Libya Fund's Depleting Portfolio May Hamper Post-War Rebuild

Libyan rebels on the verge of bringing Muammar Gaddafi's 41-year old regime to an end will likely inherit a depleted investment portfolio in the country's secretive sovereign wealth fund, as the market downturn this year worsens an already weak performance in 2010.

The fund, set up in 2006 to manage the country's oil revenues and with stakes in European bluechips, is seen key to any post-conflict reconstruction of the African country and any new government will rely on the fund for future economic development.

The market value of the Libyan Investment Authority's (LIA) investment portfolio rebounded in the third quarter of 2010, after a 4.5 percent slump in the prior quarter, to $64.19 billion as of Sept. 30, 2010, the fund's management information report showed. But that is still below a widely quoted figure close to $70 billion.

A sharp drop in asset values after the debt crisis in Europe and a downgrade of the United States' credit rating is likely to have further thinned the portfolio even though latest figures are not available, analysts say.

"The drop in market value of the fund's portfolio is reflective of its mismanagement under Colonel Muammar Gaddafi's rule," said Karin Maree, an analyst at the Economist Intelligence Unit in London.

"This could change under a new government, which will be eager to safeguard the country's assets."

Within the portfolio, cash and deposits made up the largest chunk, at 32.4 percent of total assets, while equity holdings made up 11.2 percent, bonds 5 percent and the rest mainly in subsidiaries and alternative investments.

The value of the equity portfolio, which includes stakes in Italian bank UniCredit and British publishing group Pearson , rose 18.3 percent in the third-quarter of 2010 to $7.2 billion from the prior quarter. The portfolio had dropped 17.3 percent in the second-quarter.

LIA held deposits worth $20.2 billion at the end of the third-quarter and a cash position of $593.2 million. It had around $17.32 billion of its term deposits with the Libyan Central Bank.

About $1.4 billion in cash and deposits was held with HSBC Holdings while $1 billion was deposited with Arab Banking Corp, according to the report.

The fund held $32 billion in cash with several U.S. banks each managing up to $500 million, and it has primary investments in London, a confidential diplomatic cable showed earlier in the year.

The fund's structured product investments have also seen a significant decline in value. A $1 billion investment in a Societe Generale structured product was valued at a mere $284.5 million at the end of June 30. The September report also criticised the high fees charged by externally managed funds including hedge fund Permal, Credit Suisse , BNP Paribas , Palladyne and NotzStucki.

A total of $1.4 billion invested across the five funds resulted in a 23 percent loss and $81 million in fees according to the report.

The document also showed LIA controlled 11 subsidiaries with combined value of $24.71 billion.

"The resumption of oil production and exports will be critical. That will help further boost foreign reserves and compensate for the weakness in the performance of the fund," EIU's Maree said.

LIA is one of the most opaque sovereign wealth funds in the world.

The fund is a member of the International Forum of Sovereign Wealth Funds (IFSWF) which groups many of the world's sovereign funds which together have $3 trillion in combined assets.

LIA returned profits of $2.37 billion between 2006 and early 2009, or nearly 6 percent on initial capital of $40 billion.