Saudi Arabia plans institutional fund revamp

By:
Chris Wright
Published on:

Advice sought on new fund; Shoura eyes GOSI shake-up.

Saudi Arabia’s plan for sweeping changes to its investment institutions is all the talk in the Gulf’s fund management industry. Among the possible moves is a new sovereign wealth fund – which raises the question, what happened to the old one?

Late last year, several international banks and consultants in the region were asked for suggestions on a new fund. One professional who was contacted tells Euromoney that the inquiry described a sovereign wealth fund, referring to taking state money and diversifying it beyond the energy sector. 

The request was apparently very open in its parameters: no size or timeframe was included, and it was not specified whether the fund should run through external mandates or direct investment. "It was a request for ideas," says a person familiar with the inquiry. "You could pretty much suggest anything."

Whatever structure such a fund might take, the more interesting question is why Saudi would want such a vehicle, and why now.

It has been depleting its foreign assets rather than deploying them, as it eats into its savings to finance the deficit that has come from the prolonged low oil price. 

Net foreign assets at the Saudi Arabian Monetary Agency stood at SR2.283 trillion ($609 billion) at the end of December, down by $128 billion since August 2014. 

Axed

Sama is known to have axed numerous mandates to external fund managers over the last 18 months. 

"The authorities began issuing debt in mid-2015 to slow this drain," says Steven Hess, senior vice-president at Moody’s, "but defending the currency peg amid speculative threats – which have been on the rise – also requires use of the kingdom’s reserves."

So the creation of an investment vehicle is curious, but it is stranger still as one already exists.

Historically, Sama – which fulfils multiple roles in Saudi Arabia, principally as the central bank – also acted as the closest thing the kingdom had to a sovereign wealth fund through the sheer scale of its foreign reserves. The vast majority of them have always been invested in US treasuries, a move that began to be reconsidered during the global financial crisis.

During that crisis, in July 2008, Saudi launched something that looked like a free-standing sovereign wealth fund: Sanabil al-Saudia. The fund was seeded with SR20 billion in assets and was launched by the Public Investment Fund (PIF), another state vehicle affiliated with the ministry of finance, which said at its launch that the new fund would invest for the state with a long-term investment horizon and an initial focus on technology.

That news was met with considerable fervour by the international investment community – especially when a Saudi official was quoted at one conference saying the fund could reach $900 billion – and some big names came (and sometimes went), such as former Morgan Grenfell Private Equity executive Scott Lanphere and John Breen, formerly of Canada Pension Plan Investment Board. 

But for years very little appeared to happen, and when it did, the investment focus turned out to be mainly direct investment within the kingdom (although there is an asset management arm investing in globally diversified securities). 

Today, Sanabil’s mandate is described as "support[ing] the growth of the kingdom’s economy while building international investment capability and transferring expertise to local Saudi talent."

Explained

Since that’s not the classic sovereign fund diversifier model, in the form that Adia and the KIA have made familiar in the region, this may explain the new proposal. 

"Saudi still doesn’t really have a sovereign wealth fund like Abu Dhabi’s or Kuwait’s," says one fund manager. "The closest thing it has to that model is the Kaust endowment. So I can see there would be room for something new, if you took some of that responsibility out of Sama."

The Kaust endowment is a fund for the King Abdullah University of Science and Technology near Jeddah, run by Gumersindo Oliveros, who used to run the pension plan and endowments at the World Bank.

Perhaps the broader point, though, is the new sense of experimentation that appears to have come with Deputy Crown Prince Mohammed bin Salman, the 30-year-old who now has responsibility for defence, oil and economic planning. 

In February Euromoney covered how Saudi Arabia was mooting a float of Aramco, the world’s most valuable company; this idea is thought to have come not from Aramco but Salman and his team. He appears to have prided himself on an unusual level of openness to new ideas, within which a sovereign wealth fund would fit well, even if it’s an odd time to consider one. 

In parallel, there is talk within the kingdom of reform and in the General Organization of Social Insurance, Saudi’s main pension fund, while one expert in the region believes PIF (which owns Sanabil) is being restructured into a 'domestic Mubadala’, in reference to the Abu Dhabi sovereign vehicle whose strategy is based upon building global operations and partnerships, chiefly in the energy sector. Saudi’s restructuring of state news agency SPA posted a statement in January from Saudi’s Shura Council, a government advisory body, suggesting that GOSI might revise its investment strategy in order to raise returns. Recommendations include tying retirement benefits to the inflation rate and diversifying the real estate portfolio, which at the moment is almost entirely in Riyadh.