Saudi Cash Stirs Up Buyout Game -- WSJ

By Maureen Farrell Features Dow Jones Newswires

Sovereign fund stands to be world's largest, fueled by Aramco; new winners are likely

Continue Reading Below

With less than two weeks' notice last month, more than a dozen of the top global money managers accepted a dinner invitation halfway around the world. The host: Yasir al-Rumayyan, head of Saudi Arabia's Public Investment Fund, which is set to become the world's largest sovereign-wealth fund in coming years -- and potentially their biggest benefactor, if the kingdom's state-owned oil company goes public as planned.

The guests, which included Blackstone Group LP Chief Executive Stephen Schwarzman, Carlyle Group LP's David Rubenstein, SoftBank Group Corp.'s Masayoshi Son and Robert Smith of Vista Equity Partners, mingled over nonalcoholic drinks in a large indoor courtyard lined with palm trees at Mr. al-Rumayyan's Riyadh home. At dinner, the private-equity potentates sat at small round tables with Saudi financiers, executives and government officials.

The meeting, which came a day ahead of President Donald Trump's visit to Saudi Arabia in late May, shows the potential of the Public Investment Fund, or PIF, to reshape the private-equity industry and create the next round of winners and losers in its continuous quest for assets. PIF could be the single biggest source of cash for buyout firms in the coming years, private-equity officials say.

"This was a coming-out party for the PIF," said Bill Ford, CEO of private-equity firm General Atlantic, who attended the dinner and a subsequent round table. "Every global investor should have a relationship with Mr. al-Rumayyan."

The head of PIF was previously best known for being CEO of a Saudi affiliate of French bank Crédit Agricole and a champion of the kingdom's golf scene.

Continue Reading Below

Saudi Arabia has said it would transfer the assets of state-owned colossus Saudi Aramco into its sovereign-wealth fund when it takes the oil company public, part of a plan to overhaul the Saudi economy and reduce its dependence on oil.

The oil market was jolted Monday, after Saudi Arabia, along with the United Arab Emirates, Bahrain and Egypt, severed relations with Doha and said they would close off routes to the country after accusing Qatar of backing terrorism.

Estimates of Aramco's value range from $1 trillion to $2 trillion or more, and the kingdom has said it would seek to sell 5% of the company to the public, possibly next year. That could balloon PIF's assets, which already stand at more than $180 billion, according to the Sovereign Wealth Fund Institute, and put more than $50 billion of additional cash at its disposal.

At least 20% of the IPO proceeds are expected to be invested in private equity, according to a person familiar with the kingdom's plans.

For those who manage to secure a slice of the bounty, it won't come for free.

PIF is eager to secure more of a say in how funds it backs operate than a traditional limited partner would have, people familiar with its plans said. It could have input in what types of investments these buyout funds make or have veto power over new investments. The sovereign-wealth fund will also likely pay significantly lower fees than other investors do, according to industry experts, because of its size and because it often makes the first seed investment, giving it more leverage.

There is also no guarantee the expected windfall will materialize, as the Aramco IPO is highly complicated and may not ultimately take place at the expected size or time frame.

Sovereign-wealth funds have become increasingly important for private-equity firms, accounting for 19% of their institutional capital as of January, according to research firm Preqin. That is up from 9% in 2013. At a conference last year, Carlyle's Mr. Rubenstein predicted that within five years, sovereign-wealth funds could overtake public pension funds as the most significant source of capital for private-equity firms, which according to Preqin had $842 billion available for investment as of March.

"Any time a sovereign-wealth fund decides to increase its allocation by even 1%, it's significant," said Andrea Auerbach, head of global private investment research at Cambridge Associates, which advises institutions that invest in private equity.

Blackstone and Japan's SoftBank are the first big winners in the race to secure the mountain of Saudi assets that is up for grabs. Shortly after the dinner, PIF announced it will commit $20 billion to Blackstone's new $40 billion infrastructure fund, which is to be the biggest ever raised. It has pledged $45 billion to SoftBank's Vision Fund, the world's largest technology-investment pool.

Mr. Schwarzman and other Blackstone executives spent more than a year meeting with Mr. al-Rumayyan and senior Saudi officials courting the commitment, according to people familiar with the discussions.

PIF is in discussions to anchor more funds outside infrastructure and technology, people with knowledge of its plans said.

Private-equity funds could ultimately come back to Saudi Arabia. Carlyle's Mr. Rubenstein predicted during the round table that private-equity assets would increasingly flow toward the developing world. Numerous attendees expressed interest in investing in Saudi Arabia and offered advice to Mr. al-Rumayyan on what regulatory changes would make it easier for them to be active there.

Matt Jarzemsky and Nicolas Parasie contributed to this article.

Write to Maureen Farrell at maureen.farrell@wsj.com

(END) Dow Jones Newswires

June 06, 2017 02:47 ET (06:47 GMT)