BY GEORGE HAY
Saudi Arabia wants to expand the assets in its Public Investment Fund by 60
STAKEHOLDER CIRCULAR
Aug.20, 2023
Riyadh, Kingdom of Saudi Arabia
Yasir Al Rumayyan, Chief Executive Officer, Public Investment Fund
Dear colleagues,
Firstly, please accept my gratitude for agreeing to a departure from the usual practice of holding our annual general meeting at the Al Faisaliah Hotel in the centre of Riyadh. As you know, my senior management team has spent the past few months as guests of the government at the Ritz-Carlton. Staging this year’s event here will, I hope, allow you all to enjoy the hotel’s exquisite grounds, as well as making it possible for us to attend.
It is seven years since the inception of the Vision 2030 plan to transform our kingdom. With seven years to go, now is the time to take stock of the progress we have made, and what remains to be accomplished.
Our original objectives for the PIF were clear: to grow our assetsfrom $250 billion to $400 billion by 2020, with international assets accounting for 25 percent of the total. We aimed to generate long-term returns of between 6.5 percent and 9 percent a year from six investment pools.
The overall goal was to diversify the economy by increasingnon-oil manufacturing exports from 16 percent to 50 percent of GDP. Finally, we aimed to generate an average annual shareholder return of 4 percent to 5 percent by 2020.
Benchmarked against these objectives we have had some successes. However, the fund’s performance of minus 90 percent has clearly been disappointing. There are five key lessons we can learn.
Reducing concentration risk
A core part of our strategy in 2018 was to support the visionaryElon Musk in taking his electric vehicle firm Tesla private. Our powerfulconviction in owning what we saw as the clear industry leader was such that we supplied $25 billion of the financing for the $72 billion deal. We were right about electric vehicles, where volume growth has surpassed all expectations. Unfortunately, much of the upside has gone to established manufacturers like BMW and Volkswagen. Musk’s habit of revealing game-changing product innovations on Twitter before discussing them with the board has not helped. Tesla’s valuation is now far below the 50 times 2020 earnings at which we bought, forcing us to write down our investment.
Clarity over the nature of our investments
Our decision to entrust $45 billion of our capital to SoftBank’s Vision Fund after a 45-minute meeting with Masayoshi Son in 2017 was a good example of our nimble investment strategy. Who could have predicted that the fund’s management team, led by former Deutsche Bank traders, might preside over value-destructive investments in opaque financial products? We also mistakenly assumed that Son would be reluctant to risk a repeat of 2000, when SoftBank shares fell over 90 percent after the dotcom bubble popped. We have opted not to participate in Vision Fund II, despite Son’s entreaties to “feel the force”.
A sensible use of leverage
There was nothing wrong with borrowing an initial $6 billion to $8billion from western banks eager to generate actual fees from their extensive operations in the kingdom. Adding debt was also a way to boost returns and get us closer to our fund target of $400 billion. However, we have learned the hard way that when investment values fall, leverage drags down returns even further.
Separation of political and investment objectives
Our drive to diversify away from oil has been endorsed by thedouble quick adoption of electric vehicles. The global recommitment to Paris climate change targets – following five consecutive sweltering summers – has also led to a repricing of fossil fuels as investors anticipated the end of the internal combustion engine by 2030. As oil prices remain well below the level that Saudi Arabia requires to break even on its budget, the domestic deficit has soared to 15 percent of GDP. The PIF accelerated its assistance to the Saudi state with a $50 billion contribution, a move that necessitated the unfortunate liquidation of some investments. I can assure you that this is a one-off that will not be repeated – as long as the oil price recovers.
Realistic investing for the good of society
Vision 2030 remains committed to improving the life experiences ofall Saudi nationals by broadening their potential entertainment. In hindsight, however, bankrolling thrice-weekly versions of World WrestlingEntertainment’s Greatest Royal Rumble in each of the kingdom’s majorcities represented a poor allocation of resources. Construction of palaces in the new city of Neom, while spectacular, has also been disappointingly over budget.
I would like to highlight some bright points. Against the backdropof a difficult trading environment for emerging markets-focused debt, the fund still outperformed rival benchmarks including Turkish Special Situations, leveraged exchange-traded funds tracking Iranian commodities, and the Zimbabwe smart beta fund.
We are standing by our original investment and performance targets in our new Vision 2050 plan. However, in the next seven years we are amending our original objective. Our goal now is to achieve a return OF capitalof 4 percent to 5 percent, not a return ON capital of the same amount.
Thank you for your continued support.
Yasir Al Rumayyan
First published Aug. 20, 2018
(Image: REUTERS/Faisal Al Nasser)