Kuwait Investment Authority (KIA) is in an enviable position. At a time when many Gulf sovereign wealth funds have seen government funding spun off to prop up massive public spending drives, KIA has secured a raise. Kuwait last month said it planned to more than double the share of state revenues funnelled into its Future Generations Fund, from its usual 10 per cent to 25 per cent this fiscal year.
The news reflects the increasingly central role played by KIA in Kuwait’s economy. The fund, which was originally established to invest the Gulf state’s petrodollars abroad, is facing growing pressure to spend domestically to help shore up Kuwait’s stunted economy.
Market speculation last month suggested KIA was partly responsible for a short-lived stock market rally, intervening to buy up shares in listed companies after the index slumped to an eight-year low in August.
In 2011, the fund pledged to launch a KD1bn ($3.6bn) portfolio to invest in Kuwait’s real estate market, where property prices tumbled in the wake of the global financial crisis. It holds a number of stakes in local companies, including Kuwait’s largest telecoms operator, Zain.
It is expected to take a 20 per cent stake in loss-making flag carrier Kuwait Airways, following a privatisation process that will see the government offload 35 per cent of the airline to a strategic partner.
The KIA is also managing a share auction for the Kuwait Health Assurance Company, a $1.13bn public-private partnership (PPP) that aims to privatise expatriate health insurance. The project, which also includes plans to build and operate three new hospitals and 15 clinics, is seen as a litmus test for other PPPs outlined in Kuwait’s five-year development plan.
“KIA’s domestic holdings have increased. It is either managing more domestic projects in the absence of foreign partners, or it is investing in other assets at home,” says Rachel Ziemba, a London-based director at New York-headquartered Roubini Global Economics.
|Global sovereign wealth funds|
|Country||Fund||Assets under management ($bn)**|
|Norway||Norway Government Pension Fund Global||582.9|
|UAE*||Abu Dhabi Investment Authority||450|
|China||China Investment Corporation||374.3|
|Kuwait*||Kuwait Investment Authority||296|
|Singapore*||Government of Singapore Investment Corporation||185|
|Singapore||Singapore Temasek Holdings||141.6|
|Qatar*||Qatar Investment Authority||135|
|Russia||Russian National Wealth Fund||89.8|
|Russia||Russia Reserve Fund||82.4|
|Australia||Australian Future Fund||76.5|
|Libya*||Libyan Investment Authority||64.2|
|*=Estimated; **=End of 2011. Source: GeoEconomica|
“In some territories we’ve seen sovereign funds either partner into or invest in certain industries as almost a pseudo-PPP in the absence of other options,” says Victoria Barbary, senior researcher at the Sovereign Investment Lab of Bocconi University, Milan. “That appears to be happening in Kuwait now.”
KIA’s domestic push is a reflection of Kuwait’s own economic woes. One of the least economically diversified of the six GCC states, Kuwait’s efforts to position itself as a trade and finance hub have fallen short.
The private sector comprises less than a third of the economy, leaving the Gulf emirate heavily dependent on petrodollars. Political bickering has held up investment, generating record budget surpluses but stalling a KD30bn economic development plan.
Public spending in Kuwait
The Arab spring has exacerbated pressures, forcing Kuwait to hike public spending in an attempt to pacify its population. Strikes by public sector workers resulted in a 25 per cent pay rise for government employees in March, just weeks after former central bank governor Sheikh Salem Abdulaziz al-Sabah resigned in protest at high expenditure. The Washington-headquartered IMF warned in May that Kuwait could exhaust its oil revenues by 2017 if it fails to rein in spending.
“Not only is spending increasing, but it’s nearly all being spent on consumption,” says Ziemba. “It’s transfers to citizens, increases in public sector wages – we’re not seeing an increase in public investment.”
The decision to decant more petrodollars into the Future Generations Fund is a means of offsetting this spend, Ziemba adds. “It ringfences a greater percentage of Kuwait’s oil revenues for the future, not to spend today. It also recognises that public investment – even that allocated in the budget – has tended to not actually be spent.”
[KIA] is either managing more domestic projects in the absence of foreign partners, or it is investing in other assets at home
Rachel Ziemba, Roubini Global Economics
Many of the region’s sovereign states have turned inwards. Foreign investments have been cut back in favour of redirecting cash into services such as housing and job creation. A survey by asset manager Invesco, published in May, found 56 per cent of new money from Gulf sovereign wealth funds was invested regionally this year, up from 33 per cent in 2011. Investments in local bonds more than doubled to 14 per cent, the Middle East Asset Management Study found.
“We’ve seen a strong swing towards local agendas,” says Nick Tolchard, head of the Middle East region for Invesco. “The local development pace has increased and funds are being utilised to keep economic growth plans on track, or they may be supporting policy by investing locally.”
For KIA, the transition to increased domestic spending has been fraught. Established in 1953, KIA is the world’s oldest wealth fund, and has devoted decades to investing abroad. It operates offices in London and Beijing, and maintains stakes in several blue-chips, including the UK’s BP, Germany’s Daimler, and Bank of America Merrill Lynch.
Analysts estimate KIA lost about 25 per cent of its portfolio in the financial crisis, but did rake in about $1.1bn on its contentious Citigroup investment by not selling at the trough. The fund is prohibited by law from disclosing its investments, but analysts estimate the size of its general reserve fund to be almost $300bn.
“KIA really has no experience of investing domestically at all,” says Barbary. “The last year has been a little chaotic and getting its domestic strategy right will be a massive challenge.”
Aside from the difficulty of identifying attractive assets, KIA must also grapple with the increased scrutiny likely to accompany local investments. Despite being answerable to parliament, the fund has largely escaped Kuwait’s political infighting, thanks to its overseas focus and taste for under-the-radar portfolio investments. Unlike its glitzy neighbour Qatar, Kuwait has steered well clear of headline-grabbing trophy assets. Domestic deals, however, could leave KIA vulnerable to political pressures and vested interests.
KIA really has no experience of investing domestically at all … getting its strategy right will be a challenge
Victoria Barbary, Bocconi University, Milan
“When it was investing abroad, that kind of political influence wasn’t really important,” says Barbary. “But when the remit changes … you do end up with more concern over where the money goes domestically. It does make it harder to identify where would be uncontroversial to invest, but still make an impact.”
KIA remains on the lookout for assets abroad. Risk appetite among wealth funds has declined after the shock of the financial crisis, spurring a return to income-generating, safe-haven assets such as real estate.
KIA has snapped up multimillion-dollar properties in London and Manhattan through its overseas property vehicles, fending off competition from rival funds. Its London-based property arm, St Martins, owns close to 1 million square feet of commercial real estate in countries including Australia, France, Japan and the UK.
“Real estate is a relatively safe bet for sovereign funds,” says Invesco’s Tolchard. “The key issues are the search for income and yield. It’s very difficult to get yield with a comparative level of risk in the equity markets.”
Infrastructure investments are also attracting attention, he adds. “If you take the two together, it is quite a rapidly increasing part of asset allocation.”
KIA has also turned its attention to emerging markets, particularly China, which it may use as a springboard for growth across the wider Asia region. It opened an office in Beijing last year to mark its position as a qualified foreign institutional investor (QFII).This permits the fund to invest in the country’s yuan-denominated stocks and bonds.
The wealth fund held an existing 15 per cent stake in the Kuwait China Investment Company, an asset management firm established in 2005 to capitalise on the region’s economic growth.
KIA has already been a key investor in listings, including those of Agricultural Bank of China and Citic Securities. The China Securities Journal this month reported that KIA had applied to raise its investment quota past its existing QFII $1bn ceiling.
“KIA is keen on China because there is growth and yield,” says Barbary. “They’re not making any money on bonds; they’re not making any money on developed markets’ equities. They’re a long-term investor so they can sit out some of the volatility in emerging market stocks.”
Russia and Egypt have also whet KIA’s appetite. In June, the Russian Direct Investment Fund said it would partner with the Gulf fund to invest $500m in Russian companies. In April 2011, meanwhile, KIA said it had launched a company with £E1bn ($164m) to tap Egypt’s post-crisis economy. The firm was positioned as KIA’s investment arm in the North African state, but has yet to announce any deals.
New investment model
KIA faces a tricky task as it seeks to find its feet with its new investment model. As the fund grows bigger, swollen by a bigger cut of oil revenues, the struggle to find attractive domestic opportunities will increase. Equally, if IMF predictions are correct, Kuwait may be tapping its wealth fund within 10 years to help prop up public spending. KIA may need to shrink its investment horizons to accommodate these demands.
“If the government does have to start drawing down, the challenge is how [KIA] transitions into being a different kind of investor, with liabilities,” says Barbary. “Sovereign funds are a little like oil tankers; it takes them a long time to turn around and Kuwait is no different. When you’ve had more than 50 years of one model, changing to another can be very difficult.”
In 2011, KIA pledged to launch a KD1bn ($3.6bn) portfolio to invest in Kuwait’s real estate market