September 30, 2023

Kuwait’s $700 billion wealth fund is dwarfed by ambitious neighbours

(Bloomberg) — As Middle Eastern sovereign wealth funds emerge as the go-to investors for some of the biggest deals, the world’s oldest and one of the largest is being eclipsed by its more ambitious, flashier neighbors.

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The Kuwait Investment Authority, which manages the Gulf state’s $700 billion sovereign wealth fund, has lost several senior executives in the past year, including heads of key divisions, according to those in the know. Successors have yet to be appointed for some of those positions, they said.

The KIA invested just $2.8 billion last year, compared to $25.9 billion by the Abu Dhabi Investment Authority and $20.7 billion by the Saudi Arabian Public Investment Fund, according to boutique advisor and data firm Global SWF. While the funds’ often secret transactions are difficult to track accurately, similar estimates from Javier Capapé, who specializes in sovereign entities at Spain-based IE University, confirm the trend.

The KIA’s challenges are symptomatic of a wider malaise in Kuwait, wracked by five government changes in a year. There have been a series of inquiries into the fund’s investments, and those familiar with the matter described the increasing involvement of ministers in decision-making. While it is still investing, a lack of direction and fear of oversight by lawmakers has led to a degree of paralysis for the fund as it forges deals, the people said.

“Given the size of its balance sheet and long history as a global investor, KIA is losing momentum relative to other regional SWFs that are more stable and active,” said Diego Lopez, general manager of Global SWF. “One of the main reasons is the numerous political changes that Kuwait has been experiencing recently, which have affected the governance and executive leadership of both the KIA and the Public Social Security Institution.” The PIFSS is Kuwait’s public pension fund, whose top leaders were ousted last year and have still not been replaced.

Many of the world’s dealmakers are turning to the region’s sovereign entities, collectively controlling at least $3 trillion in assets, to be a leading source of funding as others pull back. In recent months, companies like $700 billion worth of PIF and Mubadala Investment Co. worth $276 billion deals in everything from aviation to tourism, sports to video games. Neither Global SWF nor IE University are aware of any deals made by the KIA this year.

KIA officials could not be reached for comment. Still, people familiar with the fund’s strategy say its existing investments are doing well and it prefers to remain understated and conservative. The Future Generations Fund, the asset fund managed by the KIA, reported a return of 33% for the year ending March 2021, the most recent publicly available data. This included a 38% return from the KIA’s London arm, the Kuwait Investment Office.

prolific investor

The lack of high-profile deals marks a dramatic turnaround for the fund, which was once one of the most active in the region. Until recently, the KIA was a leading global investor, with stakes in BlackRock Inc. and Mercedes Benz Group AG. During the 2008 crisis, it bought banks including Citigroup Inc. It had high-profile successes in the past, selling its stake in Citigroup for $4.1 billion in 2009, making a profit of more than $1 billion. The Kuwait Investment Office has also been a prolific investor, participating in the US listing of private equity firm TPG Inc.

The KIA does not officially disclose the value of its assets or details of its investment strategy. Data and interviews show that the fund’s activity has been up and down in recent years rather than completely absent, yet remains weak compared to regional rivals.

Global SWF estimates that the $2.8 billion invested by the KIA in 2022 is more than $100 million a year earlier. Research from IE University shows that the KIA invested $670 million in 2021 and $4.4 billion last year, mainly due to its participation in a $3.6 billion deal for US port logistics company Direct ChassisLink Inc. That deal was made with other investors and is one of the last known major purchases it was publicly involved in.

Political upheaval

For more than two years, Kuwait, known for its deep domestic frictions and frequent elections, has been experiencing major political turmoil. The top leadership changed after Emir Sheikh Nawaf Al-Ahmed Al-Sabah succeeded his half-brother, who had been in power for decades. Since then, there has been widespread uproar among major government agencies. In June, the country appointed its fifth government in less than a year.

“The weaknesses of Kuwait’s economy and the political constraints on economic policy-making certainly create some negative spillovers on the perception of the KIA,” said Robert Mogielnicki, a senior scientist at the Arab Gulf States Institute in Washington. “You don’t feel like KIA is participating in and benefiting from a virtuous circle of economic momentum in Kuwait.”

The Kuwait Investment Board was established in London in 1953, eight years before the country gained independence, to invest excess oil revenues and help diversify the economy. The board was later replaced by the Kuwait Investment Office and in 1982 the KIA was established as the parent company. The KIA also manages the General Reserve Fund, or Treasury.

The fund came to the global spotlight last summer when it abruptly ousted the head of the KIO, Saleh Al-Ateeqi. Nearly a year later, Al-Ateeqi’s position has not yet been filled and the KIO – which invests primarily directly in public equities and fixed income – is largely managed from Kuwait. There have been a number of departures from the London branch in recent months and it is also struggling to attract talent, people said.

Since the start of the pandemic, most of the KIA’s investments have been made by its infrastructure subsidiaries, small investments in IPOs or public companies and commitments to existing fund managers, such as Invesco Ltd., BlackRock and Northern Trust Corp., according to SWF’s Global Lopez. .

For the past three years, the KIA has been more focused on selling assets than acquiring them. It has divested stakes in companies such as Viesgo in Spain, Rialto and Transgrid in Australia and Thames Water in the UK, according to Lopez.

In March, it sold about €1.4 billion worth of shares in Mercedes-Benz, having owned it since 1974. Knowledgeable people also described internal tensions over some investment decisions.

The fund said the sale of Mercedes-Benz was part of an effort to diversify its portfolio. Still, there were some who were baffled by the decision and timing of the sale, people said.

Saad Al-Barrak’s appointment last month as state minister for economic and investment affairs, and oil minister, places him as chairman of the KIA, according to the website. It is a departure from previous years when the fund was historically managed by the Minister of Finance. While Al-Barrak could shake things up, Mogielnicki isn’t so sure.

“I don’t see a radical shift in investment approaches and priorities happening overnight,” Mogielnicki said.

–With help from Ben Bartenstein.

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