Sovereign fund focus on regional deals boosts Middle East's alternative asset investments

Private capital assets under management in the region grew 11% annually at the end of 2020, according to Preqin report

The Abu Dhabi skyline. The UAE is home to the biggest number of investors in the region. Alamy

Private investors and sovereign wealth funds (SWFs) in the Middle East are increasingly shifting their attention to domestic and regional markets, giving a boost to private capital deals and money going into alternative asset classes.

Private capital assets under management in the region grew 11 per cent annually at the end of 2020, with an even stronger growth of 14 per cent in cash holdings for deals.

This points to “renewed investor appetite”, according to a report by alternative assets industry data and analytics specialist Preqin. It did not give the dollar value of assets under management.

There is also an increased focus on “early stage investment", with 33 venture capital-focused fund managers establishing their presence in the region between 2018 and 2020, the report said.

“Globally, sovereign wealth funds account for around 2 per cent of AUMs for private capital investors; in the Middle East they account for 44 per cent,” Preqin said.

“While local SWFs have typically invested outside the region, they are increasingly moving capital towards more regionally and domestic-focused investments.”

For instance, Saudi Arabia's Public Investment Fund plans to more than double the value of its assets under management to $1.07 trillion and commit $40 billion annually to develop the kingdom's economy until 2025.

Government-related investment vehicles accounted for 11 per cent of investor assets under management in the Middle East, compared with 3 per cent globally, according to Preqin data.

Alternative asset classes that are outside public markets’ realm include private equity, private credit, venture capital, hedge funds, commodities, property and infrastructure.

The industry has grown rapidly over the past few years, with private markets and alternative assets recording a compounded annual growth in the “low-teens”, according to Bahrain based alternative asset manager Investcorp, which plans to double its assets under management to $75 billion in the next five to seven years.

The regions’ two main economies, Saudi Arabia and the UAE, have led the growth in alternative assets investments.

The UAE, the business and financial centre of the Middle East, has dominated regional peers in terms of attracting new fund managers. It currently hosts 46 per cent of all investment managers in the region, followed by Saudi Arabia at 24 per cent.

The UAE is also home to more investors than anywhere in the region, with 40 per cent based in the country. Kuwait has also fostered a growing base of fund managers, with active growth throughout the 2000s, according to Preqin data.

Alternative asset managers in the Middle East are also “moving up the risk spectrum overall, embracing venture capital strategies and promoting innovation to deliver growth beyond private markets”, according to the report.

The aggregate value of venture capital deals in the Middle East increased significantly in the third quarter of this year and grew more than 300 per cent from the second quarter of this year, it said without giving the value.

“Software, internet and financial services industries make up the majority of venture capital activity in the Middle East,” Preqin said. “This success is helping the region develop its alternatives investment industry by drawing capital from international investors, setting a precedent that will shape the future of alternatives in the region.”

As economies in the Middle East recover from the coronavirus-induced slowdown, governments are hastening efforts to develop the service sectors of their economies and further invest in the renewable power industry, which has opened up new investment avenues for fund managers, the report said.

The aggregate value of renewable energy deals in the Middle East between 2011 and 2021 reached $13bn, with more than 60 per cent of these deals executed since 2017.

“The onus will be on reinvesting in domestic economies; some Middle Eastern states will seize this revenue opportunity, investing via innovative sectors,” said Alex Murray, vice president of research at Preqin.