A prospectus for a green bond sale has delivered the biggest insight into Saudi Arabia’s rapidly growing Public Investment Fund (PIF), in a region renowned for the opacity of its sovereign wealth funds.

The planned of issuance multi-tranche US dollar-denominated green bonds will be under GACI First Investment Company and guaranteed by the PIF, helping finance its ambitious objectives in renewables. The 180-page document reveals that PIF delivered a 25% return in 2021 on the back of a rally of global stocks, more than double the 12% annual average in 2017-2020. Revenue was SAR228.2 billion, up 27.5% y-o-y.

The performance was barely superior to the MSCI World Index, which returned 22.4% in 2021 and an average of 15% in 2017-2020. For a strategic fund like PIF, generating alpha is not as important as it is for savings and stabilization funds; success is oriented towards development outcomes, with the international portfolio used to help fund Vision 2030 priorities.

Domestic Assets Dominate Portfolio

AUM reached US$608 billion by end-June, up US$80 billion from end-2021, despite the slump in public equities amid market turmoil. PIF is aiming for a 50:50 split between domestic and foreign holdings by 2030. By end-2021, its allocation to GCC states – mostly Saudi Arabia – dominated with 69% of AUM, while the Americas represented 19%, Asia 7%, and Europe 5%. In February, the government transferred a 4% stake in Aramco, worth around US$76 billion to the fund, which increased its portfolio exposure to the domestic market and the oil industry.

With the objective of US$1.07 trillion in AUM by 2025, the fund stands to pump tens and perhaps hundreds of billions into the global economy over the short-term as it progresses towards its targets. This is on top of the “minimum of US$40 billion annually in domestic projects and investments” under the program for 2021-26. The government is likely to be the source of dry powder to finance its rapid growth; the value of the government’s contributions to the Fund amounted to SAR177.4 billion (US$47.3 billion) and SAR26.5 billion (US$7.1 billion) in 2020 and 2021, respectively. Other sources of income for reinvestment include potential dividends from portfolio companies – such as Aramco, which is boosted by the strong growth in global crude prices – as well as potential divestment from domestic public equities.

The fund is relatively liquid with 44% allocated to listed assets, 7% in money market, and 2% in private fixed income. Private equity comprised 21% of the portfolio and real estate and infrastructure a further 13%, while 12% was Aramco promissory notes – a level that reduced in H1 2022 as the national oil company paid off more than 40% of the US$70 billion owed to PIF for its purchase of petrochemicals producer Sabic. The liquidity generated by the payment will help fund PIF’s long-term ambitions, such as its domestic economic development.

Saudi Arabia’s multi-billion-dollar giga-projects such as Neom City are not valued in the portfolio, although the prospectus states it “expects the total capital expenditure of the Neom project to be approximately US$500 billion, which is expected to be funded by a combination of equity from the Fund and external sources of funding.”

International Strategy

In terms of the rest of its portfolio, its investment in SoftBank’s Vision Fund (SVF1) is now worth SAR131 billion (US$35 billion), according to the prospectus, having initially invested US$45 billion in 2017. The value of the investment has declined as funds have been redistributed to PIF with SVF1 realizing profits from exits.

The Fund has also committed up to US$20 billion to the Blackstone Infrastructure Fund Program, one of the largest dedicated infrastructure fund programs in the world, which principally aims to modernize US infrastructure at scale. According to the prospectus, its investment in the program to date totals SAR24 billion (US$6.4 billion), making it the second biggest investment after SVF1.

Other international strategic investments include PIF’s joint investment platform with the Russian Direct Investment Fund. While up to US$10 billion of joint projects were identified by the partners, by end-June PIF had deployed just US$2 billion into infrastructure, manufacturing, logistics and retail sectors. The partnership may have stalled following the Russian invasion of Ukraine, with the prospectus stating that “the Fund does not currently intend to use any proceeds from any offering under this Programme for the funding of projects in Russia or with RDIF in breach of any applicable sanctions regulations.”

It has also pressed ahead with deploying capital under its planned US$10 billion investment program in Brazil. By end-June, it had committed to two funds in private equity and infrastructure, but it has some way to catch up with Abu Dhabi sovereign fund Mubadala’s footprint in the South American economy.

Although most of its public equity holdings are listed on Saudi Arabia’s Tadawul, around 15% of its listed assets portfolio comprises US public equities. At the end of June, its US equities fell 8.7% q-o-q to US$39.9 billion. A fall in Lucid Motors’ stock price caused a US$8.4 billion hit on Saudi Arabia’s Public Investment Fund’s US public equity holdings – but the rest of its stock holdings grew US$4.6 billion with tech stocks leading the charge.

Gaming for Growth

Beyond the fund’s domestic economic objectives, tech is a primary target for PIF – in particular, the gaming industry. PIF aims to become the “leading gaming and eSports group domestically and internationally, and will work to further develop an integrated ecosystem for the sector.” In June, it invested US$1.05 billion to acquire an 8.1% stake in the Swedish gaming business. PIF subsidiary Savvy Gaming Group (SGG), which was launched in January, made the investment in line with the investor’s 2021-2025 strategy to increase exposure to the entertainment, leisure and sports market sectors. Embracer plans to set up a regional centre in Saudi Arabia on the back of the relationship with SGG, said Lars Wingefors, founder and group chief executive of Embracer Group.

Savvy aims to establish 250 gaming companies in Saudi Arabia. Last week, SGG outlined an investment plan that will see it commit SAR142 billion (US$37.8 billion) to establish Saudi Arabia’s leading role in the global games industry, including SAR50 billion (US$13.3 billion) earmarked "for the acquisition and development of a leading game publisher to become a strategic development partner."

The Saudi fund’s level of transparency in its disclosure goes a long way towards giving confidence to potential co-investors and the financial markets. Indeed, the transparency and candor, from returns and AUM to the composition of its portfolio and identification of risks, puts PIF ahead of most other funds in the Middle East.

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