Sovereign Wealth Funds in Australia: The Best Way to Break into Finance off the Beaten Path?
What do you do when you don’t fit in?
For example, what if you have so much work experience that you really don’t want to start out as a first-year analyst at a bank?
Or what if you want to work in finance, but you don’t want to “pay your dues” in investment banking at all?
And to make things even more difficult, what if you’re in a country that also has fewer opportunities?
That’s a tough one.
But our interviewee today dealt with all of those challenges and more when he won an offer at a sovereign wealth fund (SWF) in Australia, and then moved up through the ranks there.
We have received so many requests to cover sovereign wealth funds that I’m not going to give you a bulleted list of the topics we discuss – just keep reading for your full crash course:
Breaking In: How to Skip Investment Banking
Q: Before we discuss what a sovereign wealth fund does, can you tell us about your background and how you got into the industry?
A: Sure. I’m from Australia originally, and I pursued a combined Commerce and Arts degree in university (dual degrees are common here).
Like many students at Australian universities, I did a co-op in my 3rd year and began working for a proxy advisory firm. Our job was to lobby institutional investors to vote a certain way on deals and significant corporate governance issues.
It was a part-time role at first, but I switched it to a full-time role in my 4th year, and then moved it back to part-time and completed university in my 5th year.
Since I already had over a year of full-time work experience as graduation approached, I didn’t want to start out as a first-year analyst in investment banking/financial services.
So I joined a consulting firm in a role that was initially described as “providing advisory services for companies.”
I interpreted that as doing transaction-related work (e.g., Big 4 TAS), but it soon turned into HR consulting: remuneration reviews for government departments, salary benchmarks, and so on.
As I was becoming dissatisfied with the role, a new sovereign wealth fund here contacted me and said they were looking for a junior investment analyst.
This SWF was similar to a fund of funds, with a lot of high-level decision making but little-to-no direct investing.
It sounded far better than HR consulting, though, and I thought I had a good shot at a role there.
I didn’t get the first position I applied to, but a few months later something else became available and I went through three rounds of interviews, performed well, and accepted an offer.
I stayed for about three years and worked in different areas at the fund, including a generalist/reporting role and commercial real estate.
Q: Thanks for explaining that.
So what is a “sovereign wealth fund,” and what exactly does it do?
A: Broadly speaking, sovereign wealth funds are state-owned investment vehicles that exist to build up savings for future generations or to stabilize the government’s revenue in a cyclical downturn.
You can think of most of them as: “Funds of funds, but state-owned rather than private.”
These funds exist at both the national level and the state/province level, and there are a lot of provincial funds in countries such as Canada.
SWFs are huge in natural resource-dependent countries such as those in the Middle East, but they’re also common in countries like Canada and Australia with significant pension industries.
The biggest funds in the world are in Norway, the UAE, China, Saudi Arabia, Hong Kong, Kuwait, and Singapore, followed by other countries such as Russia, Qatar, Canada, and Australia.
Of those, the ones in Norway, the Middle East, and Russia are heavily linked to commodities, while the ones elsewhere are more diversified.
In Australia, there’s a “superannuation” policy that requires employers to contribute 9% of employees’ wages to a pension/superannuation fund (the exact percentage changes over time).
So oil and mining revenue doesn’t go into the SWF industry to the same extent as it does in Canada or the Middle East.
Sovereign wealth funds are a relatively small industry here, with perhaps only 4-5 funds with more than $20-30 billion in assets under management. There might be 7-8 funds with more than $10 billion in AUM.
By contrast, Norway’s fund has almost $1 trillion USD, and some provincial funds in Canada, such as Alberta Investment Management, have well over $50 billion.
A few well-known funds here include AustralianSuper, Victorian Funds Management Corporation and the Future Fund.
Q: Right, all of that makes sense.
But what about the investment strategies they pursue?
Are they closer to asset management firms, hedge funds, or something else?
A: The strategies depend on the assets the SWF is investing in, but in my experience they are much closer to long-only asset management firms or funds of funds than anything else.
I say that because they invest in everything from government bonds to equities to corporate bonds to alternative investments, but the decision-making process can be quite high-level.
For example, at my fund at the time we rarely analyzed individual companies’ financial statements; it was more about analyzing the fund itself, managers’ performance, and ensuring the appropriate governance mechanisms were in place to protect investors.
I’m sure many SWFs have participated directly in leveraged buyouts or pursued hostile takeovers, but those strategies are more common in some of the places with more established SWFs, such as Canada, Abu Dhabi, and Norway.
Recruiting at a Sovereign Wealth Fund: Got Case Studies?
Q: Thanks for explaining that.
I want to return to your story and go into the recruiting process in more detail, so can you explain how it differs from the process at a bank or PE firm?
A: The recruiting process is far less formalized, at least at a smaller fund.
At the bigger SWFs, such as ADIC in the UAE or GPF in Norway, it may be more of a structured process.
But for me, the process went a bit like this:
- I expressed interest in the role, applied to an Equities position at the firm, but didn’t win the offer at first.
- Then, a few months later, they called me back.
- I went through three rounds of interviews and spoke with HR, the CIO, and 1-2 other team members.
- There were no psychometric or quantitative tests, and also no formal stock pitch or investment case study.
I received many broad, markets-based questions: “What do you think about the Australian market? Will China experience a credit crunch? What’s your favorite investment strategy?”
They were interested in me because of my background in HR consulting. Because of that role and my experience in designing compensation plans, they assumed I understood superannuation quite well.
The recruiting process was quite informal because junior-level people don’t add that much value at a SWF.
If you compare it to private equity, you don’t dig into companies in the same depth, and you as the junior person do not push deals forward in the same way.
Q: So what types of candidates are they seeking?
A: You can potentially get into sovereign wealth funds as a recent grad without full-time work experience, but likely not the top funds.
I had an advantage because the fund I joined had undergone a government-led restructuring and was building up new teams; I don’t know if you could make the same consulting-to-SWF transition at an established firm.
So if the fund is getting into direct PE investing, they’ll go around to PE funds and try to pull people away from there.
Q: And do you have any sense of which funds are active in recruiting students?
A: Outside of Australia, from what I’ve heard, the ones in the Middle East are somewhat proactive, but mostly through very “niche” recruiters based in the UK and US.
The ones in mainland China are not active with their outreach and tend to favor local candidates (at the junior through middle-management levels), and the fund in Norway is also not proactive.
Funds in Singapore are somewhere in between, but they will still favor local candidates and usually won’t make a massive effort to recruit US or UK-based candidates.
A few funds do have formal internship programs for MBAs, and some even recruit at the undergraduate level, but those are both quite rare.
Q: Thanks for clarifying that one.
What should you expect in case studies and technical questions?
A: I barely received any traditional technical questions, but I imagine they would be similar to standard IB-style questions (at a large fund).
In a typical “SWF-style case study,” they’ll give you an equity research report and then ask you to come up with reasons to buy or sell a stock.
So it’s less about coming up with your own stock pitch and more about weighing in on someone else’s ideas.
In another common case study, they’ll give you sell-side research reports on similar companies, such as Visa and MasterCard, ask you to recommend one of those companies, give a valuation estimate, and describe the risks and ways to mitigate the risks.
Sometimes, they will also turn these case studies into group exercises, but that is more common at larger funds.
The biggest challenge with these case studies is time. You might only have one hour to read through heaps of reports, so you need to skim and make decisions quickly.
There is almost no financial analysis required because you don’t have the time; instead, you rely on the comparable company analysis from the research reports to get a rough idea of valuation.
So if you’re preparing for SWF interviews, read lots of equity research and learn how to skim and extract information quickly.
A Day in the Life at a Sovereign Wealth Fund: From Asset Allocation to Commercial Real Estate
Q: Thanks for describing all that.
I want to get into the details of the job itself, so can you explain your first role at the fund?
A: Sure. As I said, it was more of a “reporting role” at first.
I analyzed pensions over 5-year, 10-year, and 20-year periods and determined whether they would be underfunded or overfunded.
So I spent time answering questions like “What investment return is required to fund this plan properly, given assumptions about wage growth, superannuation contributions, and historical returns?”
I also analyzed the pension liabilities to see what might be overstated or understated, so in that sense it was almost like an actuarial role.
I had some exposure to our investment strategies, but a lot of that work was outsourced to the portfolio managers since we were, effectively, a fund of funds.
I stayed in that role for close to a year, but then my boss left right as other teams within the firm were starting to expand.
They wanted to bring more expertise in-house and develop their own portfolio managers, so I saw it as a good chance to move into commercial real estate, which interested me more.
Q: And what did you do in that role?
A: I spent the first six months learning the portfolio and the types of real estate funds that we had invested in: the regions, the returns expectations, the teams, and so on.
After that, my role shifted to portfolio planning and allocation. I spent a lot of time evaluating each real estate investment fund, seeing which fees were justified or not justified, and determining which relationships made sense.
Right in the middle of that, we were hit by a downturn in the property market and many real estate funds began to underperform.
Over my next two years there, I worked with a lot of troubled funds and helped the PM explore options such as selling stakes in funds, recapitalizing, or investing in new funds.
Q: You mentioned earlier that sovereign wealth funds are often closer to long-only asset management, but were you only trying to beat the market?
What were the returns expectations like?
A: It depends on the asset class, the performance objectives of the fund, and the purpose of the fund (stabilizing revenue vs. saving for future generations).
In my first role, we were trying to match the unfunded pension liabilities and ensure proper funding over time.
So our returns objectives were 4-5% higher than the bond rate of 9-10% back then.
On the real estate side, 90% of our capital was allocated to core real estate investments, so we did not pursue distressed/opportunistic/value-added funds at all.
We aimed for 4-5% returns from cash flow/NOI generation, and then 2-3% capital growth on top of that.
Around 10% of our capital was allocated to higher-risk opportunities, emerging markets, development deals, and land acquisitions, but I didn’t do much work there.
The investment process differs based on the size of the deal and the fund. Sometimes, your team will have the authority to invest up to a certain amount (e.g., $100 million), but beyond that level the decision has to go to the Board.
At other funds, though, Board sign-off is required on every single investment, which translates into more internal documents and memos and a slower process.
Sovereign Wealth Funds vs…. Everything Else
Q: Thanks for explaining that.
Do you think it was worthwhile to “skip” investment banking and move straight into a sovereign wealth fund?
A: There are some advantages, such as better hours. I worked from 9 AM to 6 PM consistently, and I spent only a few nights each quarter working until 8 or 9 PM.
And, as at other buy-side funds, you can dictate your terms, take your time to evaluate potential investments, and ignore external pressure to move quickly.
But there are also some disadvantages. For one, the amount you learn and even the environment itself are highly dependent on your boss, even more so than at a bank.
Sometimes former bankers come in and want everyone to work 80-90 hours per week, while other times 30-year fund manager veterans join, work for a few years, and then retire.
Compensation is also lower, mostly because of lower bonuses.
I earned about the same base salary as investment banking analysts, but my bonus was only 20-40% of my base salary (and that was in a relatively good market).
Bonuses tend to be lower because SWFs are state-owned (but again, I suspect this may differ at bigger funds…).
The earnings potential does go up significantly at the VP level and beyond, but you still won’t earn close to what a Partner at Blackstone or Carlyle earns because carry is much higher there.
Also, sometimes at sovereign wealth funds you get stuck and end up staying in the same role for ten years (!). At least at a bank, it’s “up or out,” so no one can remain an analyst for a decade.
Finally, you are probably more employable with broader exit opportunities after working at an investment bank for a few years.
Q: Speaking of that, what do people typically do after working at a sovereign wealth fund?
A: By far, the most common option is to move to another SWF.
Many people also switch industries and move to funds of funds instead, since they’re similar to SWFs but not state-owned.
I’ve also seen some people move into investor relations, especially if they’ve had experience with capital-raising activities here.
You could also try moving into direct investing or going to a fund manager if you have the right relationships.
Q: And that’s what you did, correct?
A: Yes – I got more interested in real estate over time, so I moved to a fund that makes direct investments in commercial real estate.
I liked aspects of the fund I worked at, but I was more drawn to direct investments and there weren’t many opportunities for that.
At first, you feel important going into meetings with senior portfolio managers and hearing their strategies, but you quickly realize you have a limited ability to impact the outcome.
Q: Thanks for clarifying.
To sum up everything, can you tell us who would be a good fit, and who would NOT be a good fit, at a smaller sovereign wealth fund?
A: You’d be a good fit if you like broad, macro-level analysis, you want better hours and don’t mind reduced compensation, and you want to stay at a wealth fund or fund of funds for the long term.
You would also be a good fit if you don’t match the profile of the “typical candidate” that banks, private equity firms, and hedge funds are looking for, but you still want to work on the buy-side.
You would not be a good fit if you want direct investing experience, quicker advancement opportunities, or the ability to make impactful decisions as a junior team member.
Q: That’s an excellent summary. Thanks for your time!
A: My pleasure.
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