Saudi Arabia plans $2 trillion sovereign fund

03 April 2016

Saudi investment vehicle will be big enough to buy top global conglomerates

Saudi Arabia plans to create the world’s largest sovereign wealth fund for the kingdom’s most-prized assets, including the oil giant Saudi Aramco.

The Public Investment Fund (PIF), will eventually control more than $2 trillion and help Saudi Arabia diversify its economy away from oil, Deputy Crown Prince Mohammed bin Salman al-Saud told US-based news agency Bloomberg in an interview.

Saudi Arabia will sell shares in Aramco’s parent company, transforming it into an industrial conglomerate. The initial public offering (IPO) could happen as soon as next year or in 2018. The kingdom plans to sell less than 5 per cent of Aramco’s shares to the public.

“IPOing Aramco and transferring its shares to PIF will technically make investments the source of Saudi government revenue, not oil,” Crown Prince Mohammed said. “What is left now is to diversify investments. So within 20 years, we will be an economy or state that doesn’t depend mainly on oil.”

PIF plans to increase the proportion of foreign investments to 50 per cent of the fund by 2020 from 5 per cent today, Bloomberg cited Yasir Alrumayyan, the secretary-general of the fund’s board, as saying.

The PIF will play a major role in the economy, investing at home and abroad. It would be big enough to buy the top global conglomerates including Apple, Google parent Alphabet, Microsoft and Berkshire Hathaway, the news agency reported.

The PIF wealth fund already holds stakes in companies including Saudi Basic Industries Corporation (Sabic), the world’s second-biggest chemicals manufacturer, and National Commercial Bank, the kingdom’s largest lender.

It is looking at two opportunities outside Saudi Arabia in the financial industry, and the prince said it is likely to conclude the deal on at least one of them.

PIF in July 2015 acquired a 38 per cent stake in South Korea’s Posco Engineering & Construction for $1.1bn and the same month agreed to a $10bn partnership to invest in Russia with the Russian Direct Investment Fund.

Saudi Arabia is implementing sweeping reforms in its economy, with an aim to reduce its revenue dependence on the sale of hydrocarbons. Last year, the government slashed spending and capped the award of new projects in the kingdom. It also raised the prices of fuel and electricity to compensate for decline in oil prices.

The government is expected to outline a blue print of structural reforms in the kingdom’s economy in April through the National Transformation Plan. “We are working on increasing the efficiency of spending,” said the prince. A draft of the plan was due to be submitted by the Economy & Planning Ministry by the end of March.

Saudi Arabia has also identified about 146 state-owned entities that could be privatised or sold to the public as it looks to monetise assets to meet budget shortfalls, MEED reported on 27 March. The list includes subsidiaries of core government ministries and government-related entities (GREs), according to sources familiar with the matter.

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