March 30, 2018
The Saudi Public Investment Fund: The Emerging Financial Vehicle Behind Vision 2030
By Phillip Cornell
The PIF, founded in 1971 as a relatively small investment fund to support a few Saudi companies, is quickly becoming the central repository for money to drive both state investment abroad and economic development at home. The PIF was notably reorganized in March 2015, changed to report directly to the powerful Council of Economic and Development Affairs (CEDA), and with MbS anointed as its chairman.
The PIF now seeks to invest about half of its money abroad (to constitute 25 percent of assets under management by 2020), and funnel the other half into strategic domestic projects and economic diversification. Its ambitious goal is to bring total assets to $400 billion by 2020, using cash from a 5 percent listing of state oil giant Saudi Aramco as well as transfers from SAMA and other state assets, and also ongoing access to state oil revenues. Mohammed al Tuwaijri (the minister for economy and planning) has said that revenues from other privatizations and central budget savings (e.g. from reduced energy subsidies) would also flow straight to the sovereign wealth fund. All this means that the PIF is hungry for deals – and that was a major theme of this month’s visit to the US by the crown prince.
Headed by Yasir al-Rumayyan (former chief executive of Saudi Fransi Capital), the fund started ramping up its international activities in 2016, when it took a $3.5 billion stake in Uber. Shortly after, it invested $45 billion into the $93 billion SoftBank Vision Fund, the world’s largest technology investment fund set up by the Japanese bank. In 2017, the PIF became the anchor investor in a new $40 billion infrastructure investment fund, providing half of the capital for the Blackstone-managed project.
PIF management is now on a new shopping spree. In 2018, their interest has turned specifically to entertainment and hospitality, with purported negotiations to take stakes in or to acquire Hollywood firms (Endeavor), hoteliers (Accor), and media groups (Penske). PIF management has also singled out robotics and artificial intelligence as sectors it is keen to be involved in.
Part of its planned acceleration of activity includes opening PIF offices in the US, UK, and Japan. Al-Rumayyan is consequently on a hiring spree, looking to double the PIF staff in 2018.
The quick reprise of such fast-paced acquisitions, and the scramble to bolster the fledgling PIF staff, underscore a widespread concern that potential investment deals are not sufficiently analyzed and prepared. Some claim that the PIF is wading willy-nilly into the kind of investments that excite MbS (mostly tech but also entertainment and tourism) without time for the due diligence usually demanded for deals of such size. When the Norwegian public fund decided to move more into property in 2010, it took years to build a specialist team prepared to capably invest in a higher-return but higher-risk sector like real estate. By comparison, the PIF employed 50 people or less until 2015. That number has since expanded to 240, but its in-house expertise is clearly limited given the bets it wants to take. The Financial Times describes PIF activity as reminiscent of “other flashy acquirers out there.”
The PIF’s own governance standards insist on transparency, but in practice that has been lacking. The fund does not publish quarterly figures on its website, personnel changes can be opaque, and it is hard to discern any specific investment strategy. The lack of transparency also makes it difficult to compare the PIF, its size, and its performance to similar sovereign wealth funds in the region. The fund also serves as a large holding company, so much of its asset pool is relatively illiquid, meaning its size is not a clear representation of its potential investment power.
Shuffling around money to enable the PIF in turn complicates analysis of the Saudi economy. State spending, state assets, and sovereign investments become harder to differentiate and categorize. When the PIF took $27 billion in 2016 from central bank sovereign assets (which total about $500 billion) to pad its liquidity, that impacted pressure on the currency and the cost of borrowing.
If the PIF is like a super-charged toddler flush with financial power and short on capacity, then it is not out of place in the current zeitgeist. On his recent American trip, MbS was enabled by a White House singularly focused on chalking up investment deals for public consumption, with little if any regard for long-term implications.
The fund’s development is also emblematic of young Saudi leadership more broadly, and its particular appetite for risk. Centralizing power and state resources into fledgling institutions and individuals is risky, and a whole-hearted embrace of the modern corporate model puts many eggs into very few baskets. If the country can pull off such a widespread economic transformation so quickly, and if that bet yields concrete benefits to the Saudi population, then it will be seen as a masterstroke.
But when institutions are re-jigged to deliver rapid unchallenged change, how that change is guided becomes critical. In such an institutional environment, when things go badly they can get very bad indeed – especially in Saudi Arabia.
Phillip Cornell is a senior fellow with the Atlantic Council Global Energy Center.