Opportunities in Saudi Arabia's Vision 2030 to broaden the offering of specialised investment vehicles

 

One of the most interesting trends in Saudi Arabia’s alternative investment sphere in 2018 was the broadening of the range of specialised investment vehicles in the market. Most of the sector-focused private equity and venture capital (VC) fund movements over recent years have targeted the technology sector, with managers searching for opportunities in scalable tech applications that offer high long-term returns. The Kingdom’s bold long-term reform programme, however, is acting as a useful disrupter of the economic landscape, throwing up fresh opportunities that domestic financial institutions have been quick to capitalise on.

New Opportunities

The transport and logistics sectors have emerged as interesting targets from an investment perspective. Vision 2030 intends to build upon the already significant capital flows in the construction of airports, ports and roads by working with the private sector to enter into new international partnerships to complete, enhance and connect infrastructure domestically and across borders. The end result of this process will be the establishment of the Kingdom as a regional logistics hub, using its strategic location to connect its trading infrastructure with the continents of Africa, Asia and Europe. Significant sums are already being spent to this end. The Kingdom’s four international airports are currently the recipients of large-scale investment, with Jeddah’s King Abdulaziz International Airport and Riyadh’s King Khalid International undergoing expansions (see Trade and Investment chapter). The Kingdom has also revealed details of how it will develop its logistics infrastructure, unveiling the blueprint for its first special economic zone in 2018. The zone will focus on integrated logistics and be located adjacent to Riyadh’s international airport.

Market Reaction

Investment houses have responded to the prospect of rapid growth in the transport and logistics sectors. In April 2018 the investment banking and asset management arm of the National Commercial Bank, NCB Capital, announced the launch of the NCB Capital Aviation Fund I. The fund, which attracted $200m in commitments, holds a majority stake in Peregrine Aviation Topco, a limited managed vehicle with an $800m portfolio of 21 aircraft, including narrow- and wide-body jets from Boeing and Airbus.

The global aviation industry has been an attractive prospect for investors for more than 30 years, offering consistently generous returns and an opportunity for those seeking to diversify their portfolios. Prospects for the Middle East airline industry are particularly strong in the short term: the International Air Transport Association (IATA), the trade body of the world airline industry, estimates that the region’s carriers will achieve net profits of $800m in 2019, up from $600m in 2018. This regional expansion chimes with a global trend, which IATA believes will see the world airline industry’s net profit rise from $32.3bn in 2018 to $35.5bn in 2019.

Meanwhile, the anticipated logistics boom is being targeted by HSBC Saudi Arabia, which in January 2019 announced that it had appointed shariah-compliant investment firm Arcapita as an advisor for its $150m fund aimed at logistics and warehouse assets in Saudi Arabia and the UAE. The Bahrain-based Arcapita will scout for potential assets on behalf of the Saudi bank, as well as provide asset management services, structuring, due diligence, monitoring and fund administration.

Looking Ahead

The Kingdom’s determination to transform itself into a centre of innovation will ensure that investment in tech opportunities will continue to drive fund growth in the country. At the beginning of 2019 the national oil company, Saudi Aramco, is reportedly mulling a $1bn VC fund that will focus entirely on technology firms that complement its operations, as well as the possibility of opening an office in Silicon Valley in order to generate deals. The implementation of the country’s long-term economic strategy, Vision 2030, is likely to provide a greater array of specialised fund opportunities over the medium term, further enriching the Kingdom’s investment fund landscape.

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The Report: Saudi Arabia 2019

Alternative Investments chapter from The Report: Saudi Arabia 2019

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