What can you do with $2trillion? You could buy the four biggest public companies in US as mentioned on Bloomberg when the news about the Saudi Arabia mega-fund was first published. It’s an interesting hypothesis, but will it happen in reality?
The mega-money of Saudi Arabia.
The news is already old and digested, yes we know Saudi Arabia plans to take public its state run oil giant Aramco, but where are they going to invest the $2 trillion mega-fund that it plans to set aside?
I don’t think they will look to invest in risky Silicon Valley type start-ups or VC funds. Beside, there are already two similar investment programs run by two countries, but with different investment missions.
Two existent investment philosophies for a wealth fund. Opportunity for frontier markets.
Norway with its Government Pension Fund, is trying to preserve and safely increase its investment capital. The second one is China trying to secure and strengthen its position as a world super-power.
What does it have to do with our frontier markets focus?
Frontier markets countries could be the beneficiaries of this fund.
Although there is no pubic information [yet] as how the fund will be invested; this article is not speculating nor forecasting, it is mere food for thought.
The two investment approaches are different in nature and Saudi Arabia can use any of them, or a hybrid of both.
The Nordic way. Winter is coming!
At the moment, the Government Pension Fund spreads its investment between equities, fixed income and real estate with the ratios of 60-35-5. These approach is conservative, investing in blue chip type companies in mature and emerging markets.
By taking the Norway’s approach to investing, the Saudis could invest mainly in already established companies. These approach is similar to any pension fund in the world, the only difference is its size.
If the Saudis decide to invest this way, the 65% allocated for stocks would represent $1.3 trillion. The disadvantage is the time it will take to invest these amount of money in strong, public companies.
Not only the time needed for investment, but also finding companies with a market capitalization big enough to absorb the buying power of more than a trillion dollars can become a headache for the Deputy Crown Prince Mohammed bin Salman.
The Chinese Way. Spreading capital and soft power.
China investment and acquisition spree all over the world is so common today as one may ask where didn’t China invest already?
From agricultural investments in Romania, currency swaps and trade relations with cash-hungry Argentina, investments in London Water System and buying and investing all over Africa, China is spreading its influence and power all over the world.
Personally, I find this approach more suited to a mega-fund of such size. Also, Saudi Arabia geographic position makes it easier for them to invest in frontier markets around Middles East, Africa and Central-Asia.
Most Chinese investments in Africa were conducted in sub-Saharan countries. Saudi Arabia can borrow this system and invest in Maghreb, making it also a strong power player in the middle east area.
Taking this investment philosophy, the Saudis will have to take a more activist approach to its wealth management. Direct investment in frontier markets in Africa or Middle East needs a more hands on approach due to spread corruption and poorer company reporting.
Different approach. Different objective.
Although a Chinese way of direct investment is more suited to Saudi Arabia, at its core, Saudi Arabia investment objective has more in common with Norway than with China.
Startfor points that, for a super power, China lacks food security. With this in mind, Chinese investments in sub-Saharan agriculture and industry can be consider its way to gain food security.
Saudi Arabia, as a desert covered country doesn’t have food security either, but they are neither aspiring to be a super-power. Securing food is less of a problem for almost 29 million inhabitants than for 1.35 billion Chinese mouths.
This way the country has more in common with Norway. The Saudis need investing for a return big enough to support their budget and social system for when the oil will dry out.
The viable approach. Probably a bit of both.
Saudi Arabia can take the middle way, analyse and take the advantages of both systems, creating an wealth fund philosophy of their own.
By splitting the fund, they can use some of the principal to play the big kid on the block in the Middle East area, investing in infrastructure or government debt and being the regional power player. The rest of the fund could be invested to generate an income that will supplement their government oil income and in the future replacing it altogether.
Food for thought that turn into speculation.
At the beginning of the article, I was looking to offer just food for thought with the $2 trillion mega-fund investment options. However, starting to think of how this amount can be invested, made me think of how can I invest it wisely. I started speculating what is best for Saudi Arabia. I don’t know what is best for their country, maybe even the Saudis don’t know it.
All we know is that, either way they are looking to invest, the mega-fund will spill capital flows into frontier markets.
How would you invest a $2 trillion fund if would have been at your disposal? That’s food for thought, don’t speculate.
All content on DraculaCapital.com is for information purposes only. Do not use this content as investment recommendation. Every type of investment involves the risk off losing investment principal. Frontier Markets presents higher risks than mature markets.