Growing Focus on Local Ventures Marks a Significant Change in Wealth Fund Dynamics
Despite the global investment slowdown, sovereign wealth funds from the GCC (Gulf Cooperation Council) region have remained actively engaged in investing in global startups during the past two years. This ongoing activity presents significant growth potential for the startup and tech ecosystem within the GCC area.
The role of Sovereign Wealth Funds
Currently, the Gulf region is home to approximately 20 Sovereign Wealth Funds, each with distinct characteristics, including differences in Asset Under Management (AUM) sizes, investment strategies, diversification approaches, mandates, governance structures, and objectives. Nevertheless, they share two fundamental similarities: their primary source of funding, which comes from surplus revenues generated through the export of commodities, particularly oil and gas, and their operation under government or ruling family guidance and oversight.
Collectively, these Gulf Sovereign Wealth Funds possess substantial financial resources, managing approximately $3.7 trillion in total. According to data from the Sovereign Wealth Fund Institute, the seven largest funds in the region have a combined asset pool exceeding $3.2 trillion, representing roughly 40% of global SWF assets.
Shifting investment strategies
Recent patterns and trends in dealmaking by Gulf Sovereign Wealth Funds reveal several noteworthy shifts. These shifts include a growing interest in alternative assets and “industries of the future,” an increased focus on domestic investments, a heightened appetite for global startup investments, a stronger emphasis on co-investments alongside private equity (PE) and venture capital (VC) firms, and a broader geographical scope of interest.
Historically, Gulf Sovereign Wealth Funds sought attractive opportunities during times of market volatility and low valuations. However, their current strategy emphasizes assets that not only yield returns but also foster growth. Instead of allocating wealth to low-risk, low-return assets, they have diversified into more lucrative areas like private equity (PE) and publicly traded shares. The category of “alternative assets” has become a significant component of the total assets managed by the region’s three largest funds.
Additionally, there is a shift towards investing in technology and innovation-driven companies, as well as key sectors such as healthcare, logistics, renewables, broadband, and digital infrastructure.
SWF investing in startups
Notably, Gulf wealth funds have significantly increased their participation in the global startup landscape. Between 2021 and 2022, GCC-based sovereign wealth funds executed more than 88 deals, totaling an impressive $35.81 billion in investments. US-based startups stood out as the preferred choice in 2022, raising $3.8 billion across 14 deals.
It’s worth mentioning that Gulf wealth funds have also begun making investments within the Middle East and North Africa (MENA) region, signaling a notable shift in their investment approach. Investments in startups within the MENA region have been growing, with funds demonstrating increasing confidence in the startups in this area.
For example, ADQ invested in health-tech company Okadoc, while ADQ, Mubadala, and the PIF-backed Riyadh TAQNIA Fund provided fresh financing to TruKKer, a logistics startup. Additionally, PE rounds in 2022 featured PIF investments in Almosafer, a travel services provider, and FOODICS, one of the largest cloud-based fintech platforms for restaurants in the Middle East.
“This shift in investment strategy marks a significant transformation in how these wealth funds operate. Historically, wealth funds primarily invested in startups on a global scale, with the US and China as primary destinations.” an investor, who asked not to be named, commented. “However, this dynamic has evolved, with India replacing China as a key investment destination. Moreover, funds have started looking more favorably towards investments within the MENA region.”
Drivers and challenges
The GCC has established special economic zones (SEZs) such as the Dubai International Financial Centre (DIFC), the Abu Dhabi Global Market (ADGM), and the King Abdullah Economic City (KAEC) in Saudi Arabia, which provide attractive incentives for foreign investors, including tax benefits, customs exemptions, streamlined regulations, and favorable conditions for doing business. However, innovation and talent acquisition remain challenges for some countries in the region, with skilled individuals often preferring tech jobs in the US and Europe.
Despite these challenges, the GCC’s tech ecosystem is poised for exponential growth, with governments actively supporting it through incubators, accelerators, and favorable policies. Events like Dubai’s annual GITEX Technology Week further underscore the region’s commitment to nurturing a thriving tech environment.