For more than a decade, the small Gulf state of Qatar, with a population of just 1.6m, has been on a conscious drive to build an international presence much larger than its size. In sectors ranging from politics, and economics to sport and culture, it has mounted a campaign to establish itself as a world leader. The emirate is now using its accumulated oil and gas wealth to make a similar impression on the world of international investment, at a time when most economies are grappling with recession.

Foreign acquisitions

On 8 May, Qatar Holding captured headlines around the world with the £1.5bn ($2.2bn) acquisition of the iconic Harrods store in London, one of the world’s most famous retail outlets. Two days later, officials announced that the company – the strategic and direct investment arm of Qatar Investment Authority (QIA), Qatar’s sovereign wealth fund – had set up an investment fund in Indonesia worth $1bn. On 14 May, Malaysia’s state news agency Bernama announced QIA had signed a memorandum of understanding with state-owned 1Malaysia Development Berhad, under which it plans to invest $5bn in the country.

Meanwhile, on 26 May, the UK’s Financial Times newspaper ran a report saying the QIA was interested in buying part of the US Treasury’s 27 per cent stake in recently bailed-out Citigroup.

QIA was founded in 2005 with a mission to strengthen the country’s economy through diversification into new asset classes. According to its website, QIA is a “central part of the state of Qatar’s economic vision”, allowing it to “invest in a manner, which transcends the cyclicality of economic cycles and fluctuations of the financial markets”. It aims to strengthen the Qatari economy by “making investments in different asset classes and geographies, thereby diversifying the economy and its financial resources”.

But further details of QIA’s investments are hard to come by. It does not publish financial information, and is coy about its strategy. Despite repeated requests, it was unwilling to speak to MEED about its strategic priorities. In a report published in May, the US’ Carnegie Endowment for International Peace ranked Qatar’s compliance with the Santiago principles (a voluntary code outlining best practice for sovereign wealth funds), 20 out of the 26 countries to have signed up to the guidelines.
It rates Qatar’s compliance at about 35 per cent, behind Abu Dhabi Investment Authority (Adia), with 50 per cent, and Kuwait Investment Authority, with 41 per cent.

“Qatar’s sovereign wealth fund is probably the least transparent in the region now, especially given that Adia has published its first annual review,” says Tristan Cooper, head analyst for Middle East sovereigns at Moody’s, an international credit rating agency. “Judging its investment strategy based on public information is shooting in the dark.”

QIA’s opacity notwithstanding, analysts are agreed on several points: it is a central pillar of Qatar’s economic diversification; it has an aggressive attitude to buyouts; and is following a twin-track strategy, comprising investments in established Western brands on the one hand, and emerging markets on the other.

Diversification move

Like its Gulf neighbours, Qatar’s overwhelming reliance on hydrocarbons revenues makes diversification a key priority for the government. Its chief revenue source is finite and subject to price fluctuations on global markets that are largely beyond its control.

“Sovereign wealth funds are of huge strategic importance to the Gulf oil producers,” says Richard Fox, senior director of Fitch Ratings in London. “They are an important buffer against energy price volatility.”

According to the Washington-headquartered Institute of International Finance, the QIA has already invested an estimated $70bn to create a source of revenue that is wholly detached from its oil and gas resources. “The objective is to make sure they invest in areas that are not correlated to the Qatari economy and that provide future generations with a diversified income stream,” says Marios Maratheftis, head of research at Standard Chartered in Dubai.

In seeking to use international investment as a means of economic diversification, Qatar is following the example of Kuwait, whose population is also too small to rely on for broadening its economy through the development of industrial and manufacturing sectors alone.

“In Kuwait, 90 per cent of imports are covered by the interest on sovereign investments,” says Mohsin Khan, senior fellow at the Peterson Institute for International Economics, also based in Washington. “That’s the model that Qatar is using. It is trying to build up a lot of assets to develop a large revenue stream outside hydrocarbons. Rather than a diversification of production, it’s a diversification of revenue.”

Although QIA claims to have a “conservative approach to leverage”, most analysts believe it has a much greater tolerance of risk than its Gulf counterparts. “QIA is probably the most aggressive sovereign wealth fund in the Gulf – it’s into anything and everything,” says Khan. “Compared to other Gulf funds, Qatar is leveraging itself substantially. Its capital investment might be $50-70bn, but its assets may have cost a lot more.”

Fox agrees: “QIA is more equity focused and it has a higher risk-profile than the other sovereign wealth funds in the Gulf.”

Investment strategy

Investments to date fall broadly into two categories: established companies with a strong reputation and a proven track record, and emerging market opportunities. The Harrods acquisition not only fulfilled QIA’s basic criteria for an established firm, but it was made particularly attractive by the weakness of the pound and the recent depression of the UK real estate market. Qatar may seek to further exploit the deal by opening up the first international stores under the Harrods brand, perhaps in Shanghai, or even in Qatar itself, say industry sources.

The Harrods purchase was the latest in a string of investments in the UK that includes stakes in the London Stock Exchange, Barclays Bank, the J Sainsbury supermarket chain, and Songbird Estates, which owns a substantial part of London’s Canary Wharf financial district. QIA is also the third largest shareholder in Germany’s Volkswagen and has a stake in Credit Suisse.

At the same time, Qatar’s investment in Malaysia and Indonesia show its desire to develop a position in future growth markets. “Asia and the emerging markets are the buzzword in the Gulf,” says Khan. “Earnings on safe assets in the West are negligible. There are bargains in the real estate sector, but Middle East governments are cautious about a physical presence. Everyone is looking east for investment in both real and financial assets. It’s the new world, where the money is to be made.”

The Indonesian fund will focus on investments in “infrastructure and natural resources,” according to Indonesian government officials, while that in Malaysia is likely to be devoted to real estate and energy infrastructure. “I expect Malaysia and Indonesia to outperform western markets in terms of growth,” says Maratheftis, “Indonesia in particular has shown great resilience [to the global economic downturn].”

Emerging markets

Qatar is also in the early stages of establishing a presence in Asia’s two largest markets. In late 2009, Qatar Holding opened an office in China, and QIA has an office in India. “These countries maybe don’t have deep enough markets to absorb funds from the Middle East at the moment,” says Maratheftis. “But I expect them to outperform western economies in the coming years and to open up to overseas investment in the future, so it makes perfect sense to focus on them.”

While Qatar’s overseas investment strategy leaves it vulnerable to the volatility of global markets, it is in a strong position to take on risk. “Given their stage of hydrocarbons output, which is still ramping up hugely, they can take more risks because they are nowhere near their peak revenue stream,” says Fox. “The influx of revenues means that the QIA’s wealth is increasing despite market place volatility.”

Cooper agrees: “Qatar’s huge inflow of gas revenues all but ensures the QIA’s riches will accumulate even if it suffers mark-to-market [the valuation of an asset based on its current market price] hits from volatile prices.”

Qatar’s aggressive investment strategy and rapid accumulation of wealth point to a sharp increase in overseas investment in the coming years, so more headline grabbing acquisitions can be expected. “Any surplus revenues go into the QIA, so you can expect an exponential increase in investment,” says Khan. “If they keep central bank reserves where they are, they’ll have about $20bn to invest in 2010 and about $50bn to invest in 2011. Even if they’re leveraging conservatively, they’ll be able to invest in assets worth two or three times that.”