How GCC wealth funds are fuelling growth and prosperity

The region’s sovereign investors are broadening their investments in various sectors including healthcare, technology, private equity and hedge funds as part of a diversification strategy away from oil and gas

The GCC is expected to buck the global recession with its real GDP projected to moderate from 6.1 per cent in 2022 to 3.4 per cent this year. The oil-rich Gulf economies have grown in relevance over the year, as they have emerged as new bankers to the world and the go-to investors for distressed western assets desperate to raise fresh capital.

Global SWF said the investment momentum by wealth funds that are not from oil-rich countries such as China, Singapore or Korea is ominous. However, the position and momentum of Middle Eastern state investors, especially in the oil-rich GCC, are much better, driven by an average oil price of $99/barrel in 2022 and the currencies’ peg to the dollar.

The region is home to some of the world’s largest sovereign wealth funds (SWF) with more than $3.7tn in total assets under management (AUM), according to Global SWF – an amount that exceeds the UK’s 2022 GDP.

“As investment arms of any sovereign nation responsible for managing and investing the nation’s wealth in domestic and international markets, sovereign wealth funds play a vital role in the generation of wealth, employment, value creation and the overall sustainability of a global economy,” said Deloitte.

Gone are the days when Gulf investors had a reputation for investing in trophy assets such as Manhattan real estate and Harrods department store. This time round dealmakers say the funds have grown more proactive and strategic when it comes to global investments.

Global dealmakers

The wave of dealmaking by the Gulf sovereign investors began with the outbreak of the Covid-19 pandemic. Once sleepy government holding companies, the funds are emerging as investment vehicles with global ambitions.

The European Investment Bank said the investment strategy of the GCC sovereign funds is to maximise returns on investment and in some cases perform synergies or acquire capabilities that can be deployed in the home countries.

Buoyed with cash after oil prices surged to record highs in 2022, Gulf sovereign investors are hunting for opportunities amid volatility in global markets.

GCC state-owned investors spent a combined $89bn on investments last year, double the previous year, Global SWF said in its 2023 annual report, while noting that a colossal $51.6bn of that amount went into Europe and North America.

Saudi Arabia’s Public Investment Fund (PIF) has shifted its investment strategy over the years to focus mainly on exchange-traded funds (ETFs), technology and gaming stocks. PIF’s largest public holding is a 63 per cent stake in electric carmaker Lucid Motors.

The fund’s US equity holdings grew last year, driven by an additional $7.6bn that was invested in major corporations including the big four technology firms – Google parent Alphabet, e-commerce giant Amazon, Microsoft and Facebook’s Meta.

ADIA, Abu Dhabi’s most traditional and conservative wealth fund, has been investing at a high velocity. The fund jointly acquired a 72.5 per cent stake in VTG, Europe’s biggest railcar lessor, in June 2022 for an enterprise value of $7.5bn.

Mubadala is making huge bets on computer software, hardware and biopharmaceuticals. The fund invested an estimated $30bn in 2021 and committed to investing $12.2bn in the UK over the next five years. Mubadala has already deployed about half of the investments building on its pledge to invest $978.3m in the UK’s life science sector.

Meanwhile, Abu Dhabi’s ADQ has been on an acquisition spree in the emerging and frontier markets. It acquired stakes in five publicly-traded Egyptian companies including Commercial International Bank worth $1.8bn in April 2022. The state investor also joined hands with the Oman Investment Authority (OIA) to explore investment opportunities valued at $8.2bn in the sultanate.

Since its establishment in 2005, Qatar Investment Authority (QIA) has been known for being one of the most active GCC dealmakers. Global SWF estimates that QIA’s overall portfolio is split into 40 per cent Europe, 20 per cent Americas, 27 per cent Qatar and 13 per cent the rest of the world.

The fund invested $3.2bn in Europe, including 10 per cent in Germany’s power producer RWE and $1.7bn in the US, including a stake in tech company AIT.

Driving diversification

Sovereign investors in the Gulf region continue to increase in number, size, variety and scope. The state investors are the engines that are driving the transformation of their respective economies in preparation for life after oil.

PwC said sovereign funds are not just passive actors, but they are actively contributing to the transformation of their domestic economies.

With a target to manage $1tn assets by 2025 and $3tn by 2030, PIF is the vehicle for Saudi Arabia’s Vision 2030 economic blueprint. The Saudi fund is significantly investing in large initiatives that have not yet been capitalised into its balance sheet. PIF is tasked with stimulating inward investment, accessing new technologies, developing local industries and addressing underemployment.

PIF is funding a host of new cities in the desert including the $500bn futuristic NEOM city, the Red Sea Development Company’s mega tourism project and the Qiddiya entertainment park. Saudi Arabia unveiled a new national carrier, a wholly owned PIF company, in March.

Riyadh Air is expected to add $20bn to the country’s non-oil GDP growth and create more than 200,000 jobs both directly and indirectly. The fund is pursuing a two-pronged strategy – building an international portfolio of investments while investing locally in giga projects that will help to reduce Saudi Arabia’s reliance on oil revenues.

The trend of rising domestic investments in the GCC is likely to be sustained by the emergence of new strategic funds with the mission to attract foreign investors into local markets and increased activity of some of the existing funds.

Oman merged its two wealth funds into one entity, OIA, in 2020. The fund’s assets surged to $41.5bn in 2022 and it inaugurated 10 strategic projects worth $1.95bn across the sultanate in partnership with domestic and foreign investors to mark the country’s national day in November 2022.

The bulk of OIA’s investments are in the sultanate, which makes up 61.5 per cent of its portfolio.

GCC strategic funds that have large portfolios of domestic assets such as Mubadala and ADQ in Abu Dhabi, Investment Corporation of Dubai (ICD) and Mumtalakat in Bahrain are not expected to suffer losses in the medium-term due to their limited exposure to upheaval in the global markets.

With $300bn AUM, ICD’s aviation portfolio includes the Emirates Group, flydubai and Dubai Aerospace Enterprise. The fund is the principal investment arm of the Dubai government and holds stakes in Emirates NBD, Dubai Islamic Bank, Emaar Properties and Emirates National Oil Company. The fund reported record revenues of Dhs121.1bn in H1 2022 and net profits of Dhs14.8bn.

Flush with cash after the latest oil boom, GCC state investors are expected to be busy in 2023 as the slowing global economy and the turmoil in the financial services sector are accelerating a pivot towards other sectors including healthcare and technology. The funds are likely to be driving forward with the pursuit of ‘cheap’ assets in the US and Europe, chasing deals across all sectors.