Saudi megafund’s success rests on fuzzy local bets

A big PIF. Saudi Arabia’s main mission is to diversify its heavily oil-dependent ecomy. But that “Vision 2030” project is undergoing a transition of its own. kingdom’s $950 billion Public Investment Fund (PIF), tasked by Crown Prince Mohammed bin Salman (MbS) with delivery, is increasingly focused on a collection of relatively young domestic firms. While this segment’s value w exceeds $250 billion and is growing rapidly, PIF’s dual mandate of boosting profits and jobs looks tough.

Since MbS started expanding investment vehicle in 2016, PIF has me a string of high-profile global bets, like committing $45 billion to SoftBank chief Masayoshi Son’s first Vision Fund, bankrolling a new golf tour, and making contrarian punts on Western blue-chip stocks during 2020 lockdowns. It has also me outlandish plans for flashy “giga-projects” to lure foreign tourists and businesses, most torious of which is NEOM – an entire new region in rthwest of kingdom intended to feature a futuristic 170-kilometre-long city kwn as  Line.

Yet drill down into what PIF actually is today, and it’s clear that vehicle’s Goverr Yasir Al-Rumayyan has a different focus. overseas investments, like Newcastle United Football Club and Uber Techlogies, collectively amounted to just 20% of assets, or $156 billion, at end of 2023. Despite massive spending required to complete giga-projects, total investments in that segment and wider real estate and infrastructure unit amounted to $126 billion, or just 17% of PIF’s assets under manment (AUM).

By far largest portion of vehicle’s investments, by contrast, sat at home. One bucket, called Saudi Equity Holdings, accounted for 27% of AUM and owned stakes in established listed companies like Saudi Telecom and Saudi National Bank. That was before government this year transferred 8% of oil giant Aramco into PIF, which altered numbers.

or, much faster-growing segment is called Saudi Sector Development. division houses about 100 homegrown companies with a paper value of $251 billion as of December, or one-third of total AUM, making it by far PIF’s biggest division in 2023. companies include everything from unlisted sports and leisure startups to mining and healthcare groups.

This segment is halfway between a startup incubator and a private equity portfolio. Even more strikingly, its valuation doubled between end of 2022 and 2023, making it comfortably fastest growing part of PIF. According to a person familiar with matter, majority of this spike came from vehicle’s decision to deploy new capital, rar than a paper valuation uplift.

Riyh’s Future Investment Initiative last week was full of se shiny new companies, which include startups selling Saudi’s distinctive brand of camel-milk ice cream and those focusing on female wellness. Many have hired ted foreign CEOs, attracted by chance to deploy a ton of cash. SURJ Sports Investments, which is behind UFC rival Professional Fighters League, is w heed by former Australian soccer executive Danny Townsend. Riyh Air, an entirely new flagship carrier intended to help ferry 150 million tourists to Saudi by 2030, has secured services of former Etih boss Tony Douglas. And Savvy Games, which in 2021 secured $38 billion from PIF to invest in gaming and e-sports sectors, is led by former senior Activision Blizzard executive Brian Ward.

Assessing current financial health of se entities is complicated by ir youth, and limited disclosure. aggregate numbers imply an aver valuation of about $2.5 billion per company, which seems a stretch given nascent st of many of firms. But it’s likely that at least some are making heway. Savvy Games, for example, last year completed $4.9 billion acquisition of U.S. mobile gaming group Scopely. Given that target’s “Mopoly Go!” game has generated $3 billion of revenue in little more than one year, company may alrey be worth multiples of purchase price, since gaming peers like Electronic Arts tre on enterprise values of as much as 5 times sales.

Yet building homegrown stars by throwing money at companies is tough. Just ask SoftBank’s Son, whose Vision Fund 1 experienced underwhelming returns despite a $100 billion pot to spend. A bigger heache is that Rumayyan is t being judged solely on financial performance. All portfolio companies have a second mandate to develop employment and ecomic demand across 13 sectors in ir home country. Vision 2030 requires 65% of ecomic activity to stem from private sector, against 48% as of last December. That gives PIF executives like Rumayyan, and national development division he Jerry Todd, a tough job.

Saudi faces major problems with a domestic education system that doesn’t churn out eugh skilled young people, and a business environment that still often hinges on personal connections, rar than merit. Savvy Games exemplifies how international scale and local employment heft don’t necessarily yet go toger. Saudi’s young population seems like a good match for gaming sector, but only 80 of Savvy’s 3,500 staff are based in kingdom, and only 30 of m are actually Saudi.

r does Gulf state have limitless resources. country’s finance ministry is projecting a 3% fiscal deficit even in 2027. Saudi government does have $445 billion of net foreign assets on top of its PIF wealth. But a substantial drop in price of oil, which provides 62% of state revenues, would limit Riyh’s ability to keep topping up state fund. Government debt is mittedly only 27% of GDP , offering room to borrow, but issuing bonds to pour into local startups seems like a risky move.

That backdrop will factor into thinking of senior PIF s like Todd, especially since fund is starting to nail down its strategic priorities for five years from 2026, according to a person familiar with matter. Saudi Finance Minister Mohammed Al-Jaan has alrey hinted at possible changes to pace of giga-project plans. Bankers at FII conference also expected Riyh to rein in breakneck construction plans, like hotels, in case hoped-for tourist boom fails to materialise.

All of which leaves Rumayyan’s local corporate bets in a potentially tricky position. y’re essentially carrying hopes of government, but with an arguably vulnerable source of funding and a domestic labour force and demand that remain unkwn quantities. If local stars do more than flicker, neir outcomes r returns will look pretty.

Context News

Saudi Arabia’s Future Investment Initiative took place in Riyh between Oct. 29 and Oct. 31.