The New Saudi Investment Vehicle
Andrew England writes in the Financial Times about a new sovereign fund that Saudi Arabia is close to approving and about the public investment fund (PIF), a domestically focused holding company of which it will be a subsidiary. The fund will start small, with capital of under $6 billion and will have separate management from the public investment fund, its parent. While details are limited, the fund will be a portfolio investor – Mansour al-Maiman cites Norway’s pension fund and Singapore’s GIC as models. I see it also as being an example of the trend in GCC countries to create new investment vehicles to optimize wealth management, diversify revenue streams and promote economic development. Yet in some cases, the development of these new vehicles has the potential to open up competition between different asset managers not coordination.
Given the size of Saudi Arabia’s assets, its not a surprise that it might allocate more funds to higher yielding assets – in fact some people have been surprised it took this long – or that the assets involved are relatively small. 20b Saudi Riyal or 5.3b USD is very small up next to the Kingdom’s foreign assets – SAMA manages well over $300 billion. And lately Saudi Arabia has been saving around $15 billion a month.
So why so small? Perhaps attempt to limit the pressure to place a lot of funds immediately. This initial capital might be a pilot project with more to follow. Alternatively, a small amount might minimize any conflicts within the government about how to manage the funds and possibly any competition with SAMA. Furthermore Saudi Arabia may have been wary of creating a fund large enough to move markets as it shifted allocations, especially as it probably can’t shift much from US assets at present. With the exception of China, there isn’t much precedent for launching a fund with more than a few billion dollars. Most have grown from a small level, gradually receiving most of the inflows.
At the same time, despite its pledge to be a portfolio investor, it might come under pressure to be more activist or to spend more domestically. The goals of the fund are as follows
– Building a savings base for future generations
– Diversifying the Kingdom’s financial asset base and optimising its investment risk management
– Optimising returns on national funds
– Enhancing development of the Kingdom’s financial services sector, building [a} Saudi national asset management skills base and driving Saudi financial sector competitiveness.
In other words sounds not so different from a group of investment vehicles emerging out of the Emirates including Mubadala. Of course the Saudi fund may not take direct stakes like Mubadala or even the sort of private equity style funds of other GCC countries. It may prefer to set it self up as a strategic equities fund like that of DIC. While it may stay a portfolio, and largely passive investor, some may encourage it to seek out a more active role. One could extrapolate from the activities of the PIF domestically to get a sense of the kind of role some might seek for this new fund. It’s worth checking out the transcript of the interview to learn more about the PIF itself whose portfolio today consists substantially of loans, equity shares in national companies and equity shares in bilateral and multilateral corporations:
Below I excerpt from a new report available to RGE clients on the investment strategies of GCC funds, with special attention to the strategic stakes many have accumulated. Saudi Arabia
Size: At present, Saudi Arabia lacks a dedicated oil investment fund – its foreign assets are managed by the Saudi Arabian Monetary Agency (SAMA) whose non-reserve foreign holdings were just under $200 billion at the end of 2006 and over $300 billion by February 2008. SAMA’s reserves accounted for another $30 billion. SAMA also manages almost $60 billion on behalf of other government agencies including Saudi pension funds.
Saudi Arabia is considering a small $6b fund to invest in foreign equities. Such a fund might be managed by the public investment fund of the ministry of finance which until now has focused on attracting investment into Saudi Arabia, loaning funds to Saudi businesses and managing stakes in state companies
Given the size of SAMA’s assets, Saudi Arabia might choose to seek higher returns either by creating a new institution to manage part of its foreign assets or increasing the share allocated toward higher-risk assets within SAMA.
Asset allocation: Most of SAMA’s assets are invested in liquid, low-risk bonds but also include equities, and higher risk bonds than those usually included in reserve holdings. The strategic allocation is not disclosed but McKinsey estimated that SAMA’s total foreign assets had a 20% cash/deposits, 55-60% fixed income and 20-25% equity split.
Currency Composition: SAMA’s dollar share is likely by far the largest of GCC funds. They may be as high as 85%.
SAMA outsources all of its equity allocation and likely some of its fixed income management. No strategic stakes are reported for SAMA but Saudi private investors are very active. Prince Alwaleed bin Talal’s Kingdom Holding is most notable, managing public and private equity holdings of about $50 billion.
Saudi Arabia has a higher share of foreign assets in private hands than other GCC countries – as much as $326 billion if McKinsey calculations are correct. An undisclosed Saudi investor took a stake equivalent to 1.5% of UBS in December along with GIC.
Governance: The proposed fund would be a subsidiary of the public investment fund, and thus might come under its oversight. However, Mansour al-Maiman suggested it would have a separate and independent management team. Since one goal is developing asset management industry, it might quickly seek to increase the share managed internally.
No guidelines for disclosure have been set. At present SAMA does not disclose the currency composition of its assets except to say that the dollar dominates (as would be expected of a dollar-pegged economy). However, it does break down its non-reserve foreign assets into holdings in foreign banks (deposits) and holdings of foreign securities. These, like the total stock are reported monthly.
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one puzzle: why was the same agency that manages the states strategic stake in domestic industry also given the mandate to invest abroad. China created a new agency, but one that has a similar structure: strategic investor domestically, portfolio investor abroad. It is a structure that I suspect increases rather than reduces concerns about less-than-fully economic motivation.
How would one determine what percentage Saudi dollars are invested in, lets say, the non-American automoble industry?Trying to pull-together a few investment facts regarding equity purchases in auto-sector (%) from this area of the world: “Saudi Arabia has a higher share of foreign assets in private hands than other GCC countries – as much as $326 billion if McKinsey calculations are correct.”How much of their money is invested in the auto sector — Toyoto, GM, Hyundai, Suzuki, Honda, BMW etc. ?How do I determine that? Thanks for any research tips.