After a slow start, Saudi Arabia’s sovereign wealth funds (SWFs) may be gearing up for some earnest deal-making. In early February, US-based solar technology manufacturer SunEdison struck a deal with two investment arms of the Saudi government to fund a feasibility study into the development of an integrated solar photovoltaic manufacturing complex at Waad al-Shamal industrial city in the north of the country.

The estimated $6.4bn project will enable Saudi companies to gain access to and benefit from SunEdison’s technology and downstream products to develop solar energy projects in local and regional markets.

Besides giving a boost to the kingdom’s renewable energy ambitions, the agreement was doubly significant, in that it was a rare deal by the newly established Sanabil al-Saudi, alongside the state-owned Public Investment Fund (PIF).

Funding entities

Sanabil, which is wholly owned by the PIF, was established in July 2008 with $5.3bn in assets and a remit to focus on technology-related investments. However, the fund has had a quiet gestation period. Unlike other limelight-hugging Gulf SWFs, such as Qatar Investment Authority (QIA), which dived into multimillion-dollar deals for big-name assets including the UK’s Harrods and Germany’s Porsche, the Saudi fund waited until January 2013 to make its first investment.

What… the position of these entities in the broader institutional architecture will be is still under consideration

Gulf-based economist

At that point, it acquired a 13.7 per cent interest in the Riyadh-based power and water developer Acwa Power, which is also building solar energy assets. The company issued 89.5 million shares to Sanabil and the Saudi Public Pension Agency (PPA), which took a 5.7 per cent stake.

An equally low-key start has been seen at another recently created state investment vehicle, Hassana Investment Company, which is held by the General Organisation for Social Insurance (GOSI) – the government unit responsible for private-sector workers’ pension contributions. Set up in March 2009 to invest GOSI’s estimated $400bn in assets, Hassana’s investment mandate targets real estate and commercial projects. It also covers domestic and international equity markets, a potentially significant role given that GOSI holds interests in some of the kingdom’s biggest stocks.

There has been precious little public information about Hassana’s strategy, and no detail on any deals completed.

Although Qatar, Kuwait and Abu Dhabi have all set up major SWFs with explicit investment mandates and sizeable assets under management, Riyadh has been reticent about anticipating a clear strategy for Sanabil and Hassana.

The government has so far failed to make public what the two SWFs are intended to achieve, what their precise investment strategies are, and how they fit into the wider institutional architecture of the kingdom. This is all the more confusing, as the central bank, Saudi Arabian Monetary Agency (Sama), is already charged with managing the country’s wealth. 

“Organisationally, they’ve been set up in a pretty professional way, using good people to staff them, including people with long-standing, impressive credentials in the Saudi context, as well as qualified professionals from outside the kingdom,” says one senior Gulf-based economist. 

Among the key investment professionals hired by Sanabil are a former Morgan Grenfell private equity executive, Scott Lanphere, who joined in November 2011 as head of direct investments, overseeing a $4.5bn private equity programme. In March 2012, John Breen, formerly of the Canada Pension Plan Investment Board, joined as senior executive investment officer.

These individuals add credibility and heft to Sanabil. “The idea is they do want to create proper asset management entities,” says the Gulf economist. “But what exactly the relative position of these entities in the broader institutional architecture will be is still under consideration.”

A complicating factor here is that there are a number of entities in the mix; not just Sama, but also the cash-laden PPA and PIF.

Unwanted influences

One possibility is that there is a deliberate desire on the part of the Saudi authorities to ensure at least part of the oil windfall is not subject to any predetermined set of rules and is not vulnerable to political bargaining. This is currently the case with the likes of the PIF, and as has occurred with Sama’s reserves, says the economist. “Whenever the tide has turned, Sama’s reserves have been the first port of call, in terms of quick cash,” he says.

The new investment bodies may be a way for the Saudi authorities to create the means of removing cash streams that were potentially subject to political pressure.

“It doesn’t necessarily even have to be a very structured system in terms of managing those assets. They could just parcel them out to various asset managers outside the kingdom,” says the Gulf economist.

The kingdom’s powerful and respected central bank manages a total of $720bn in reserves, which exceeds 100 per cent of Saudi Arabia’s GDP. Most of these reserves are held in liquid assets, such as US Treasuries.

A significant portion of the reserves are deployed to defend the riyal, whether as cash or short-term securities and deposits. The remainder is kept in fixed-income securities capable of being gradually diversified, either into other currencies or real assets.  

If we have more investments by Sanabil and others, we’d see more revenue diversification

Fahad Alturki, Jadwa Investment

Some of Sama’s remaining reserves are placed in equities and alternative strategies, with suggestions that up to 3 per cent could be put in more risky, alternative asset classes. Last year, it began to place some of its allocation into infrastructure, the first time it had moved away from liquid assets. Even so, the central bank’s overall investment focus is likely to tend towards the conservative. 

“It would be much more difficult for the Saudis to start throwing around their central bank reserves on some kind of flagship international investments,” says the Gulf economist. “Given the magnitude of those reserves, it is understandably much more conservative and subject to stricter limits. So, for the most part, it will prefer liquid investments.”

Diverse vehicles

The different investment arms associated with the Saudi state should not be lumped together as one group, says Fahad Alturki, head of research at Riyadh-based Jadwa Investment. “The PIF, Sanabil and Sama are all very different. Sama has vast chunk of the reserves, but it acts as a central bank rather than a SWF in managing these vast reserves.”

Despite the opaqueness surrounding the kingdom’s investment vehicles, some contours of the new SWFs investment strategies are becoming clearer. “In terms of the geographic location of the investments, Sanabil is diversifying between local and foreign, whereas the PIF is mostly looking at local investments in real assets,” says Alturki. “Sama, on the other hand, holds mainly liquid sovereign securities.”

Sama’s reticence over its precise investment priorities is understandable, says Alturki. “If you have a fixed exchange rate, you wouldn’t really expect your central bank to explain its investment strategy in fine detail,” he says.

In light of Sama’s substantial size and experience with its own investment management unit, the question is whether the smaller SWFs will be able to truly compete. There must be questions as to whether Sanabil and Hassana will ever really gain the momentum and credibility that will make them significant investors, whether inside the kingdom or abroad.

The Saudi authorities clearly want the option of investing elements of their national wealth in a more flexible way than conventional central bank reserve management would typically allow. There is a case to be made for empowering the likes of Sanabil with more assets under management and a more aggressive investment mandate.

“As a Saudi observer, I’d very much like to see a SWF with larger wealth than Sanabil has, and I wouldn’t like to see that managed by a central bank – Sama should do what it has been doing, which is managing the country’s reserves rather than wealth,” says Alturki.

The new entities could be seen as attempts to create centres of excellence; entities that could develop some genuine asset management capacity. This has always been an objective in a hugely capital rich country such as Saudi Arabia, which needs to develop a domestic asset management industry.

Even if these entities are able to secure this role, it may prove difficult for them to take away large chunks of Sama’s reserves.  

Norway, another oil-rich economy, may provide a model for Saudi Arabia to follow. Once it started North Sea production, large volumes of oil revenues began flooding into its strategic reserve, the Petroleum Fund of Norway, which now exceeds Sama’s reserves with an estimated $815bn in assets under management.

For many years, this fund kept expanding until the authorities eventually decided what they wanted to do with the money.

Saudi Arabia may now be in this position, even if – unlike Norway – it has a large and growing population and substantial domestic spending requirements. “The Saudi authorities recognise that even though money is plentiful today, some of the fiscal trends in energy markets are quite alarming and they may need more cushions in the future than what Sama’s reserves currently provide,” says the Gulf economist.

Pressing need

Sanabil has shown, with its energy-related investments in Acwa Power and SunEdison, a desire to participate in the development of the country’s industrial capacity, harnessing its natural resources.

It remains to be seen if it is ready to reposition itself as a more aggressive, risk-taking entity with asset management and direct investment capacity.

There is a pressing need for such an entity, says Alturki. “If you look at the kingdom’s non-oil revenues, these are still very small,” he says. “If we have more investments by Sanabil and others, we’d see more revenue diversification –not necessarily Saudi-based revenue, but probably in the form of intentional investment.” 

This is not to say that Sanabil or Hassana will soon be rivalling the likes of QIA and Abu Dhabi Investment Authority in bidding for holdings in major global financial entities or department stores.

“Going out and buying luxury carmakers may or may not be a part of the Saudi thinking, but a much more compelling argument is the realisation that they have the ability to invest in a far wider range of asset classes than they would typically have with foreign currency reserves,” says the Gulf economist. 

There is a precedent for Gulf SWFs with smaller assets under management – Bahrain’s Mumtalakat, with an estimated $7bn, is one of them. The island state, however, is not a significant oil producer. Many in Saudi Arabia would like to see SWFs that are more in line with its status as the Middle East and North Africa region’s largest and most powerful economy. It is not yet evident that Sanabil or Hassana will be those entities.