The Magnificent seven Gulf Sovereign Wealth Funds Are Going On The Offensive: Expect more M&A activities from this part of the world

As already witnessed after the 2008 financial crisis, the Gulf Cooperation Council (GCC) Sovereign Wealth Funds (SWFs) became more assertive investors during times of financial and economic difficulties. Their role has become more critical in stabilizing the international financial system during and after the recent financial crisis. Gulf SWF invested over 50 billion dollars to support banks and financial institutions in 2008, reducing the impact of the crisis, while propping up the US dollar value.  A few of the companies the Gulf countries invested in during the crisis were global lenders Citigroup, Barclay, and sports assets like the Manchester City football team, and the prestigious shopping empire Harrods.

These SWF were able to perform such investments because of the excess liquidity they accumulated via oil and natural gas exports. The GCC account for nearly 40 percent of global oil reserves and 24 percent of natural gas reserves. More specifically, the “Magnificent Seven” have combined assets of $3,2 trillion amounting to approximately 40% of SWFs global assets.  These seven SWF 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), the Investment Corporation of Dubai ($300 billion), and Abu Dhabi's Mubadala ($284 billion) and Abud Dhabi ADQ ($108 billion). 

While twenty years ago these SWFs were a more traditional type of investors, prioritizing equity and fixed income instruments, as of recently, they have become more aggressive investors taking large equity positions in international companies across different sectors. This shift in strategies is also due to their increased investment readiness, local teams’ strength, and increased political clout. 

What are Sovereign Wealth Funds?

A sovereign wealth fund is a state-owned investment fund investing money generated by the government, often derived from a country's surplus reserves. SWFs aims to provide benefit for a country's economy and its citizens. Popular sources  of SWF are surplus reserves from state-owned oil and gas, trade surpluses that may accumulate from budgeting excesses, foreign currency operations, revenues from privatizations, and governmental transfer payments.

When the Middle East emerged as a large supplier of energy in the late 60s, several Gulf Countries established their own SWF, to ensure that oil revenues were invested for the long-term benefit of the national economies. One of the first to be established was the Saudi PIF which began its work in 1971. Under the Saudi Crown Prince, MBS PIF is expected to continue to grow from today’s $620 billion to a $1 trillion dollar by 2025. 

SWF invest directly in companies’ and in private equity funds that invest in technology companies and in other strategic sectors. Unlike the past, SWF invests in low-risk mature businesses as well as in riskier early-stage ventures from all over the world. Mubadala or PIF for example are investing aggressively in artificial intelligence, biotechnologies, health, fintech and blockchain. Both PIF and Mubadala are also pursuing investments in renewable energy, green growth, clean tech and sports. PIF specifically is also investing in their three flagship projects of Vision 2030: the futuristic Neom city at 500 billion dollars, the leisure city of Qiddiya and the Red Sea tourism megaproject. The UAE’s $1.4-trillion wealth funds, combined across the different emirates, are now being used as part of the government’s strategy to diversify their economies as the world transitions away from fossil fuels to renewable alternatives such as Green Hydrogen.

Across the 7 funds, since 2008, Gulf SWFs have focused on these two types of funds:  

• Future generation funds, focusing on performance, long-term and foreign investment, particularly in Europe, the US and Asia.
• Funds focused on local economic development driven by their impact on their economies, particularly in terms of technology transfer, jobs and wealth creation.

What is happening in the market?

The Gulf region’s largest sovereign wealth funds have been involved in at least $28.6 billion worth of acquisitions outside the Middle East and Africa in 2022, according to data compiled by Bloomberg. That’s 45% more than at this point in 2021 and the most for any corresponding period on record.

Current global market conditions also support the rise of the Gulf SWF as their oil surplus can be mobilized and deployed quickly. These investment deals help in diversification away from oil over the long term and develop an alternative international revenue stream. These deals have accelerated as the pandemic, Russia’s war in Ukraine and global inflation are limiting the ability of traditional financial actors to invest, giving a chance to GCC funds to secure investments at bargain valuations. 

Conclusion

While Gulf SWF were the lenders of last resort during the 2008 financial crisis, they are fast becoming the most attractive investors and partners because of their strong liquidly, revived strategy targeting technologies and net-zero emission investments, and appetite for early stage disrupting ventures. This year alone, we Gulf SWFs have increased the deal numbers across every type of investments, and the mega deals (those above 1 billion dollar) are growing the fastest.  In the first 2 quarters of 2022 Gulf SWF closed 33 transactions for $1 billion or more, which is in line with SWFs trying to increase their allocation to private markets very rapidly.

As SWF to adjust to the new market conditions, we should expect more GCC WSF co-invest in partnerships with state organizations in destination markets and we should expect more investment in large US tech. Finally, as the GCC countries host or prepare to host global sports events like the FIFA world cup, we should expect more M&A activities across the football space in Europe and in other football mature markets.