Jean Castellini: "The Reserve Fund is gradually transforming into a Sovereign Fund"
Evolution of the banking sector and the Reserve Fund, the creation of financial markets, the world of cryptocurrencies, Monégasque ICOs: the Minister of Finance and Economy, Jean Castellini, analyses the financial news.
FINANCIAL MARKETPLACE
In the second quarter of 2022, the amount of banking assets was €141 billion, up 1.9%, despite a negative impact from market effects. What is your view of the evolution of the Monégasque banking sector in recent years (concentration of players, attracting new market leaders such as Goldman Sachs, the development of hedge funds, private equity)?
The calculation of Monaco’s 2021 GDP once again shows the importance of banking, financial and insurance activities. The sector is the second-largest contributor at €1.168 billion euros (an increase of 7.1% compared to 2020). In 2022, there was certainly the negative impact of the market effect, whereas this effect had been positive in recent years, both in terms of inflows and the behaviour of international exchanges; but the marketplace remains attractive, as evidenced by the installation of big names in international finance such as Pictet and, more recently, Goldman Sachs. The interest of the big names is explained by the increasing weight of the assets of Monégasque residents (we are now tending towards parity). However, wealthy clients now have more systematic recourse to players established in Monaco.
You have been advocating the development of hedge funds and private equity in the Principality for years. Where we are now?
My view has not changed. In terms of investment capital, the Principality does not yet occupy its rightful place. Our current goal is to position ourselves as the place where people in charge of investment decisions can establish themselves. Due to the small size of the territory, we can hardly compete with Dublin and Luxembourg for asset management or, in particular, private equity; but if Monaco is not suited to attracting technical and administrative teams, we can attract managerial skills and decision-makers. Wealthy clients who want to invest in new technologies or in sustainable finance [areas of development for the Principality - editor’s note] must be offered products and services in the field of investment capital/private equity. It’s a virtuous circle: the more customers you have interested in sustainable development and the more customers you have interested in private equity, the more players in these sectors will set up in the Principality!
CONSTITUTIONAL RESERVE FUND
What are the latest figures from the Constitutional Reserve Fund (FRC)? Has it suffered this year from the energy crisis and market volatility? What is the current percentage of green finance in the FRC?
The FRC currently has around €2.5 billion in liquid assets and the percentage of investments in sustainable investments is over 50%, including 20-25% of the liquid part placed in private equity! Remember that 10 years ago, we were at 0! This rate brings us closer to certain funds, in particular the structures of the major American universities, which have long-favoured private equity. Alongside these investments in private equity (mainly in new technologies and sustainable development), the FRC has 25-30% invested in more traditional and more liquid assets (equities, bonds, etc) as part of a sustainable strategy. Our goal is to reach 100% one day. We started with two funds managed by CMB and CFM, Ecoplus and MEDD, with a few tens of millions of euros invested in sustainable development and in which the FRC was a historical and majority investor. We have grown to more than one billion euros invested in highly-liquid sustainable investments or in private equity (average duration of seven to 10 years), with an ESG strategy that emphasises the “E” (for Environment: Green and Blue Funds). Emphasis must now be placed more on an “S” and “G” (Social and Governance) strategy, focusing on the values of inclusiveness, gender equality and respect for human rights: ESG must be applied to all segments.
In real terms, will the FRC invest in companies that have a strong Corporate Social Responsibility (CSR) strategy and do not greenwash?
Companies must not only display CSR values but be able to demonstrate them! This came up again at COP27: “no tolerance for greenwashing on carbon neutrality,” warned Antonio Guterres and “red lines” were drawn against greenwashing by private companies, which is of interest to states and investors. We must offer more transparency and evidence that the objective pursued is being achieved and not just hoped-for. In the same way, it will be necessary to fight against the practice of “social washing”.
Could the FRC be transformed into a Sovereign Fund?
It is clear that from its historic vocation as a reserve, the FRC must evolve and has already evolved. It can become the armed wing of an economic, financial and environmental policy that corresponds to the objectives set by the Sovereign. Whilst the budget finances investments based in the Principality, the FRC can finance everything that is done outside our borders. It is a vocation that it did not have historically but today the way in which it is invested means that it is naturally and gradually transforming into a Sovereign Fund. It should be noted that a certain number of such funds [Norway and Qatar, for example - editor’s note] are very dependent on fossil fuels. We do not have a Sovereign Fund powered by fossil fuels. With our sustainable strategies, we are doubly virtuous.
So the FRC has not suffered too much from market volatility?
No, thanks to its ever-increasing diversification. We currently follow about 50 lines, with diversified funds (which mainly use liquid assets such as stocks and bonds invested in international markets) but also specialised strategies, on very specific asset classes (including a fund 100%-invested in green Midcaps). We see to what extent, in a year like 2022, there is an interest in using private equity in terms of shock absorption, thanks to the return we get from it that is uncorrelated from the markets. The FRC also has a strategy in the field of hedge funds which plays its role of shock absorber in 2022 and delivers positive profitability, unlike liquid strategies subject to the vagaries of the markets.
FINANCIAL MARKETS/CRYPTO ASSETS
Why is there no stock market in Monaco? Is it just a matter of the size of the country?
The size of the territory is an obstacle but it is not the only reason: the Franco-Monégasque agreements and the European Convention mean that to have a stock market in the Principality, it would be necessary to transpose into internal law a certain number of regulations and European directives. It would be a long and complicated exercise. We must ask ourselves what this could bring financially and economically and, on the other hand, what it could require in terms of adapting the legislation and the burdens induced for the administrative and legislative services.
Could the joint use of the cloud and crypto assets lead to the emergence in Monaco of a micro financial market, as some would like?
There would be the same issues. France and the EU attach great importance to ensuring that Monégasque legislation complies with the highest standards. We have demonstrated agility in adapting our legislation in terms of financial innovation, crypto assets and metaverses but we must constantly weigh the balance between profitability and risk. Beyond the innovative image of Monaco, which is essential, the reputational risks are significant. In terms of ecosystem, we can incubate FinTech within MonacoTech but what role can we realistically play? We are currently discussing these issues with resident entrepreneurs who have been active in this area and are available to help us move forward on this subject. They help us reflect on what has worked elsewhere and what can be implemented.
Has the FRC taken the plunge and invested in crypto?
No, because for me it remains a strategy of high volatility, as the last few months and the recent bankruptcy of FTX have shown. In the portfolio of a HNW private client, where the play money accounts for 2-10% of the portfolio, it is risky but why not have an investment in cryptocurrencies, specially if this investment is uncorrelated from other asset classes, much like gold. For an institutional investor, on the other hand, stability must prevail, so this type of investment does not seem advisable to me, particularly since it is no longer as uncorrelated from other assets as in the past. An institutional investor seeks, above all, decorrelation and diversification, in addition to performance and social and environmental objectives.
Should we transpose banking regulations to the world of cryptocurrencies?
It is an essential prerequisite. I reference the work of regulators in Europe. [In France, the AMF financial markets authority has published information on the precautions to take before investing in crypto assets. New rules are due to apply in early 2024 better to protect European savers against scams and provide a legal and supervisory framework for the provision of services on digital assets - editor’s note].
I think, as does the new AMF President, Marie-Anne Barbat-Layani, that the information section and the sanctions section need to be improved. Cryptocurrencies are not strategies suitable for everyone. There should be training for savers, service providers, promoters of products or services and so on but also strict regulations to sanction shortcomings in informing the client, in proposing inappropriate strategies according to the risk objectives of the client. There is a balance between innovation and the search for a quick and significant profit. We cannot pretend that money grows on trees! One of the main forces to remember is correlation. Beyond the real damage to the environment linked to the creation of cryptocurrencies, there is a purely financial logic: if an asset retains high volatility but is more correlated to strategies that are less so, it loses its attractiveness. The saver needs to be aware of this! We have seen the limits of alternative funds, particularly in the Madoff affair. We are moving in the field of cryptos towards an evolution of this type. On the Monégasque side, a Sovereign Ordinance will soon complete the legislation on aspects of control and sanction.
The government wanted to attract businesses via Initial Coin Offerings (ICO), serving companies linked, for example, to the green economy or health. The director, Luc Jacquet, was thus able to benefit from the first ICO. The objective was a dozen or so operations of €30 to €50 million per year and the creation of 100 to 150 jobs within the incoming companies. What is the current situation?
We have realised, in this case as in others, that investors currently prefer to favour more traditional investment methods. Even in private equity where innovation is the norm, they prefer using currencies like the euro or dollar over issuing tokens. The fairly strong enthusiasm that had manifested before the Covid crisis did not pan out in the same manner. Particularly with a year 2022 marked by the resumption of inflation, the rise in rates and an international financial environment disturbed by the crisis in Ukraine, investors are less able to innovate to support certain projects. The use of ICOs and STOs is therefore less – all these things are still of interest but past excesses will not be seen again and that is a good thing.
