The Long-Term Strategy of Gulf Sovereign Wealth Funds

Joseph Dana

AFP Photo: Adrian Dennis

The world’s largest sovereign wealth funds are sensing the moment is ripe for bargain-hunting. The Covid-19 pandemic has produced perfect conditions for cash-rich funds, such as Saudi Arabia’s Public Investment Fund (PIF) and Abu Dhabi’s Mubadala, to scoop up a wide variety of assets. With billions of dollars from the sale of hydrocarbons under their management, such Gulf funds play a critical role in long-term wealth creation for countries across the region. Why, then, are their actions so often disparaged?

In the last month, Saudi Arabia’s wealth fund has bought an 8.2 percent stake in cruise operator Carnival and holdings in oil and gas companies Royal Dutch Shell, Total, Eni and Equinor. The Saudis also led a group of investors in purchasing an 80 percent stake in the English premier league soccer club, Newcastle United. Other funds, including the Qatar Investment Authority, which owns London’s Shard building, are looking for similar opportunities in this turbulent market. But it is Saudi Arabia that has got the world’s attention.

The recent purchases provoked some rather waspish comments in the global financial press. “There’s a certain devil-may-care glamor about going on a shopping spree when you’re already living beyond your means,” remarked one Bloomberg columnist. The Financial Times eschewed hyperbole but ran a lengthy dissection of the specifics of the deals.

Surprisingly, both publications missed the point. Let’s consider the Carnival purchase as an example.

For the past three years, Saudi Arabia has been opening up to global tourism. As part of the Vision 2030 strategic framework for economic diversification, the country has greatly increased its investments in tourism infrastructure, as well as allowing tourist visas-on-arrival for nationals of 72 countries. These measures are deemed critical for broadening the kingdom’s economy away from oil. With a pristine coastline along the Red Sea, there is plenty of room for growth.

Taking a major stake in one of the world’s largest cruise lines is a logical move; it will help persuade Carnival to bring more cruise liners to the country and kickstart its Red Sea tourism. Since Carnival’s share price has almost collapsed completely, the timing is perfect.

What about Saudi Arabia and Newcastle United? While the English Premier League might seem to be the ultimate luxury investment, it is also one of the most-watched sporting operations in the world. For a country eager to market itself as a tourism destination and change its image in the eyes of millions of people, there are few places offering better exposure than English soccer.

Saudi Arabia’s other purchases in the oil and gas sector also make long-term sense, in light of its dominant position as the world’s largest oil exporter and the recent IPO of Saudi Aramco, the national oil company.

Back In 2008, the Abu Dhabi Investment Office (ADIO) bought a massive stake in the ailing American housing market. Over the last 12 years, that purchase has generated enormous returns for ADIO, which has roughly $700 billion in assets and cash and is now one of the biggest landlords in the US.

ADIO also invested $100 million recently in four agricultural technology companies that will open research and development hubs in the emirate. This fits neatly with the UAE’s larger plans to build a knowledge-based economy. Mubadala, another Abu Dhabi investment fund with roughly $300 billion in capital, is looking at the healthcare-technology sector in the US, Europe and China. For evidence of how lucrative this sector will be in the medium and long term, look no further than the resources pouring into the race to find a vaccine for Covid-19.

The sound logic behind these acquisitions has not stopped the snide remarks about the Gulf states spending “recklessly” while the economic outlook shrinks alarmingly.

The criticism is justified up to a point. No economy is immune to the Covid-19 pandemic and the double whammy of low oil prices and the near-total collapse of international travel has hit countries like the UAE particularly hard. The levels of debt in these economies are also worrying.

However, the reality is that this pandemic will pass eventually. The purpose of these wealth funds is to look further ahead and invest in whatever will generate long-term revenue for the countries they serve. Recent purchases demonstrate how they are carrying out their mandate in creative ways.

Anyone mocking the “splashy overseas acquisitions” of the world’s largest sovereign wealth funds should at least try and understand what a sovereign wealth fund is. It is not a vehicle offering short-term debt relief, but is instead an instrument for long-term wealth creation. An economic climate as challenging as the present one will demand a great deal of attention on immediate problems. Gulf nations, however, also have their eye on a more distant ball.

Joseph Dana, based between South Africa and the Middle East, is editor-in-chief of emerge85, a lab that explores change in emerging markets and its global impact.