“The Middle East is not just a source of capital, but it can be a destination as well. And that's really in terms of big ideas, I think the transformation we're going to be seeing in this side of the world…is going to be coming onto their radar screen in a big way.”
Russell Read is Group Managing Partner for the C Change Group of investment funds, companies, and advisors, dedicated to materially transforming the production, distribution, and consumption of natural resources around the globe. In addition, Dr. Read serves as Senior Advisor to MSCI with respect to crafting solutions for the global asset owner community. Prior to C Change, he was Chief Investment Officer (CIO) of the Alaska Permanent Fund Corporation, the Gulf Investment Corporation (GIC), and the California Public Employees’ Retirement System (CalPERS).
The Middle East has long been off the radar of investors, but that is changing a rapid way. The potential stems from more than just the sovereign wealth funds, but also in large part due to its geographical centrality to the emerging world. It is set to play a major role as both a source of capital and as a destination. “I look at UAE and Abu Dhabi as the financial and logistical center for an emerging region.”
Sovereign wealth funds have come a long way in the last ten years. A big shift occurred as result of the 2008 financial crisis where sovereign wealth funds provided tremendous support to the financial system and the global financial capital markets.
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SPEAKER
Russell Read
Group Managing Partner
C Change Group
MODERATOR
Anthony Scaramucci
Founder & Managing Partner
SkyBridge
EPISODE TRANSCRIPT
Rachel Pether: (00:07)
Hi everyone, and welcome back to SALT Talks. My name is Rachel Pether. I'm a senior advisor at SkyBridge Capital, a global alternative investment firm, as well as being the MC for SALT, a thought leadership forum and networking platform that encompasses business, finance, and politics. SALT Talks as a series of digital interviews with the world's foremost investors, creators and thinkers. Just as we do at our global SALT events, we aim to empower really big, important ideas and provide our audience a window into the mind of subject matter experts. Today, I'm very excited that we have a subject matter expert with us, Dr. Russell Read.
Rachel Pether: (00:49)
Russell is the group managing partner for the C Change Group of investment funds, companies and advisors dedicated to transforming the production, distribution, and consumption of natural resources around the globe. Russell also serves as a senior advisor to MSCI. Prior to C Change, Russell has been the CIO of not one but three major asset owners, the Alaska Permanent Fund Corporation, the Gulf Investment Corporation, and CalPERS. He served as chairman of the investors' committee of the president's working group on financial markets under treasury secretary Henry Paulson, and he's also been recognized by Institutional Investor as one of the world's most effective chief executives. Dr. Read has multiple degrees, and he received both his masters in economics and doctorate in political economy from Stanford University, Russell, welcome to SALT Talks.
Dr. Russel Read: (01:45)
Great to be here, Rachel.
Rachel Pether: (01:48)
Now this conversation could go in so many different directions, because I know you have experience in sovereign wealth funds, pension funds, natural resources, sustainability, but I'm going to try and focus on institutional asset owners today. Before I do that, perhaps you could just tell me a bit more about your personal background, and how you ended up back here in the Middle East.
Dr. Russel Read: (02:12)
So the Middle East is a particularly important place, but not for the reasons that many people think. Of course, when the investment community thinks of the Middle East, they oftentimes think of the sovereign wealth funds. And that's certainly part of the story, but what they don't think about is the geography and the centrality of the Middle East. And in particular, the way I look at it is UAE and Abu Dhabi as the financial and logistical center for an emerging region. And that emerging region that people don't really think about we call MEASA region, the Middle East, Africa, Southern Asia. And it's encompasses about half of the world's humanity. So this is interesting, because it's half the world's humanity, it's a disproportionate amount of its growth. It's the major consumption story for the world. And yet it's really off the radar screens for institutional investors.
Dr. Russel Read: (03:22)
So the Middle East is not just a source of capital, but it can be a destination as well. And that's really in terms of big ideas, I think the transformation we're going to be seeing in part is that this side of the world that investors have really shied away from, oftentimes for good reasons, is going to be coming onto their radar screen in a big way.
Rachel Pether: (03:48)
Although I must admit your background doesn't look like you're in the Middle East, but we know the truth. You've had the luxury of working with both an established pension fund, CalPERS and also one of the world's most respected sovereign wealth funds, the Alaska Permanent Fund. Before we go deeper and to their asset allocation, perhaps you could talk a bit about some of the key differences in approach between the two.
Dr. Russel Read: (04:15)
So sovereign funds and pension funds share some real similarities, but there are also some real key differences that people don't necessarily realize. One of them is linked to the nature of sovereign wealth funds themselves. And that is they are artifacts of national wealth, or in the US are state sovereign wealth funds, but that gives them a different status. For instance, when it comes to currencies, an agreement that was reached just a few years ago was that sovereign wealth funds would generally be treated as the same as the monetary authority of that country when it came to foreign currency conversion. So this is important. For instance, if you think of China, the way that currencies work an institutional investor has some work to do to repatriate their investments to their currency out of China. But that's not the case with a sovereign wealth fund.
Dr. Russel Read: (05:25)
So sovereign wealth fund has the currency convertibility of the monetary authority of that country. So they generally can convert currencies, for instance in a place like China, at all times and on shore. This is a very different set of circumstances. It also generally relates to the access to fixed income markets, to local fixed income markets, besides the structural feature of being a sovereign fund associated with the monetary authority, there's also a difference in the liabilities. Of course, all too often when it comes to investment funds, the investment teams think about their investments, but they don't necessarily focus on what they're investing for. This has happens all too often. But the liability difference is pretty dramatic. And with sovereign funds, they can have very, very longterm liabilities or obligations eventually to the state. Generally the sovereign wealth funds are more global in their character. They are longer term in their character. So in general, the asset liability management problem does not bite nearly as closely.
Dr. Russel Read: (06:52)
So the sovereign wealth funds have really come of age, particularly in the last 10 years. There was also a very important change I should mention that occurred before the global financial crisis versus after the global financial crisis. And in many ways, before the global financial crisis, there was a sort of a suspicion about sovereign wealth funds, and would they be good actors? Would they be positive in terms of their contribution to the international capital markets? Or would they be sort of a tool of statecraft? So there was real concern about this, particularly from the United States.
Dr. Russel Read: (07:38)
And so that was before the global financial crisis. Global financial crisis hits, and opinions changed completely. What happened in the global financial crisis is that the sovereign wealth funds were an unambiguous source of stability in the financial system and the global financial capital markets. And that was unexpected. So they went from being viewed with suspicion to being absolutely critical to the health of the global financial system. So I would say that the acceptance of sovereign wealth funds globally as sort of the investment partners of choice, that has really taken root. So for doing international partnerships, for being welcomed by host countries and by the financial community, sovereign wealth funds are now in a wonderful position. Even better, I think, than the standing of most pension funds.
Rachel Pether: (08:47)
I think that's a great point that you raise about perceptions. I know in the global financial crisis, they really came in as your most white knights, didn't they? Particularly with some of the banks, we saw that with the Middle East, we saw that with Barclays and Citi taking on a lot of Middle East money to help them through the crisis. Do you think that sovereign wealth funds are considered smart money in the world of investing? It's okay to just have capital, but do you think they're also seen as savvy investors? And maybe you could talk about that from a perception point of view as well.
Dr. Russel Read: (09:23)
Well, I think they are viewed as smart money. Now, there is a range of sovereign wealth funds, of course. The largest sovereign wealth funds have taken a very interesting role that's quite different than what exists among pension funds. Pension funds are largely allocators. They do some direct investments depending on the size and nature of the pension fund, but they're allocators first. Sovereign wealth funds, particularly the largest sovereign wealth funds, have become direct investors in a very significant way. Now that's true among the largest sovereign wealth funds, but it's very significant. They are significant direct investors, as some of the largest investment management firms are.
Dr. Russel Read: (10:13)
So that role from being what they used to be, they used to be largely allocators like the pension funds, but that has changed. The role of the sovereign fund and the largest of the pension funds to become co-investors, direct investors, changes the dynamic fundamentally with the investment management community.
Dr. Russel Read: (10:37)
And it's not just about the management of fees, it's that the sovereign wealth funds can add significant teams and they become potentially excellent partners for some strategic investments in areas like infrastructure, for instance, that require significant amounts of capital.
Rachel Pether: (10:58)
So in line with that smart money angle, and certainly one thing that we're seeing the sovereign wealth fund community has been this huge push towards partnerships, and often with other sovereign wealth funds. Where are you seeing some of the greatest innovations in that space? Because the two that I'm thinking of actually both involved the Alaska Permanent Fund. So perhaps you could talk us through an example of a transaction or a deal that you worked on there.
Dr. Russel Read: (11:25)
So one of the biggest transformations and points of enthusiasm, I think is that the shift from being an allocator to being a direct investor and co-investor has another potentiality that's really promising. And we pursued these from an Alaskan perspective. And that is that we can retain, the sovereign funds and other pensions can not just be allocators among investment managers, but they can take a more proactive role. They can have a thematic approach, where they interview and hire investment managers to conduct certain mandates.
Dr. Russel Read: (12:11)
We did this in two significant ways from Alaska. One was we partnered with other pools of capital from in the Middle East and in Europe and in Asia to form what's called capital constellation. Capital constellation is intended to take talented, promising private equity teams and give them their foundational mandates, and also take a strategic stake in their in their enterprises. So instead of... The idea is that it would catalyze and accelerate the success of those private equity investment teams. And we wanted to participate also in the strategic benefits of being an owner with that.
Dr. Russel Read: (13:08)
So we pooled our capital together. Note the difference, we weren't just being sold to. We engaged the investment management community as a collection of funds, that we were not going to manage those strategic investments directly, but we were going to pool our capital together and act in a concerted way. I think historically, that was really quite different. Namely, the asset owners did not act in concert. So I think the ability for asset owners to increasingly want to work together, and not necessarily look to dis intermediate the investment management community, but to direct them into the themes, into the geographies that are of most interest to them. So that's a very different role, and we find that the investment management community has really welcomed that type of engagement.
Dr. Russel Read: (14:08)
Second thing that we did is we launched into an engagement for related to equities in the markets comprised of the MEASA country. So Middle East, Africa and Southern Asia. This was something that we were looking to take advantage of in terms of the fast growth in these economies. So again, we were leading sort of the charge about inclusion, which countries could be investible, which stocks could be investible within those markets. And it was a way that we saw of capturing the high growth of those countries. You know, we have an interesting challenge, which is that global growth and this is abstracting from the current COVID crisis, but absent that in general, worldwide growth has been reasonably good. But the interesting part is that the growth is shifting, and the growth is shifting from sort of the OECD markets to, particularly to the MEASA region. So there's this question, if growth is shifting to these other parts of the world, how do we capture those returns? Because if you don't make the adaptation, you face the prospect of considerably lower long-term returns in your established markets.
Rachel Pether: (15:48)
There's so many parts to what you just said that I'd like to pick up on. So the first piece that you raised, the capital constellation, and you spoke about being an active investor, this obviously leads into ESG because you can have more of a say in the companies that you're investing in. How do you see that playing out in the asset owner community? Because I know CalPERS, for example, has been very proactive on this front. Is this something that you've seen a shift towards more, more of this activism?
Dr. Russel Read: (16:24)
It is. And I think the ESG lens is one of the most important changes, really over a very recent period, and that recent periods over the past, say 24 months. And I want to contrast with a difference that I saw. There was a nascent ESG investment effort prior to the global financial crisis in '08, '09. And what happened there is that the global financial crisis acted to defer interest in ESG investing. There was a kind of a view that the house is on fire in institutional plans, and we have other fish to fry. So ESG considerations will come later.
Dr. Russel Read: (17:22)
Now what we've had, including with the COVID crisis, is the opposite reaction. It is not that the initiatives related to environmental, social, and governance investing have diminished, they've actually increased in importance. So it's been a fundamentally different response. And we see this as a real opportunity. And it's an opportunity that is also aligned with a challenge. And that challenge is related to the utilization of natural resources. And it's related to some real environmental challenges. Of course, we hear about global warming. That is not the only challenge that is out there. The global plastics problem looms as a very large problem as well. Chronic shortages of water. And from an investment standpoint, this creates an opportunity. In fact, without galvanizing capital into attractive investment opportunities, those ESG problems will not be solved.
Rachel Pether: (18:31)
And Russell, who was leading that charge pre-financial crisis on the ESG front? Was that being driven from a regulatory perspective, or was it being spearheaded by the sovereign funds themselves?
Dr. Russel Read: (18:43)
I think pensions and sovereigns together have both played a disproportionately important role. The rise of ESG investing has been even relatively recent in terms of being done at scale. But the first manifestation of this really at scale is with existing publicly traded equities. So the idea that has appealed to many funds is, for instance, having perhaps a portfolio of stocks, a large portfolio of stocks that has the same risk and return factors as a market cap weighted index, except with a lower carbon footprint. That's sort of an example. If you wanted to have the essential performance of market cap weighted indexes, but wanted to have less a footprint, then you could manifest that in your stock portfolio. I think the bigger challenge is, and what will ultimately be more important, will be the private markets.
Dr. Russel Read: (19:52)
The private markets is where institutional investors can actually lead to direct transformation in the global consumption story, in the global natural resources story, and in the global environmental story. So that is looming as a very big opportunity, and it's one in which the emerging markets, particularly the MEASA region, loom disproportionately large. MEASA region accounts for almost a hundred percent of the prospective population growth of the planet over the course of the coming decades. So 60% of that would be in Africa. So along with that population growth is the consumption growth story. So we have a challenge, because we have a region that is going to account for a disproportionate amount of some of the most compelling potential investment themes. And it's sort of off the radar screen of our traditional investment community.
Rachel Pether: (21:03)
I'd love to pick up more on some of the points that you talk about with regards to the growth and consumption story. And you also spoke about projects being investible. So if you just hone in on the G part of that ESG equation and the governance, how do you approach the lack of transparency or the perceived lack of transparency in some of these emerging markets, where it can be difficult to access data in some cases?
Dr. Russel Read: (21:33)
So this is a big issue but it's an issue which the solving of it becomes part of the attractiveness of the market. So what do you have in the emerging markets in general? Governance is a challenge, but some of the most promising companies in the world actually are born out of the emerging markets. We think of Saudi Aramco as an example in which governance can actually be quite good on a corporate level. But what we see is the important role of the public markets. So the public markets themselves instill a discipline and transparency. If you're going to be publicly traded, in order to be credible with global investors, you have to be transparent. You have to be auditable. And so the inclusion of enterprises in the global capital markets is inherently a disciplining tool. So we've seen a dramatic improvement in governance as the countries and as the companies become part of the capital markets.
Dr. Russel Read: (23:02)
We also see the importance of transitions from private market investments to public market investments. Why are public market investments interesting? In part also because they provide a path to liquidity. So if you're investing in a place like Africa in the private markets, which can be very promising, we need to be able to think of an exit or find an exit path. And this is even more important in the emerging markets than it is in the OECD, where you also have to think about what your exit is going to be when it comes to the private markets. But unlike the OECD, in the emerging markets, you cannot necessarily count on a strategic exit. You have to be able to see a path in general toward becoming publicly traded. So there are some very important features here.
Dr. Russel Read: (24:00)
There was a choice that Aramco had between listing in London, listing in New York, and they ended up listing in Saudi Arabia. And this was an important choice, because it also signaled something very fundamentally different, that it wasn't that you had the list in a major market to be credible. You can actually list in your local market, and that that would be helpful for the development of your local and regional economies. So I think that that choice of Saudi Aramco, that list in Saudi Arabia was a particularly important signal to the emerging markets in general.
Rachel Pether: (24:46)
It was almost like saying, "Yes, we are good enough," in some ways, wasn't it? Like, "Yes, we are just as good as a New York Stock Exchange or a London Stock Exchange."
Dr. Russel Read: (24:56)
If they chose a different path, if they had listed in London or New York first, it would have given a very different signal, not just to Saudi Arabia, but across the emerging markets, that to emerging companies, if that you had to list, you would have... It would have sent a signal that if you want to be taken seriously as an investment to the global capital markets, you have to list in London or New York or Hong Kong. So I believe that that was a pivotal decision, not just for Aramco, but for the emerging markets.
Rachel Pether: (25:32)
And you talk about just picking up a little bit more on the investible side of the equation, we've discussed the transparency piece, but with regards to the MEASA region, and you're talking about these large asset owners that need to deploy multi-millions of dollars, are there actually projects of scale for them in the private markets? And particularly ones that actually incorporate all of these ESG factors?
Dr. Russel Read: (25:58)
So this is one of the important challenges. From a big picture perspective, is there the need for capital in places like Africa? And of course the answer is yes. However, and the however is an important thing, the number and scale of bankable projects is limited. Does Africa need a trillion dollars in infrastructure investment? Sure it does. Are there a trillion dollars of investible bankable projects? Not in the near term. So how do we bridge this gap? How do we create, how do we help with establishing a pathway toward bankable projects? And here there are some important lessons about what are sort of the key needs and opportunities. And we're seeing some of the answers with, for instance, the digital economy, that Africa is proving to be an excellent source of growth for the digital economy.
Dr. Russel Read: (27:08)
So if you go to a place like Kenya, it's surprising how ubiquitous are smartphones and how advanced the applications are, in many ways have skipped traditional infrastructure development. Kenya is a middle income country by global standards. It is not a poor country by world bank standards anymore. And you can of see a different development path. I think that the infrastructure needs associated with energy and communications are leading the path toward bankable projects. And those are proving to be pretty straightforward from a governance perspective as well. So I think in addition to that, logistics, the African logistics problem looms as a very, very interesting opportunity. Along with that will be the role of distributed energy. Africa will not have an established grid system such as we have in North America and in Europe, they won't want to do it. Given how vast the continent is, it is going to require a distributed energy system. And that's a pretty exciting opportunity as well for new technology.
Dr. Russel Read: (28:29)
So what we have is we have many great technologies being born out of places like Silicon Valley and MIT and in Europe and Australia, but some of the best applications and scalability of these technologies won't be in places like the United States, it'll be in places like the MEASA region. India is kind of a great case in point. What's the the incremental energy need in India? It's a lot greater than any place in Europe or North America.
Rachel Pether: (29:04)
Yeah, that's a great point, all technology has to solve a need or a gap, and I guess the need or the gap is typically much larger when you look at these emerging markets. You can make so much more of an impact with such a small change in the lifestyle or the technology.
Dr. Russel Read: (29:27)
And I think what it leads to also is that those sorts of investments, many of the infrastructure investments in North America or in Europe, can be commoditized in a that it limits or puts a ceiling on what the potential returns are. That is different than in a high growth region like the MEASA region. So commoditized returns can convey a low degree of risk, but also a low degree of potential return. And I think the growth prospects of capturing infrastructure opportunities in the emerging markets, particularly in the MEASA region, are one of the great things we're going to be seeing.
Rachel Pether: (30:16)
Fantastic. Thanks, Russell. And we've had a number of questions coming in from the audience, and broadly you can group these into the MEASA region and ESG. So I'll just start with one of the ESG questions. First from the Tesco pension fund, he asked to what extent do we all have the same dreams and objectives around ESG, but because of inconsistent approaches, we're not pulling in the same direction?
Dr. Russel Read: (30:43)
Well, it's a perfectly good insight. What we're absolutely seeing is that institutional investors have become much more sensitized to ESG concerns, but they have very different conceptions of what that means, and it can be vastly different. Now, that being said, there are a few big themes that are reasonably consistent among many of those investors. Clearly climate change is one of the big themes. So that is one where there's a critical mass of institutional investors that can pursue not only a configuration of public market stock portfolio investments, but also private market investments. Some of the other themes that are emerging, and they don't have to... They can make a big difference without having to scoop up the majority of investors. And I think for instance, take a look at smart cities and consumption related opportunities in Africa, how Africa now accounts for about a trillion dollars in consumer purchases. A trillion dollar consumer sector is actually meaningful. It's one of the great opportunities. And that is where a critical mass of investors doesn't have to be the majority of investors.
Dr. Russel Read: (32:27)
So I think that there will be for investors, institutional investors that can identify and develop the bankable opportunities in these high growth regions, that is going to be the antidote to potentially slower growth in the OECD.
Rachel Pether: (32:44)
That's actually a really great segue into another question that's come in on China's role in the MEASA region. Obviously, China is moving through with the One Belt One Road and the new Silk Road. This will lead to indebtedness of many countries in the MEASA region. How are you seeing that playing out, particularly because many of the investments are on the infrastructure front? Maybe you could give your views on the One Belt One Road initiative.
Dr. Russel Read: (33:15)
Well, my view is that overall, this is a positive. It's not without its issues, as you point out, there is a level of indebtedness with a number of the African countries, which has led a number of those countries to become cautious. But I view it in a completely healthy way. Is Africa in general better off because of the commitments from China? Unambiguously, yes, it is. If they did not have those investment commitments from China, the economic growth prospects of the continent would not be the same as they are today. And it's probably reached a pretty healthy state, namely, African countries are now being much more judicious about the types of capital and conditions under which they accept investment. So they need investment, want investment, and China has been unambiguously helpful, but they are no longer simply accepting investments with lots of strings attached without doing their own due diligence. So I think it's actually reached a very healthy state. And so this is a pretty exciting part of the story, but China has been an important piece in this whole puzzle.
Rachel Pether: (34:44)
Is China included in your MEASA strategy, or is that, that's outward you're looking at more of the high growth, younger demographic countries in the region?
Dr. Russel Read: (34:55)
When we look at the MEASA region as an investible geography, we think of it as everything but China and the Belt and Road initiative. And in many ways, it's what people historically have thought about related to the emerging markets. China is no longer a high population growth country. It's likely to be declining in population. Interestingly enough, today China, India, and Africa have the same population. They each have 1.4 billion people. This is a very interesting crossroads. However, the future of those three geographies, China, India, and Africa is going to be quite different. China will have a declining population, whereas India will be increasing to a projected 1.75 billion at its peak. Africa is expected to have a population by the end of the century of 4.3 billion people. So this is a very different trajectory from having the same population base as today.
Dr. Russel Read: (36:12)
And so some of the things that we like to think about with the emerging markets are high population growth, are high economic growth, high consumption growth. Growth is what we like to think about related to the emerging markets. And that's not necessarily what we think about with China. We think about that with the MEASA region.
Rachel Pether: (36:33)
We actually had a guest on SALT Talks last week from the Hong Kong Monetary Association. He made the comment that China will grow old before it becomes rich. So I guess that plays into your growth story.
Rachel Pether: (36:46)
And we have one final question to finish on. You speak very passionately about collaboration and this partnership approach. And when you're looking at some of the infrastructure needs in Africa, many of them are actually Pan-Africa. So if you're particularly looking at physical infrastructure like roads and train tracks and things like that, what would be your advice to the African nations in terms of collaborating with each other on these projects? What would be some of your, I guess, key rationales for collaborating together?
Dr. Russel Read: (37:31)
So I think you're exactly right that the collaboration among African economies is likely to be particularly important. And it's not just trade zones, it's logistics. When I think of some of the great challenges in Africa to creating bankable, investible projects, oftentimes they fall short because of logistics. You're going to have countries with high populations with something on the order of a single major road. And so how is the logistics problem going to be solved? And then part the logistics problem is going to be linked to energy and the digital economy. And I think that's going to be an interesting thing, that the logistics problem in Africa is likely to be solved different than how it was solved in North America and in Europe. So I think the digital economy is shaping up to be an important force in actually helping to solve logistics issues. It doesn't mean you won't still need more traditional roads and other sorts of things, but the optimization of the logistics, I think, is something that crosses borders and requires cooperation among the countries.
Dr. Russel Read: (38:55)
And there's a big benefit to it. You can see it particularly in sectors such as agriculture, where throughout much of the Sub-Sahara, 30 to 50% of crops rot in the fields. That is an informational problem along with a logistics problem, and both can be solved in part through better technology.
Rachel Pether: (39:18)
Fabulous. Well, thanks, Russell. I mean, it's been a pleasure speaking to you as always, really appreciate you giving your time and covering so many topics. I thank you so much for joining us today.
Dr. Russel Read: (39:29)
Thank you, Rachel.