Sovereign Wealth Funds (SWF) are the first clients people think of when they consider doing business in the Middle East and North Africa (MENA). SWFs are evaluated first over Mergers and Acquisitions (M&A), Capital Markets, or purely commercial transactions. Although SWFs are now a global group, this article focuses on the MENA SWFs and is part of our series about the Arabia business opportunity.

What is an SWF?

Arab_CoinsAn SWF is a fund created by a sovereign nation which has more reserves than debt. SWFs are also characteristic of countries with either very strong current account surpluses (China) or large hydrocarbon reserves (Norway, Gulf Cooperation Council). Unlike a Central Bank, whose objective is to manage liquidity, foreign exchange and interest rates, the objective of an SWF is generally the preservation, or the creation, of long-term wealth. Such strategy can also be consistent with the avoidance of the “resource curse”: Countries which have a sudden windfall from commodity revenues could inconsiderately spend the money in a short period of time, creating inflation and limited long term benefits. In a way, an SWF can be a fund for future generations, aiming to create a wealth reserve for a future time where commodity revenues dwindle, either because reserves run out, or prices go down.

SWFs are a global group

MENA SWFs, and specifically Gulf Cooperation Council (GCC) SWFs (: UAE, Qatar, Saudi Arabia, Kuwait, Oman, Bahrain) get a lot of focus and media coverage. However, SWFs are a global group. The first SWF is said to have been created by the state of Texas in 1854. The growth in the number of SWFs accelerated in 2000 and the term itself only came to wide usage in 2005. Assets under management of SWFs, as defined by the Sovereign Wealth Fund Institute, now amount to $5.8 Trillion. Out of these, more than $2.1 Trillion, or 37% are with MENA SWFs. The top 3 Global SWFs by reserves are:

  • Norway’s GPF ($737B)
  • Saudi’s SAMA ($676B)
  • Abu Dhabi’s ADIA ($627B)

The Kuwait Investment Authority (KIA), which was founded in 1953, before the country even became independent from the UK, has $386 Billion in reserves. SAMA, ADIA, and KIA are the 3 GCC funds in the top 10 global list. The next one in the list is Qatar’s QIA at 12th position with $115 Billion. It was only founded in 2003 and is one of the fastest growing given Qatar’s massive surpluses from the LNG market. These numbers are only estimates and hide the fact that many countries are using multiple vehicles to deploy their wealth internationally, including funds, corporate entities and sometimes direct personal investments by members of the ruling families.

Within MENA, SWFs are very diverse

Just as they are diverse internationally, SWFs are also very diverse within MENA itself. The flagship SWFs, such as SAMA, ADIA and QIA have investment policies similar to large international asset managers. They typically invest in liquid securities including stocks and bonds, with some allocation to third party asset managers, and alternative investments such as private equity, hedge funds, and real estate. A number of SWFs, such as the newly created Mubadala, IPIC and Aabar in Abu Dhabi and QIA in Qatar have attracted international attention via their direct investments. These include high profile companies such as Porsche, Daimler, Xstrata, Glencore, and numerous trophy real estate assets. It is important to note that these investments, although very visible, and highly sought after by the western corporations, only represent a small part of the asset allocation of SWFs overall. It is the mix between these various allocations that generates different opportunities for different constituencies. Heads of research, sales, and trading are queuing alongside investment bankers and the accompanying corporate CEOs, and managers of private equity and hedge funds. All constituencies are vying for an allocation from SWFs.

How should SWFs really be investing their money?

So what would you do if you were running one of these SWFs? There is no standard answer as the investment strategy has to depend on the overall national strategy and national interest. This varies from country to country significantly. For example, Saudi is very focused on developing its large local economy, while Qatar needs a very well organized international investment strategy, given the rapid growth in its reserves relative to the size of the population. An interesting area of discussion when assessing an SWF investment is about how to strike a balance between: – The merit of investments from a pure financial perspective: valuation, IRR, risk/return etc. – Intangible or indirect benefits for the country, i.e.: job creation, technology transfer, image creation etc. In any case, SWFs have a very important mission to fulfill relative to their local populations. They are also closely watched by the global public opinion to ensure that their investments are made responsibly.