Quciktake Q&A

How Saudi Arabia Is Building Its $2 Trillion Fund

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Hello asset managers, welcome to Riyadh.

Photographer: Ali Al Mubarak/Getty Images

Saudi Arabia is stepping up plans to turn its sovereign wealth fund into a global giant. The Public Investment Fund is central to the government’s effort to diversify the economy away from oil, under a plan known as Vision 2030. The fund, which plans to control more than $2 trillion by 2030, hosted the titans of investing and finance this week at a summit where the likes of BlackRock Inc. chief Larry Fink and SoftBank Group Corp. Chairman and CEO Masayoshi Son mingled with Crown Prince Mohammed bin Salman and the head of the sovereign fund.

1. What was the summit all about?

The event was a coming-out party of sorts for the fund. The prince announced plans for a $500 billion city called Neom on the Red Sea and said the kingdom was returning to “moderate” Islam and intended to “eradicate” extremism. (The kingdom also introduced a robot named Sophia to whom it had granted citizenship.) SoftBank’s Son said he plans to invest in the new city and potentially acquire a “substantial” equity stake in state-controlled Saudi Electricity Co. So far, the sovereign fund has offered peeks at what it intends to do, and its head described its investment strategy.

2. What is the fund up to?

The fund’s dealmaking has quickened as it seeks to hold a quarter of its assets in foreign market. This week, it committed $20 billion to an infrastructure investment fund with Blackstone and said it plans to invest $1 billion in Richard Branson’s Virgin Galactic, which could see the fund take a “significant” stake in the spaceship company. It previously announced plans to invest as much as $45 billion in a technology fund run by SoftBank. At home, it’s starting a $500 million energy-efficiency company and built a $2.4 billion stake in a Riyadh-based dairy farm and food processor. It also established a $1.1 billion fund to support small- and medium-sized businesses and is spearheading a $4.8 billion project to redevelop the Jeddah waterfront on the Red Sea -- all in the past few months. These deals followed a $3.5 billion investment in U.S. ride-hailing company Uber Technologies Inc. in June 2016.

3. Is the fund new?

No. It was set up in 1971 to support projects of strategic significance to the Saudi economy and until this year focused mainly on its home market. It holds about $130 billion of assets in listed Saudi companies, including stakes in Saudi Basic Industries Corp., the world’s second-biggest chemicals manufacturer, and National Commercial Bank, the kingdom’s largest lender.

4. What are the expansion plans?

The kingdom plans to transfer ownership of Saudi Aramco, the state-owned oil company, to the PIF. An initial public offering of a small Aramco stake -- probably just under 5 percent -- will provide investment cash. That sale could raise about $106 billion, according to the Sovereign Wealth Fund Institute. Transferring Aramco to the PIF would allow the government to get its revenue from investments, rather than oil, according to the Prince, and along the way transform the PIF into the world’s biggest sovereign fund. The fund will also look for more partnerships like its tie-ups with money managers Blackstone and SoftBank to boost assets. The PIF plans to borrow as it targets annual returns of 8 percent to 9 percent by 2025 to 2030 from about 3 percent currently, it said this week. The fund aims to increase its assets to $400 billion by 2020 from $230 billion currently.

5. Where does the $2 trillion figure come from?

The bulk of that is based on Aramco’s value. While the Aramco holding would vault the PIF ahead of Norway’s $850 billion sovereign wealth fund, currently the world’s largest, most of the PIF’s assets will be illiquid until the Saudis sell Aramco shares. For this reason, some analysts say the $2 trillion figure is misleading. Aramco could have a market value between $1 trillion and $1.5 trillion now that the government has slashed the oil producer’s tax burden to attract investors, analysts at Sanford C. Bernstein & Co. and Rystad Energy AS said in March. But other industry experts say Aramco is worth no more than half, and maybe as little as a fifth, of $2 trillion, based on oil reserves and cash-flow projections under different tax scenarios.

6. When will the IPO happen?

The IPO is on track for 2018, the crown prince said this week. But people familiar with the situation said in early October that the kingdom was considering delaying the international portion of the Aramco offering until at least 2019, though a domestic share sale in Riyadh could still happen next year. Another option could involve a domestic-share sale next year and a private offering to one or several cornerstone investors, the people said. "Even in the unlikely event that a stake sale does not happen, we would expect PIF to be funded,” said Aqib Mehboob, an analyst for Saudi Fransi Capital in Riyadh. “The government has deep reserves, is rapidly introducing policies to extract revenue, reduce subsidies and has been very successful in tapping international debt markets, so clearly has the ability to support the fund.”

7. Who runs the fund?

The managing director is former Saudi Fransi Capital CEO Yasir Al-Rumayyan, who joined in 2015. Since then, the fund has more than doubled the number of employees. People familiar with the matter said this year it hired Greg Bankhurst, formerly the head of Qatar Investment Authority’s real estate arm, as chief development officer and named Rashed Sharif, who led Riyad Bank’s investment-banking unit, as head of domestic investments.

The Reference Shelf

  • QuickTake explainers on Saudi Arabia’s modernization strains, its plans for Saudi Aramco, Crown Prince Saudi Prince Mohammed Bin Salman and the conflict with Qatar.
  • Bloomberg stories on the PIF deals with Blackstone and SoftBank, and another on Saudi Arabia’s cities in the sand.
  • Bloomberg’s interview with then Deputy Crown Prince Mohammed bin Salman and a Businessweek cover story on how he is preparing Saudi Arabia for the end of oil.
  • Bloomberg Markets examined how Saudi Arabia was prolonging the world’s reliance on oil in its May 2015 issue.
  • The International Monetary Fund studied Saudi Arabia’s push to diversify the economy and boost employment.

— With assistance by Filipe Pacheco

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