Saving for tomorrow: The Kuwait Investment Authority aims to diversify income sources

The Kuwait Investment Authority (KIA), the manager of the country’s sovereign wealth fund, is playing an increasingly active role in the domestic and international economy. This bodes well for the country’s growth prospects, and for a future in which national income no longer depends on the global price of oil.

MANAGING ASSETS: The KIA was established in 1982 to manage and develop the country’s assets under the General Reserve Fund and to oversee the Future Generations Fund, an account to which 10% of national revenue is allocated every year. The KIA operates under the minister of finance, who heads its board of directors. Board members also include the minister of oil, the governor of the Central Bank and five investment experts appointed by decree for four-year terms. As an asset manager for the state of Kuwait, the KIA invests in non-oil markets to diversify the country’s income sources beyond petroleum sales. Like other sovereign wealth funds, the KIA does not publicly disclose the value of its assets or its investment strategy; however, it is known to invest across economic sectors and geographic areas in pursuit of undervalued assets and long-term returns. According to estimates from the Sovereign Wealth Fund Institute, as of July 2011 the KIA had assets worth $296bn, making it the sixth-largest fund of its kind in the world. Along with asset management, the KIA plays a crucial role in stabilising the economy during times of crisis. In the aftermath of the 1990-91 Iraqi invasion, the fund financed a significant portion of the country’s reconstruction. During the economic downturn of 2008-09, the KIA established a dedicated fund for the local bourse worth KD1.5bn ($5.4bn) to reassure investors. Most recently, in 2010 the KIA announced plans to invest KD1bn ($3.6bn) in the domestic commercial real estate sector over the next five years to boost falling property values and improve the financial position of indebted companies in the industry.

DRIVING BUSINESS: Moreover, the KIA has played a key role in stimulating private sector business activities. In the past, the fund has invested heavily in private companies that would go on to become domestic industry leaders, including Zain in telecoms, Gulf Cable in the industrial manufacturing industry and Agility, now the largest logistics operator on the Arabian Peninsula. Further, at the time of publication the KIA was managing a share auction for the Kuwait Health Assurance Company, a new public-private enterprise that will begin offering expatriate insurance in 2015, thus paving the way for health care privatisation nationwide. Finally, in July 2011 the KIA announced that it would contribute KD35m ($126.2m) to state-owned Kuwait Airways Corporation (KAC) to cover the recent decline in the carrier’s value – a measure expected to facilitate KAC’s upcoming partial-share privatisation.

SUBSIDIARIES: The KIA fosters private enterprise through subsidiaries such as the National Technology Enterprises Company (NTEC), a venture capital fund and technology transfer firm established in 2002 under an initial capitalisation of KD100m ($360.5m). In June 2010 the NTEC and the Global Innovation Company were selected by Microsoft Kuwait to participate in the Microsoft BizSpark Programme, an initiative designed to accelerate the growth of new businesses. Through this partnership, the NTEC will gain access to the Microsoft Unlimited Potential Community Learning Curriculum, which it will use to develop essential technology skills among start-ups. “We will work closely with Microsoft Kuwait to help businesses use technology to achieve success by providing educational programmes, business mentoring and peer networking,” Bader M Al Saad, the managing director of the KIA, told reporters.

Local entrepreneurs and businesses are also benefitting from the Global Bridge Initiative (GBI), a programme jointly developed and launched in January 2011 by the NTEC and the Global Commercialisation Group, an interdisciplinary research unit at the University of Texas. Having been successfully implemented in several countries, the GBI is now operating in Kuwait under an initial four-year agreement. The programme’s aim is two-fold: the first is to provide Kuwaiti professionals with advanced training in high-tech industries such as renewable energy, IT and life sciences; the second goal is to facilitate technology transfer in these areas by partnering local and international companies.

According to NTEC officials, several partnerships have already been formed, resulting in the introduction of 18 new technologies to the Kuwaiti economy. In addition, 24 Kuwaiti workers had received GBI training as of June 2011. “These partnerships were made because international companies were convinced that Kuwait is a promising market with local professionals capable of handling and transferring high technology,” Anas Meerza, NTEC’s general manager, told reporters. “This will serve as a focal point for diversifying the national economy, transferring technologies to Kuwait, creating new jobs and attracting foreign capital.”

EXPANDING OVERSEAS: As the KIA increases its involvement in the domestic economy, it is also boosting its investments in overseas companies. In May 2011, the NTEC acquired an 11% share in Heliocentris Energy Solutions, a Berlin-based firm specialising in eco-friendly energy storage solutions, some of which utilise advanced fuel cell technology. Many regard this deal as win-win for both parties, with Heliocentris gaining a stronger regional presence and the KIA benefitting from enhanced access to renewable power sources for use in local industries. Kuwait plans to generate 5% of its power via renewable sources by 2020.

Meanwhile, in June 2011 it was reported that the KIA had met with representatives from the Royal Bank of Scotland (RBS) to discuss the purchase of bank shares from the British government, which has an 83% stake in RBS after bailing out the bank for $74bn during the financial crisis. Indeed, the KIA has had some success investing in distressed financial institutions. In 2008 the fund invested $3bn in US-based Citigroup by purchasing preferred stocks, in the process drawing criticism from local lawmakers who considered Citigroup a risky investment. Less than two years later, the KIA sold its stake in Citigroup for $4.1bn, making a profit of $1.1bn, or an impressive 36.7% return on its investment.

The KIA’s penchant for targeting assets it deems underpriced made headlines again in April 2011, when newspapers reported that the fund will establish a company with $1bn in capital to invest in the Egyptian stock market, which has lost about one-third of its value since the Arab Spring began in January 2011. “We affirm Kuwait’s positive position towards Egypt, and we are confident about in investing in Egypt,” Ali Al Ghanim, the head of Kuwait’s chamber of commerce, was quoted as saying in local newspaper reports.

PLENTY OF RESOURCES: According to projections from the KIPCO Asset Management Company, in the 2011/12 fiscal year Kuwait will generate revenues of KD28bn ($100.5bn). This means that the KIA will have significant resources going forward, whether to invest in local or overseas markets. Indeed, this forecast applies to sovereign wealth funds across the Gulf, which, according to some projections, will receive combined annual inflows of more than $150bn in the coming years.