Alireza Zaimi of the Public Investment Fund on navigating calamity
Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (PIF), which holds almost $400bn of assets under management, has played a critical role in maintaining financial stability during the coronavirus pandemic. Alireza Zaimi, head of corporate finance at the PIF, tells GlobalCapital how the fund weathered a commodity shock of unprecedented proportions, how the crisis has shaped its investment choices, and how its funding strategy has held up.
GlobalCapital: How has the PIF navigated its way through the crisis?
Alireza Zaimi, PIF: We are all getting used to living in this “new normal”. With a still significant death toll every day across the world, we are living through an unprecedented time. At PIF, our first reaction and priority was to ensure that our people and their families were safe, so we put in place all of the recommendations suggested by the Ministry of Health. That included remote working, taking different rotations into the office, and so on. In terms of work, the development of new technologies has allowed us to function very well during this challenging time.
Our liquidity position is based on a strategic funding plan that we have developed over a number of years. I joined PIF in 2017 and helped create a long-term and robust plan that is specifically designed to go through the ups and downs of economic cycles.
It is not a strategy that will dramatically change over time. Of course, we adapt to every new circumstance, but we will continue to execute our funding strategy that has four main pillars. The first is capital injections from the government. Earlier this year, the government made a $40bn cash injection into PIF. The second is asset transfers into PIF — for example, the land contribution for our Giga projects. The third is income that we generate from our assets. The fourth is the borrowing policy that we have. We have borrowed twice in the international loan market so far, including a $10bn bridge loan in October 2019 and an $11bn syndicated loan in September 2018. So although we appreciate that we are living through difficult times, we feel good about the way we have managed throughout the crisis.
The slump in oil prices has hit oil-producing sovereigns hard, especially those in emerging markets. How has that affected the PIF?
Our funding strategy is designed to go through ups and downs, as oil prices have been going up and down over the last few decades, so we felt sufficiently equipped to deal with the fall in commodity prices.
However, we believe that it is in these difficult times where the solid sovereigns or organisations are able to differentiate themselves from the others. Saudi Arabia as a whole came into the crisis on a very solid basis with a low debt to GDP ratio, which is not the case for all the countries in the region or the world. Similarly, PIF also came into the crisis on a solid footing, as our debt to asset ratio is very low.
Putting the human catastrophe of the crisis to one side, throughout the crisis we have been able to differentiate ourselves from other sovereign funds, because when asset prices are depressed that is when people who can actually afford to buy, buy. We have continued our domestic and international investment programme throughout the crisis.
Saudi Aramco’s $70bn acquisition of Sabic from the PIF has, however, been impacted by the crisis. What does that say about the current financing climate?
We owned a 70% stake in Sabic — one of the world leaders in the downstream business of the oil and gas industry. But our mandate at PIF is to help diversify Saudi Arabia away from oil. So it was natural for us to consider selling Sabic, and at the same time the team at Aramco had a strategy about developing their downstream business.
So when we agreed to sell Sabic to Aramco in March 2018, it was a win-win situation for us. It allows us to diversify our assets away from oil and gas, while benefiting Aramco.
However, it was decided recently to extend the repayment period by a number of years.
Now, when it comes to the financing, our balance sheet is clearly solid. The transaction is $69.1bn, and if you include the loan charges this brings the total amount to $75bn. That is a large amount of money for anyone, and frankly if you inject that much into PIF’s coffers, it would be difficult to deploy that in a short period of time, simply because we already have so much on our books. Just looking at the last two years in which we boosted our assets: the $40bn we received from Sama (Saudi Arabian Monetary Authority) in May, the $21bn from the loan market and the proceeds from the Saudi Aramco IPO. So we agreed with Aramco that it was not optimal for either organisation to have the payment in one go. Prior to the crisis the repayment period was just a couple of years. But we realised it did not make sense for either organisation, so it was an amendment that was easy to agree on. Therefore, we rescheduled the payments over a number of years.
But it could not have been all smooth sailing for the PIF during this crisis? On a health level, our challenges are the same as the rest of the world and so Saudi Arabia implemented strict measures like most countries in the world. But putting the significant health consequences to the side, the pandemic has stirred volatility in the market, which has led to asset prices fluctuating. Although the S&P 500 has recovered, it is mostly the technology sectors that have been successful. We are big investors in the tech sector. On the other hand, the oil and travel sectors have gone down.
We are patient investors. We have time in our favour and we have the means to deploy substantial capital in times when everybody else is retreating. These are two of our big edges compared to other investors.
What are your current debt raising plans?
The $21bn of international loans we have already raised were part of our longer term funding plan. We have been successful executing that plan so far and hope to continue on that route.
Fortunately, despite the crisis and the effect of Covid-19 on oil and debt prices, we have not had to dramatically change the funding plan. We even prepaid our $10bn bridge loan in August, which was a few months before its final maturity. In my 25 years of experience, I have never seen any organisation pay back a $10bn loan early and without refinancing. So of course we will raise debt and use any borrowing tools at our disposal in a prudent way, but we see no immediate need to raise funding. Our aim is to keep our balance sheet solid, because that is our edge, especially in these difficult times.
In July, the Saudi government raised its first green ECA-backed loan. Does the PIF have any plans to raise green debt?
We see a lot of organisations go through various lengths to explain why they are green and how they benefit the planet. But for PIF it is a much easier exercise because our very existence and mandate is to diversify the kingdom away from oil. So by design, we are there to invest funds in new technologies and renewable energies. Green financing is an interesting tool at our disposal and we intend to use it, but we do not have a specific time frame.
Some say that Saudi Arabia’s efforts to go green are not credible, given the kingdom’s dependence on oil. What do you say to that?
But that is exactly what Vision 2030 is about — diversifying and investing in other areas than oil and gas. The government raised a green loan this year, so clearly that market is open to us. We (PIF) do not have a date in mind, but our mandate is to invest in green technologies and we have very ambitious investment plans in solar and wind power. Our Giga projects, for example, demonstrate Saudi Arabia’s focus on renewable energy. Now whether green finance is the best way for us to fund those projects is yet to be seen, but it will certainly be a tool in our overall funding strategy.
When do you intend to debut in the bond market?
Issuing in debt capital markets has its advantages — size and tenor — and it is definitely a tool at our disposal. But our banking syndicate has been so supportive of us so far that we do not see the need to raise bonds today. With that being said, PIF’s new mandate was born in 2015, so it is still a relatively new strategy. So we will get there at some stage, but for now we are relying on our banking partners.
Do you think the pandemic and the increased discussion of ESG principles will provide an impetus for hydrocarbon-dependent economies, like Saudi Arabia’s, to accelerate the diversification away from oil and towards more socially and environmentally responsible behaviour?
We have not waited for the pandemic to decide to become environmentally friendly. Similarly, we are not waiting for 2030 to implement the sustainability policies in Vision 2030. We are already making progress and I think we will achieve our sustainability aims before then.
We have grown PIF from 40 people in 2016 to more than 900 now, with plans to have over 1,000 by year-end 2020, providing employment opportunities for the younger Saudi generation. We recruited talents during the pandemic and continue to do so.
We have a number of new social initiatives, the most recent being Roshn, which is a PIF project that aims to contribute to meeting the growing demand for housing in the kingdom. In the last two decades, the population of Saudi has increased from 20m to 30m people. We are taking steps with Roshn to support the country’s home ownership level to 70%, providing housing and help with home financing for young Saudis.
The PIF has been particularly active with investment during the pandemic, across geographically diverse regions. What kind of credits is the PIF looking for? What are the motivations behind certain investments?
In the last few years, we have more than doubled our assets under management. The short term objective is to get to $400bn AUM, and we are nearly closing that gap. We have organised our assets into six pools of investment — four focused on Saudi and two on our international investment strategy. Our investment strategy is fully operational and we are going through the ups and downs of cycles.
In terms of governance and the way we operate, we have in place a world-class governance model and make sure our assets are well managed. All investment decisions are guided and reviewed by five key committees, and we have in place more than 300 PIF representatives on the boards of our portfolio companies.
We have been investing in international markets for five years, so our recent investments are nothing new. We have been buying assets at depreciated prices, which we consider less risky than buying assets at top prices.
Exactly what kind of credits are you looking for? Our pools of investment are quite specific and we are as transparent as possible. One of our six pools is our international strategic investments, which includes, for example, investments where we have a say in the future strategy of an asset. One good example is Uber, where we have representation at the board level. That made sense for us because Uber is very active in Saudi Arabia for transportation. That kind of thinking is how we tend to approach potential strategic investments.
Then we also have an international diversified pool of investment, where we build a well-balanced portfolio of assets across different asset classes — whether it’s listed or private assets, directly or through funds.
Many sovereign wealth funds (SWFs), especially in the Gulf, have been relied on heavily during the pandemic to fill fiscal deficits. Should SWFs be seen as good alternatives to plug deficits in times of crisis as opposed to external fundraising? Or should they be used solely as vehicles for external investment and diversification?
Each sovereign wealth fund is diverse and unique has a different mandate. But what I can say is that the objectives of PIF include maximising assets for the Saudi people, and launching new economic and business sectors in Saudi Arabia. The list of sectors and projects goes on and on: recycling, housing, construction, Giga projects and more. We are a large investor in new technologies and localising modern technologies in the kingdom. At the moment, we are focused on that and building strategic economic partnerships in order to do that.
We know our mandate is different to others, some of which may depend more on drawing directly from the funds, but our main functions are to help achieve Vision 2030 through investments.
We are not there to discuss the government’s budget or get involved with day-to-day financing — we are in the investment business. We are there to make sure we find the right opportunities that fulfil our income streams.
What strategic preparations is the PIF making for the expected volatility in the fourth quarter with the US election and a possible wave of coronavirus infections?
The macro environment is currently shaped by the pandemic, which has been completely unpredictable so far. If you go back to 2017, people were concerned about how high interest rates would go. Now they are close to zero, if not zero. So the macro environment will continue to evolve, but that makes it more important for us to have the right investment and funding strategy to navigate through anything thrown at us.
Ultimately, our strategy is built to last us through elections, whether in the US, France or India, and through whatever the macro environment throws at us, whether that is a pandemic or a commodity crash. Whether it’s the elections, a potential second wave, a rise in rates, the equity market, etc, our strategy needs to stand up.
Over the last few months we have demonstrated that we are navigating through the challenging period in a constructive and optimistic way by deploying more capital. We did not change our funding plan, in fact, we reimbursed our $10bn loan in advance rather than trying to raise funds in a difficult time.
How have the PIF’s investment activities been affected by the shift to working from home and the restrictions on travel?
This pandemic has illustrated that the financial sector can do things better and in a more efficient way than the status quo. Bankers coming to pitch a deal pre-Covid would have taken a flight from London to Riyadh, spent a few nights in a hotel, pitch and then rush to get on a flight back to London, which is a pretty long and tiring process. That we are doing all of that now through video calls has shown us the benefits of technology in working life. I do not think things will go back to “normal” once the pandemic is over, I think we will rely on technology more than before, and that is why we have seen tech valuations continue to perform very well. We are a large investor in the technology sector.