The UK-Saudi strategic trade partnership just got closer

• Post-Brexit deals stand to benefit both countries
• Saudi Arabia’s Vision 2030 is particularly attractive to the UK
• Technology and sports are fuelling Britain’s interest

When British Prime Minister Boris Johnson met Saudi Arabia’s Crown Prince Mohammed Bin Salman in Riyadh in March, the headlines focused on Moscow’s invasion of Ukraine and the need for countries to work together to improve energy security and reduce reliance on Russian hydrocarbons.

But the leaders also committed to boost co-operation in defence, security, trade and culture, and welcomed a new UK-Saudi Strategic Partnership Agreement.

It seems like Saudi Arabia, rather than the UAE, holds the most potential in the Middle East for UK cross-border trade and deal activity in the short to medium term, according to George Traub, managing partner of Lumina Capital Advisors, a specialist mid-market corporate finance adviser. 

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“What we are seeing from a transactional point of view is that a lot of UK private equity and venture capital funds are looking at the region, and particularly Saudi Arabia, more seriously. It’s becoming a lot more relevant in terms of a source of capital and diversifying their investor base,” said Traub. “Previously, they relied a lot on Europe, but that pool of capital is drying up, while Russia is pretty much cut off and China has its own issues.”

The uplift in interest in the kingdom over the past 12 months was pushed onto the front pages in October when a consortium led by Saudi Arabia’s Public Investment Fund completed the acquisition of an 80 percent stake in English Premier League football club Newcastle United. Soon after, Riyadh-based Alfanar Group announced plans to invest £1 billion ($1.3 billion) in a sustainable aviation fuel project on Teesside, also in the northeast of England.

From commitments to transactions

Bilateral commitments have been translated into real private sector transactions in the past few months, with a focus on medium-to-large family conglomerates to “capture excess liquidity for investment in the UK,” noted Traub.

The announcement in October by the UK Government that it was entering into free trade negotiations with the GCC will be significant in driving further deal activity.

“Transaction-wise, we are seeing a lot more interest in direct investments from UK companies into the region, whether through acquisitions or joint ventures… Previously, there was limited interest but the risk radar on the Middle East has diminished, and the change of sentiment is positive,” Traub explained.

He added that Saudi Arabia has emerged as the dominant country of interest in the Middle East for UK-based companies and funds, citing the potential of Vision 2030, the kingdom’s investment and development strategy, and the impact of the UK’s withdrawal from the European Union.

“When I’m talking about the region, pretty much 80 percent of the time I’m referring to Saudi Arabia as that’s really the only game in town in terms of the growth in the region,” he said, explaining that the Saudi market is 10 times the size of the UAE and with nationals comprising the majority of the population, it is a much less transient economy in terms of consumer behaviour. 

“Coupled with the infrastructure spending commitments from the Saudi government, you’re getting a lot of interest there,” he added. 

Technology and entertainment

Technology is fuelling activity between the UK and the Gulf, especially in the healthcare, education and logistics sectors. Traub said Lumina Capital Advisors is currently working with several companies looking to establish joint ventures in Saudi Arabia. He noted that sports and entertainment – areas in which both Saudi Arabia and the UAE are investing heavily – will also be important sectors in the future.

Data from Lumina Capital Advisors shows that the growth in UK-Middle East and North Africa (MENA) cross-border trade and deal activity between 2018 and 2020 was primarily fuelled by Brexit and revenue diversification opportunities. Its research shows that since 2018, the Middle East’s contribution to the overall revenue of FTSE-listed companies has increased by 1 percent year on year. In 2020, the MENA region generated 14 percent of revenue for FTSE-listed companies, compared to 13 percent in 2019 and 12 percent in 2018; the expectation for 2022 is in excess of 15 percent.

As the GCC looks to diversify away from oil, there has been a significant push into other key sectors, in particular technology, aerospace, healthcare and infrastructure.

So what does the future hold for UK-MENA investment relations?

According to Traub, while Saudi Arabia will continue to be the main market, there will also be an increasing focus on North Africa, especially Egypt.

“Quite a lot of private equity investment is going into North Africa, which I can see becoming more significant and not just an add-on to the Middle East,” he said. “I think we are just before the peak. The window of opportunity for private equity flows between the UK and MENA is probably 18-24 months to convert the excess liquidity available to develop industries and boost job creation. This is preferable to buying up London and New York, which is what used to happen. Very positive.”

Factfile: UK businesses in the Middle East

• In 2020, 14 percent of FTSE listed companies’ revenue was generated from the MENA region – nearly £10 billion ($12.3 billion). This compared to 12 percent in 2018
• Before the Covid pandemic, in 2019, 7 of the top 10 FTSE 250 companies with MENA revenues demonstrated year-on-year regional revenue growth, the highest number for five years
• Annual double-digit MENA growth was seen at top UK listed companies in: Engineering, 67 percent
  Retail, 22 percent
  Infrastructure, 16 percent
  Pharmaceuticals, 15 percent
  Aerospace, 13 percent
• FTSE-listed MENA companies in the oil and gas sector contributed 18 percent of the total revenue generated in 2020. This was down from 33 percent in 2018, reflecting the regional government initiatives to grow income from non-oil and gas sectors
• Key growth sectors were aerospace and healthcare. Aerospace revenue grew from £3.2 billion in 2018 to £3.9 billion in 2020, with the contribution increasing from 32 percent to 40 percent.Healthcare revenue from the MENA region contributed an additional 3 percentage points of worldwide revenue between 2018 and 2020, rising from 11 percent to 14 percent.