High oil prices offer Middle East SWFs more capital to invest in alternatives

The eight-largest sovereign wealth funds in the region have more than $3tn in combined total assets

The Adia office building in Abu Dhabi. The eight largest Middle Eastern Sovereign Wealth Funds have more than $3 trillion in combined total assets, Preqin says. Delores Johnson / The National
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Higher oil prices are providing fresh capital to the Middle East's sovereign wealth funds to increase allocations to alternatives, a new study showed.

Given that much of the regional SWFs' funding relies on state-owned oil and gas industry revenue, the crude price rally is driving new opportunities for managers to help them diversify from a reliance on commodities, research company Preqin said in the report.

The eight-largest Middle Eastern SWFs collectively have more than $3 trillion in combined total assets, according to Preqin data, which is aimed at helping international managers source new capital from investors in the region.

"With oil prices at highs not seen since before 2014, the region’s economic outlook is improving, but the desire to move away from reliance on oil revenues provide opportunity for private capital models to see capital invested outside the region," said Alex Murray, vice president of research insights at Preqin.

“The Middle East provides a promising opportunity for international managers to find new sources of capital. The investors' base is diverse and deep, so intelligence on the potential market is crucial to focus fundraising efforts to ensure success."

Oil prices have remained volatile this year after hitting close to $140 a barrel in April following Moscow’s military offensive in Ukraine and subsequent sanctions by the US and Europe on crude imports from Russia.

Brent, the global benchmark for two thirds of the world’s oil, closed 0.85 per cent higher on Friday at $94.92 a barrel, recovering some of the losses from earlier lows during the week, but still down 11 per cent compared with the previous week.

West Texas Intermediate, the gauge that tracks US crude, edged up 0.53 per cent at $89.01 a barrel, but down 8 per cent from last Friday's close.

Environmental, social and governance investments by sovereign investors globally into funds and companies surged by more than three times last year, as government investment arms continued to add sustainability-linked assets to their portfolios.

Investments by SWFs in the ESG space reached $22.7 billion at the end of last year from $7.2bn in 2020, according to Finbold.com and data from industry tracker Global SWF. The number of sustainability-linked investment deals at the end of 2021 also rose to 37 from 19 a year earlier.

About 55 per cent of SWFs in the Middle East have repositioned their portfolios in anticipation of further interest rate rises, international asset manager Invesco said in a report last month.

Surging inflation has prompted sovereign funds to re-examine their asset allocations, with private markets the main beneficiary, Invesco said in its 10th annual Global Sovereign Asset Management Study.

Fifty per cent of SWFs in the Middle East plan to increase allocations to private equity, 20 per cent to property and 20 per cent to infrastructure over the next 12 months, it said.

Meanwhile, 63 per cent of Middle East family offices said China presented one of the best investment opportunities in the next 12 months, according to the Preqin report.

Family offices also had a lower preference for the Middle East as a market for deployment, which may signal a stronger appetite to see capital invested outside of the region, it said.

Updated: August 07, 2022, 9:14 AM