuel retail company operating in 23 African countries.
In totality, I expect this number ($8.3 billion) to remain pretty much the same, he said.
Almost 45 percent of the fund's alternative investments are in structured products, 36 percent in hedge funds, 12 percent in private equity and 7 percent in derivatives, documents show.
Between hedge funds and private equity it looks fine, Nayed said. But the structured products and the derivatives I believe are mostly not appropriate for a sovereign wealth fund with a long term horizon.
Nayed said the fund's equities holdings -- around 20 percent in the energy sector -- should be more diversified.
The future management will probably rebalance the equities portfolio away from energy and away from Libya for diversification purposes.
About 18 percent of equities are currently invested in the financial sector, and 15 percent in the industrial sector.
Nayed said he was working with the IMF and World Bank to ensure the fund is run in a transparent way.
(Editing by Sitaraman Shankar)