The Middle East (defined here as the Arabian Gulf and its periphery) has long flourished as one of the wealthiest regions of the world. Sustained current account surpluses (i.e., when the value of exports is higher than the value of imports) and low domestic absorption capacity have meant that the region has one of the highest investible surpluses in the world. This surplus has propelled the region as an influential player on the global commercial stage, complementing its already important political presence.
Acquisitions of high-profile assets around the world have been a hallmark of investment activity. Various entities from the region have invested in brand names such as Harrods, the Chrysler Building, The Shard in London, Ferrari (through the ownership stake in Volkswagen), Newcastle United, as well as stakes in global champions like Citigroup, Credit Suisse and Volkswagen. Many of the local Sovereign Wealth Funds (SWFs) and Public Pension Funds (PPFs) have also invested in private equity funds, committing large amounts to many global private equity firms. The COVID-19 pandemic has created additional opportunities to deploy capital. The announcement of Mubadala’s investment in Reliance Jio is the most recent example. Healthcare, logistics and technology are opportunities for growth and regional investment.
At a more strategic level, COVID-19 has created business model changes which present a unique, market-defining opportunity for those with deep pockets, including capital pools in the Middle East. This hunt for deals is reminiscent of the 2008-09 global financial crisis when Qatar and Abu Dhabi invested billions of dollars in groups including Barclays, Credit Suisse, Volkswagen, Porsche and Daimler.
But there is another side to the story. The region is contending with not one but three key challenges of its own: a global pandemic, a sudden drop in oil prices to historic low levels and a problematic geo-political situation. As the impacts of this unforeseen confluence are felt, leaders are balancing the need to “keep things running” to capitalize on investment opportunities while balancing the budget.
The need to shore up reserves has manifested in important privatization deals such as the minority sale of Aramco (though limited to the domestic capital markets) and the recent minority sale of the gas pipeline business of Abu Dhabi National Oil Company (ADNOC). Major international players participated in the gas pipelines deal, collectively investing over $10 billion in a recently-announced deal.
Then there is the social contract. Almost all the regional SWFs have been instrumental in helping the ruling families underpin the social contract—from free education and healthcare for locals, to funds required to fulfill additional social promises made during the Arab Spring. Defense spending has added to the pressure on surpluses. While local SWFs have evolved rapidly both in terms of talent and asset allocation, the strategic use of reserves for national interests continues to have some influence.
Given this backdrop, balancing competing objectives is one of the significant regional challenges and priorities. The region is looking to shift away from the heavy reliance on oil, moving into more diversified sources of revenues. Exploring long-chain hydrocarbons (oil derivative industries like plastic, paint or rubber) is one of the strategies used by Saudi Arabia and they have done so successfully with instances of industrial businesses that have performed well. Qatar invested early in gas pipelines, which have since come on stream, generating significant income for the country. With no oil reserves, Dubai has firmly established itself as the trading and commercial hub for the region. There has also been a consistent strategy to make portfolio investments in the public and private markets to balance the reliance on the oil issue.
From 19th-century pearl diving in Bahrain, gold trading in the UAE and spice trading in the Hejaz to high-quality local businesses, banks and investments, the region’s resilience combines a traditional commercial acumen with natural resources. The myth that the region is purely relationship-driven should be debunked. Relationships go a long way, but a sound commercial proposition goes further. Middle Eastern investors like brand names both in terms of what they acquire and who they fund and transact with, so brand—and brand building—is a differentiator in the region.
The Middle East has come a long way in terms of domestic economic progress, global influence and the rapid rise of an urban infrastructure comparable with any international metropolis. The mix of traditional influences combined with more prosaic symbols of modernity are present everywhere and also reflected in the arts and culture scene in Kuwait, Abu Dhabi and Qatar. Museums like Guggenheim and The Louvre have established a local presence—which suggests that more civic and social engagement may be on the horizon.
SS&C has an on-the-ground presence in the Middle East, serving a host of local clients across banking, private equity, wealth management, SWFs and PPFs. We also serve many other Middle Eastern clients from our private equity and real estate service centers in Dublin, New York, London and Luxembourg.
In our recent webinar “SS&C Dialogues: Middle East Outlook – What is the Market Temperature?” SS&C and three regional business leaders gave their insight into the region, the challenges and the opportunities. Watch the “SS&C Dialogues: Middle East Outlook – What is the Market Temperature?” webinar.
Asset Management, EMEA