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Headwinds against Saudi Arabia’s $2tr mega fund

Prince Mohammed bin Salman
Saudi Arabia’s plan to create the
world’s biggest sovereign wealth fund-
a $2 trillion behemoth that can throw
its weight around global markets may
be slowed down by its responsibility for
aiding the economy at home.
Building the Public Investment Fund
(PIF) into “the largest fund in the world
by far” is a cornerstone of radical
economic reforms announced by
Deputy Crown Prince Mohammed bin
Salman last month to cut the kingdom’s
reliance on oil.
The PIF, founded in 1971 to finance
development projects in Saudi Arabia
and until now little known abroad, is to
grow from 600 billion riyals ($160
billion) to over seven trillion riyals,
helping make Riyadh a global
“investment power”, he said. The
biggest sovereign fund so far is
Norway’s, worth $852 billion.
“There will be no investment,
movement or development in any
region of the world without the vote of
the Saudi sovereign fund,” Prince
Mohammed told Al Arabiya television.
Under the plan, Saudi Arabia would
partly live off returns earned on the
PIF’s foreign investments, which would
help offset Riyadh’s loss of oil revenues
due to low crude prices.
But the PIF is also being pressed into
service for a second purpose: it is to
use its money to revitalise the Saudi
economy and create jobs by developing
new industries and pushing through
stalled multi-billion dollar development
projects.
The PIF will “help unlock strategic
sectors requiring intensive capital
inputs. This will contribute toward
developing entirely new economic
sectors and establishing durable
national corporations,” the reform plan
reads.
For example, the government will
transfer ownership of Riyadh’s
floundering King Abdullah Financial
District to the PIF, sources told Reuters.
The PIF may also get involved in areas
such as mining, shipbuilding and
developing six industrial cities. The
government says it is examining ways
to salvage the industrial city scheme,
plagued for a decade by delays and a
lack of enthusiasm among potential
tenants.
The result, say bankers and consultants
familiar with Saudi official thinking, is
that in the initial years at least, the
PIF’s resources and management
attention are likely to focus more on
domestic projects than foreign markets.
The PIF did not respond to requests for
comment.
Sven Behrendt, head of German
consultancy GeoEconomica, said the
PIF’s foreign role, where it would face
pressure to maximize returns by taking
risks, would contrast with its domestic
role as a strategic investor, where
returns would be secondary as projects
could not be allowed to fail for political
reasons.
“If you look around the world, you will
see there are only a few funds that have
this double mandate. Usually it’s one or
the other.
“The two approaches require different
investment philosophies – different
capabilities, different management
skills and different evaluation criteria…
It’s difficult to square.”
Bankers and consultants in touch with
the PIF say the fund, under new
secretary-general Yasir al-Rumayyan, a
former chief executive of Saudi Fransi
Capital, is still designing its new
operations and structure, while looking
to hire managers within the kingdom
and abroad.
To build up the fund, the government
has been transferring corporate assets
and land to it, including ownership of
state oil giant Saudi Aramco. But that
simply makes the PIF a large holding
company rather than a fund that can
funnel large sums into new
investments.
A total of $579 billion in net foreign
assets held by Saudi Arabia’s central
bank (SAMA), which has traditionally
served as Riyadh’s sovereign fund, will
not be transferred to the PIF, the
sources said.
So, to raise money that the PIF can
reinvest, Riyadh plans to sell shares in
PIF companies over coming years – a
complex process that will depend on
the appetite of foreign investors for
Saudi assets in an era of cheap oil.
The sales will include up to 5 percent of
Aramco; Prince Mohammed estimated
the company was worth over $2 trillion,
implying the offer could raise $100
billion.
A number of bankers and consultants
are skeptical of that figure, however,
saying it will depend on factors such as
Aramco’s dividend policy, political risk
and willingness to disclose sensitive
information to investors.
Some analysis suggests all of Aramco
might have a market value of $250-460
billion, excluding the value of refining
assets and guaranteed access to oil, said
Washington-based consultancy Foreign
Reports.

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