When the going gets tough, Gulf sovereign wealth funds jump in

Fourteen years ago they were dubbed the “White Knights”, riding to the rescue of global financial markets amid the biggest liquidity crunch in decades. They also walked away with billions in profits.

When predatory subprime lending, excessive risk-taking by global financial institutions and the bursting of the US housing bubble conspired to create the worst financial crisis since the Great Depression, the wealthiest Persian Gulf monarchies escalated.

They bought stakes in Western lenders like Citigroup and Barclays, even a football team (Manchester City) or a department store (Harrods), and pumped billions into the capital markets through their sovereign wealth funds at a a time when liquidity was drier than the Arabian desert.

On the contrary, the profile of these sovereign wealth funds based in the Gulf, whether it is the Kuwait Investment Authority or the Saudi Public Investment Fund, has increased since the financial crisis of 2008. The same goes for their ambition. Today, you are as likely to see a Gulf fund in the press releases of a new tech fundraiser as a prestigious Silicon Valley venture capital firm.

And with cheap money once again in short supply – and with crude prices at an all-time high in memory – Gulf sovereign wealth funds are taking more calls than the switchboard during a celebrity telethon from 1980s. Just like in 2008, they’ve gone on a spending spree and are ready to choose undervalued or depreciated assets – and make a pretty penny out of them when the markets rebound.

From sovereign wealth to the diffusion of wealth

So what exactly is a sovereign wealth fund? Basically, it is any state-owned investment fund that gets its money from a pipeline of government money. These may be a country’s excess reserves or excess resource revenues, or foreign currency holdings.

They invest this money with the aim of creating greater savings for their country, which can in turn finance social and economic development or be used to stabilize the economy against volatility or inject capital in times of crisis. Not the sort of thing your average Sand Hill Road VC outfit tends to worry about.

Arguably the most famous sovereign wealth fund is not found in the Gulf or elsewhere in the Middle East: the Norway Government Pension Fund Global, which the northern European country established in 1990 to invest excess income from the oil trade , has few peers. The Oil Fund, as it is commonly known, now has $1.2 trillion in assets (about $230,000 for every Norwegian) and owns an average of 1.3% of the world’s listed companies, making it arguably the most powerful shareholder in the world. With apologies to the Beatles: isn’t it good, Norwegian wealth?

seven magnificent

According to sovereign wealth fund tracker Global SWF, the seven largest sovereign wealth funds in the Gulf region hold more than $3 trillion in assets. These are the Abu Dhabi Investment Authority ($829 billion), the Kuwait Investment Authority ($769 billion), the Saudi Public Investment Fund ($620 billion), the Qatar Investment Authority ($445 billion billion), the Investment Corporation of Dubai ($300 billion), and Abu Dhabi’s Mubadala ($284 billion) and ADQ ($108 billion).

Gulf funds were already shifting their strategies from offshore deposits and securities to buying large stakes in companies before the 2008 financial crisis. But it was the Great Recession that accelerated this transformation. by offering the opportunity to acquire assets cheaply, and have they ever taken advantage of it:

  • According to the European Investment Bank, the number of foreign direct investments by Gulf Cooperation Council sovereign wealth funds increased by 540%, from 15 in 2006 to 96 in 2009.
  • This included a number of investments that rescued Western banks at the height of the subprime mortgage crisis, with Gulf sovereign wealth funds bailing out Citigroup, Morgan Stanley, UBS, Merrill Lynch and others with around 40 billion investment dollars.

Growing Gulf

The profitability of these investments quickly became apparent. In December 2009, Kuwait’s sovereign wealth fund reported a profit of $1.1 billion on a $3 billion stake it took in Citigroup in January 2008, good for a 37% annualized return.

A few months earlier, in June 2009, the Abu Dhabi government’s International Petroleum Investment Company had sold part of its investment in British bank Barclays, making a £2 billion profit on a £2 billion investment. pound sterling. In October 2009, Qatar’s sovereign wealth fund made a profit of £600m selling a small portion of its stake in Barclays (it would eventually reap £1.7bn from its stake, which it exited in 2012).

“They didn’t panic to sell at the bottom of the market,” Mohamed El-Erian, then CEO of Pimco, told CNBC of Gulf funds in 2009. “And now they can sell.”

In the first year of the COVID-19 pandemic, Gulf funds took similar action when markets faced the initial shock of lockdowns. Middle East-based sovereign wealth funds invested $14.7 billion in the United States in 2020, more than double the $6.5 billion they spent in 2019.

The new setback

Fast forward to today. This year’s economic pain hasn’t quite matched the punch of the 2008 subprime mortgage meltdown, but it hasn’t exactly been snappy sailing either. Between the highest inflation for a generation, broken supply chains and energy markets damaged by Putin’s misadventures in Europe, the blows have been linked. And it shows.

After years of gains, stock markets are down – the S&P 500 has fallen 14% this year. After years of cheap money and frantic fundraising, global venture capital funding fell 27% year-over-year to $120 billion, according to data from Crunchbase. Meanwhile, at least 358 companies have canceled or postponed financing deals – including initial public offerings, mergers and acquisitions, bond sales or loans – worth more than $254 billion, according to Bloomberg data.

So who to turn to in this new bear market? Gulf rulers of course, who have been bolstered by the rising energy prices that are a symptom of the current recession (Saudi Arabia alone earns close to a billion dollars a day from export of crude)”

  • The Gulf’s largest sovereign wealth funds have made no less than $28.6 billion in foreign acquisitions this year as of July 26, according to Bloomberg data, 45% more than at the same time in 2021 and the most for all the first six months ever recorded.
  • The new twist on this investment frenzy is that after a decade of expanding their portfolios, the low valuations and trading targets they are focused on are tech and healthcare – the Saudi Public Investment Fund has , in the years since the last downturn, becoming one of the biggest tech investors in the world thanks to a $45 billion contribution to SoftBank’s Vision Fund (although the massive tech fund stumbled, losing $27 billion in 2021 after a profit of $37 billion a year earlier).

Stirred, not shaken

Among the flurry of Gulf sovereign wealth fund deals this year is a $93m investment from the Public Investment Fund in Aston Martin of Bond, taking its existing stake in the British automaker to 17% in the in a $777 million rights offering.

One of the most active Gulf funds is Mubadala, headed by Abu Dhabi ruler Sheikh Mohammed bin Zayed. The fund led a $400m investment round in digital insurance company Wefox, closed a $3bn deal to buy Swedish medical freight company Envirotainer in partnership with EQT Private Equity, and is came to the rescue of Klarna by leading an $800 million financing round in the struggling company to buy now and pay later after its valuation fell to $6.7 billion from $45.6 billion a few months earlier.

“Gulf sovereign wealth funds have become more sophisticated in their investment strategy and have extensive global relationships,” said Ayham Kamel, head of Middle East and North Africa at consultancy Eurasia Group. Bloomberg. “Current global market conditions are also supporting the rise of Gulf sovereign wealth funds as their excess oil can be mobilised.”

blood money

It’s great to have a group of oil-rich state funds with seemingly endless resources ready to inject liquidity into the markets at a moment’s notice whenever there’s economic uncertainty, but there There is a difficult question for some: is it moral to take money from a state that does immoral things?

Saudi Arabia is at the forefront of concerns regarding the Gulf States in this region. In 2018, a team sent from Saudi Arabia murdered Washington Post journalist Jamal Khashoggi under the orders of Saudi Prince Mohammed bin Salman, the CIA determined. In addition to Saudi Arabia’s continued use of torture, suppression of free trade, and widespread discrimination against women, Khashoggi’s death has left many in Silicon Valley wondering. if the money was worth it.

“Any CEO should worry if they have a murderer among their investors,” said Ali Partovi, CEO of venture capital fund Neo. WaPo. “Your customers and employees are watching.” Investors also plan to take money from China, whose human rights record is far from perfect, although in neither case has the pontificate led to a settling of scores – moral , financial or otherwise.

It would seem that cash, in the end, is king. Or sultan in this case.