Saudi Arabia’s Sovereign-Wealth Fund Bets Big at Home

Saudi Arabia’s sovereign-wealth fund made a global splash with investments in SoftBank’s Vision Fund, Newcastle United soccer club and professional U.S. golf. Its next big bet? Camel dairy farming at home.  

After pumping tens of billions of dollars into high-profile global investments, the $700 billion Public Investment Fund is accelerating spending at home, often on obscure startups and projects that it plans to own and operate. Last month, PIF said it would start selling milk from camels and dates grown in the region around the holy city of Medina. Before that, it launched a halal meats exporter and a company aiming to make Saudi coffee globally popular.

The bets are all part of Crown Prince Mohammed bin Salman’s push to diversify the country’s economy away from oil by creating jobs for Saudi nationals, boosting domestic consumption and attracting foreign investment. But with unrivaled resources and political clout, PIF’s top-down decision making and investments are raising questions about whether this could squeeze out the private sector from the economy and expand the government’s role—the opposite of what Mohammed set out to do.

The challenge for the fund, said Robert Mogielnicki, resident scholar at the Arab Gulf States Institute, a Washington, D.C. think tank, is to harness its growing global reputation to channel investor interest into the Saudi market without crowding out private business.

“Is the pie big enough for the PIF to come in, get visibility and then share the wealth as well?” he said. “That’s going to be the tricky balance.”

Flush with cash after a bumper year for oil prices, the Saudi government is using PIF to double down on domestic investments, fueled by ad hoc capital injections from the government, dividends from its companies and the transfer of assets from the state. It is also borrowing tens of billions of dollars to finance bigger projects.

The Saudi government wants PIF to help jump-start the traditionally risk-averse private sector and improve corporate governance. To boost private participation in PIF projects, the fund created a national development division headed by former McKinsey consultant Jerry Todd. The state is also spending tens of billions of dollars to stimulate private sector investment.

PIF in a statement on Wednesday said its mandate is to drive the economic development of Saudi Arabia. It is a long-term investor that “creates significant opportunities for the private sector through unlocking new sectors, localizing knowledge, and building strategic economic partnerships,” the fund said. 

“By acting as a cornerstone investor, PIF’s size and long investment horizon mean we can step in at the early stages, lay the foundations and ‘crowd in’ the private sector,” Todd wrote earlier this year in a Saudi newspaper. “This is particularly important in sectors that don’t exist currently or are in the early stages of growth in the kingdom.”

Until 2015, when Mohammed became the day-to-day ruler of the kingdom, industries such as entertainment, cinemas and tourism didn’t exist in the conservative Muslim state. The construction sector has benefited from investment in giga-projects and housing. The retail sector is also growing after an influx of female workers were empowered by social changes in the kingdom.

Saudi bank Jadwa Investment last month said it forecasts gross domestic product unrelated to oil will grow at 5.9% this year, compared with a 7.5% contraction in GDP related to hydrocarbons.

What might seem like an eclectic bunch of investments at PIF makes sense, said Hasnain Malik, a Dubai-based analyst at Tellimer Research. Creating a distributor with coffee beans grown in the kingdom or with milk from camels reared there is arguably simpler than the higher profile initiatives PIF is undertaking, he said. 

For example, PIF this year began investing billions of dollars in local soccer teams paying lucrative transfer fees for stars in a bid to make the kingdom’s domestic competition as big as the English Premier League. 

Coffee beans, camel milk and dates, “at the end of the day those are indigenous resources,” Malik said. World-class “footballers are not,” he added.  

PIF said it is focusing on developing 13 sectors it considers strategic, including aerospace and defense, healthcare, entertainment, leisure and sports. In its statement, the fund said it was already boosting the private sector after signing contracts with private companies worth $50 billion in 2022. Its housing developer plans to outsource roughly a quarter of the thousands of planned homes to other companies to build and sell in communities, an opportunity for the private sector, the fund said. Meanwhile, Neom, PIF’s futuristic new city-state in the northwest, has awarded contracts worth more than $5 billion to firms helping develop infrastructure, the fund added.  

From a procurement perspective, PIF said it intends to encourage all the companies it owns and operates to source goods and services from Saudi Arabia. 

The Saudi sovereign fund isn’t the first to focus on creating industries at home and investing in companies abroad to encourage them to establish domestically. Singapore’s Temasek, founded in 1974, was an early investor in companies that helped develop its economy. Abu Dhabi sovereign-wealth funds Mubadala and now ADQ have similar remits. 

PIF was founded in 1971 and for years acted as a sleepy holding company for state assets. Since 2015, it has expanded from fewer than 50 employees to more than 2,200 and has gone further than other sovereign funds in seeking to develop the domestic economy. In the past five years, the fund says it has established 84 companies and has helped create half a million jobs in the kingdom, making a return of roughly 8% annually. Mirroring many other sovereign-wealth funds, PIF reported a mark-to-market investment loss of $11 billion for 2022, a year when stocks and other markets performed poorly.

“The depth and breadth of PIF in creating new companies from scratch and pursuing giga-projects is truly unparalleled,” said Diego Lopez, managing director of Global SWF, a research firm. But, he said, “the challenge of such an approach is that it is very different to develop domestic projects than to invest in overseas stocks.”

The government’s strategy faces risks if oil prices fall. Analysts estimate the kingdom needs to keep prices above $80 a barrel to finance the crown prince’s plans. After trading at lower levels earlier this year amid fears about slowing global demand, Brent crude, the international oil benchmark, has risen firmly back above $80 a barrel following a 13% jump in July. It was down 1.8% to $83.82 on Tuesday. 

Capital Economics forecasts oil prices to fall next year and while the kingdom has room to borrow more it could scale back spending.

“The boost to economic growth from government spending is likely to fade and capital expenditure on the kingdom’s giga-projects could fall behind,” it said in a note.

Meanwhile, investment continues. The wealth fund has pumped in cash to start a cruise liner company, a helicopter operator, an electric vehicle manufacturer, and a second national airline with $35 billion in orders from Boeing. It runs a developer building tens of thousands of suburban homes and is pouring billions of dollars into constructing entirely new cities, including two that are each marketed as the size of Belgium. 

On Monday, it said it was investing in and launching “an integrated fitness and well-being company” focused on women and chaired by Princess Reema bint Bandar Al Saud, a royal family member and the Saudi ambassador to Washington.

The fund separately said it plans this week to also announce the establishment of a facilities management company. 

Write to Rory Jones at [email protected] and Stephen Kalin at [email protected]