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Sovereign funds hiring their own rainmakers

Funds such as Saudi Arabia's PIF are asserting themselves as direct investors, sidestepping established managers

London

WHEN Lucid Motors, an electric carmaker, announced that it had raised US$1 billion in financing last month, the transaction appeared at first blush to be just another Silicon Valley megaround.

But what made the deal stand out was the identity of the lead investor: the Public Investment Fund, or PIF, an arm of Saudi Arabia's government, charged with investing the kingdom's oil fortune.

The Lucid investment is just the latest deal in the PIF's multibillion-dollar spending spree over the past two years, which highlights the evolution and growing ambitions of so-called sovereign wealth funds. Once regarded mostly as sources of money for professional money managers, sovereign funds have matured into ambitious investors. They have stocked their ranks with experienced dealmakers and are searching for opportunities to strike their own deals.

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"They've evolved into becoming more direct investors," Michael Maduell, president of the Sovereign Wealth Fund Institute, a research group. "They are competing against the Carlyles and the Blackstones of the world."

Governments have long needed ways to invest their surplus cash, particularly those nations whose petroleum reserves gushed money. Sovereign funds offered one way to deploy that capital to generate income for decades to come.

Such funds hold vast sums of money: roughly US$7.8 trillion as of June 30, according to data from the Sovereign Wealth Fund Institute. The biggest in the world, Norway's Global Pension Fund, manages just over US$1 trillion, or more than double what Blackstone oversees.

Early on, many of these funds placed money with professional money managers. But starting a decade ago, some government funds began to assert themselves as direct investors.

In the prelude to the global financial crisis, troubled banks such as Citigroup and Barclays turned to the Abu Dhabi Investment Authority and the Qatar Investment Authority for cash infusions. And Qatar went further, buying up assets such as the British department store Harrods and London's Canary Wharf financial district - along with European fashion houses Valentino and Balmain. Their ambitions have continued to grow in the years since the financial crisis. The 10 biggest deals by such funds were all struck within the past decade, according to the Sovereign Wealth Fund Institute. The biggest on record, Blackstone's sale of the warehouse operator Logicor to the China Investment Corp, was for roughly US$14 billion.

To help hunt down opportunities, many of the funds have built up their in-house investment teams, hiring experienced rainmakers from top international banks and private equity firms. From 2012 to 2016, for example, Temasek's head of the Americas was Boon Sim, who had been Credit Suisse's head of global mergers and acquisitions. During the past year, the PIF has hired Alireza Zaimi, a senior banker at Bank of America Merrill Lynch, and Abdulmajeed Alhagbani, who led HSBC's Saudi asset management team.

To attract top managers, some of these funds have offered compensation packages competitive with Goldman Sachs and KKR, a far cry from the salaries normally paid for what are essentially civil-servant positions.

There are a number of factors behind sovereign funds' push to make direct investments. One is simple: These funds are awash in money, more than what professional investment firms can put to work.

"The key driver for them is that they want to invest privately more than what private equity firms allow them to do," said Francesco Rossi Ferrini, head of JPMorgan Chase's sovereign wealth funds advisory team for Europe, the Middle East and Africa.

Striking deals directly also helps sovereign funds save on fees charged by money managers. But for some funds, direct investments are of strategic import. Take the Saudi fund, PIF. Its newfound ambition is indelibly linked to Vision 2030, the expansive economic reform plan outlined by the kingdom's de facto ruler, Crown Prince Mohammed bin Salman. Its investments are meant to wean the world's biggest petrostate away from oil.

To give the PIF the firepower it needs for such a task, the Saudi government planned to infuse it with cash from an initial public offering of Saudi Aramco, the state-owned oil company. The transaction has since been postponed and the government has directed Saudi Aramco to buy a majority stake in Sabic, a big oil company controlled by the PIF. The fund also has borrowed US$11 billion from international banks.

The PIF's first headline-grabbing investment came in 2016, when it invested US$3.5 billion in Uber. The deal helped promote the idea of the Saudi fund as an up-and-coming investor in hot technology companies. Afterward came investments in companies such as Magic Leap, a ballyhooed player in the augmented-reality industry, and a space travel venture run by Richard Branson.

The Saudi fund was also in the middle of Tesla's recent scandal. Conversations with PIF officials over the past year left Elon Musk, the carmaker's chief executive, convinced that the fund would finance his effort to take the company private, and he went on Twitter and posted his intentions to buy out Tesla investors - with money for such a move purportedly "secured". But the fund had not actually taken the steps required to invest in such a transaction.

A month after Mr Musk's scandal broke, the PIF announced its investment in Lucid. NYTIMES