Why GCC wealth funds are becoming engines of regional growth

The GCC region is home to a range of sovereign wealth funds (SWFs), which have evolved into national champions that can move the needle locally and overseas.

With a projected $7.6tn in combined assets under management (AuM) by 2030 from a historical peak of $4.1tn in 2023, GCC SWFs have increasingly become an oasis of sustainable growth on their home grounds and a prominent source of cash for international deals.

These state investors have been among the biggest beneficiaries of the Gulf region’s recent boom, on the back of higher oil prices and a thriving economy. “Gulf SWFs have reaped the rewards of the fiscal windfalls and recovered quicker than others from the 2022 financial markets debacle,” Global SWF said in its annual report earlier in January.

The research consultancy firm said one of the key consistent themes when it comes to sovereign capital was the prominence of investors from the GCC in 2023.

GCC sovereign funds increased their dealmaking dominance last year, largely due to the maturity of the investment landscape, with a wide range of players entering both the domestic and global markets with a level of sophistication never seen before.

“The sovereign wealth fund industry is still relatively young at the global level — however, some of the funds in the Gulf region are now more than 50 years old and it is just natural that their investment strategies and sophistication evolve,” says Diego Lopez, the managing director of Global SWF.

Lopez notes that GCC funds have for years used external managers and hired investment professionals who have nurtured local talent and are now ready for a new stage of growth with a second generation of leaders.

The sovereign funds’ strategic investments are accelerating economic diversification, which is expected to push GCC’s GDP growth to 3.6 per cent and 3.7 per cent in 2024 and 2025, respectively, according to the World Bank.

GCC states ended 2023 on a stronger footing and remain remarkably resilient against a backdrop of a slowing global economy and higher for longer rates despite stable inflation. The contraction in oil sector activities due to the successive oil production cuts by OPEC+ was largely compensated for by the non-oil sectors, which are expected to expand by 3.9 per cent in 2023.

Drivers of sustainable growth

GCC SWFs play a significant role in accelerating economic diversification in the region. The six-member GCC bloc — Saudi Arabia, the UAE, Qatar, Kuwait, Bahrain, and Oman — has traditionally been heavily reliant on oil and gas revenues.

However, recognising the need for sustainable economic growth and reducing dependence on hydrocarbons, these countries have been actively pursuing diversification strategies, and sovereign wealth funds are integral to these efforts.

S&P Global Market Intelligence said wealth funds are key to achieving governments’ wide-ranging reforms to achieve socio-economic transformation and contribute to deploying national wealth in domestic sectors of interest.

The state investors are playing a pivotal role in creating domestic employment opportunities and fueling growth, and in managing the transition to low carbon economies in line with National Visions such as Saudi Vision 2030, Oman Vision 2040, and We the UAE 2031.

Similarly, GCC SWFs are not only asked to perform financially but also to create jobs, propel the domestic economy and contribute to decarbonisation goals.

Global SWF said Saudi Arabia Public Investment Fund (PIF) was the lead investor with $31.6bn deployed in 49 deals, 33 per cent more than in 2022. Nearly a decade after its “reborn”, the fund has emerged as the main vehicle for the expansive ambitions of Crown Prince and Prime Minister Mohammed bin Salman bin Abdulaziz, under Vision 2030.

The PIF’s sources of funding include assets transferred by the government, cash injections from the government, loans and debt capital markets funding, and retained earnings from its expanding investment base.

The fund has said it aims to invest $40bn a year in the local economy, an amount that dwarfs its international spending. Major projects underway domestically include the $500bn futuristic NEOM city, the Red Sea Project, the entertainment offering Qiddiya Project, and the ROSHN Project.

The $700bn wealth fund is investing in a broad range of sectors, including retail, sports, construction and real estate. Last June, PIF took control of four of the kingdom’s top soccer clubs including Cristiano Ronaldo’s Al-Nassr, Karim Banzema’s Al-Ittihad, Riyad Mahrez’s Al-Ahli, and Neymar’s Al-Hilal.

Overall, GCC wealth funds that have large portfolios of domestic assets include Mubadala Investment Company (Mubadala) and ADQ in Abu Dhabi, Investment Corporation of Dubai (ICD), Qatar Investment Authority, and Bahrain Mumtalakat Holding Company.

Fostering impact investment

Playing hosts to two consecutive UN climate summits (COPs) provided the Middle East with the opportunity to forge itself as a leader in the fight against climate change.

The recently concluded COP28 showcased sovereign investors’ approach to sustainability, as the Gulf region’s energy transition agenda is being delivered across asset classes from lithium mining to infrastructure to industrial development to venture capital.

“Sovereign wealth funds’ characteristics, particularly their long-term investment strategies and their contribution to economic and financial diversification make them well-suited to finance the transition to a green economy,” the International Monetary Fund (IMF) said in a report in December.

GCC sovereign funds are leading green investments as the six-nation bloc has made considerable headway in transitioning to a low-carbon economy. Global SWF said in a report that sovereign investors are looking to gain exposure to all energy transition segments as well as greening existing “black” assets through decarbonisation.

Globally, sovereign wealth funds deployed a record $26.1bn in ‘green assets’ last year, with state investors from the Gulf region accounting for nearly half of that figure.

“While their wealth originates from oil and that cannot change, GCC SWFs are a driving force behind some of the largest environmental, social and governance (ESG) initiatives in the world,” explains Lopez.

The sovereign funds are focused both on strategic investment in domestic renewables capacities and on yield-generating assets abroad, with Mubadala leading the way through Abu Dhabi Future Energy Company (Masdar).

Founded in 2006, Masdar is targeting a renewable energy portfolio capacity of at least 100 gigawatts (GW), and an annual green hydrogen production capacity of up to one million tonnes by the end of the decade.

With Saudi Arabia on track to invest more than $100bn in renewable energy and natural gas-fired electricity, PIF-backed ACWA Power’s portfolio with an investment value of $82.8bn, can generate 53.69GW of power and produce 7.64 million m3/day of desalinated water.

Founded in 2002, the utility firm develops power generation and desalinated water plants, with assets across the Middle East and North Africa, Europe, Asia and the Commonwealth of Independent States. It counts the $8.5bn NEOM green hydrogen project, Morocco’s Khalladi 120-megawatt (MW) wind farm and the 950 MW Noor Energy 1 in Dubai among its biggest projects.

On the mobility front, GCC states are powering up their efforts to become a force to be reckoned with in the electric vehicle (EV) market.

One of PIF’s key initiatives is to develop an auto manufacturing hub on the western coast of Saudi Arabia. The wealth fund is Lucid Group’s biggest shareholder, and the US electric carmaker is already assembling cars at its production facility in Jeddah — where it is set to be joined by Hyundai Motor and Ceer, an electric car venture with Taiwan’s Foxconn Technology Group.

“We are igniting a new industry and an ecosystem that attracts international and local investments, creates job opportunities for local talent, enables the private sector, and contributes to increasing Saudi Arabia’s GDP as part of PIF’s strategy to drive the economic growth under Vision 2030,” Crown Prince Mohammed bin Salman,  said in a statement following the launch of Ceer.

Abu Dhabi has long talked of becoming a manufacturing hub for electric cars as part of the emirate’s wider industrial strategy and its plans to tackle climate change. Last December, Chinese EV maker Nio secured a $2.2bn investment from CYVN Holdings, an investment vehicle based in Abu Dhabi that is backed by the Abu Dhabi Investment Authority (ADIA).

Abu Dhabi Investment Office (ADIO) also partnered with electric car startup Faraday Future in December to bring the firm’s generative AI and advanced intelligent EV capabilities to the SAVI cluster. The fund is set to introduce electric flying taxis in the UAE in partnership with US eVTOL maker Archer Aviation in 2026.

Green investments and net-zero carbon emission targets have been on the radar screens of GCC wealth funds for years – and the state investors show no signs of pulling back post-COP28.

Though the share of climate finance in GCC wealth funds’ portfolios remains limited so far, the IMF said it has rapidly progressed over the years.

Lending a helping hand

The money from the GCC funds still overwhelmingly goes to developed markets, in particular the US and Europe. However, the state investors are readier than ever to shine regionally by directly supporting peer governments in neighbouring countries, through lending or deposits at the central bank.

“Although GCC SWFs’ foray into global markets will likely continue in the near term, we are also likely to see a recycling of GCC petrodollar inflows into MENA countries and other emerging markets that present interesting investment opportunities and need external funding,” S&P Global Market Intelligence.

Türkiye has been on the hunt for foreign investment deals to support its embattled economy. It signed around $51bn worth of deals with the UAE in July and the agreements include wealth fund ADQ possibly buying as many as $8.5bn of bonds from Türkiye to fund reconstruction efforts following devastating earthquakes a year ago.

The Abu Dhabi state investor signed a $3bn agreement with Turkey’s Export Credit Bank last July to finance companies planning to export goods to the UAE and other markets. It also launched a $300m joint investment fund with Türkiye Wealth Fund (TWF) to invest in venture capital funds and growth potential companies in Türkiye in 2022.

Egypt has been courting Gulf investment as the North African seeks to stimulate inward investment, which has been limited due to the country’s yawning budget deficit, weak currency and high-interest rates.

Saudi Arabia’s PIF launched a $10bn fund, the Saudi Egyptian Investment Company, which has already acquired minority stakes in four listed companies for $1.3bn.

 

Jordan is also a recipient of money from GCC sovereign funds. ADQ launched a $100m technology-focused venture capital fund with Jordan’s Ministry of Digital Economy and Entrepreneurship in 2022 to drive growth in the kingdom’s burgeoning digital economy.

PIF established the $3bn Saudi Jordanian Investment Fund alongside 16 domestic banks in 2017 to pursue investments in the country’s “vital and promising sectors”.

Within the GCC region, Oman has drawn interest from PIF and Abu Dhabi funds — Mubadala and ADQ. Saudi Arabia’s wealth fund joined forces with Oman Investment Authority in July 2023 for $5bn Saudi Omani Investment Company — an investment platform that was an anchor investor in Abraj Energy Services’ public listing in Muscat.

Mubadala pledged support to the Oman and Etihad Rail Company, which is building a $3bn high-speed railway network connecting the sultanate and UAE. ADQ and OIA identified investment opportunities worth $8.2bn (Dhs30bn) across different sectors in Oman including hydrogen, solar and wind, green aluminium and steel.

Flush with cash after the latest oil boom, GCC wealth funds are reshaping their strategies, emphasising supporting local economies and creating wealth for future generations while bankrolling some of the world’s biggest rescue packages, investments and acquisitions. The funds are driving significant domestic investments and deals to support economic diversification and transition to low-carbon economies.

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