Sovereign funds account for 86% of deal value in Middle East

27 March 2024 Consultancy-me.com 5 min. read

The value and volume of dealmaking in the Middle East has accelerated over the past years, with the share of deals closed by sovereign wealth funds climbing up to over 85% of total deal value. Tom De Waele, Grégory Garnier, Riccardo Molinari and Elif Koc from Bain & Company outline how sovereign wealth funds are defining the deals landscape.

The region’s sovereign wealth funds (SWFs) sit on an abundance of capital that they are using to accelerate an economic transformation, including an aggressive diversification away from hydrocarbon and an ambitious shift toward deals in Asia.

Overall, deals dropped by around 3% in both volume and value in 2023, and SWFs (directly or through portfolio companies) saw the lion’s share of activity in the region, representing 86% of deal value.

Sovereign funds account for 86% of deal value in Middle East

The direct strategic investments of sovereign wealth funds fall into five distinct categories:

Deals to enter a new vertical at scale
These acquisitions are aimed at building local platforms in underdeveloped sectors. For example, that was the objective of Saudi Arabia’s Public Investment Fund’s (PIF’s) move to consolidate the steel sector in Saudi Arabia by acquiring AlRajhi Steel and Hadeed. In a non-SWF deal, Abu Dhabi-based healthcare company M42 bought dialysis provider Diaverum.

Deals to strengthen ties with partners
These include acquisitions to support the development of regional economies in countries such as Egypt, Jordan, Oman, and Sudan as well as those to solidify relationships, especially in Asia. Emirati holding company Mubadala co-led a $2 billion investment in the Chinese online fashion company Shein. Qatar Investment Authority invested $1 billion in India’s Reliance Retail Ventures, the retail arm of billionaire Mukesh Ambani’s Reliance Industries.

Deals to invest in economies or sectors of the future
Consider PIF’s majority ownership of Lucid Motors, a US-based maker of electric vehicles, for example, or Mubadala’s investments in China’s Hasten Biopharmaceutical as well as its joint venture with National Resilience, a technology-focused biomanufacturing company dedicated to broadening access to complex medicines. As part of the deal, Mubadala will establish a first-of-its-kind biopharma manufacturing facility in the region, based in the UAE.

Deals to increase soft power and visibility
Among the most publicized acquisitions for national branding was PIF’s big move into football. Local teams Al Hilal, Al Ahli, Al Nassr, and Al Ittihad are all now owned by PIF, which also owns Newcastle United. Investments in the Saudi teams included attracting global stars. Portuguese forward Cristiano Ronaldo plays for Al Nassr, and his former Real Madrid teammate Karim Benzema joined Al Ittihad.

Deals that build regional champions via strategic investments through SWF portfolio companies
Leading domestic companies are buying to expand from the GCC into higher-population and higher-growth markets as well as turning to M&A to enhance capabilities. For example, PIF-owned Savvy Games acquired Scopely for $4.9 billion. The deal follows PIF’s earlier investments in esports ESL and Faceit. Similarly, Abu Dhabi–based AD Ports Group completed its acquisition of Spain-headquartered logistics group Noatum.

Sovereign funds account for 86% of deal value in Middle East

Two SWF trends to watch in 2024

For 2024, we note two SWF-related emerging deal trends to watch.

More deals are aimed at accelerating the energy transition
Middle Eastern countries have announced ambitious net-zero targets. So far, the UAE and Oman pledged to reach net-zero emissions by 2050, and Saudi Arabia, Bahrain, and Kuwait by 2060. Within the region, Saudi Arabia and the UAE have positioned themselves as leaders in providing clean energy globally with both expertise in hydrocarbons and a potential advantage in renewables and energy transitions.

This energy transition push is reflected in M&A activity. PIF and Mubadala have committed to net-zero targets by 2050. In addition to working to decarbonize existing portfolios, those funds are investing in green assets and in technologies that support decarbonization.

Setting the target and ambition is the first step for investment companies to decarbonize their portfolios, and it has broad implications for M&A practitioners’ investment strategies and portfolio management. For example, net-zero commitments now will lead investment companies to consider emissions as part of the deal approval framework. It also now requires them to actively advocate for emissions reduction in portfolio companies and evaluate investments in enabling decarbonization technologies for portfolio companies.

The SWFs’ increasing exposure to Asia

During the first three quarters of 2023, those funds invested a total of $8.5 billion in increasing their ties to Asia, nearly a 60% rise over 2022. The activity was spread across Asia, including China, India, South Korea, Japan, and Singapore.

Sovereign funds account for 86% of deal value in Middle East

PIF and South Korean automaker Hyundai recently entered a joint venture valued at more than $500 million that will build a new manufacturing plant in Saudi Arabia. The localization of Hyundai’s vehicles is aimed at accelerating the development of the country’s automotive and mobility ecosystem and attracting further investments to the sector and the wider economy.

Overall, the investment thesis in Asia includes tightening ties with Asian countries, building supply chain resilience in strategic categories such as automotive and semiconductors, leveraging green energy investments, and a big shift to relocate the Asian companies’ manufacturing, innovation, and commercial operations in the Middle East. It’s a massive goal with equally sizable benefits for GCC economies.

Achieving those benefits requires substantial effort from the region’s SWFs and governments to build an extensive talent base, to provide localization incentives, to design win-win deals with Asian partners, and to provide local supply chain ecosystems and infrastructures.