Saudi Arabia plans world’s largest wealth fund

Saudi Arabia is planning to expand its sovereign wealth fund into the world’s largest. The Public Investment Fund could eventually control more than $2 trillion, according to Deputy Crown Prince Mohammed bin Salman, making it big enough to buy the world’s four largest publicly traded companies.

The fund is at the center of efforts to diversify revenue from oil under an economic transformation plan known as Vision 2030. The 84-page Vision blueprint includes plans to restructure the country’s finances, administration and reshape oil giant Saudi Aramco into an industrial and energy conglomerate.

Plenty of questions, though, remain about the fund’s ambitions, size and structure. Here we identify – and attempt to answer – some of them.

1. Does Saudi Arabia have a sovereign wealth fund now?

Yes. The PIF was set up in 1971 to support projects of strategic significance for the development of Saudi Arabia’s national economy. It has assets worth about $160 billion, including stakes in companies such as Saudi Basic Industries Corp., the world’s second-biggest chemicals manufacturer, and National Commercial Bank, the kingdom’s largest lender. Overseas investing has so far been limited. In July, it took a 38 percent stakein Korea’s Posco Engineering & Construction Co. for $1.1 billion and also agreed to a $10 billion partnership to invest with the Russian Direct Investment Fund in that country.

2. What are the plans to develop the fund?

The kingdom plans to transfer ownership of Saudi Aramco and real estate to PIF, while the sale of a less than 5 percent stake in Aramco to the public would provide funds for investment. That could raise about $106 billion, according to the Las Vegas-based Sovereign Wealth Fund Institute. Transferring Aramco to the PIF would technically make investments the source of government revenue, not oil, according to the Prince.

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

The vast bulk of that valuation is based on what Aramco might be worth. While $2 trillion would make the PIF the largest sovereign wealth fund in the world, dwarfing Norway’s $850 billion fund, most of these assets will be illiquid until the country sells the shares.

In addition to Aramco, the PIF will hold about $300 billion in other assets, as well as the current value of the fund which is about $200 billion, the Prince said. “In this way we will have a Public Investment Fund with a size exceeding $2 trillion, approaching $3 trillion,” he said. But, as some analysts have pointed out, this figure may be confusing:

“There’s a big question mark with regards to a $2 trillion sovereign wealth fund,” said Sven Behrendt, managing director of Geneva-based consultancy GeoEconomica. “Saudi Arabia’s state-owned assets might well be worth that amount, but only if the government sells these entirely, and I don’t believe that they plan to do that.”

4. Why expand the fund now, especially with low oil prices?

With oil accounting for about 70 percent of government revenue, Saudi Arabia has been withdrawing money from international markets amid a budget deficit, according to Insight Discovery. The net level of foreign assets held by the Saudi Arabian Monetary Agency dropped by $115 billion last year. And while the Prince indicated that an initial public offering of Aramco could happen as soon as next year, the timing of a sale would likely depend on whether crude has rebounded to make the IPO attractive. As of now, oil has slumped by more than 50 percent from its peak in 2014. The fund, though, is an attempt by the country to reduce its dependence on energy revenues.

5. Who will run the PIF?

Yasir Alrumayyan, former chief executive officer at Credit Agricole-backed Saudi Fransi Capital, is its managing director and sat with the crown prince during a recent Bloomberg interview. The fund is also working with U.S.-based executive search firm Korn Ferry International to recruit senior bankers for positions including head of private equity, head of real estate, head of risk management and the head of markets, people with knowledge of the matter said last month.

6. What does the PIF plan to invest in?

It’s still not entirely clear. The fund ultimately plans to increase the proportion of its foreign investments to 50 percent by 2020, from 5 percent now, according to Alrumayyan, though that figure excludes the Aramco stake. The PIF is looking at “two opportunities outside Saudi Arabia” in the financial industry, according to the prince. It’s also going to help drive the kingdom’s defense industry and invest in defense companies. Other than that, not much is known.

“I don’t see Saudi Arabia’s wealth fund, post-Aramco proposed IPO, engaging in an overseas spending spree like the QIA did years ago,” said Michael Maduell, president of the Sovereign Wealth Fund Institute, referring to Qatar’s wealth fund, which invested in banks such as Credit Suisse Group AG and Barclays Plc. “The Kingdom’s state-owned enterprises may pursue acquisitions to increase value, then be partially privatized.”

7. Will it follow the example of other SWFs?

Some analysts are already drawing similarities with other sovereign funds.

“One can identify aspects in the Vision and the statements of the government that suggest that they have used Norway’s approach as an example,” said Behrendt. “At the same time, if it is planning to have 50 percent in domestic assets for development purposes, then other funds come to mind.” The China Investment Corp., for example, holds significant positions in the domestic banking sector. Singapore’s Temasek Holdings Pte was created to manage the state-assets when it was created in the 1970s.

8. How will it be received by the rest of the world?

The deputy Crown Prince has expressed lofty ambitions for the fund, which he expects to have a global influence. The PIF “will be the main engine for the whole world and not only the region,” he said in an interview with the country’s Al Arabiya television channel. “There will be no investment, movement or development in any region of the world without the vote of the Saudi sovereign fund.”

The prince “put the bar very high with his remarks,” said GeoEconomica’s Behrendt. “For the time being, the Saudi authorities should remain rather down to earth with the international role the PIF could play. Prince Mohammed suggested that it would be a dominating one. That’s probably not what the rest of the world would be comfortable with so there should be a focus to develop a fund that works for Saudi Arabia.”