Middle Eastern countries have long been criticized for the lack of transparency in their companies and institutions. Before the 2008 crisis took root, Western policymakers repeatedly sounded the alarm, claiming many of the sovereign wealth funds (SWFs) set up in the region appeared to be instruments of state policy rather than investment vehicles purely designed to maximize economic value.
In response, the IMF-led Generally Accepted Principles and Practices for SWFs (GAPP), commonly known as the Santiago Principles, were proposed in 2008. Under these, SWFs worldwide committed themselves to transparency, good governance and high accountability standards.
The implementation of the principles failed to assuage these concerns. But post the financial crisis in 2008, how much does this really matter? In dire need of liquidity, many western corporates and institutions went cap in hand to places including Kuwait, Qatar and Saudi Arabia to gain access to their plentiful resources and build on liquidity back home.
London is a prime example. The Qataris have stakes in Harrods, the Olympic village and Barclays. One of the stand-out features of London’s modern landscape, the Shard, is 95% owned by Qatar’s sovereign wealth fund.
For sure instances of protectionism are rife, particularly when state-owned companies are the target. The latest involved a spat between China and Canada following a bid by Chinese state-owned China National Offshore Oil Cooperation (CNOOC) for Canadian oil company Nexen. Nevertheless, the debate about SWFs is arguably less polarized than ever, sharpening the focus on the core challenge: deciphering the investment patterns of these funds. As Richard Street, head of investor client sales management for CTS in EMEA at Citi, tells Euromoney in a November feature: "Each of them is unique and has its own approach. It’s difficult to look for a single theme when there is so much money at stake.”
But there are some distinctly regional patterns. Among the Gulf funds, there are shifts into emerging markets but cash instruments are still popular even amid a bout of risk-taking. "There is still a lot of money on the sidelines, going into money-market vehicles,” says Street. "There is a concentration issue – a very real one – where many managers on the money-market side are having to turn away some of their most significant investors or direct them to a managed account structure.”
So what do we know about SWFs in the Gulf?
As Chris Wright highlights, Abu Dhabi Investment Agency (Adia) is the logical place to start:
| Adia is... the biggest, the most open, and a regional role model. It is understood that, before the fall of Gaddafi at least, the Libya Investment Authority had a long-term plan to model itself on Adia... |
He adds the following insights into its allocation strategy:
| One is that the emerging markets equities component of the fund can run as high as 20% of the whole portfolio, and is believed to be towards that figure today. (Across all asset classes, 25% can be in emerging markets.) That’s comparatively high, and others have followed it. Singapore’s GIC, for example, a natural comparison to Adia because of its scale and sophistication, only really started shifting to emerging market equities in 2011, reaching a level of 15% by March 2012. |
But while Adia is the biggest of the region’s sovereign wealth funds, Kuwait’s Investment Agency, (KIA) is the oldest and boasts diverse holdings:
| Although KIA’s presence in alternatives is far less entrenched than Adia’s, it is large and growing. KIA has a subsidiary called National Technology Enterprises Company that is basically a venture capitalist, and it has a long-standing involvement in real estate – not just through vehicles such as St Martins, which has holdings in London, but more recently through Kuwait China Investment Company, whose China investments include real estate. |
Interest in China is an obvious characteristic of other funds in the region. Also high on the agenda is Africa:
| ...it is known that the KIA has looked at ways of building expertise in sub-Saharan Africa, and at thematic investment methods such as renewable and green technology. This year it confirmed a $500 million investment in partnership with the Russia Direct Investment Fund. |
According to Wright, the Qatar Investment Authority (QIA) plays a different game altogether:
| QIA has absolutely nothing in common with Adia or KIA bar its location. "QIA is much more a new-style aggressive deal-driven sovereign than a KIA or Sama that have been doing it for years and like to be more low profile," says one asset manager. Another adds: “What the QIA is doing today is what the KIA used to do 20 years ago. They are very opportunistic, not like a sovereign wealth fund. In fact they’re more like a family office.” Another says: "It acts like a proprietary trading book, rather than a long-term savings vehicle.” |
Last but not least of the aloof Gulf SWFs is the Saudi Arabia Monetary Agency (SAMA):
| For years, asset managers hoping to get mandates from the sovereign had to go through the Saudi Arabia Monetary Agency, which is first and foremost a central bank. Sama does have some sovereign wealth fund roles: the country’s foreign reserves are run through its General Investment Department. But it is considered perhaps the most conservative of all sovereign wealth entities worldwide, with the vast majority of its investments in Treasury-like debt securities. As then governor Mohammed Al Jasser said when asked about allocations in 2010: "I have made it a very explicit policy not to talk about this, except to say we put a lot of emphasis on safety first, liquidity second, and, third, risk-adjusted returns – in that order." |
 |