The Daily Update - Saudi Aramco, SECO, PIF

Saudi Arabia’s Public Investment Fund (PIF) is set to become the world’s largest sovereign wealth fund with a value approaching $2tn, dwarfing Norway’s Global Pension Fund which has a value of $850bn and is currently the largest sovereign wealth fund globally.

Currently the PIF is valued around $130bn with a focus on Saudi domestic investment. Founded in 1971, with a plan to transfer ownership of Saudi Aramco into the PIF its value could be boosted by as much as $2tn according to some analysts. This is part of the Saudi government's ‘Vision 2030’ project which aims to diversify the country's revenue away from its reliance on oil.

The pace of deal making within the PIF has already picked up with the fund trying to move to a position of around 50% invested in foreign holdings from the current 5% exposure. An initial public offering of around $106bn in Saudi Aramco shares is expected next year, which would be the largest on record, and would represent around 5% of Aramco’s value. This would provide the first tranche of investment cash for the PIF as currently its investment portfolio is rather illiquid.

Crown Prince Mohammed bin Salman, who is the main driver behind ‘Vision 2030’, explains that ‘the transfer of Saudi Aramco to the PIF would allow the government to get its revenues from investments rather than oil, and along the way transform the PIF into the world’s biggest sovereign fund’. The Fund has already doubled its number of employees and recently employed the ex-head of the Qatar Investment Authority’s real estate arm as Chief Development Officer and the ex-head of Riyad Banks investment banking unit as its head of Domestic Investments.

Two of our favoured holdings are from Saudi Arabia, represented by state-owned Saudi Electricity, we hold the 5.06% maturing April 2043 and the 5.5% maturing April 2044. Both bonds yield around 4.8%, have a spread around +200bps over US Treasuries which equates to a return and yield of around 21% should they move to ‘fair value’. Both bonds are rated A2, we therefore calculate that they are roughly 4 credit notches cheap. Even if you allow a 2 credit notch downgrade for the ‘geopolitical risk’ element of investing in the region, on a risk reward basis these are still some of our favoured holdings across our diversified portfolios.

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