Building on decades of experience, Saudi Arabia’s mutual fund segment continues to flourish, while opportunities are opening up for private equity (PE) and venture capital (VC), both of which are gaining increasingly strong government backing. Dealmaking is expected to continue accelerating in 2018 as investors seek new opportunities and exit options broaden.

New Opportunities

Investment in Saudi Arabia has traditionally focused on real estate, which remains the single most popular asset class among nationals. Population growth has helped support rising property values, while the security and tangibility of bricks and mortar appeals to conservative, risk-averse local investors. A stock market surge in the mid-2000s led to a peak in 2006, rapidly followed by a sharp correction, deterring some from public equity investments. However, it has led to a move towards PE, with a rash of start-ups in 2006-08, as both financial sector professionals and investors looked for new and smarter forms of investment. This has been reinforced by the recent performance of the Saudi Stock Exchange (Tadawul). The stock market as a whole rose by around 4% in 2016, driven by a strong fourth quarter, though this came after a disappointing year in 2015, when market capitalisation dropped by nearly 20%.

This has led Saudi investors to look anew at alternative investments, including PE and mutual funds. “The investor base here is traditionally exposed to real estate and public equities, so investing in PE provides a diversification solution,” Ivo Detelinov, vice-president and head of PE funds at Riyad Capital, a Saudi investment bank, told OBG. “There’s a lot more activity than even two years ago.”

Mutual Funds

Saudi Arabia’s fund market was established earlier than many in the Middle East, thanks both to the size and sophistication of the domestic economy, and regulations that effectively promoted the formation of mutual funds. Until swap contracts were introduced in 2008, non-resident foreign investors could only participate in the Kingdom’s stock exchange through subscribing to a mutual fund, thus channelling considerable investment towards the segment. The first mutual fund in the country was launched in 1979, an open-ended dollar-denominated instrument offered by National Commercial Bank, which stimulated demand for similar investment vehicles elsewhere in the region.

Nonetheless, Kuwait did not trial a mutual fund until 1985, while Egypt, Bahrain and Oman followed in 1994. Lebanon, regarded as a leader in financial services in the Middle East, did not introduce mutual funds until 1996, with neighbouring Jordan following suit in 1997. By this stage, Saudi Arabia’s mutual fund market was already well established, with the first rules governing its activity set in 1993.

Growing Strongly

Maturity and size advantages have helped Saudi Arabia become the regional centre for fund investment. Overall, the Saudi mutual fund market has more than $23bn in assets under management, of which $19bn were allocated to domestic assets and $4bn to foreign investments, according to a May 2017 report published by the Ireland-based company Research and Markets.

Mutual funds have proved particularly popular for Saudis investing over the long term for their retirement, as well as among affluent expatriates. Demand has driven more institutions to offer funds, and recent years have seen strong growth. As of the first quarter of 2017, there were a total of 270 public and 259 private funds registered by the Capital Markets Authority (CMA), up from 238 and 203, respectively, in the first half of 2013, the beginning of the authority’s time series on the latest available statistics.

Public funds’ assets – excluding those of real estate investment trusts and exchange traded funds – totalled SR103.7bn ($27.7bn) in the first quarter of 2017, up from SR100.1bn ($26.7bn) in the first half of 2013, while private fund assets grew even more strongly, from SR32bn ($8.5bn) to SR129bn ($34.4bn) in the same time period. Even in the year from the first quarter of 2016 growth was impressive: private funds were up 74.6% from SR73.8bn ($19.7bn) and public funds rose by 13.8% from SR91.2bn ($24.3bn).

As the market has grown, the Kingdom’s banks and asset management companies have broadened their offerings from a traditional focus on equities to build the most diverse funding pool in the region. Public funds’ assets at the end of the first quarter of 2017 were led by money markets – representing SR74.9bn ($20bn) – and equities, accounting for SR21.9bn, ($5.8bn), followed by real estate at SR3.3bn ($879.8m), funds of funds at SR2.9bn ($773.1m) and debt instruments at SR819.9m ($218.6m).


The main body regulating fund investments in Saudi Arabia is the CMA, while the Saudi Arabian Monetary Authority oversees the financial system as a whole. The CMA is generally well regarded, and its recent efforts to open capital markets and the funds industry to foreign investors and enhance the regulatory infrastructure to promote investment have been welcomed by the market.

Both foreign and locally domiciled fund managers must be licensed by the CMA to manage assets, with non-real estate funds subject to the same regulations, whether they are syndicating a single transaction or running a large blind pool. Offering documents for a new fund must be posted for 15 business days, during which the regulator can raise any objections. If none are raised, the fund technically has one year before sales open to secure financing and close. In practice, blind-pool funds tend to take much longer to raise the target capital and thus seek extensions, according to lawyers from King & Spalding, an international law firm, writing in the sixth edition of The Private Equity Review. In November 2016 the CMA issued long-awaited new amendments to its investment fund regulations, streamlining the process of setting up a fund and further liberalising rules on private offerings. The new regulations enhance investor protection, addressing issues revealed by the 2006-08 downturn, and take into account the wider range of funds that have emerged over the past decade.

The amendments clarify that foreign nationals may invest in any fund registered under the CMA, unless the fund manager has the express approval of the CMA to limit ownership by nationality. The exception is private real estate funds that invest in the holy cities of Makkah and Medina, as these funds are open only to Saudi citizens. The reforms also provide greater flexibility on fund governance by removing the obligation to have 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 with a view to support growth and diversification.

Private Equity

The line between VC and PE are blurred in the region, so the two are regularly combined in statistics. Given the size of the markets (in VC and PE terms, at least), reliable figures are also more readily available at a regional rather than a national level. The Kingdom ranked second in MENA for intra-regional PE and VC investment value in 2016, but accounted for only 9% of the total. It also secured 9% of deal volume, ranking third in the region. The UAE, which ranked first, attracted 62% of deals by value and 34% by volume. Lebanon, with an economy less than 10% the size of Saudi Arabia’s, secured 16% of overall regional volume. The Lebanese central bank’s 2013 Circular 331 is widely credited with giving a huge boost to VC by providing guarantees of up to 75% of investments in innovative businesses.

Slower regional growth and uncertainty brought about by the price of oil and global political changes saw investors focus on the UAE – traditionally the regional centre for VC and PE – where there is a relatively wide range of targets and greater scope for exits, partly thanks to economic diversification.

Gaining Momentum

PE has not historically been a substantial presence in Saudi Arabia for a number of reasons. One has been the lack of a legal structure applicable to the sector, particularly regarding bankruptcy and concerns relating to arbitrary court decisions, leading to uncertainty about overall risk and processes when companies fail. The dominance of traditional family-owned companies (which make up around 95% of the corporate economy) has also slowed the development of PE, as many are wary of giving outsiders equity and control of their businesses. Owners have also tended to overvalue their assets, partly thanks to the inflated valuations seen in the boom years of the mid-2000s. At the same time, parts of the economy remain in the hands of the government and major multinationals, and until recently the Kingdom did not have a particularly strong group of truly innovative private companies, further limiting targets for acquisition. Lastly, the scope for exits in Saudi Arabia has generally been rather limited. Initial public offerings (IPOs), secondary buyouts and leveraged recapitalisations are quite rare. The Tadawul’s relatively low international profile and liquidity has also proved limiting. However, these factors are all easing. The CMA’s 2016 reforms have improved the environment for investors, while the government is drawing up a new insolvency law. An increasing number of family-owned companies are now looking for long-term growth in a competitive market, and are headed by younger generations who are more open to outside capital and management. Furthermore, the stock market is set to grow in stature and liquidity with the upcoming IPO of Saudi Aramco, the world’s biggest oil company. The opening of a parallel market, Nomu, provides a potential platform for exits for small-cap companies (see analysis).

Indeed, investors are showing considerable confidence in the market. In total, 10 new funds were launched in 2016, according to the CMA, and big players in the financial sector are becoming increasingly involved. “There hasn’t historically been a lot of PE in Saudi Arabia, and the market still can’t be compared to Europe or North America, but there are some great targets here,” Moath Qasem Al Khasawneh, CEO of Riyadh-based Falcom Financial Services, told OBG. “Foreign investors are sometimes put off because they are not familiar with the market, or because financial information from targets isn’t of good quality due to lower standards of auditing. So some investors miss opportunities that would be easy to fix by hiring a better auditor. The language barrier can be an issue as well, particularly for family companies here. There are a lot of good targets, but you need people with experience of the market to find those opportunities.”

Venture Capital

Despite having a large number of high-net-worth individuals (HNWIs) – those with $1m or more in investable assets – and a record of strong growth over the past few decades, the Gulf has produced relatively little domestic VC activity, for many of the same reasons its PE market has lagged behind other developed markets. Many regional HNWIs and institutional investors who invest in VC do so outside the region, looking to markets where VC is more mature, targets are more plentiful and risks are lower. Even UAE-based start-ups have tended to raise capital from abroad. Dubai’s, a start-up with an exit valuation of more than $1bn, had raised most of its funding from US-based Tiger Global Management and South Africa’s Naspers. There were 116 VC funds operating in the Gulf in 2016, of which only around 25 were locally based, according to BECO Capital, a tech-focused VC in Dubai.

Local press reports suggest that VC investments in Saudi Arabia are the equivalent of 0.02% of GDP, compared to 0.3% in the US and 0.03% in the UAE. This picture is starting to shift however, with regional VC gaining momentum, and Saudi Arabia, as the largest economy in the region, at the forefront of this change. According to ArabNet, a Beirut-based tech business platform, the Kingdom was home to 18% of all digital VC investors in the MENA region between 2004 and 2016. In that period a total of nine VC funds were active in Saudi Arabia, as well as nine accelerators, four seed funds, and two angel networks.

Tech Start-Ups

The establishment of the $500m VC fund STV by government-owned Saudi Telecom Company (STC) in May 2017 may prove a watershed moment for the sector. The fund will focus on technology start-ups in what STC calls “new digital areas” with an aim to support digital innovation, a move in line with Vision 2030, the country’s long-term development plan. STV’s initial capital makes it the largest institutional technology VC fund in the Middle East. STV’s establishment reflects growing interest in the tech sector in Saudi Arabia as the Kingdom looks to move its diversification programme up a gear and boost the innovative, value-added elements of its economy. In May 2017 the sovereign Public Investment Fund (PIF) and Japanese financial institution SoftBank announced that they had secured $93bn in first-round financing for their Vision Fund, which is set to be the world’s largest technology investment fund. This follows the approval in August 2016 of a $1.1bn fund to develop the domestic VC industry, backed by PIF and the Ministry of Industry and Commerce.

PIF’s dual mandate of diversifying the national portfolio and promoting growth and diversification domestically has led to a renewed focus on tech both inside and outside the country. The fund joins a growing range of incubators and investors that are supporting domestic tech development (see analysis).

Slower Year

As of mid-2017 there was growing confidence that dealmaking was picking up after a slower year across the region in 2016, particularly in the Kingdom. Lower activity in Saudi Arabia in 2016 was partly due to the effect of a lower oil price on economic growth, leading investors to take a more cautious approach. The rise in petrol, electricity and water prices intended to boost the budget, in addition to the anticipation of new tax hikes in the pipeline, also had an effect on dampening domestic demand. In what was previously an extremely low-tax environment with heavily subsidised fuel and utilities, these changes came as a shock to the system, though they are economically necessary and widely praised internationally (see economy chapter).

Despite taxes on various goods and a new “family tax” for expatriates’ dependants being raised in mid-2017, along with the value-added tax introduced in January 2018, there are signs that the market is slowly adapting to the new environment.

“Changes over the past year have raised expenses for businesses and individuals, which has definitely had an impact on what’s happening in terms of investments,” Al Khasawneh told OBG. “The impact has taken some time to filter through, so there’s a degree of uncertainty as people get used to the changes. But the upside is that the economy is fundamentally strong. The government is very serious about diversifying, the population’s purchasing power is high and major projects like the Riyadh Metro are going ahead. So the picture is rosier than it may seem.”

Stronger Prospects

The “11th MENA Private Equity & Venture Capital” report, published in June 2017 by the MENA Private Equity Association (MENA PEA) and developed with professional services company Deloitte, found that 55% of respondents expected the regional economic climate to improve through 2017, with the expectation that the second half of the year would see a stronger pick-up in growth and investor confidence. This compares to just 35% of respondents who felt that the climate would remain much the same as in 2016. In July 2017 the IMF forecast that non-oil growth would pick up, to 1.7% for the full year, and praised the government’s fiscal and business climate reforms. Signs in the first half of 2017 were that private sector non-oil growth was accelerating to the highest levels seen since mid-2015, and independent analysts forecast that the non-oil economy will grow by more than 3% in 2018.

The Kingdom’s diversification push was given a substantial boost in 2016 when Crown Prince Mohammad bin Salman unveiled the Saudi Vision 2030. The implementation of this ambitious plan is likely to lead to growing opportunities for investors in a broader array of sectors, ranging from infrastructure to real estate. The government’s aim of increasing the number of Umrah pilgrims from 6m to 15m by 2020 has boosted demand for hotel rooms, with a number of new hotel openings in the pipeline over the coming years. Meanwhile, the $8bn expansion of railways in the Kingdom is set to stimulate growth in the logistics real estate segment, particularly if Saudi Arabia can use the new infrastructure to successfully leverage its geographical advantages as a trading and transportation centre for the Middle East.

Initiatives to increase the number of incubators and accelerators, establishing innovation centres around the country, and fostering the development of local digital content are included in the SR270bn ($72bn) of government investments outlined under Vision 2030. “Investors are excited about the Vision 2030 announcements, but are still waiting for the first parts of the plan to be implemented before taking any major action,” said Al Khasawneh. “However, sentiment is that it is a very clear plan and the right people are in charge to ensure positive results in the end.”

Market Expectations

The survey of investor expectations for 2017, conducted by professional services company Deloitte for the MENA PEA report , provides a useful picture of how PE and VC players see the market shaping up. Chosen by 32% of respondents, who represented a wide range of general partners across the MENA region, Saudi Arabia – along with the UAE – is ranked as the country most likely to see the highest level of investment activity.

Respondents’ answers show several factors behind this confidence, particularly the Saudi Aramco IPO. This is expected to benefit activity in a number of significant ways, including: boosting the liquidity on the Tadawul, enhancing its position as a platform for private investment exits; stimulating expenditure and thus economic growth via the offering of Aramco and government funds; and the overall impact on investment activity. Widespread media coverage and analyst sentiment suggests that the offering is part of a broader opening-up of the Saudi economy, and is indicative of the government’s determination to both boost private sector activity and diversification.

However, some respondents noted downside risks to the outlook in the Kingdom, including the effect of tax rises and cuts to fuel subsidies on spending power, and the pressure of Saudiisation – the policy of promoting employment of Saudi nationals, which has in some cases led to a squeeze on employment of expatriates – on employers.

The survey indicates that across the region PE funds are adjusting their strategies to a lower oil price environment, seeing it as a “new normal”. After a more pessimistic outlook in the 2016 survey, respondents appear confident that the sector’s recalibration allows funds to maintain momentum, and in many cases to intensify dealmaking activity. While 40% of respondents to the 2016 survey expected investment activity to decrease in the coming year, for 2017 only 12% of respondents made the same forecast. Some 46% expect activity to remain much the same as in 2016, while 42% are confident that it will pick up.

Greater stability in oil prices – with the cost per barrel settling near $50, not as low as some had feared – and a better match of valuation between buyers and sellers is expected to support activity. Meanwhile, traditionally conservative family groups are increasingly looking to diversify their assets by investing outside the region. This may have a twofold effect on activity: both a greater willingness to sell stakes in local companies to PE, and a boost for locally based funds which invest overseas. “It’s said that there aren’t enough targets on the Saudi market,” said Detelinov. “But we aim for five to six deals a year with $2m to $15m annual revenue, which is not insignificant, and we find enough.”

Target Sectors

Regionally, at 27%, respondents saw health care as the sector likely to attract the most activity, followed by education at 18%, food at 15% and technology at 12%. Overall, consumer-driven sectors such as retail, health care, food and education were cited by 70% of respondents.

These sectors tend to see steadily increasing demand due to population growth and ageing, and are thus less susceptible to fluctuations in commodity prices and broader economic growth, making them good defensive bets in the current climate. For many funds, the watchword in 2017 was steady growth, rather than quick wins. Meanwhile, there has been a significant increase in interest in technology as tech start-ups have flourished, with the sector’s intersection with education, health care and retail each being particularly significant in the region. “In Saudi Arabia, the top sectors are retail, including food and beverages, and health care,” Al Khasawneh told OBG. “Industry is a bit tougher, but we’re at the bottom of the cycle now and it will come back over the longer term.” Health care in the Kingdom benefits from the government’s policy of promoting private provision to boost overall system capacity. Medical tourism is also supporting demand, with the Kingdom seen as a destination for high-quality treatment for HNWIs from the Middle East and other emerging markets.

The MENA PEA expects the region as a whole to see the emergence of large health care agglomerations by private players, as well as consolidation between large hospitals and SMEs as owners look to achieve public listing size thresholds.

Shifting Patterns

Activity is likely to be dominated by domestic PE funds and family offices – cited by 39% and 35% of respondents, respectively – though there is an expectation of increasing activity by foreign PE players as the market stabilises and seeks to grow. However, activity from international funds is still expected to be a relatively small part of the market, given foreign players’ sensitivity to the regional political and economic environment, and a perception that targets are relatively limited.

Across the region, family offices are increasingly looking to scale up their activities by building PE-style operations, including through co-investments with established PE funds. This sort of cooperation is mutually beneficial, bringing new sources of wealth to the PE funds, while the family offices gain the expertise and capacity of PE players. In some cases, family funds are even moving their resources to managed accounts, lowering their own costs and risk exposure.

Looking Abroad

The slowdown in the Gulf economies, driven by lower oil prices and a raised perception of political risk, have led some locally based investors to look towards the slower-growing developed markets of North America and Europe. Asset managers from these regions (as well as some domestic players) are now actively courting a wide range of Saudi investors, from HNWIs to sovereign wealth funds.

In May 2017 the PIF and US PE fund Blackstone announced plans to create a $40bn fund to provide investment for infrastructure projects, focusing on the US. The PIF is expected to provide a $20bn anchor investment. The fund aims to capitalise on opportunities created by President Donald Trump’s proposed infrastructure overhaul, and is also likely to tighten ties between the two allies. Family offices are, however, somewhat wary of investing in developed markets, especially the US, given a regulatory and political environment that is not particularly encouraging to Middle Eastern investors.


While a difficult period for the stock market has helped raise the profile of alternative investments, it has also had an impact on the fund-raising climate, with many investors becoming more risk-averse, having experienced a drop in liquidity. The MENA PEA’s report finds market players sanguine on the immediate fundraising outlook in the region, with 60% of respondents saying that the environment became more challenging in 2017, due to both changing market conditions and a shortage of local PE funds with track records.

Only 13% said that they expected the climate to become more conducive to fundraising. This environment has led to PE funds, particularly in the second tier, shifting away from the traditional blind pool model and adopting deal-by-deal funding structures, which entails identifying a target before turning to investors. This model is particularly well suited given Saudi Arabia’s family offices, providing the investors in question with greater control over where and how their funds are invested, and greater confidence in the strength of the underlying asset.

As is the same elsewhere in the world, fundraising is easier for bigger players with stronger track records than smaller funds, though if the latter discover particularly promising targets, they can often find investors using the deal-by-deal structure. Conversely, growing momentum in the PE market – driven by the maturing family funds – is likely to draw more funds and see blind pools prevailing over the long run, the King & Spalding lawyers argue. Increasing interest from local investors in overseas assets, and the corresponding efforts of experienced and high-profile international asset managers to promote their funds, have also had an impact on the liquidity that is available for regionally focused funds.


In the MENA PEA 2017 survey, 53% of respondents forecast exit activity to increase, up from just 5% in 2016 – a sign of the renewed energy and confidence around the market. Some 23% said that they expected exit volumes to remain much the same, and only 15% said that it would decrease. Investors are under pressure to realise returns after a difficult period, and also to maintain a track record of successful exits that increases their ability to raise new funds.

Nonetheless, there is widespread acknowledgement that market conditions may still make it difficult to achieve target returns, leading some investors to continue to hold assets in the expectation of an upturn in the medium term. Limited exit opportunities are another factor holding back sales, though there is a perception that prospects are improving.


Saudi Arabia’s investment environment as a whole is undergoing an overhaul, with Vision 2030 promoting private sector growth, economic diversification, improved infrastructure and a stronger legislative framework for investors.

The alternative investment segment in particular should benefit from this, with enhanced rules relating to VC and PE, and a broadening range of targets likely to emerge in the coming years, while greater confidence in the country’s economic future will support fundraising. The government’s involvement through public sector company funds and support for innovation is an important element, and the symbiotic relationships being formed with international investors should benefit local players as well as global targets.