Wall Street never grasped Gulf investors’ interests
The rift between Saudi Arabia and the United Arab Emirates is extending beyond geopolitics into the realm of global finance. Global banks, historically viewing the Gulf as a singular, expansive source of capital, are now compelled to navigate challenging decisions. They are bracing for a future where the movement of money, personnel, and assets may not be as unrestricted across the region as it currently is. Together with the impacts of the Iran war, this has fundamentally altered their understanding of the dynamics within the Gulf region. The finance industry bears full responsibility for its current predicament, however. It had overlooked the fact that wallets, no matter how substantial, possess proprietors. Those owners possess interests that it is the responsibility of the banks to comprehend. It is not that the Gulf has become more intricate; the truth is that it was never straightforward. The erroneous assumption that the region operates as a single entity has led to proposals that are similarly generic, carelessly formulated, and inadequately tailored to the specific mandates and limitations of each investor.
The idea that Saudi Arabia and the UAE, along with Qatar and other affluent neighbours, represented essentially similar market dynamics held a certain allure. There is an undeniable resemblance in their substantial capital reserves and their pursuit of long-term returns. Thus, the argument posits that the Gulf will provide financing for any global asset that presents even a potential for future returns. The region’s deficiency lies in Western technology, expertise, and access, leading it to acquiesce to any terms presented. Consequently, numerous strategies aimed at Gulf capital resembled scaled-down iterations of the notable 2017 agreement involving SoftBank Group and the sovereign wealth funds of Saudi Arabia and the UAE, which collectively contributed approximately 60% of the initial $100 billion for the Vision Fund. Global funds anticipated that their counterparts in Abu Dhabi or Riyadh would assume risks that they could not market to investors in their domestic markets, while projects were crafted with scant regard for local plans and aspirations. Naturally, this situation was not sustainable.
Bankers ought to have observed that neither the kingdom’s Public Investment Fund nor Abu Dhabi’s Mubadala Investment Co. allocated fresh capital to the Vision Fund’s second iteration a few years later. By 2023, both entities — along with the Qatar Investment Authority — had shifted their strategies away from indiscriminately allocating funds to open-ended passive commitments or high-profile assets. Instead, they are seeking investments that address particular national requirements. The Saudis are focusing on agreements that provide a chance to diversify their domestic economy beyond fossil fuels, while simultaneously generating employment for their rapidly growing working-age demographic as swiftly as possible. Capital controlled from the UAE is seeking global platforms that will advance the Emirates’ objective of establishing itself as essential to the world economy, even in the eventuality of diminishing oil reserves. Qatar, in its strategic approach, utilises its investments to hedge against fluctuations in energy markets while simultaneously expanding its influence within them, and also to acquire a degree of political leverage.
What are the practical implications of this? A data-center deal, for instance, may exhibit varying levels of attractiveness based on the target audience. The Saudis would assess their capacity to develop domestic capabilities; an Emirati investor might evaluate whether it offers supply-chain advantages; the Qataris could scrutinise it for its resilience against geopolitical and economic shocks in the long run. If two countries are vying for the location of a global financier’s regional hub, it is not merely a juvenile quest for prestige; rather, it is a strategic endeavour to align incentives as closely as possible. Strategic capital may exhibit patience; however, patience does not equate to indiscriminate investment. Finally, contributing to fund managers’ “befuddlement” regarding navigation of the region is the reality that within each of these nations exist numerous additional pools of capital, some governed by private individuals, frequently with familial or other connections to the state and a similar yet distinct agenda. As David Petraeus of KKR & Co. (and formerly of the US Army) told last year with admirable understatement: “It’s almost hard to aggregate, believe it or not, because the investors all have a slightly different personality.” The expanding divide between Saudi Arabia and the UAE, regardless of its permanence, ought to act as a significant alert. Serious investors had already begun to cultivate a deeper comprehension of the region; however, antiquated caricatures may have persisted for an excessive duration in the methods by which deals were marketed and structured.
If an investment presented compelling financial logic to various backers in the Gulf, they would likely exhibit greater hesitance to abandon it — even in the event of disagreements among themselves. From now on, dealmakers in the Gulf will need to enhance their terms or, at the very least, design transactions that effectively align with the priorities of each investor. That entails examining the underlying assumptions associated with each proposal: Does it assume ongoing regional integration? How does it align with various industrial and transition policies? Who possesses the final authority over the flow of data, individuals, or resources associated with the transaction should geopolitical tensions escalate? The responses to each will need to be communicated transparently with potential clients. The existing centers of finance perceived the region’s desire for economic transformation as a justification to advance their own interests. However, they will need to exert greater effort moving forward. Fewer flying visits and 10,000-foot views; more boots on the ground and deeper local expertise. Treat the Gulf as a typical mature market: characterised by fragmentation, competition, and high demands.
