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Saudi Arabia’s $2bn bet on electric car company Tesla has reaffirmed the appetite of the kingdom’s powerful sovereign wealth fund for high-profile investments. But the market-moving deal has also increased scrutiny on the finances of the Public Investment Fund, the entity chosen by Crown Prince Mohammed bin Salman to overhaul the kingdom’s oil-dependent economy.
The young heir to the throne is transforming the once sleepy sovereign wealth fund into a global investment vehicle — aiming to raise its assets from $250bn under management to $400bn by 2020. Over the past two years, the PIF has bought stakes in ride-hailing app Uber and invested in space tourism company Virgin Galactic, while pledging tens of billions of dollars to funds run by SoftBank and Blackstone.
To finance such deals and large-scale development projects in Saudi Arabia, the PIF has received cash from the central bank, sought to sell stakes in companies it owns, issue debt and draw on proceeds from the privatisation of state assets. It was also due to be the main recipient of the $100bn that Riyadh expects to raise from the planned stock market flotation of the energy company Saudi Aramco.
With that initial public offering plagued by delays, Prince Mohammed, 32, and his advisers are now upending government processes in place for decades as they scramble for other sources of funding to boost its firepower, according to people familiar with the kingdom’s reform plans.
“The PIF has made big commitments so it needs to come up with the cash,” said Steffen Hertog, associate professor at the London School of Economics and a Middle East expert. “But it is seen as opaque, a black box. Few know what’s going on there, including sometimes other government ministries.”
Complicating the PIF’s expansion is nervousness from foreign investors towards Saudi Arabia, which is engaged in a diplomatic dispute with Canada, just months after Riyadh rattled investors with a sweeping anti-corruption crackdown targeting hundreds of tycoons, royals and former government officials.
Saudi Aramco’s Sabic approach casts doubt on both the state energy giant’s IPO but also how much liquidity the PIF has access too © EPA
Riyadh is now taking radical steps to boost the fund’s coffers. The Royal Court instructed Saudi Aramco to acquire the fund’s 70 per cent stake in Saudi petrochemicals maker Sabic, potentially raising $70bn for the PIF, three people familiar with the matter said.
As the kingdom delays the Saudi Aramco privatisation indefinitely, these people said, the transfer of funds from one state coffer to another allows the PIF to raise cash quickly at a time when finance ministry handouts have diminished and its big-ticket investments are yet to yield returns.
“If they get this done, people are going to ask whether they need to go through with the listing [of Saudi Aramco],” said one banker in the Middle East.
The Sabic deal has rankled senior Saudi Aramco executives, who have raised questions over how the deal adds value. Some advisers working on the IPO say it undermines any future privatisation, which the country cannot afford to abandon.
IPO advisers have been keen to show Saudi Aramco keeps a healthy distance from Riyadh. Yet the Sabic deal is fuelling concerns among the oil company’s executives about its perception as a political tool and whether it will be forced into future deals, two people close to the company said.
“While there is a business case for Saudi Aramco to buy a controlling stake in Sabic, this was not the primary driver of the deal,” said Phillip Cornell at the Atlantic Council’s Global Energy Center. “It was requested from higher up in order to put liquidity into the PIF.”
Those close to the Royal Court say the Sabic deal is an optimum outcome for the kingdom as it shifts the majority ownership and oversight of a chemicals company to an entity that has the expertise, allowing the PIF to focus on capital deployment.
Saudi Aramco is looking to raise $40bn-$60bn from international banks in debt to pay for the stake, which some advisers see as an alternative to an IPO that achieves almost all of the same objectives.
A bond issuance would require similar transparency and disclosures to an IPO — one objective of the flotation — while also raising almost all the funds it initially required, one adviser said. Any listing later would only generate “extra” PIF funds, this person added.
Jennifer James at Janus Henderson Investors said: “Issuing debt to fund the Sabic acquisition is a more elegant way for PIF to raise money quickly in order to execute its strategy.”
The PIF, which declined to comment, is in separate talks with financial institutions to borrow $6bn-$8bn, marking the first time the entity will directly tap banks for funding and paving the way for further debt raising.
But the move — approved by King Salman — was met with resistance by Saudi officials, one person with knowledge of the situation said, underscoring the strain the PIF is under for funding as Riyadh is grappling with a budget shortfall.
The debt raising has also raised alarm bells among regional bankers who say powerful institutions such as the investment authorities of Abu Dhabi, Kuwait and Qatar only tend to use debt to fund specific transactions.
“No major sovereign wealth fund raises leverage at the top level like this,” the banker said. “This is like Dubai,” he added, referring to the emirate that has extensively used leverage at its state investment institutions. One person close to the PIF said the debt financing would only form a part of the overall funding.
Saudi Crown Prince Mohammed bin Salman with Masayoshi Son of Softbank, and right, Stephen Schwarzman, chief executive of Blackstone, at the Future Investment Initiative conference in Riyadh in October © AFP
PIF, formed in 1971, was for decades a passive entity quietly overseeing the state’s equity in listed firms. As neighbouring countries built up their sovereign funds over years using their petrodollar wealth, Saudi Arabia put its surpluses with the central bank, which invested conservatively, mainly in US Treasuries. Now it is being rapidly transformed at time when Riyadh is still dealing with the fallout of a prolonged period of lower oil prices that forced it to draw down on its reserves.
Some Saudi economy analysts have criticised the PIF for following the whims of Prince Mohammed with flashy deals, rather than making prudent investment choices that generate adequate returns and create jobs as unemployment rises.
Although the PIF has sought to expand overseas, increased its staff from 50 people in 2015 to almost 500 this year and sought advice from financiers such as former Citigroup banker Michael Klein, Middle East analysts question if the PIF has the capacity to carry out its strategy.
Yasir al-Rumayyan, managing director of the PIF and a close ally of Prince Mohammed, acknowledged to business leaders in New York that the fund had struggled to balance generating returns now with making strategic investments for the future.
“Sometimes we have long-term views and sometimes if we have volatility on short term it will have [an] impact on our performance,” said Mr Rumayyan in March.
Attention is also turning to how the PIF’s activities affect the operations and finances of Saudi Aramco, the kingdom’s revenue generator.
While the Sabic stake falls broadly within Saudi Aramco’s plans to develop its petrochemicals arm, and has been discussed in the past, one person close to the company says the latest move is a “deviation from existing plans” to invest in speciality chemicals and expand abroad.
Undertaking a deal of this scale has also raised questions about how Sabic’s assets would be integrated into existing operations. “Nobody knows how it is going to be managed,” said one Saudi government adviser.
As JPMorgan and Morgan Stanley work with Saudi Aramco to raise debt from global investors, there are worries about the company’s future capital availability and dividends to the state. These may need to be reassessed should oil prices fall, three people close to the company have said.
One person said passing on the risk to Saudi Aramco, a financially conservative entity, is akin to a “raid” to fund Prince Mohammed’s ambitions for the PIF.
“No one wants to tell the crown prince to slow down,” said a person close to Saudi’s leadership.
Additional reporting by Andrew England
Appetite for assets
PIF’s dealmaking timeline
The redevelopment of Jeddah’s waterfront is one of PIF’s major investments © Alamy
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