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A Snapshot of Middle East-Based Sovereign Wealth Funds

by Kais Osman

  • 23 May 2018
  • INF
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Sovereign Wealth Funds (SWFs) continue to grow in prominence, with Middle East-based SWFs at the forefront: three of the top five SWFs by AUM are based in this region. According to data from The 2018 Preqin Sovereign Wealth Fund Review, the AUM of Middle East-based SWFs stands at $2.4tn, second only to Asia with $3.1tn. As part of the global trend, SWFs in the Middle East continue to broaden their investment strategy by investing more capital into alternative assets, and currently allocate an average of 22% of their AUM towards alternatives.

Appetite for Real Assets Continues
Historically, the wealth of Middle East-based SWFs derives from their hydrocarbon reserves, but with continued investment in alternative assets as well as increasing AUM, alternatives are providing more lucrative returns. Regardless of the obstacles presented by infrastructure – rising prices, fewer opportunities and increasing competition – 49% of SWFs invest in the asset class, perhaps attracted to the strong risk-adjusted returns and inflation-hedging characteristics it offers. In practical terms, this enables governments to upgrade their existing infrastructure while encouraging economic growth through new projects. A notable example of direct foreign investment is the Qatar Investment Authority, which pledged $45bn to the US market, with $5bn in real assets and an additional $10bn earmarked for infrastructure. Saudi Arabia’s Public Investment Fund was another high-profile SWF investor that committed $20bn, making it an anchor investor to the Blackstone Infrastructure fund.

Evolution
Although market conditions will continue to define the investment landscape, Middle East-based SWFs are likely to continue investing in alternative assets as a means of diversification. However, some market conditions have imposed operational and structural changes, with SWFs consolidating investments and gaining much needed transparency. Recent noteworthy examples of this occurred in the UAE and Saudi Arabia: Sheikh Mohammed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi, announced that Abu Dhabi Investment Council will join Mubadala Investment Company Group, which merged with the International Petroleum Investment Company in 2017. Meanwhile, the Crown Prince and First Deputy Prime Minister of Saudi Arabia, Mohammed bin Salman, announced in 2017 that Saudi Arabia’s Public Investment Fund will increase its AUM to $400bn by taking a stake in Saudi Aramco as part of its overall 2030 vision. These moves to consolidate assets are designed to streamline the operations of these investors, thus allowing a more competitive edge through economies of scale while minimizing the cost of operations. Several Middle East-based SWFs, such as Kuwait Investment Authority and Oman Investment Fund, have directly confirmed to Preqin their intent to move towards a more transparent investment vehicle. This move will allow the region to align with other SWFs globally, and in turn pave the way for future SWFs in countries such as Egypt and Israel.

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