Cash-rich Gulf funds splurge on mega deals as liquidity dries up

When liquidity evaporated from world markets in 2008, the richest monarchies in the Gulf stepped in to lap up everything from stakes in western lenders such as Citigroup to trophies like the Manchester City Football Club and Harrods. They’re at it again. Flush with cash from a commodity boom, the region’s biggest sovereign funds – which control more than $3tn in assets – are pouring billions of dollars into global deals, playing funders of last resort for companies in a volatile market.

In the more than a decade since the 2008 financial crisis, cheap money and access to an array of investors meant companies didn’t really need to turn to the Gulf. As these sources of funding start to dry up, the region’s oil-rich states are being solicited again, giving them an opportunity to cherry-pick assets as well as accelerate a pivot in strategy away from a dependence on the black gold.

Bankers from New York to London and Singapore are seeking out Gulf funds for big deals around the world – a US-based investment bank is pitching one of the region’s biggest money managers to invest in a $20bn deal, a person familiar with the matter said. More Middle Eastern money is coming to the market than has been for a while now, said a senior executive at one of the world’s largest investment firms.

The region’s largest sovereign wealth funds have been involved in at least $28.6bn worth of acquisitions outside the Middle East and Africa this year, according to data compiled by Bloomberg. That’s 45 per cent more than at this point in 2021 and the most for any corresponding period on record, the data show.

More sophisticated
Just in the last few months, Gulf funds have emerged in talks to acquire everything from New York-based asset manager Fortress Investment Group to stakes in Klarna, the buy-now-pay-later giant, and British carmaker Aston Martin Lagonda Global Holdings.

While they have historically scouted out attractive opportunities in times of volatility and low valuations, a key difference this time is the shift toward sectors like technology and healthcare. They’re backing private equity firms, and leveraging relationships with large entities to do more direct deals.

“Sovereign wealth funds in the Gulf have become more sophisticated in their investment strategy and retain extensive global relationships,” said Ayham Kamel, head of Middle East and North Africa at political risk consultant Eurasia Group. “Current global market conditions also support the rise of the Gulf sovereign wealth funds as their oil surplus can be mobilised quickly. The deals help in diversification away from oil over the long term and also develop an alternative international revenue stream.”

Abu Dhabi’s Royal Group, a low-key conglomerate led by UAE national security advisor Sheikh Tahnoon Bin Zayed, has emerged as one such go-to stop for jet-setting dealmakers. The firm has committed money to a new fund launched by SoftBank Group executive Rajeev Misra while making investments alongside billionaires including Indian industrialist Gautam Adani and Colombian banker Jaime Gilinski.

Mubadala, headed by Abu Dhabi ruler Sheikh Mohammed bin Zayed, has backed Wefox, agreed to buy Swedish medical freight firm Envirotainer AB, and is also in talks to acquire Fortress Investment. The wealth fund came in as a new investor in Klarna after its valuation plunged to $6.7bn from $45.6bn last year.

Other deals include Emirates Telecommunications’ $4.4bn investment in Vodafone, while Abu Dhabi Investment Authority teamed up with Global Infrastructure Partners to buy a German railcar lessor for about $7.4bn.

State-backed investment behemoths in Saudi Arabia, Qatar and Kuwait have also gotten in on the action. The Riyadh-based Public Investment Fund is boosting its stake in British carmaker Aston Martin, Qatar Investment Authority is exploring deals in the blockchain industry and Kuwait Investment Authority is eyeing transactions in the property space.

The funds are also not confining themselves to western companies, but casting their nets wider as they turn to investments in China, India, Singapore and elsewhere, said Javier Capapé, director of sovereign research at IE University.

Political clout
The boom is prompting some global investment firms to shift additional staff to the region. Dubai, the UAE’s business capital, recently emerged as a magnet for hedge funds, while bigger money managers have been exploring new offices in Saudi Arabia. The deals spree comes as the pandemic, Ukrainian crisis and inflation upend some of the world’s traditional financial centres, translating into greater political clout for Middle Eastern leaders. US President Joe Biden met with Crown Prince Mohammed Bin Salman, Saudi Arabia’s defacto ruler, this month, but left without a firm commitment for a production hike that could ease pain at the pump.

Read: US President Joe Biden begins Middle East tour, meets Saudi Crown Prince

The region’s re-emergence has been aided by the fuel shortage that has hiked energy prices. Saudi Arabia, the world’s biggest oil exporter, is making close to $1bn a day from crude exports. Qatar – one of the world’s leading producers of LNG – has gained from the desperate attempts by Europe to wean itself of Russian energy. Doha’s energy exports are due to reach $100bn this year for the first time since 2014.

The UAE, meanwhile, is OPEC’s third-biggest producer and its capital Abu Dhabi is one of the few spots globally to manage over $1tn in wealth fund capital. Abu Dhabi is consolidating more assets under the umbrella of Sheikh Tahnoon’s Royal Group, according to people familiar with the matter, a move that will cement his role as the royal family’s top businessman under Sheikh Mohammed, who took over as ruler in May after their brother’s death.

For Gulf funds that were in the spotlight when in 2008 funds in Qatar, Abu Dhabi and Kuwait stepped in to invest billions in lenders including Barclays, Credit Suisse Group AG and Citigroup, the latest round of investments marks a significant evolution, said IE University’s Capapé.

“Wealth funds have made their journey from limited partnerships in the first stage, become co-investors in the second, to direct investors in the third level,” he said. “They have built teams, defined strategies and grown direct investing capabilities.”