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The Promise of Middle East Sovereign Wealth Funds

DUBAI – A decade ago, sovereign wealth funds (SWFs) from the Middle East and North Africa (MENA) were the behemoths arriving on the global financial scene. Funds like the Qatar Investment Authority (QIA) grabbed headlines as they gobbled up assets – including listed securities, private companies, and real estate – primarily in Europe and North America. But the world in which SWFs invest has changed, and they must change with it.

Over the last 20 years, as strong hydrocarbon revenues have enabled Middle Eastern SWFs to proliferate and grow, a variety of labels have been created to categorize them, including stabilization funds, future generation funds, and investment funds. But most sovereign investors – which also include sizeable social security and pension funds, such as Saudi Arabia’s General Organization for Social Insurance and Public Pensions Agency – belie clear-cut labels.

Few Middle Eastern SWFs are pure financial investors. Because many of them held stakes in state-owned enterprises before becoming financial investors, their holdings tend to be diverse, and often include those same SOEs, as well as real estate and equity stakes in listed and unlisted companies. These holdings also include a growing volume of assets in the developed economies – a reality that has raised eyebrows in Europe and the United States.

To allay concerns over SWFs’ potential political considerations, the International Monetary Fund convened 26 SWFs – over 30% of them from the Middle East – in 2008 to develop the Santiago Principles. The goal was to promote transparent and sound governance of SWFs, ensure that they adequately account for investment risk, and help to maintain global financial stability.