43 billion reasons why the US is key to Saudi’s wealth fund

Lucid Motors media room

Saudi Arabia’s Public Investment Fund (PIF) is expected to continue with an investment strategy of “bargain hunting” in the United States but will likely deploy some caution, given current volatility in the US stock market.  

US president Joe Biden’s visit to the kingdom is an opportunity to strengthen bilateral business ties, commentators told AGBI, and follows a period in which the sovereign wealth fund had significantly increased its US investments before apparently scaling back. 

PIF tripled its US-listed equity holdings to $43.4 billion in the third quarter of 2021, from $15.9 billion the previous quarter, according to a regulatory filing to the US Securities and Exchange Commission in November, cited by Saudi financial data website Argaam.  

• Package: Biden in the Middle East
• Saudi Arabia Vision 2030

The fund made 15 new investments including stakes in electric car maker Lucid Group, payments firm Visa, logistics company Fedex, supermarket giant Walmart, and industrial supplier Air Products & Chemicals.

By December the value of PIF’s US-listed stocks had reached $56 billion, driven in part by gains made by Lucid since its initial public offering on the Nasdaq stock exchange last July.  

PIF invested a reported $1 billion in California-headquartered Lucid in 2018 and increased its stakeholding to 62 percent in February this year. It also owns a 3.75 percent stake in ride-sharing company Uber Technologies. 

“PIF increased its US equity assets significantly in late 2021,” Karen Young, senior fellow and founding director of the Program on Economics and Energy at the Middle East Institute, said.

“Any subsequent increase can be attributed to a global trend that is seeing some flight to safety and a routing of emerging market holdings, either in equities or debt.

“PIF has mainly a domestic mandate with assets in major Saudi firms from energy to petrochemicals to infrastructure. It will spend more domestically in new firms and new sectors.”    

Their holding in Lucid was valued at $38.6 billion in December, up from $25.8 billion three months earlier, according to a February SEC filing cited by Reuters.

However, shares of Lucid have tanked this year as the company grapples with rising raw material costs, supply chain delays, and inflation.  

Lucid slashed production targets as a result, potentially derailing its plans to distribute thousands of electric vehicles to Saudi Arabia under a deal struck in April. 

At the same time US stock markets have suffered the worst first half of any year since 1970 as the Fed substantially tightens monetary policy to fight rising inflation.   

Overall, PIF has reduced its US equity holdings since the start of 2022 by 22 percent from $56 billion to $43.6 billion by the end of the first quarter of 2022, an SEC filing in May showed.

The fund cut its stake in Visa, Plug Power, Prologis and Walmart, while raising its stake in five companies – Take-Two Interactive, PayPal, Alibaba, Farfetch and Pinterest – and investing in five others.

Albara’a Alwazir, director of economic research at the US-Saudi Business Council, told AGBI: “Global equity markets are currently being tested as growing inflation concerns, rising energy costs, supply chain bottlenecks, and geopolitical tensions continue. PIF did exceptionally well with its US market strategy in 2020 as it ‘bargain-hunted’ following a depressed equity market in the wake of COVID-19. Although the current downturn in equity markets stems from additional factors compared to 2020, PIF is likely to adopt a similar approach as strategically appropriate opportunities present themselves.”

According to Alwazir, PIF’s volume of international investments now stands around 30 percent of assets under management and it has increased its investments in the US over the years especially since 2017.

“A majority of PIF’s equity investments in the US have mirrored sectors the kingdom wishes to strengthen domestically, like tourism, e-gaming/e-sports, auto manufacturing, electric vehicles… Besides identifying strong investment opportunities in general, I anticipate PIF will invest along the same pattern we’ve witnessed in recent years,” he added.

Ratings agency Fitch in April revised its investment outlook for PIF to positive from stable, reflecting its strong net cash position and minimal debt.

“As PIF is in its early growth phase, its outstanding debt is low and is net cash positive, resulting in a very strong financial profile,” Fitch said in a research note. 

“This makes the prospect of financial distress remote, which we also believe the state has a strong incentive to avoid, given the impact it would have on international financial markets and the borrowing capacity of the state or other Saudi GREs (government related entities).”

Diversifying into new sectors

PIF manages about $620 billion in assets, according to its website, and is at the centre of Saudi Arabia’s Vision 2030 strategy aimed at diversifying the kingdom’s economy and reducing reliance on hydrocarbons. 

Crown Prince Mohammed bin Salman has set a target that the fund will be overseeing assets of $2 trillion by 2030 – $1 trillion of that by 2025 – which would make it bigger than Norway’s sovereign wealth fund, currently the world’s largest with around $1.4 trillion of assets under management. PIF’s assets have almost quadrupled since 2015. 

PIF’s principal mandate is to invest in domestic companies and sectors that support the Vision 2030 agenda, such as Saudi Telecom Co and the $500 billion Neom mega project. 

However, in recent years it has expanded its interests by investing in businesses across North America, Europe, Asia, Latin America and Africa, in sectors such as healthcare, technology, real estate, infrastructure, transportation and consumer services. 

In February it announced the opening of three subsidiary offices, in London, New York and Hong Kong, to help support its international growth.

“[The new offices] will further enable PIF to continue to work with its partners across regions globally while helping to transform global economies and drive the economic transformation of Saudi Arabia,” PIF said in a media statement.

In the US, PIF has expanded into new technology, from electric vehicles through Lucid Motors, to tech entertainment such as gaming to more general apps and software, and this focus is likely to continue, noted Young.  

However, the US-Saudi investment relationship faces political challenges.

In June a US House of Representatives committee launched a probe into a $2 billion investment by PIF in a private equity firm belonging to former president Donald Trump’s son-in-law Jared Kushner, who worked for Trump as an advisor.  

The payment last year was made six months after Kushner left the White House, however the committee is also investigating whether his personal financial interests improperly influenced US foreign policy in the Middle East under the Trump administration.  

In a letter to Kushner requesting documents pertaining to the investment in A Fin Management, Carolyn B Maloney, chairwoman of the Committee on Oversight and Reform, wrote: “Your support for Saudi interests was unwavering, even as Congress and the rest of the world closely scrutinised the country’s human rights abuses in Yemen, the murder of journalist Jamal Khashoggi by Saudi assassins tied to Crown Prince Mohammed bin Salman, and Saudi Arabia’s crackdown on political dissidents at home.” 

Young told AGBI: “PIF investments can certainly be political, especially for a domestic economic mandate, but one cannot read too much into its US holdings in this way.”

When approached to elaborate on its US investment strategy, PIF declined to comment.