An increasingly diverse fund landscape and improved regulatory foundation underpinning Saudi Arabia's investment outlook


Alternative asset activity in Saudi Arabia is taking place across an increasingly diverse range of investment instruments. The Kingdom is a regional leader in mutual fund activity, with the deepest and most varied investment pool in the GCC. Meanwhile, in the venture capital arena, the domination of state-funded programmes is giving way to private capital, which has until now been largely focused on private equity (PE) opportunities. While 2018 was a quiet year for dealmaking across the region, the government’s bold programme of economic reform is expected to generate new opportunities over the short to medium term.

Mutual Funds

Saudi Arabia pioneered mutual funds in the region nearly 40 years ago, with the National Commercial Bank (NCB) establishing the first investment vehicle of this kind in the GCC in 1979. The early growth of the mutual fund segment was spurred by the fact that, until the introduction of swap contracts in 2008, they were the only means by which non-resident foreign investors could gain exposure to the Saudi Stock Exchange (Tadawul). By 1993 Saudi Arabia had moved to formalise the industry, establishing a regulatory framework that further cemented its position as a centre of fund activity. By 2015 the Kingdom had established itself as the biggest fund domicile in the MENA region by far, accounting for around 77% of the $35.7bn worth of assets under management (AUM) in the GCC fund arena. However, the Kingdom’s public mutual fund assets as a percentage of GDP stood at 4.3% that year, compared to a global average of around 18% and rates as high as 90% in developed economies such as the US. Therefore, the domestic fund segment has considerable potential for growth, both in terms of AUM and diversity of fund types.

Since 2015 the Saudi fund has shown a steady rate of expansion. According to the latest available annual report by the Capital Market Authority (CMA), at the close of 2017 there were 577 authorised investment funds, an increase of 16.8% on the previous year. Their aggregate AUM stood at SR251.9bn ($67.2bn), representing a rise of 16.3%. The diversity of fund types has also increased, from an initial focus almost entirely on money markets, and local, regional and global equities. This is in part due to the arrival of exchange-traded funds (ETFs) on the Tadawul in 2010 and, more recently, real estate investment trusts (REITs). The Kingdom’s first REIT was listed on the exchange in 2016, and, thanks to yields in excess of 7%, it has quickly emerged as popular investment tool: in 2017 the CMA approved the offering of 29 investment funds, 15 of which were REITs. Overall, however, money markets and equities funds continue to dominate, accounting for 65.9% and 19%, respectively, of the assets of the 273 authorised public investment funds in 2017. Real estate funds accounted for 8% of the total, followed by REITs (3.3%), general funds (3%), debt instruments (0.7%) and ETFs (0.03%).

A total of 304 private funds, meanwhile, offered access to similar asset classes, as well as alternative investment instruments such as commodities, and hedge and financial derivative funds. In terms of asset trends, a period of subdued oil prices and regional political tensions resulted in a 22.4% decrease in allocations to Arab equities between 2016 and 2017. The main beneficiary of this was the European equities segment, which rose by nearly 50%, with Asian equities seeing a similar uptick in interest, with allocations up by 31.8%.

Key Players

The size of the Kingdom’s fund market means that its key participants are some of the largest and most influential in the wider MENA financial sector. With AUM of nearly SR130bn ($34.7bn) at the close of 2017, NCB Capital is one of the biggest asset management firms in the region. Founded in 2007 as the investment banking and asset management arm of the NCB, the company is also the largest sharia-compliant asset manager globally. Five other asset managers form a leading group with AUM of more than SR20bn ($5.3bn) each, all but one of which are subsidiaries of banking institutions. Alinma Investment is the second-biggest custodian of assets, with SR34.9bn ($9.3bn) of AUM at the end of 2017, followed by Samba Capital with SR33.7bn ($9bn), Al Rajhi Capital with SR27.4bn ($7.3bn), Riyad Capital with SR25.3bn ($6.7bn) and Jadwa Investment with SR24.1bn ($6.4bn), the only non-subsidiary at the top end of the market. Each of these large players offers a range of fund types to suit varying investment appetites, from high-risk and high-growth portfolios to medium-growth instruments, and income equity and small-cap equity funds. As well as the local players, a number of blue chip international institutions have secured licences to offer investment services in the country, including Lebanon’s Blominvest, Egypt’s EFG Hermes, the US’ Morgan Stanley and the UK’s HSBC. The opening up of the Tadawul to foreign investors in 2015 has attracted some of the world’s biggest names in asset management, including the UK emerging markets specialist Ashmore Group, which has established locally as Ashmore Saudi Arabia.


The principal regulator of the Kingdom’s increasingly diverse asset management industry is the CMA, while the Saudi Arabian Monetary Authority (SAMA) oversees the financial system as a whole. Both locally domiciled and foreign fund managers must be licensed by the CMA to manage assets. In November 2016 the CMA published its long-anticipated amendments to its investment fund regulations, which inter alia streamlined the process of establishing a fund, boosted investor protection, clearly established the right of foreign nationals to invest in most funds and took into account the wider range of funds that have emerged over the past decade. The reforms also significantly enhanced the flexibility of fund governance by removing the obligation to establish a fund board and abolishing the previous limit on the number of investors that can be approached for a private placement. The regulatory authority is in the process of a wide-ranging review of financial services regulations as part of the Financial Sector Development Programme, one of the implementation plans of the Vision 2030 strategy (see Economy chapter). The programme aims to develop deeper capital markets through more initial public offerings (IPOs) and security listings, encouraging more government entities to privatise through IPOs, and privatising SAMA’s payment system, SADAD.

Private Equity

While the Kingdom has been a regional leader in fund management, other bands of the alternative investment spectrum are less developed. The PE arena, although expanding rapidly, remains at a nascent stage, accounting for 9% of the MENA region’s total investment volume in 2016, behind the UAE (34%) and Lebanon (16%), according to the MENA Private Equity Association. One reason for this is the absence of a codified legal system, which makes it difficult for investors to assess the risk attached to any given transaction. Additionally, a lack of bankruptcy legislation has proved problematic for PE investors when portfolio companies have failed. Lastly, PE firms face a challenging lack of exit opportunities. IPO exits, secondary buyouts and leveraged recapitalisation are relatively rare in Saudi Arabia, leaving trade sales – a stake sale to other corporate entities – as the only viable exit from PE transactions in most cases. All of these hurdles, however, have recently been tackled. The launch of a commercial courts system in late 2017, as well as an accompanying “paperless court” project, has shortened the period for execution of judicial orders from two months to 72 hours, significantly reducing the time and costs associated with business disputes. By October 2018 the Kingdom’s new commercial court system was making between 44 and 190 rulings per day, according to the Ministry of Justice. In October 2018 a new insolvency law came into effect, which has made it easier for indebted companies to maintain their operations while rescheduling their debts.

Though the challenge of limited exit mechanisms still exists, the increasing depth of the Kingdom’s capital markets is starting to generate solutions. The Tadawul and the CMA officially launched a new parallel market in February 2017. As with parallel markets elsewhere in the world, Nomu offers listing companies a more lenient regulatory framework aimed at smaller and less formalised companies, which involves lower minimum capital requirements and less onerous disclosure demands. These conditions may prove attractive to smaller companies that have progressed through several stages of venture capital funding and are ready to establish themselves as a public company through an IPO. Liquidity on the platform remains low compared to the main market, mainly as a result of the limits the CMA has placed on the type of investor that can access it (see Capital Markets chapter). However, as a structural advance in the PE ecosystem, the arrival of Nomu is a significant development.

Potential Growth

A number of other factors underpin the prospects of the domestic PE industry. Firming oil prices in 2017 and 2018 have buoyed investor sentiment, while the experience of a period of lower oil prices has shifted the investment strategies of the region’s sovereign wealth funds (SWFs) towards greater alternative asset allocations, including PE funds. According to a 2018 report by PwC, global SWFs raised their allocation to alternatives from 19% to 23% between 2009 and 2016. The 14 SWFs in the Middle East have traditionally maintained relatively small alternatives allocations, but in 2011-16 they rose from 3.7% of total assets to 6.1%. The Kingdom’s young demographic – with the youth making up 50% of the population – is another comparative advantage. Added to this is the risk averse stance of the banking sector, which has resulted in just 2% of the aggregate Saudi loan book being directed to SME lending, thereby creating a funding gap that PE is ideally suited to address.

One of the questions facing the industry as it continues to grow is the issue of a funding model. Fundraising in the Kingdom, as elsewhere in the MENA region, can be challenging for many market participants, due in large part to the relatively small number of general partners with an adequately robust track record. Saudi Arabia therefore follows the regional trend by which investors generally subscribe to transactions on a dealby-deal basis rather than via the traditional blind-pool structure seen in more developed PE markets. However, increasing levels of corporate governance in the Kingdom may see a greater demand for general, or blind-pool, PE funds in the future.

Venture Investors

The line between venture capital (VC) and PE has sometimes been blurred in the region, but as the market matures, a distinct VC arena – focused on young, rapidly expanding companies – is emerging. The arrival of an industry body is also helping to more clearly define the regional VC landscape: the Middle East Venture Capital Association (MEVCA) was established in January 2018, and seeks to further develop the VC ecosystem by acting as a platform for collaboration and the sharing of best practices. The board of MEVCA includes some of the most prominent VC players in the Gulf region, including Algebra Ventures, Wamda Capital, Jabbar Internet Group, Silicon Badia, VentureSouq, Womena, B&Y Venture Partners, STV, WAIN and Raed Ventures.

VC Development

The concept of VC is a relatively new one in the country. In the early 2000s there was negligible VC activity and no formalised investment at the seed or angel end of the spectrum. Early development of the segment was driven by the public sector, with the creation of the Badir Technology Incubators and Accelerators Programme by the King Abdulaziz City for Science and Technology (KACST) in 2007. The tech-focused initiative is open to Saudi entrepreneurs with early-stage prototypes or concepts, and provides a range of services that include business consultancy, office and laboratory space and assistance with preparing business plans, financial modelling and pitching. Badir also helps its clients find funding for further development. Since the creation of Badir, the state VC apparatus has grown to the extent that it accounts for much of the start-up infrastructure in the country. The university network has taken the lead in this regard, with the King Abdullah University of Science and Technology, King Abdulaziz University in Jeddah, the King Fahd University of Petroleum and Minerals, and Riyadh’s King Saud University all operating investment arms. Of these, the VC arm of King Saud University, the Riyadh Valley Company, has emerged as the most prominent, created with an initial fund of SR100m ($26.7m). The organisation is established as a private company and its portfolio of 15 firms is weighted towards the health care and renewable energy sectors. The company has also begun to assume a coordinating role within domestic VC by organising regular conferences for the MENA VC and PE segments, most recently at Riyadh’s Kempinski Hotel in December 2018.

Private Interest

While the government plays a large role in the start-up and VC segment, its activity has also helped to foster private sector interest. The Badir Programme for Technology Incubators was instrumental in the creation of an angel investment platform on Saudi’s west coast. Sirb, an angel investor network was formally founded as an initiative of KACST, in line with Vision 2030’s goal of transforming Saudi Arabia into a knowledge-based economy. Launched in May 2012, Sirb bridges the funding gap between the ideation stage and the Series A investment stage, and the membership of its network includes a range of public and private entities. Elsewhere, the government has joined forces with private sector VC institutions to provide funding channels. The Riyad Taqnia Fund, for example, is a VC vehicle founded by Riyad Capital and the Saudi Technology Development and Investment Company, and established by the Public Investment Fund of Saudi Arabia in 2011. The joint effort is backed by a number of the Kingdom’s leading institutional investors and focuses on the areas of ICT, energy and sustainability, and advanced materials.

Purely private VC entities began to emerge after 2011. Regional accelerators such as Egypt’s Flat6Labs and Jordan’s Oasis500 have added to the private start-up and VC ecosystem, while further momentum has been provided by some of Saudi Arabia’s biggest corporates. One of the most prominent of these is STC Ventures, an independently managed VC fund whose anchor investor is the Saudi Telecom Company. The fund focuses on technology innovation in Saudi Arabia, the GCC, Levant, North Africa and Turkey.

Regional VC activity in 2018 was slower than it had been in previous years. While 2015 and 2016 saw 28 deals each, according to the Emerging Markets Private Equity Association (EMPEA), at the end of the fourth quarter of 2018 some 26 VC deals had been closed. Nevertheless, the size of the Saudi market and its potential for further deals continued to attract significant VC interest, including the largest venture investment in the Kingdom recorded by EMPEA: the May 2018 acquisition by the UAE-headquartered Gulf Capital of a $1bn ($266.6m) stake in Geidea, one of Saudi Arabia’s largest financial technology (fintech) companies.


Some structural blocks remain to fund expansion in Saudi Arabia. The lack of arrangements for the mutual recognition of fund licences between the GCC states means that regional funds face constraints on distribution. While the concept of a GCC fund passporting system similar to the European model has been discussed in the past, the complex process of regulatory alignment necessary for its introduction means that no short-term solution to this challenge is likely. The Kingdom’s increasingly diverse fund universe, however, is providing institutions and high-net-worth individuals with steady returns and the means with which to take advantage of the useful economic disruption arising from the country’s long-term economic reform process. This, combined with an improving regulatory foundation, underwrites the future expansion of the industry.

The PE and VC segments, meanwhile, are operating against a regional backdrop of weak macroeconomic conditions, oil price concerns and enhanced political risk. Some sectors, however, continue to provide opportunities: according to MENA Research Partners, fintech start-ups in the GCC are expected to attract $2bn in private funding between 2018 and 2028, compared to $150m worth of investments in the previous decade.


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