Middle Eastern sovereign wealth funds have long been a coveted source of capital. But with the fundraising slowdown in the U.S. and Europe, managers are increasingly investing in capabilities to reach sovereign funds to fill the gap. And the competition is fierce.
To take advantage of the growing amount of capital in Middle Eastern sovereign wealth funds and their desire to diversify their assets and invest globally, European and American managers are setting up offices in Abu Dhabi and Dubai, in particular. They’re also partnering with sovereign wealth funds and family offices on co-investment vehicles and doing other unique deals.
The reasons for the growing interest are two-fold: Asset owners stateside have less money to put to work because of liquidity constraints and having too much invested in private markets.
Meanwhile, the growth of sovereign wealth funds in the Middle East, particularly Saudia Arabia’s Public Investment Fund and Abu Dhabi’s Mubadala, means that there’s capital waiting to be put to work.
According to a recent Willis Towers Watson report, of the top ten sovereign wealth funds as measured by assets under management, five are based in the Middle East. Altogether they manage roughly $2.92 trillion in assets.
“Often these funds are grown by a transfer that takes place out of assets of the state that were in a particular pension,” said Roger Urwin, co-founder of the Thinking Ahead Institute, created by WTW. “For example, what you find with PIF is that quite a lot of the growth of that fund is the privatization of Saudi Aramco.”
Most of these sovereign wealth funds have made their billions on finite oil reserves. As the world looks to transition to green energy options, sovereign wealth funds from Norway to PIF are urgently aware of the need for diversification within their own portfolios.
“It’s an intergenerational transfer of wealth coming from the existing benefits of the energy system,” Urwin explained.
This has led to a unique fundraising environment overseas, as investment managers race to snag a piece of that pie.
“Competition there is intense,” said James Clarke, global head of institutional business development, at alternative asset manager Blue Owl Capital. He said he recently took an Emirates flight from the region and realized that seven of his fellow passengers also worked for credit funds.
Blue Owl has been building its presence in the region for years. The firm recently inked a $1 billion partnership with Mubadala and has plans to open an office in Abu Dhabi. “The model of fly in fly out, whilst it is a good way to establish a beachhead, it’s not a good way to build a presence,” Clarke added.
And they’re clearly not the only investment manager working on this. This week, Eiffel Investment Group and Vibrant Capital Partners announced that they’re both building offices in Abu Dhabi. Bloomberg reported that Sagard is opening an office there, while AllianceBernstein and GoldenTree Asset Management are opening offices in Dubai
Meanwhile, established players are growing their presence. Ardian, which has operated in Abu Dhabi for years, is planning to set up an office in Riyadh. The firm also has an office in the region available to its portfolio companies.
“There’s a real rush for the Middle East,” said François Aissa Touazi, co-global head of investor relations at Ardian. “We have all to take into consideration that they have a very high standard.”
According to both Touazi and Clarke, Middle Eastern sovereign wealth funds have a predilection for partnership. Clarke said that Blue Owl has tried to replicate its landmark customized mandate for CalSTRS with investors in the region. And the Mubadala strategic partnership, which it announced in September, looks similar to the deal.
Touazi, meanwhile, highlighted the need for coinvestment deals in the Middle East. On Wednesday, the firm announced a deal with Saudi Arabia’s Public Investment Fund, in which the two acquired stakes in the holding company of Heathrow Airport.
“You have to show your ability to share these co-investments,” he said. “They appreciate the time dedicated to them.”