GCC sovereign wealth fund activity picks up

The number of sovereign wealth funds (SWFs) operating in the GCC has grown in the last decade. The value of these SWFs – created to invest and manage the huge sums flowing into the region from hydrocarbons sales – stood at $2.9trn in March 2017, according to the Sovereign Wealth Fund Institute (SWFI), representing 38.5% of the global total.

Turning A Corner

With oil prices remaining relatively low since the middle of 2014, many SWFs have had to reign in investments, pulling money out of global stock markets and holding off on investment plans to make up for shortfalls in government spending. According to investment management firm eVestment, between 2015 and 2016 SWFs around the world withdrew upwards of $85bn from investment houses. This trend has been particularly noticeable in countries like Saudi Arabia, where net foreign assets held by the Kingdom’s central bank dropped from $737bn in August 2014 to $487bn in July 2017 as the government made use of reserves to cover its budget deficit.

Despite mid-2017 oil prices still being far below those seen prior to the middle of 2014, experts believe the weaker investment landscape for SWFs could be beginning to turning a corner. In August 2017 Jamal Al Naif, head of Pictet Asset Management for the Middle East, Africa and Central Asia, told Bloomberg that SWFs in the Middle East were beginning to revive their capital spending plans, with investments likely to start increasing towards the end of 2017 or in early 2018.

Global Giants

According to a July 2017 ranking published by the SWFI, the largest fund in the GCC is the Abu Dhabi Investment Authority (ADIA). Founded in 1976, it manages the second-largest amount of assets in the world, behind only Norway and its Government Pension Fund. Also among the top-10 global SWFs are those overseen by the Kuwait Investment Authority, SAMA Foreign Holdings of Saudi Arabia and the Qatar Investment Authority. In total, eight of the top-20 SWFs in the world are from the GCC.

UAE

ADIA has a portfolio valued at $828bn, with investments spanning over a dozen asset classes and sub-categories. According to the fund’s own data, its 20- and 30-year annualised rates of return in dollar terms were 6.1% and 6.9%, respectively, as of December 2016. One current area of interest for ADIA is India’s transport infrastructure, with the fund looking to buy a stake in Hyderabad International Airport and Cube Highways, the operator of road tolls in the country. Concerning European assets, it was reported in May 2017 that ADIA was actively looking for buyers for $1.7bn worth of Paris office buildings.

The UAE has a number of other important SWFs, with the Investment Corporation of Dubai, Mubadala Investment Company, Abu Dhabi Investment Council, Emirates Investment Authority, RAK Investment Authority and Sharjah Asset Management also involved in managing the sovereign wealth of the various emirates. More recently established funds, such as the Abu Dhabi Investment Council launched in 2007, have also been tasked with making investments that help support domestic economic growth and facilitate the development of local companies on the international stage.

Kuwait

Fourth on the list of the largest SWFs in operation is the Kuwait Investment Authority (KIA), considered by some to be the oldest fund in the world, with roots tracing back to 1953. Managing assets of approximately $524bn, the KIA holds high-profile stakes in German car manufacturer Daimler, BP, Vodafone and HSBC. In August 2017 the KIA sold its 4.8% stake in French energy company Areva for a reported €83m, significantly less than from the €600m it paid in December 2010.

The loss in value was attributed to a global shift away from nuclear power after the Fukushima nuclear reactor disaster in Japan in 2011. Despite the loss on the sale, the KIA said it made a profit of KD45.2bn ($149.5bn) in the six fiscal years it held the shares leading up to March 31, 2017.

Going forward, at the beginning of 2017 the KIA announced that it was aiming to increase the allocation of funds managed in-house – from less than 2% to as much as 8% – with plans to invest more in private assets and global infrastructure projects.

Saudi Arabia

Important developments have also been taking place at the Public Investment Fund (PIF) of Kuwait’s neighbour, Saudi Arabia. PIF was originally established in 1971 to invest in commercial projects, but for much of its operating life it has been little known, operating largely as a no-frills holding company. However, in March 2015 a decree was issued transferring oversight of PIF from the Ministry of Finance to the Council of Economic and Development Affairs, with the fund’s goals brought in line with Saudi Vision 2030.

Since 2015 PIF has been among the most visible SWFs in the world. In 2016 alone the fund invested $3.5bn in Uber, the ride-hailing app, and agreed to invest $45bn in a $100bn-technology fund in partnership with Japan’s SoftBank. It also announced plans in May 2017 to contribute $20bn to US private investment firm Blackstone Group to finance infrastructure projects in the US.

Its biggest deal, however, is yet to come. In 2018 PIF is expected to benefit from government plans to offer shares representing an estimated 5% of state-owned oil giant Saudi Aramco through an initial public offering (IPO). The proceeds, worth a potential $100bn, would go to the fund.

The SWF already has considerable reserves, with the government allocating it SR100bn ($26.7bn) from the central bank in November 2016. One banker told the Financial Times in January 2017 that the fund’s assets could rise from around $190bn to $500bn even before Saudi Aramco’s IPO.

In other developments, PIF is expected to be involved in theme park construction with US entertainment operator Six Flags, as well as participating in efforts to develop a domestic defence industry. In May 2017 PIF established Saudi Arabian Military Industries with the aim of reducing the Kingdom’s reliance on foreign purchases of military equipment. PIF’s domestic portfolio includes stakes in Saudi Basic Industries Corporation – one of the world’s biggest chemicals manufacturers – and National Commercial Bank, the Kingdom’s largest lender.

In August 2017 it was reported that PIF had hired Rashed Sharif, former CEO of the investment banking unit at Riyad Bank, as the new head of its domestic investments, reporting to the fund’s managing director, Yasir Alrumayyan. That same month the government announced that it planned to transfer ownership of the Kingdom’s airports to PIF as part of efforts to privatise them. Individual companies would be set up for each airport, operating under Saudi Civil Aviation Holding, which itself was spun off from Saudi Arabia’s General Authority of Civil Aviation.

Bahrain

Bahrain’s Mumtalakat Holding Company has accumulated an estimated $10.6bn worth of assets under management since its 2006 inception, according to the SWFI. After Mumtalakat signed a mutual investment agreement with the Russian Direct Investment Fund in 2014, February 2016 saw the holding company make a $250m investment in the Russian management account. Speaking to Reuters in June 2017, Mahmood Hashim Al Kooheji, the CEO of Mumtalakat, highlighted the large pipeline of investment deals that Bahrain has with Russia.

In October 2015 Mumtalakat, along with Blackstone Group and Dubai-based Fajr Capital, bought a significant stake in the UAE’s GEMS Education, and in 2016 the SWF acquired notable equity stakes in UK-based water treatment company Envirogen Group and European health care provider KOS Group. 

Mergers

On the back of lower global oil prices, there had been talk of SWF mergers in 2017, with the creation of larger funds seen as a way to cut costs and limit overlaps from coexisting national accounts. In February 2017, for example, it was announced that Abu Dhabi was close to finalising the merger of its Mubadala Investment Company and International Petroleum Investment Company (IPIC). According to the SWFI, the new entity would be the 14th-largest fund globally, with around $125bn in assets.

Mubadala is active in 13 sectors and more than 30 countries around the world, and is focused on developing industrial heavyweights in sectors like aerospace manufacturing, ICT, the semiconductor industry, metals and mining, and renewable energy. Meanwhile, IPIC has traditionally focused on oil and gas exploration and production, with stakes in 18 companies around the world in nations such as Kazakhstan, Pakistan and Austria. The new fund is expected to continue to invest in energy, infrastructure, metals, real estate and aerospace, while also expanding into new sectors. In April 2017 reports surfaced of Oman following suit, with plans to merge the country’s two main SWFs. The State General Reserve Fund (SGRF) and Oman Investment Fund would together create an entity with approximately $25bn in assets. The SGRF is the older of the two, established in 1980 to invest and manage the country’s financial surplus from its oil and gas revenues. The general fund maintains assets of around $18bn, according to the SWFI, while the Oman Investment Fund – founded in 2006 – has around $6bn in assets.

Growing Role

As countries in the GCC push to further diversify their economies away from hydrocarbons, some SWFs have been tasked with promoting alternative domestic industries and facilitating the development of regional firms able to operate at the highest international level.

Mubadala Investment Company is one such example, but a number of other funds could take a more active role in developing domestic industries in the near future. As investments by SWFs in the region continue to pick up after the jolt of lower oil prices, this will be an important development to follow.