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About a decade ago, a flashy, deep-pocketed investor emerged. Saudi Arabia’s Public Investment Fund (PIF) was mandated and in a position to think big: it acquired a $3. 5 billion stake in Uber, invested $45 billion in the world’s largest generation investment fund, SoftBank’s Vision Fund, and provided some capital for a $40 billion infrastructure fund controlled through Blackstone. a private equity giant. Since then, it has bought stakes in everything from Heathrow Airport and Nintendo to Hollywood studios and French studios. Hotels. Last year, it deployed more than $30 billion in new capital, making it the world’s largest spending wealth fund (see chart).
However, even as the PIF splurges abroad, its mandate at home becomes increasingly important. This is due to Crown Prince Muhammad bin Salman’s plan for the Saudi economy, known as “Vision 2030,” in which the PIF is expected to play a role. a fundamental role. It has been tasked with making an investment of at least 150 billion riyals ($40 billion) in the country every year. The goal is also to increase its holdings from 3. 5 billion riyals to 7. 5 billion riyals by the end of the decade, with the potential to create millions of jobs as the economy moves away from oil. After a strong 2022, the kingdom’s GDP fell by 0. 9% last year (its worst performance since 2002, outside of pandemic years or currency crisis), making the task even more urgent.
The FIP’s role as the linchpin of the Saudi economy means that it is unlike any other sovereign wealth fund or public pension fund. Norges Bank Investment Management, Norway’s sovereign wealth fund, has separate responsibilities and governance from those of the country’s pension fund and Ministry of Finance. Singapore’s ICG wants to fill its government’s budget, but its investments are driven by profits. In Qatar, the public fund basically invests abroad. As the PIF tries to fulfill the ambitions of its political masters, it faces three challenges.
The first is funding. Lately, the PIF receives the maximum from its capital asset transfers and capital injections from the government. On March 7, the Saudi government revealed that 8% of Saudi Aramco’s capital, valued at about $164 billion, had been transferred to the fund, doubling its stake in the domestic oil giant. The fund also receives dividends on investments and holdings and can access debt markets. It raised $11 billion last year by issuing bonds in foreign capital markets and has already raised another $5 billion this year. Last year it borrowed at least $12 billion in long-term loans. In the past, the central bank’s foreign exchange reserves have also been transferred to it.
Many of those resources will be under pressure. Not only is the fund expected to continue spending more, but as oil demand slows, the Saudi government will be less generous. By 2030, millions more Saudis will have entered the workforce. The state employs many locals with higher salaries than those in the personal sector. , whose salaries account for 40% of their total expenses, meaning this will put pressure on their budget. Domestic entrepreneurs, many of whom are partly part of the PIF, are now talking about cutting costs. And because the fund has eagerly tapped into debt markets, interest rates are rising. Its monetary position fell to $15 billion at the end of September, down from about $50 billion at the end of 2022.
The PIF’s preference for driving expansion across the Saudi economy also means that it invests in corporations at other stages of development, complicating efforts to achieve consistent returns. In the last five years, the fund has created 93 corporations. Of the thirteen “strategic” sectors that the PIF is tasked with developing, from fitness to gaming to tourism, a wide diversity of returns. The portfolio of companies ranges from ROSHN, a real estate developer, to NEOM, a large smart city under construction, and Riyadh Air, an airline that is not yet under construction. Operational.
All of this brings us to the current challenge of the FIP: increasing yields. Since 2017, when the fund was tasked with implementing Vision 2030, its investments have returned around 8% on an annual basis. That’s just above their minimum target of 7%. but well below the consistent personal action-like returns he aims to achieve, one executive admits. Such ambitions are better than those pursued through maximum sovereign wealth funds, which are more reserved due to the difficulties of generating giant returns with such diversified holdings. and monetary reserves. So far, the PIF has been able to pick assets that promise economic progression and strong returns, while taking advantage of dividends from those holdings. As their role expands, this will become increasingly difficult.
Additionally, private equity-type valuation methods, which rely on projections beyond execution and long-term cash flow, are difficult to apply to many of the companies and projects in which the PIF currently invests. NEOM, for example, is expected to collect around $500 billion. But how and when it will start generating a steady flow of coins remains up for debate, making the investment more like venture capital investing. In other areas, such as fitness and infrastructure, the role of the fund is similar to that of investment, whose objective is to achieve certain social objectives and guarantee profits. This type of investment is often characterized by returns that worsen with scale and are most productive when held over a long period, according to researchers at Harvard Business School and the International Finance Corporation, part of the World Bank. As PIF grows, another challenge arises: portfolio companies overlap and compete with each other, cannibalizing returns. In fact, it is equivalent to taking coins from the left pocket to put them in the right, the manager sighs.
The final challenge is to attract foreign investment to Saudi Arabia. As the fund grows, foreign capital can satisfy its ambitions. It would also allow domestic corporations to broaden their horizons and access new markets, reducing the dangers of competing with each other. And it would allow the PIF to withdraw from some of its investments, forcing the personal sector to fend for itself.
But last year, after a revised survey approved through the IMF, Saudi Arabia attracted only 53 billion riyals in foreign direct investment in the first three quarters, equivalent to 2% of 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 stop by [ourselves],” says a Saudi minister, “and inviting others. “The wait can be very long. So far, global investors seem happier accepting cash from Saudi Arabia than investing their own cash in the country.
Correction (March 21, 2024): The chart in this article incorrectly listed the Sovereign Wealth Fund Institute, rather than the Global SWF, as the source. Sorry.
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This article was printed in Finance.
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