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Financial Innovations Lab™ Report

STRUC TURING ISRAEL’S

SOVEREIGN INVESTMENT FUND

Financing the Nation’s Future

December 2011

Financial Innovations Lab™ Report

Struc turing

Israel’s Sovereign

Investment Fund

Financing the Nation’s Future

December 2011

Financial Innovations Labtm Report

Financial Innovations Labs™ bring together researchers, policymakers, and business, financial, and professional practitioners

to create market-based solutions to business and public policy challenges. Using real and simulated case studies, participants

consider and design alternative capital structures and then apply appropriate financial technologies to them.

Acknowledgments

This Financial Innovation Lab report was prepared by Glenn Yago, senior research fellow at the Milken Institute and senior

director of its Israel Center, and by Yuan-Hsin (Rita) Chiang, senior research analyst.

We are grateful to those who participated in the Financial Innovations Lab for their contributions to the ideas and

recommendations summarized in this report. We wish to express our appreciation to our Milken Institute colleagues—

especially Financial Innovations Lab Manager Caitlin MacLean, Senior Economist Cindy Li, Israel Center Director Alma

Gadot-Perez, Executive Assistant Karen Giles, and Editor Dinah McNichols—for their tremendous effort. We are honored

to be able to contribute to this important assignment and appreciate the cooperation of Professor Eugene Kandel and Morris

Dorfman of the National Economic Council of the Prime Minister’s Office, Dr. Karnit Flug of the Bank of Israel, Eran

Heimer, Haim Shani, and Yoav Oron of the Ministry of Finance on the Lab and other work focusing on Israel’s economic

development.

About the Milken Institute

A nonprofit, nonpartisan economic think tank, the Milken Institute works to improve lives around the world by advancing

innovative economic and policy solutions that create jobs, widen access to capital, and enhance health. We produce rigorous,

independent economic research—and maximize its impact by convening global leaders from the worlds of business, finance,

government, and philanthropy. By fostering collaboration between the public and private sectors, we transform great ideas

into action.

© 2011 Milken Institute

Introduction......................................................................................................1

Part I: Issues and Perspective ........................................................................4

Opportunities and Challenges .......................................................................................5

International Experiences .............................................................................................8

International Principles for Sovereign Funds................................................................11

The Financial Innovations Lab.....................................................................................12

Part II: Financial Innovations for Structuring

an Israeli Sovereign Investment Fund...................................................13

Step 1: Determine a Clear Mission...............................................................................13

Step 2: Formulate a Governance Framework................................................................15

Step 3: Designate the Fund’s Revenue Source..............................................................20

Step 4: Define the Withdrawal and Spending Rules......................................................22

Step 5: Design the Investment Strategy.......................................................................24

Other Recommendations from the Lab........................................................................31

Conclusion.........................................................................................................33

Appendix I: Sovereign Wealth Fund Scoreboard................................34

Appendix II: Financial Innovations Lab Participants .......................36

Endnotes..............................................................................................................37

Table of Contents