Here’s how it is the golden age of GCC sovereign wealth funds

By Puja Sharma

Although investments in large advanced economies and prominent emerging markets are likely to continue in the next few years, S&P Global Market Intelligence assesses that GCC SWFs will also recycle part of the petrodollar inflows in peer Middle East and North African (MENA) economies in need of external financing

Sovereign Wealth Funds (SWFs) of Gulf Cooperation Council (GCC) countries have largely benefited from external surpluses generated by the latest energy revenue windfall across the region to increase their global footprint and deepen their foray into global markets through diversified sectoral buys.

Although investments in large advanced economies and prominent emerging markets are likely to continue in the next few years, S&P Global Market Intelligence assesses that GCC SWFs will also recycle part of the petrodollar inflows in peer Middle East and North African (MENA) economies in need of external financing.

Investments realized by GCC sovereign investors surged by 27% during 2020, at the start of the COVID-19 pandemic, to $49 billion, as the GCC snapped up distressed assets and stakes in hard-hit companies and sectors. However, that was nowhere near the high of $83 billion deployed in 2022, during a large spending spree driven by surging petrodollar inflows — more than four times the aggregated amount deployed in 2018. GCC SWFs appear to have become go-to investors in difficult times for the global economy and markets.

Five of the world’s 10 biggest spending SOIs of 2022 were from the GCC and they deployed approximately $74 billion on aggregate last year, according to Global SWF. Out of these five GCC SOIs, the United Arab Emirates accounted for 62% of total capital deployed in 2022 (through three funds, namely ADIA, Mubadala, and ADQ). They were followed by Saudi Arabia with 28% (through the PIF), and Qatar with 10% (through QIA), as per the same source.

SWFs of the region are utilizing part of the additional inflows to make strategic buys in advanced economies, mostly in the United States and Europe (including the United Kingdom). However, the region’s SWFs have not only gotten cash by relying solely on government-transferred oil and gas receipts; they also were the most active sellers of holdings in 2022.

Relentless foray into global markets

GCC SWFs are currently striving to expand their global footprint by investing in various geographies and sectors. India and China — and other Asian countries — are on the radar screens of GCC SWFs at a time of deepening economic, trade, and diplomatic ties. A few of them have made headlines in 2023, particularly PIF and ADIA.

ADIA purchased a stake in Adani Enterprises (India)’s $2.5 billion secondary share offering. ADIA and Swedish fund EQT announced in Q2 2023 a £4.5 billion ($5.6 billion) deal to acquire Dechra Pharmaceuticals (UK), a veterinary pharmaceuticals company, whereby the Abu Dhabi-based SWF will own a 26% stake and the Swedish fund a 74% stake.

In July, ADIA said it teamed up with other investors to buy a portfolio of 27 Japanese hotels from Daiwa House Industry for $900 million, amid a continued recovery of global tourism activity from the COVID-19 pandemic downturn phase. ADIA also bought additional shares in China’s Zijin Mining and appeared in the top 10 shareholders list of China Shenhua Energy in 2022, among other investments. ADIA also ventured further into India by taking a 20% share in IIFL Home Finance through a subsidiary mid-2022.

Lending a helping hand within MENA

Although GCC SWFs’ foray into global markets will likely continue in the near term, we are also likely to see a recycling of GCC petrodollar inflows into MENA countries and other emerging markets that present interesting investment opportunities and need external funding or are vulnerable to current geopolitical, economic, and monetary shocks.

GCC governments might also directly support peer governments in neighboring countries, through lending or deposits at the central bank (e.g. Egypt, Turkey, and Pakistan).

Turkey is also looking to raise funds to help meet its external financing needs. It signed approximately $51 billion worth of deals with the UAE aimed at diversifying and expanding the framework of the existing Comprehensive Economic Partnership Agreement

Key findings:

• Although external surpluses across the GCC are likely to moderate in tandem with energy prices in the near term, they should remain comfortable with the aggregated GCC current account surplus forecast by S&P Global Market Intelligence at 9% of GDP in 2023 and 6% of GDP in 2024. This means that funds will continue flowing into deep pocketed SWFs, providing additional investment opportunities domestically and abroad.
• GCC SWF assets under management have grown by 20% on average in the past couple of years to reach a high of around $4 trillion today, the equivalent of approximately 37% of global SWF assets under management (AUMs), as per Global SWF statistics. Their size is almost equivalent to the sum of all AUMs of Asia, Latin America, and Sub-Saharan Africa SWFs.
• GCC SWFs appear to have become go-to investors in difficult times. GCC state-owned investors (SOIs, including SWFs and public pension funds) have deployed around $83 billion of fresh capital during 2022. Among the world’s 10 largest investments on behalf of SOIs during 2022, five were from GCC sovereign investors (broken down into 62% from the UAE, 28% from Saudi Arabia, and 10% from Qatar). For their strategic buys, GCC SWFs are not only relying on capital injections from governments, but also on asset sales.
• The continued foreign currency generation will allow SWFs of the region to extend their foray into diversified sectors and geographies in the next few years. We are also likely to see a recycling of GCC petrodollar inflows into MENA countries and other emerging markets that present interesting investment opportunities and need external funding or are vulnerable to current geopolitical, economic, and monetary shocks. Egypt and Turkey are a case in point.