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Tapping investor reserves in Abu Dhabi and Dubai

Sovereign wealth funds in the Middle East are flush with cash and less stretched than pension funds in Europe or the US. Their allocations are flowing to private equity, but they won’t be captured by all…


This article first appeared in the December 2022 Investor Interest Insights Report


Sovereign wealth funds in the Middle East are flush with cash and less stretched than pension funds in Europe or the US. Their allocations are flowing to private equity, but they won’t be captured by all…

When rumours first emerged in early 2017 that Blackstone was raising $40bn for the world’s largest infrastructure fund, many without knowledge of the plans balked at such an ambitious target.

Weeks later, opinions quickly changed when an anchor commitment of $20bn was revealed. It was to come from a Saudi sovereign wealth fund known as PIF, one of the largest wealth funds in the world.

“It was the deal that made people realise the financial firepower of these Middle East sovereign wealth funds,” says an adviser to the fund.

In the five years since, private equity firms without any connection to SWFs in the region have been desperately trying to find one. And, in a higher oil price environment, these SWFs have even more financial firepower to commit, both as passive LPs and increasingly as co-investors.

Last month, Saudi’s Public Investment Fund (PIF) was reported as one of the investors behind KKR and GIP’s $15bn Vodafone towers acquisition and, separately, as an anchor investor in BlackRock’s Middle East infrastructure strategy.

But while the commitments on offer can be jaw-dropping, those with experience of these SWFs say it can take years to build a relationship and their allocations can be so large that only a small number of GPs can accommodate them.

In total, there are 27 SWFs and 13 pension funds in the Middle East managing around $4.6trn in capital, close to the same level in Europe where almost twice as many institutional investors operate.

They have a reputation for secrecy and have historically played an outsize role in times of global economic uncertainty as during and after the Global Financial Crisis. But they are also modernising and growing fast. Assets held by Middle Eastern sovereign-wealth funds have appreciated by 20% so far this year, to about $3.75tn, according to Sovereign Wealth Fund Institute data. That increase follows the rising price of Brent crude, which has risen by about 23% this year to over $93 a barrel at the time of writing.

Reliable information on how much sovereign-wealth funds invest overall in private equity is difficult to find but according to a presentation on the Middle East by Preqin in November, their average allocation to alternatives doubled from 22% in 2021 to 44% in 2022. Even more noteworthy in the current fundraising environment is that these SWFs can be more flexible in the face of a denominator effect and often have fewer specific liabilities than large pension funds in the US or Europe.

As the examples above show, relationships between international private equity managers and Middle Eastern SWFs have traditionally hinged on infrastructure and real estate but between 2014 and 2019 there has been a steady shift away from real estate. In 2021, it was venture capital that dominated, as shown when Abu Dhabi’s Mubadala Investment Co came in as a new investor in Klarna after its valuation plunged to $6.7 billion from $45.6 billion last year. For 2023, private equity is in the ascendency. Fifty per cent of SWFs in the Middle East plan to increase allocations to private equity, according to the Global Sovereign Asset Management Study 2022 conducted by Invesco in the first quarter of this year.

Of the 10 sovereign-wealth funds with the largest private-equity holdings, including both direct and fund investments, five are located in the Middle East, according to Sovereign Wealth Fund Institute data. The largest is Mubadala with about $97 billion in private equity assets, followed by the Kuwait Investment Authority with about $71 billion.

North America remains the most popular investment destination while Europe has declined in popularity due to the ongoing Russian-Ukraine conflict, according to Invesco’s study. The trend reflects a wider preference among allocators going into 2023. In Private Equity Wire’s Investor Interest survey, more investors plan to increase (35%) and maintain (60%) their allocation to North America than any other region.

This shouldn’t dissuade European private equity managers from looking to the Middle East though, says Mike Preston, a partner at law firm Cleary Gottlieb who works with SWFs there. “There is a weighting to the US,” he says. “SWFs tend to allocate on average around 30% to Europe but 30% of a lot is still a lot – it’s not a small allocation.”

In terms of sectors, infrastructure has been a mainstay for SWFs in the region but healthcare and medical technology are growing areas of interest, particularly as new mega cities and centres of excellence spring up. According to recent reports, Mubadala and PIF are investing heavily in artificial intelligence, biotechnologies and fintech.

The net zero ambitions of Norway’s sovereign wealth fund – also built on vast oil reserves – provides a clue on future strategy too. The energy transition is becoming increasingly important to Middle Eastern SWFs as they try to “balance the other side of the equation”, says the unnamed adviser.

Where they are investing indirectly, through private equity funds, typical commitments of between $100m and $300m require a manager with a fund of at least $1bn in size, but potentially much larger.

“There are two types of GPs that can raise from SWFs,” said Dr Bhaskar Dasgupta, head of strategic development – MEA, Apex Group during the Preqin presentation: “Large funds where they have a relationship; and differentiated strategies that can meet specific SWF allocations [for a specific region or sector]. Smaller GPs will find it more difficult.”

“Those (Middle East SWF) tickets take so much face time,” says a fundraising source at a large US-based manager. “You can go there seven times and think you have a relationship. In one case it took two years to cultivate what we thought was a good relationship and we were told it will take another two years. So, you have to be really smart about how you spend your time, and very targeted.”

According to Preqin data, 21% of LPs in the region expect a number of in-person meetings before committing capital while 66% expect a mix of in-person and virtual meetings. “There is a clear expectation that managers will need to build rapport to succeed in fundraising,” said Preqin’s analyst Alex Murray.

Setting up a local office can help – UAE’s business capital Dubai has become a magnet for hedge funds while asset managers such as BlackRock and Franklin Templeton have opened offices in Saudi.

“It’s not about timing the market, but ‘time in’ the market,” said Laura Merlini, Managing Director, EMEA, for the CAIA Association on the Preqin webinar, later adding that smaller funds can also find a place if they “do their homework”.

“SWFs can be quite diverse on their mission, mandate and regional restrictions,” she added.

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