In October, the Qatar Investment Authority (QIA) divested a $615m stake in German construction firm Hochtief. It is also planning to sell a $425m stake in France’s Vinci.

The two transactions alone could be considered part of the sovereign wealth fund’s (SWF’s) usual strategy of turning over assets, as it sells stakes for a profit. But the news comes against a background of SWFs converting illiquid to liquid assets and major withdrawals from investment funds.

GCC governments spent years transferring surplus oil revenues to SWFs. Now facing major fiscal deficits, they are starting to draw down on the SWFs to finance their shortfalls.

Different structures

The extent to which governments can dip into SWFs depends on their structure and purpose. Funds with a mandate for stabilisation, such as the Abu Dhabi Investment Authority (ADIA), can be accessed more than funds that act as investors and holding companies in the domestic economy, such as Bahrain’s Mumtalakat Holding Company.

“Where fiscal budget deficits are widening and there is government budget reliance on oil, [SWFs] are rethinking their allocation,” says Michael Maduell, president of the US-based Sovereign Wealth Fund Institute.

“The funds are looking at their assets to see what can be sold to make money.”

Riyadh vulnerable

Data from US-based Nasdaq Advisory Services, reported by UK news agency Reuters, shows the Saudi central bank, Saudi Arabian Monetary Agency (Sama), has sold $1.2bn of equities across Nasdaq’s European client base. Dubai-based market intelligence firm Insight Discovery puts the kingdom’s global withdrawal from investment funds at $50bn-$70bn.

Sama manages Saudi Arabia’s reserves and while not technically a SWF, it fulfils that role in the kingdom. However, its lack of a fixed mandate means the government has been able to draw down its reserves by SR279bn ($74.4bn), or 10.2 per cent, to SR2,483.5bn in the year ending August 2015, according to Sama.

It is believed to be pursuing the most aggressive strategy of liquidating assets for cash and securities.

While the rate of depletion has been slowed by debt issuance in the third quarter, and reserves remain historically high, its rapidity is a worrying sign for Saudi Arabia’s fiscal health.

Higher spending

“Saudi Arabia is in a different position, with higher expenditure, so they care more about cash and liquid securities than Qatar or Abu Dhabi,” says Maduell. “If low oil prices go on, they will prefer liquid assets, and when they go up SWFs will refill their coffers and then restart acquisitions.”

Sama’s strategy has always been conservative, with a higher proportion of securities and a lower proportion of private equity.

Khalid al-Sweilem, former head of Sama’s investment portfolio, has called for Saudi Arabia to establish two sovereign wealth funds on the model of the Kuwait Investment Authority, which manages a Future Generations Fund (FGF) and a General Reserve Fund (GRF).

While the FGF operates as a pension fund, investing for the long term, and cannot be drawn down, the GRF receives government surpluses and is a stabilisation fund, intended to meet shortfalls created by volatile oil prices.

Greater impact

But other SWFs are also feeling the pressure. ADIA has cut some $300m-worth of European shares from its $3.6bn holding, according to Nasdaq.

QIA has made some high-profile divestments, but this follows a year of major acquisitions. It spent $14.8bn in 2014, the highest in the GCC and second-highest globally, according to the Sovereign Wealth Lab at Italy’s Universita Bocconi.

Meanwhile, holding company-type SWFs, including Abu Dhabi’s International Petroleum Investment Company and the Investment Corporation of Dubai, are expected to consolidate rather than invest, as new funds are not made available.

Changing strategies

The prospect of governments drawing down on SWFs is pushing them to change strategies, and alter the type of asset they prioritise. They are transferring their focus to liquid assets such as fixed-income products.

But liquidity has to be balanced with high returns, and funds are still looking for acquisitions, albeit on a smaller scale.

Institutional investment analysis firm Preqin has found that more SWFs are planning to increase their allocations for real estate investment, with 86 per cent globally looking to invest directly.

Property focus

However, these priorities may be driven by other market factors such as low interest rates, a strong dollar and poor stock market performance, especially in emerging markets.

Real estate deals in 2015 have focused on London, such as ADIA’s purchase of a Marriott Edition hotel and QIA’s $4bn acquisition of Songbird Estates in Canary Wharf.

Fundamentally, stabilisation SWFs are doing the job they were created for – investing surpluses from high oil price years to fund deficits in low oil price years. Those with clear structures and mandates, such as Kuwait Investment Authority, will weather the low oil prices.

“None of the funds are in serious distress and there are no firesales, although they wouldn’t want to telegraph something like that,” says Maduell. “They are taking advantage to look at their portfolios and sell above the market price.”

Continuing depletion depends on oil prices and how governments manage their budgets. But every withdrawal from SWFs is less investment, and GCC governments must walk a fine line between spending, debt and providing for a future where oil revenues will likely dwindle.