aabout a decade ago, a flashy investor with deep pockets appeared. Saudi Arabia’s Public Investment Fund (PIF) had a mandate to go big, and it was willing to: it took a $3.5 billion stake in Uber, placed $45 billion in the world’s largest tech investment fund, SoftBank’s Vision Fund, and provided half of the capital for a $40 billion infrastructure fund. run by Blackstone, a private equity giant. Since then it has bought stakes in everything from Heathrow Airport and Nintendo to Hollywood studios and French hotels. Last year it deployed more than $30 billion in fresh capital, making it the highest-spending asset fund in the world (see graph).
But even if the PIF indulges abroad, his mandate in his own country is becoming increasingly important. This is due to Crown Prince Muhammad bin Salman’s plan to transform Saudi Arabia’s economy, known as ‘Vision 2030’, in which PIF is expected to play a crucial role. The country has been mandated to invest at least 150 billion riyals ($40 billion) domestically every year. It also aims to increase its holdings from 3.5 trillion riyals to 7.5 trillion riyals by the end of the decade, luckily creating millions of jobs as the economy moves away from oil. After a strong 2022, it’s kingdom GDP fell 0.9% last year – its worst performance since 2002, barring years of pandemic or financial crisis – making the task more urgent.
The PIFThe country’s role as a mainstay of the Saudi economy means it is unlike any other sovereign wealth fund or public pension fund. Norges Bank Investment Management, Norway’s sovereign wealth fund, has duties and governance that differ from those of the country’s pension fund and finance ministry. Singapore’s GIC must supplement the government budget, but its investments are aimed at profit. In Qatar, the state fund mainly invests abroad. Like the PIF As the country tries to realize the ambitions of its political masters, it faces three challenges.
The first concerns financing. The PIF currently receives most of its capital through asset transfers and capital injections from the government. On March 7, the Saudi government announced that 8% of Saudi Aramco’s shares, worth about $164 billion, had been transferred to the fund, doubling its stake in the state oil giant. The fund also receives dividends from investments and holdings, and can tap debt markets. It raised $11 billion last year by issuing bonds on the international capital markets, and has already raised another $5 billion this year. In addition, the fund borrowed at least $12 billion in long-term loans last year. In the past, the central bank’s foreign exchange reserves have also been transferred to it.
Many of these resources will come under pressure. Not only is the fund expected to continue to spend more, but as oil demand declines, the Saudi government will become less generous. By 2030, millions of Saudis will have entered the labor market. The state employs many locals at higher wages than the private sector, with salaries accounting for 40% of total expenditure, meaning this will put pressure on the budget. Bosses at domestic companies, many of which are partially owned by the PIF, now talking about cost savings. And since the fund has eagerly tapped the debt markets, interest payments have been increasing. Cash flow fell from about $50 billion at the end of 2022 to $15 billion at the end of September.
The PIFThe country’s desire to stimulate the growth of the entire Saudi economy also means that the country invests in companies at different stages of evolution, complicating efforts to maintain consistent returns. Over the past five years, the fund has founded 93 companies. In the thirteen ‘strategic’ sectors in which the PIF is charged with development, from healthcare to sports and tourism, returns vary widely. Portfolio companies range from ROSHNa project developer NEOMa huge smart city under construction, and Riyadh Air, an airline yet to become operational.
All this leads to the PIF‘s second challenge: increasing returns. Since 2017, when the fund was tasked to implement Vision 2030, investments have returned approximately 8% per year. This is just above the minimum target of 7%, but far below the return it actually wants to achieve based on private equity, one director admits. Such ambitions are loftier than those of most sovereign wealth funds, which are more cautious due to the difficulties of achieving big returns from diversified investments and such large cash holdings. So far the PIF has managed to select assets that promise both economic development and strong returns, while simultaneously reaping dividends from these investments. As his role increases, that will become increasingly difficult.
In addition, private equity-style valuation methods, which rely on past performance and projections of future cash flows, are difficult to apply to many of the companies and projects in which the PIF invest now. NEOMfor example, this is expected to cost approximately $500 billion. But how and when it will provide consistent cash flow is up for debate, making the investment more like venture capital. In other areas, such as healthcare and infrastructure, the fund’s role has the feel of impact investing, where the aim is to achieve certain social goals while securing profits. According to researchers at Harvard Business School and the International Finance Corporation, part of the World Bank, these types of investments are normally characterized by returns that deteriorate with scale and perform better if held for long periods of time. Like the PIF expands, another problem arises: portfolio companies often overlap and compete with each other, cannibalizing returns. In fact, this means that you take money out of your left pocket and put it in your right pocket, the director sighs.
The final challenge is attracting foreign investment to Saudi Arabia. As the fund grows, foreign money would support its ambitions. It would also allow domestic companies to broaden their horizons and access new markets, making them less likely to compete with each other. And it would be the PIF to stop some of its investments, which would push the private sector to fend for itself.
But last year, after a IMF-approved data revision, Saudi Arabia attracted only 53 billion riyals of foreign direct investment in the first three quarters, an amount equivalent to 2% of the GDP. The goal is to more than double that number by 2030. “We can wait for investors, but it will take time, so let’s do it. [ourselves],” says a Saudi minister, “as he invites others.” It could be a very long wait. So far, global investors seem to prefer taking Saudi Arabia’s money rather than putting their own money into the country. ■
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