Saturday, December 23, 2017

Why Tribal Sovereign Wealth?

TSW Community:

Many folks want to know, where do we start?

Likely the best place to start is to ask the question "why" your community may want or need a sovereign wealth entity. This is the most critical question, as it sets the objective and drives all future decisions around structure, strategies and processes. When setting up an institution that will last into perpetuity, this question is not trivial.

Two primary (and very different) reasons groups establish a vehicle for sovereign wealth are:

(1) Stabilization: (Current Obligations) We have one source of income (e.g., gaming, natural resources, gov't contracting) and think we should diversify in case something happens to negatively impact that income source. In this case, we expect to have an obligation to spend some of the money on an annual basis, so we want to make a bit more money from our investment returns so it can cover our spending needs.

(2) Growth: (Future Obligations) We are making money now but want to grow our wealth so it will be around for future generations. In this case, we do not necessarily need any money now, so we can invest (and re-invest) the money for the objective of growing the money to meet a future spending need.

If I were going to have an initial meeting around establishing a sovereign wealth fund, I would dedicate the first discussion to "why" we think we want to embark on this initiative. These two objectives are often not mutually exclusive for a given group, although some constituents may lean heavily towards one side or the other.

Some groups may find the need for both stabilization and growth, which is not unusual. If my group was wanting to go down both paths in parallel, it will be important to decide how the initial contributions of resources are to be allocated to each objective as the interaction between and management of these two objectives are not trivial (and likely a post, or series of their own).

I will also note, some tribal groups (especially those with a high population-to-income dynamic) are first and foremost concerned with creating jobs for their tribal members, which I'd largely group into economic development or impact investing - aka, program related investments (PRI), mission-related investments (MRI), socially responsible investments (SRI) or environmental, social and governance (ESG) investments. I'll cover this area in a future post.

In Perpetuity,
-Jay

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NOTES:

  • Indian Country has largely defined "diversification" as "not gaming", although I would argue that's a dangerous definition. More on that later.

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