Money talks for Gulf SWFs

The Gulf’s oil-rich sovereign wealth funds are seeking to increase their allocations to assets including private equity, infrastructure and real estate, while scouting out new opportunities in emerging markets

Sovereign wealth funds in the oil-rich Gulf will seek to raise allocations for private equity, infrastructure and real estate this year, while funnelling cash into local infrastructure, as part of a broader strategy to diversify their portfolios and spur the regional economy.

While none of these funds disclose the extent of their assets, they are widely perceived as ranking among the world’s richest institutional investors, not to mention the most secretive. According to estimates from the Sovereign Wealth Fund Institute, Saudi Arabia’s SAMA Foreign Holdings’ assets total $675.9bn, Abu Dhabi Investment Authority’s (ADIA) $627bn, Kuwait Investment Authority’s (KIA) $386bn and Qatar Investment Authority’s (QIA) $170bn.

Each of these derives its funding from its respective government’s hydrocarbons receipts and has a mandate to diversify its national economy, but they differ markedly in asset allocation and overall strategy.

ADIA, currently the only Gulf SWF to publicly disclose its asset allocations, presently allocates the bulk of its portfolio to developed market equities and government bonds, but is increasingly diversifying into areas including private equity, infrastructure and real estate.

According to its latest Middle East Asset Management Study, published last year, investment manager Invesco highlighted increased appetite for private equity-style deals as a key trend among the Gulf’s SWFs. In terms of those funds that primarily invest internationally, such as ADIA, KIA and QIA’s Qatar Holding, the average allocation for this asset class has risen from 5 percent in 2011 to 13 percent last year.

“They’re using private equity because they think that’s an opportunity where they can perhaps be more active and gain more value from the money they’re putting to work,” says Nick Tolchard, head of Middle East at Invesco. He says that this is part of a broader move by SWFs in the Gulf to reduce fees, increase exposure and pursue investment strategies outside of the remit of the large private equity houses.

Tolchard adds that sovereign wealth funds in the region are also seeking to tie-up with SWFs in regions like Asia for co-investment private equity deals.

There is evidence that sovereign funds in the Gulf have been bulking up their internal expertise in terms of private equity and infrastructure deals. Under Ahmed Al Sayed, appointed CEO last summer, QIA has since announced senior hires in emerging markets, real estate and infrastructure. ADIA has also recently hired new heads in its infrastructure division.

“There’s an area which most funds seem to think they can improve, and that’s to bring in more skills. But there’s only a certain amount of technical expertise to go around,” Tolchard says.

Gary Smith, head of sovereign wealth funds at Baring Asset Management, agrees that diversification has become the primary focus for the region’s sovereign wealth funds. The performance of Western equity markets last year, which saw the Dow Jones Industrial Average close the year up 26.5 percent and the S&P 500 up 29.6 percent, means that those funds with larger allocations to developed equities may have more risk appetite around the fringes of their portfolios.

“For most funds this means both a continued move away from government bonds to other asset classes,” explains Smith.

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Posted by: Medhat Magdi

Good point. However, what's the need for b&M to hire 400 professionals for just, mainly, investing in bonds, getting no more than 2.7% profit a year?
One more point, not all real estate and equity investment are risky.
However, I do agree with you that investment in general should be long term oriented and profit-balanced.

Posted by: John A. Sandwick

The asset allocation discussion is all fine, but compare what these SWFs are doing to what the Bill & Melinda Gates Foundation does. There you have 400 professionals creating global allocations with a very long-term investment horizon (essentially forever). They have ever resource for investing at their fingertips. They are not affected by political or even social trends, they are there simply to make a lot of money and give it to charity. Of the $36 billion in AUM they have 4% private equity and 0% real estate. Now, ask yourself, are the asset managers at the Gates Foundation stupid, and these SWF managers all geniuses? Or, are the SWF managers simply following popular trends, not really thinking through what they are doing. Private equity and real estate are sexy and hard to resist. It makes one more popular. Plain vanilla investing is boring. I personally believe the SWFs are making a big mistake, and the future will show us their errors.

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