Libyan Investment Authority Transformation Strategy

Libyan Investment Authority

LIBYAN INVESTMENT AUTHORITY

TRANSFORMATION STRATEGY

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

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EXECUTIVE SUMMARY

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

LIA has taken critical steps to transform itself into a world-class sovereign wealth fund – New strategy approved by the Boards in July 2013

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

– Multi-year transformation program initiated in October 2013

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

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

– Budget Stabilisation Fund (for cushioning budget shortfalls)

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

– 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)

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Libyan Investment Authority

EXECUTIVE SUMMARY

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 • 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

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Libyan Investment Authority

• 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

THE LIA’S MISSION

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 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.

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Libyan Investment Authority

NEW STRATEGY AND TRANSFORMATION 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

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Libyan Investment Authority

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

1 LIA Transformation Strategy

The LIA’s Long-Term Strategy

LIA ASSETS: THE PLAN 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)

Libyan Local Investment & Development Fund

Budget Stabilisation Fund (BSF)

Holdings Portfolio

• 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 • Domestic investment for socio-economic development • Stimulating private-sector projects in non-oil industries • Gateway for foreign expert partnership and investment • Protection against oil revenue volatility • Replenished when there is surplus, available to cushion shortfalls • Cash and fixed income fund with tranches of different liquidities • 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

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Libyan Investment Authority

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

Nonpermanent and to be established over the next 3-5 years

The LIA’s Long-Term Strategy

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

LIA as holding company

Securities & Alternative Investments

Long Term Investment Portfolio (LTP)

Future LIA fund structure

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

Subsidiaries

Associates

Medco International Ventures Limited

Libyan Foreign Investment Co. (LAFICO)

Oilinvest (Tamoil)

First Energy Bank

Libyan African Investment Portfolio (LAP)

Dalia Advisory Limited Company

Libyan Norwegian Fertilizer Co.

Woodside (N.A.) Ltd.

Itren Investment Limited Co.

Libyan Local Investment & Development Fund

Menadrill Investment Co.

BP Exploration Libya Limited

Maplecross Properties Limited

LIA as asset owner & fiduciary manager

Joint Ventures

Budget Stabilisation Fund

Future Generations Fund

Local Investment & Development Fund

Permanent funds

Libyan Oasis Energy & Water Co.

The new permanent funds will represent pools of assets under LIA, not legal entities 8

Libyan Investment Authority

Holdings Portfolio

Legacy Portfolio

To be established over the next 3-5 years

The LIA’s Long-Term Strategy

TARGET ORGANISATIONAL STRUCTURE LIA will implement a new organisational structure which better aligns with the strategy and enhances control functions Board of Directors Committees Nomination / Comp

Audit & Risk

Governance

Investment

Internal Audit

Non-Executive Chairman LIA Advisory UK Ltd (London)

CEO

CEO’s Office¹

Deputy CEO2

CIO (FGF, BSF)

Treasury

Holdings & Legacy

Equities

Evaluation & Research

Fixed Income

Legacy

Alternatives

Phase II

COO2

Libyan Development Fund2 Subsidiary LLIDF integrated over time

Risk Management

Financial Risk

Legal & Compliance

Finance & Control

IT & Facilities

HR

Legal

Finance

IT

HR Planning

Compliance

MIS & Reporting

Facilities & Admin

Resource Management

Phase I Non-Financial Risk

Holdings HR Services

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

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Libyan Investment Authority

Control Departments

Support Departments

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

The LIA’s Long-Term Strategy

DUAL LOCATION MODEL HUB APPROACH

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

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2 LIA Advisory UK Ltd – London, UK

1

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Libyan Investment Authority

•

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

The LIA’s Long-Term Strategy

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

Improved governance and transparency

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

• LIA becomes a ‘manager of managers’ – All investments to be made via best- inclass external fund managers – Asset allocation to be recommended by best-in-class investment consultants

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

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Clarification that it is a sovereign entity not a corporation

Libyan Investment Authority

• 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

LIA Transformation Strategy

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

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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

Libyan Investment Authority

LIA Transformation Strategy

CREATION OF IMPLEMENTING TASKFORCES 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.

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.

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Libyan Investment Authority

LIA Transformation Strategy

PLANNED IMPLEMENTATION OF THE TRANSFORMATION

Year 1: ‘Stabilising LIA’

Underway

Year 2: ‘Integrating Subsidiaries'

Next wave

1. Strengthen LIA Core

2. Strengthen LIA & Subsidiary Governance

3. Assign Initial Assets to Funds

4. Establish Fund Structure

5A. Align Subsidiaries with LIA

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Libyan Investment Authority

5B. Integrate Subsidiaries into LIA

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Portfolio Performance Review

Portfolio Performance Review

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

Risk & investment goals in line with Strategy

Legal & regulatory requirements

Performance measurement framework

Strategic Asset Allocation (SAA)

• Defines the target allocation and relevant benchmarks or absolute targets (to be determined) • SAA for each of the 3 permanent funds

Tactical Asset Allocation (TAA)

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

Manager/ Asset Selection

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

Defining target returns and risk profiles for distinct funds based on SAA increases proficiency of performance evaluation 16

Libyan Investment Authority

Portfolio Performance Review

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

Responsible

Establish new fund structure

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

• BoT – approves • BoD – recommends

Select Investment Consultants (IC)

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

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

Select External Fund Managers

• Manage assets based on the defined SAA

• BoD – approves • Invest. Com./ mgt recommends

Select Transition Managers

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

• BoD – approves • Invest. Com. / mgt recommends

Activities

Revamp MIS & Reporting

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Libyan Investment Authority

•

Enhance reporting to measure portfolio performance against target returns

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

Heads – develops, implements

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 LIA and LTP marketable securities By asset class in $BN +3%

45 40

38.5

40.5

39.8

3.0

3.0

Alternatives

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

6.7

6.4

Fixed Income

10.6

10.1

Equity

• 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

3.4 35

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

6.6 30 25

8.9

20

– Matured fixed income portfolios contributed to cash increase

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– Market value of remaining fixed income increased over the period (from $6.33MM to $6.40MM)

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19.7

20.2

20.2

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

5 0 Jun-13

Dec-13

Jan-14

Note: Cash represents LIA’s position only Source: Oliver Wyman analysis, MI report for June 2013, December 2013, and January 2014 18

Cash

Libyan Investment Authority