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Libya's hidden wealth may be next battle

Libya’s sovereign wealth fund has $70 billion in assets but much of it is invested in the country or the Middle East, out of the reach of sanctions.
/ Source: The New York Times

As the battle for Libya rages on, the struggle over control of the country’s sovereign wealth fund and its $70 billion in assets has just begun.

With a sizable pot of ready cash and stakes in a few elite European companies — including the British publisher Pearson and the Italian soccer club Juventus — the fund served as an emphatic calling card for its founder, Seif al-Islam el-Qaddafi, a son of the Libyan ruler who was once regarded as the reformer in the family.

Established in 2006, the fund was used by Mr. Qaddafi in an effort to make the case that Libya was ready to open itself to the West. It helped draw into Mr. Qaddafi’s orbit a range of powerful figures, including the Rothschild family, Prince Andrew of Britain, the former European trade commissioner Peter Mandelson, the cream of corporate society in Italy and the American private equity investors Stephen A. Schwarzman of Blackstone and David M. Rubenstein of the Carlyle Group.

The United States said it intended to freeze any Libyan Investment Authority’s assets controlled by American institutions, though no specific bank or asset had been publicly identified. In Britain, officials say the fund will be prevented from selling and repatriating its assets, which include, in addition to its Pearson stake, a small portfolio of commercial real estate holdings in London.

But what remains unclear is to what extent the $50 billion or so of cash and liquid securities in the fund, which operated under the indirect control of Mr. Qaddafi, is accessible to the regime of his father, Col. Muammar el-Qaddafi.

Cash mountain
Virtually all of Libya’s riches come from oil, and while the country may well be sitting on a cash mountain, deploying those sums in international markets to buy arms or pay outside fighters is likely to be very difficult.

People who worked closely with the fund said that its inner workings were largely a mystery as bureaucratic inertia and lack of investment expertise kept it from being more active. It made its first outside investments only in 2008. Most of the money is probably held in Libya or in other banks in the Middle East outside of the reach of sanctions.

“There was no backup, no staffing and no system — and everyone wanted to have a cut of the action,” said Oliver Miles, a former British ambassador to Libya. “It would be wrong to say that it failed, but it has not succeeded, either.”

To a degree, Mr. Miles argued, the fund’s experience mirrors that of Seif Qaddafi’s reform agenda as a whole. “He did not have the professional knowledge and backup to do what he said he was going to do,” Mr. Miles said, “and there is a question of how truly committed he was to reform.”

While bankers say that some of the cash pool is probably being managed by the investment banks that so aggressively wooed the fund in its early days, they say it is also likely that the bulk of the assets have been kept in Libya’s liquidity-rich banking system — a reflection of the country’s long experience with Western-imposed sanctions.

In addition to the fund, Libya’s central bank has reserves of about $110 billion, giving it a net cash position of about 160 percent of the nation’s annual gross domestic product, according to the International Monetary Fund.

Ever since his “rivers of blood speech” last month, in which Mr. Qaddafi first expressed his family’s determination to stay in power at all cost, his once-wide circle of acquaintances has shrunk drastically.

In Britain, friendship has turned to revulsion.

Marjorie Scardino, the chief executive of Pearson, which publishes The Financial Times and The Economist, said the company was uncomfortable with Libya’s 3 percent stake. The company has frozen the position and will not pay a dividend to the fund.

In the British Parliament, the opposition Labour Party has called on Prime Minister David Cameron to remove Prince Andrew from his position as a worldwide promoter of British business interests because of his reported ties to Mr. Qaddafi.

In Italy, where the fund was more heavily invested, in part because of the longstanding ties dating from Italy’s colonization of Libya, the response has been more measured. Andrea Agnelli, chairman of Juventus, has said that he was not worried about the 7 percent stake that has been tied to one of Mr. Qaddafi’s brothers, Al-Saadi, a former professional soccer player in Libya.

Unicredit, the Italian bank that is 7 percent owned by the Libyan Investment Authority and the Libyan Central Bank, has merely said it is monitoring the situation.

The investment authority was established in 2006 just as Libya and Mr. Qaddafi in particular, were making a concerted attempt to rejoin the community of nations.

Mercer, a consulting firm, was called in to provide technical advice, and Mr. Qaddafi made use of his connections at the London School of Economics, where he was working on his doctorate, to recruit further expertise, including Howard Davies, the school’s director, to serve as an adviser to the fund.

Mr. Davies said he regretted his involvement with the fund and was no longer connected with it. He said he had taken no fee and had not offered advice on specific investments. The London School of Economics said late Thursday that Mr. Davies had resigned as director and that it had commissioned an inquiry into the school’s relationship with Libya and Mr. Qaddafi.

Providing the intellectual launching pad for not just the fund but also for Mr. Qaddafi’s fanciful dream to remake Libya as an entrepreneurial hub for the region to rival Dubai was a paper he commissioned from Michael Porter, the international competitiveness expert at Harvard University, which extolled Libya’s potential and its system of “popular democracy.”

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“We were there because the country seemed ready to reform,” Mr. Porter said in response to a question about his involvement in Libya. “And Seif was the key reform driver. It became clear that the conservatives had blocked the reformers and I ended my personal involvement in 2007.”

The fund’s nominal head is Muhammad H. Layas, perhaps Libya’s most experienced international banker. He has had a leadership role in institutions including the Libyan Arab Foreign Bank, the only bank allowed to conduct international business during the imposition of United Nations sanctions against Libya; British-Arab Commercial Bank, a London-based wholesale bank now majority owned by Libya; and the Arab Banking Corporation, a Bahrain-based bank also majority controlled by Libya.

But while he was the titular head, bankers who have had dealings with the fund say that the real power was wielded by Mustafa Zarti, a close friend of Mr. Qaddafi whose title is deputy chief executive.

Brash and with an “in-your-face” style, according to people who dealt with him, Mr. Zarti went to school with Mr. Qaddafi in Austria. He is also his partner in a tuna farming enterprise, R. H. Marine Services, on the west coast of Libya.

Bankers who dealt with Mr. Zarti said he fancied himself quite a deal maker — very much taken with glossy Wall Street names like Goldman Sachs — and was known for his impulsive and unsuccessful investment decisions, like investing in Royal Bank of Scotland before it was bailed out.

In 2008, as the fund began to get off the ground, Mr. Zarti attracted the attention of foreign bankers, so much so that at his wedding in Tripoli in 2009, two of private equity’s biggest investors, Mr. Schwarzman of Blackstone and Mr. Rubenstein of Carlyle, were invited and attended as guests.

Peter Rose, a spokesman for Blackstone, said Libya had not invested in any of the company’s funds. Christopher W. Ullman of Carlyle said that the company did not comment on the identity of its investors.

While Mr. Qaddafi largely kept his distance from day-to-day operations, he would on occasion swoop in to authorize an investment, like its stake in Rusal, the aluminum producer controlled by the Russian oligarch Oleg V. Deripaska.

By early 2010, the fund was sitting on $50 billion in cash and securities, according to Mr. Layas.

In an interview in his office in Tripoli a little more than a year ago, Mr. Layas said that the bankers were well aware of the billions in cash available to Libya’s fund but that he was never tempted to invest overseas at the level and scale of other funds, like the Abu Dhabi Investment Authority.

Indeed, he suggested that the scars from decades of sanctions were still deeply felt. “Sanctions have made us very conservative,” he said. “And it is the opinion of the leader that as we build our reserves that we keep most of them with the central bank.”

This article," ," first appeared in The New York Times.