Activity picks up among GCC's sovereign wealth funds as oil prices stabilise

The number of sovereign wealth funds (SWFs) operating in the Gulf has grown in the decade to 2018. The value of these SWFs – created to invest and manage the huge sums of money flowing into the region from hydrocarbons sales – stood at $2.78trn in mid-2018, according to the SWF Institute (SWFI), representing 35.6% of the global total.

Turning a Corner

With oil prices remaining relatively low from mid-2014 to late 2017, before rebounding somewhat in 2018, many SWFs have had to rein in their capital outlays, pulling money out of global stock markets and holding off on investment 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 was particularly noticeable in countries such as Saudi Arabia, where net foreign assets held by the kingdom’s central bank dropped from $737bn in August 2014 to $478bn in September 2017 as the government made use of reserves to cover its budget deficit. This saw a moderate rebound later in 2017 and throughout the first half of 2018, reaching $492bn by August 2018.

Despite mid-2018 oil prices still being below those seen prior to the middle of 2014, the weaker investment landscape for SWFs has shown some recovery, with the August 2018 levels of net foreign assets held by the Saudi Arabian Monetary Authority representing the highest levels seen since February of 2017.

Global Giants

According to a SWFI ranking published in August 2018, the largest fund in the GCC is the Abu Dhabi Investment Authority (ADIA). Founded in 1976, it manages the third-largest amount of assets in the world, behind only Norway’s Government Pension Fund and the China Investment Corporation. Among the top-10 global SWFs are those overseen by the Kuwait Investment Authority (KIA), SAMA Foreign Holdings of Saudi Arabia and the Qatar Investment Authority. In total, seven of the top-20 SWFs in the world are from the GCC.

UAE

ADIA has a portfolio valued at $683bn, with investments spanning over a dozen asset classes and subcategories. According to the fund’s own data, its 20- and 30-year annualised rates of return in US 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 toll roads 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 aid in supporting domestic economic growth and facilitating the development of local companies on the international stage.

Kuwait

Fourth on the list of the largest SWFs in operation is the KIA, considered by some to be the oldest fund in the world, with roots tracing back to 1953. Managing approximately $592bn in assets, 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. In early 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 it has been little known for much of its operating life, functioning 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 the fund invested $3.5bn in ride-hailing app Uber and agreed to invest $45bn in a $100bn technology fund in partnership with Japan’s SoftBank. In May 2017 it also announced plans to contribute $20bn to US private investment firm Blackstone Group to finance US infrastructure projects. Its biggest deal, however, has yet to come. PIF is expected to benefit from government plans to offer shares representing around 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, according to officials, but by mid-2018 it was apparent that the IPO would be delayed until at least 2019.

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, and in mid-2018 PIF had $250bn, according to the SWFI.

In other developments, PIF is set to engage in theme park construction with US entertainment operator Six Flags and participate in efforts to develop a domestic defence industry. In May 2017 PIF established Saudi Arabian Military Industries to reduce reliance on foreign purchases of military equipment. PIF’s 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 Al Rumayyan. That same month the government announced plans to transfer ownership of the kingdom’s airports to PIF as part of privatisation efforts. 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

Mumtalakat Holding Company of Bahrain 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 international media in June 2017, Mahmood Hashim Al Kooheji, CEO of Mumtalakat, highlighted the 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 was 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 finalised the merger of Mubadala Investment Company and International Petroleum Investment Company (IPIC), operating under the former name. According to the SWFI, the new entity became the 14th-largest fund globally by mid-2018, with around $226bn in assets.

Mubadala is active in 13 sectors and more than 30 countries, and is focused on developing industrial heavyweights in sectors like aerospace manufacturing, ICT, the semiconductor industry, metals and mining, and renewable energy. Meanwhile, IPIC 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 continuing to invest in energy, infrastructure, metals, real estate and aerospace while expanding into an array of new sectors.

In April 2017 reports surfaced of Oman following suit, with plans to merge the country’s two main SWFs, though no further progress had been announced by mid-2018. 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 revenue, and maintains assets of around $18bn, according to the SWFI. Meanwhile, the Oman Investment Fund – founded in 2006 – has approximately $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.

As a state-owned holding company, Mubadala Investment is one such example, but various other funds could take a more active role in developing domestic industries. As SWF investments in the region continue to pick up with oil price recovery, this is likely to be an important development to follow.

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