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Middle East Sovereign Wealth Funds Round-Up

August 22, 2017

Sovereign wealth funds (SWFs) face new challenges such as market upheaval and changing economic and political landscapes, and they must continue to achieve the returns expected by stakeholders. In many cases, this means being flexible and adapting new strategies and approaches to asset allocation.

This involves breaking away from traditional strategies that rely on surpluses in a country’s payment balances and seeking alternative revenue sources. In particular, Middle Eastern SWFs are implementing different approaches to achieve returns in ways that insulate them from fluctuations in commodities. 

Middle East SWFs Ramping Up Real Estate Investment

Along with those in Asia, SWFs from the Middle East are emerging as leaders in real estate allocations. This is a significant shift from traditional allocations such as those associated with oil commodities. According to Preqin’s 2017 Sovereign Wealth Fund Review, the Middle East accounts for 27 percent of investors in global real estate investment. In comparison, North America accounts for 19 percent. 

Abu Dhabi Investment Authority (ADIA) is the largest investor in real estate among Middle Eastern sovereign wealth funds, and is the third largest SWF in the world. ADIA currently allocates US$50 billion to the asset class, according to Preqin.  

Middle Eastern SWFs are also increasing property investments in the Asia Pacific region. Qatar Investment Authority’s (QIA) recently purchased Asia Square Tower 1, located in Singapore, for US$2.45 billion. The sale is the largest single-tower real estate transaction in the Asia Pacific region to date, as well as the second-largest globally. Besides Singapore, Middle Eastern SWFs are also investing in Hong Kong properties, with a focus on hospitality-related properties. 

Factors Influencing Middle Eastern SWF Investment in Real Estate

There are a number of factors influencing the trend of increased real estate investment for Middle Eastern SWFs. Some of these driving factors include:

  • Minimization of risks due to low correlation with traditional investments such as bonds and equities
  • Low interest rates associated with real estate
  • Geopolitical uncertainty
  • Changing oil markets

Shifting oil markets are a concern for many, but some Middle Eastern funds such as ADIA are now so large that they no longer need to rely on new capital from oil surpluses, as core holdings generate significant additional income.

The behavior of Middle Eastern SWFs is also changing. Previously, Middle Eastern funds often held assets for the long term; now these SWFs are beginning to monetize profits, especially where threshold returns have been achieved. Profits are resulting from value creation followed by exits, which requires good acquisition timing. 

Other Middle East SWF Trends

Expansion into Tech Assets
In addition to increased real estate activity, Middle East funds are also expanding into the tech sector. Data from CB Insights indicates that the Middle East is home to some of the world’s most active sovereign wealth funds investing in the tech industry. These include niche areas such as data centers, logistics, and even “unicorns” (startups with a valuation of more than US$1 billion)  like Uber and Snap (previously known as Snapchat).

Three funds in particular are investing more in the tech industry: Kuwait Investment Authority (KIA), the Public Investment Fund of Saudi Arabia (PIF) and The Qatar Investment Authority (QIA). For instance, QIA invested $3.5 billion in Uber last year; Middle East funds are also opening more offices in Western tech hubs. 

Geographical Trends
With regard to geographical allocations, Middle Eastern SWFs tend to fall in line with the following perceptions

  • The U.S. is a top preferred investment market
  • Germany is perceived as relatively “safe” to invest in
  • The U.K. is seen as a less attractive option on account of Brexit concerns
  • Investment in the Asia Pacific region is becoming more frequent

Summary

Middle East SWFs (and SWFs in general) face more unique challenges and unprecedented market conditions, and they must continue to discover and create inventive solutions for returns. Sound practices such as clear reporting mechanisms are important, as Middle Eastern funds tend to be less transparent than others due to the family dynamics that are often involved in business operations.

Funds must have clear objectives and goals, but also need to remain adaptable as new solutions present themselves in the near future. If you have any questions or concerns regarding sovereign wealth funds, large pension funds, or other organizations, contact us today at Kessler Topaz. Our team is known for our work on behalf of institutional investors, especially in identifying important marketplace events and potential filings that can affect shareholder interests.