THE rift between Saudi Arabia and the United Arab Emirates (UAE) is spilling over from geopolitics into global finance.
Global banks – long accustomed to treating the Gulf as a single, large and obliging wallet – are now being forced to make difficult choices, preparing for a time when money, people and assets might not flow as freely across the region as they do now.
Together with the impacts of the Iran war, this has upended their notions of how the Gulf works.
The finance industry has only itself to blame, however. It had forgotten that wallets, however deep, have owners.
And those owners have interests that are the banks’ job to understand.
It’s not that the Gulf has gotten more complicated; the reality is it was never that simple.
The misbegotten belief that the region is a monolith incentivised offers that were equally undifferentiated, lazily sketched-out and poorly aligned with each investor’s mandate and constraints.
The notion that Saudi Arabia and the UAE – not to mention Qatar and other deep-pocketed neighbours – were basically variations on the same market had a certain seductive appeal.
There’s no denying the similarities in their massive pools of capital and desire for long-term returns.
Thus, the argument runs, the Gulf will finance any global asset that has even a chance of paying off in the future.
What the region lacks is Western technology, expertise and access, so it will accept whatever terms it’s offered.
And so, too many approaches to Gulf capital were like miniature versions of the famous 2017 deal between SoftBank Group Corp and the Saudi and Emirati sovereign wealth funds, which together put up about 60% of the first US$100bil Vision Fund.
Global funds expected their partners in Abu Dhabi or Riyadh to take on risks that they wouldn’t be able to sell to investors in their home geographies, and projects designed with minimal concession to local plans and aspirations.
Naturally, this couldn’t last. Bankers should have noticed that neither the kingdom’s Public Investment Fund nor Abu Dhabi’s Mubadala Investment Co invested new money into the Vision Fund’s second iteration a few years later.
By 2023, both – as well as the Qatar Investment Authority – had moved away from throwing cash at open-ended passive commitments or trophy assets. Instead, they are looking for investments that meet very specific national needs.
The Saudis, for example, are prioritising deals that offer the opportunity to diversify their local economy away from fossil fuels, while creating jobs for their burgeoning working-age population as quickly as possible.
Capital controlled from the UAE is looking for global platforms that will further the Emirates’ goal of making itself indispensable to the world economy even after its oil dries up.
Qatar, for its part, tends to use its investments to both hedge against and broaden energy markets, as well as buy a bit of political influence.
What does this mean in practice? A data-centre deal, for example, might have a differing appeal depending on the audience.
The Saudis would examine its ability to build domestic capability; an Emirati investor might consider whether it provides supply-chain leverage; the Qataris might test it for its ability to withstand geopolitical and economic shocks over the long term.
If two countries are competing over the location of a global financier’s regional hub it isn’t some sort of adolescent hunt for prestige, but an attempt to align incentives as closely as possible. Strategic capital might be patient capital; but patient does not mean undiscriminating.
Finally, adding to fund managers’ “befuddlement” with how to navigate the region is the fact that within each of these nations are numerous other pools of capital, some controlled by private individuals, often with familial or other links to the state and an overlapping but not identical agenda.
As David Petraeus of KKR & Co (and formerly of the US Army) told Bloomberg News 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 widening rift between Saudi Arabia and the UAE, whether transitory or not, should serve as a wake-up call.
Serious investors had already begun to develop a greater understanding of the region, but outdated caricatures may have survived too long in the ways deals were marketed and structured.
If an investment made irresistible financial sense to disparate backers in the Gulf, they would be more reluctant to run out on it – even if they fell out with one another.
From now on, dealmakers in the Gulf will have to provide better terms, or at least structure transactions to effectively target each investor’s priorities.
That means testing the assumptions behind each offer: Does it presume continued regional integration?
How does it fit with multiple industrial and transition policies?
Who has ultimate control of the movement of data, people, or assets related to the deal if geopolitical turbulence worsens?
The answers to each will need to be shared transparently with possible clients.
The existing centres of finance saw the region’s hunger for economic transformation as an excuse to finance their own.
But they will now have to work harder now. Fewer flying visits and 10,000ft views; more boots on the ground and deeper local expertise.
Treat the Gulf as just another mature market: Fragmented, competitive, demanding. — Bloomberg
Mihir Sharma is a Bloomberg Opinion columnist. The views expressed here are the writer’s own.
