Saudi Fund of Funds Bets $1.07 Billion on Small, Local Firms

In early February, Tesla’s share prices rallied despite losing the backing of Saudi Arabia’s Public Investment Fund, refocusing attention on the investment strategies of the kingdom’s sovereign wealth fund. The Public Investment Fund’s bold bets on international technology firms and major investment companies, such as SoftBank, have led critics to accuse it of neglecting Saudi entrepreneurs and local startups. The launch of Jada – a $1.07 billion, self-described fund of funds company – ostensibly reflects an effort to redirect investments toward small and medium-sized enterprises in Saudi Arabia’s domestic market.

The establishment of Jada may reflect a new phase of increasingly professionalized state-led investment funds in Saudi Arabia. Or the latest fund might serve to extend the Public Investment Fund’s institutional sprawl into new segments of the Saudi economy. It is too early to measure Jada’s precise impact, but its investment decisions and growth trajectory over the coming years will be revealing.

Though announced in 2017, Jada officially launched in December 2019 under the Public Investment Fund’s institutional umbrella and alongside a resolution by the Council of Ministers. The Saudi government intends Jada to be “a critical component of Saudi Arabia’s Vision 2030,” and the company’s mission is “to provide funding to Saudi SMEs through commercially sustainable investments in private equity and venture capital funds.” Public Investment Fund officials expect that Jada will generate 58,000 jobs and add approximately $2.29 billion to the country’s gross domestic product by 2027.

Through initiatives like Jada, the Saudi government aims to better support local small and medium-sized enterprises in keeping with the Vision 2030 target of increasing their contribution to the country’s GDP from 20% to 35%. In 2018, the General Authority for Small and Medium Enterprises launched a $750 million fund, the Saudi Venture Capital Company, to invest in Saudi venture capital funds and startups. The government also hopes to increase access to funding by encouraging financial institutions to allocate as much as 20% of their overall funding to Saudi small and medium-sized enterprises; currently, they only receive an estimated 5% of their funding from the country’s financial institutions.

One Fund to Rule Them All

Jada’s leadership draws upon a deep pool of experience to strengthen the investment environment for Saudi small and medium-sized enterprises. Jada’s chairman of the board is Mazen al-Jubeir, managing director of Jawaris Limited and a board member of the Public Pension Agency. Adel Al Ateeq, previously deputy chief executive officer of Riyad Capital, is Jada’s chief executive officer. In an interview, Ateeq suggested that underdeveloped private equity and venture capital funds in Saudi Arabia and the broader Gulf create a need for Jada to serve as an “anchor institutional investor.” Jada’s website currently lists six investment partners: Arzan Venture Capital, BECO, 500 Startups, global.ventures, Ra’ed Ventures, and Vision Ventures.

Saudi Arabia’s venture capital ecosystem – though growing – lags behind that of the UAE, in terms of available investment capital and deals. Saudi venture capital funding grew from $7 million and 16 deals in 2015 to an estimated $67 million and 71 deals in 2019, according to MAGNiTT’s 2019 Saudi Arabia Venture Capital Snapshot report. However, venture capital funding in the United Arab Emirates reached $426 million in 2019. Saudi Arabia’s $1.07 billion fund could alter the geographic balance of these investment levels, but Ateeq noted that Jada’s leadership is “very cautious not to inject excess capital that might lead to imprudent investment practices.”

Saudi Arabia’s renewed focus on its small and medium-sized enterprise sector – particularly technology startups – has led to suggestions that an “undeclared competition” exists among business hubs in the Gulf states. Indeed, many entrepreneurs based in neighboring Gulf states view Saudi Arabia’s 34 million residents as a key market to scale their enterprises. Saudi officials hope to attract these entrepreneurs to the kingdom and encourage more locals to launch ventures within the country. A similar strategy of recycling investments domestically and preventing economic leakage out of the country is reflected in other high-profile development projects under the Public Investment Fund’s institutional umbrella: Neom, Qiddiya entertainment city, and the Red Sea development project.

Critics of the investment strategy behind Jada’s creation question the efficacy of permitting the Public Investment Fund to extend its institutional control over additional segments of the economy. Attracting investment capital in Saudi Arabia, according to this line of reasoning, demands less state involvement and better startups. Reports that some of the Public Investment Fund’s major investment decisions are made by a small number of employees and government officials have heightened concerns over the sovereign wealth fund’s governance framework. A number of analysts suggest that rather than overseeing specific investment deals, government officials should continue to focus on improving the business environment for small and medium-sized enterprises. Saudi Arabia has made demonstrable progress in this respect: The country ranked as the most improved economy in the World Bank’s “Doing Business 2020” report.

Proponents of Saudi Arabia’s new fund view government involvement in the local private equity and venture capital sphere as a necessary step to stimulate the country’s startup industry and generate greater interest among local investors who traditionally look toward domestic financial institutions for safe, solid returns. This more positive view of the state’s link to Jada also sees the new fund of funds as moving toward the dedicated private equity and venture capital departments of more established Gulf sovereign wealth funds, in which specialist committees and risk managers are delegated authority to make collective investment decisions. In this light, any autonomy afforded to Jada could insulate the Public Investment Fund from poor investment decisions and reputational damage.

No Deficit of Funds

Jada is not the only government-owned fund of funds in the Gulf region. However, the geographic focus of investments and how they are deployed vary.

Mubadala, an Emirati sovereign wealth fund, announced a $150 million fund that supports Hub 71 – a government-sponsored tech hub in Abu Dhabi Global Market – through coordinated investments in global venture capital funds. Mubadala allocated another $100 million for direct investments into promising, early-stage tech startups interested in joining Hub 71. In June 2018, Mubadala launched a $400 million fund for its venture capital arm, Mubadala Ventures, to target leading European tech companies. In this case, the “fund of funds” reflects the activities of a dedicated venture capital department within the larger sovereign wealth fund.

The Qatar Science and Technology Park, a member of the Qatar Foundation, has two small and medium-sized enterprise-focused funds: the Tech Venture Fund and Product Development Fund. The former provides seed funding directly to tech entrepreneurs, whereas the latter supports small and medium-sized enterprises and startups that align with local needs and are at least 20% Qatari owned.

Bahrain established the Al Waha Fund of Funds in 2018 to support venture capital funds that invest directly in the Middle East and North Africa or have a strategic interest in the region. The Bahrain Development Bank serves as the investment manager for the $100 million fund.

Oman’s State General Reserve Fund also oversees two funds: the $200 million Oman Technology Fund and Ibtikar Development Oman. The Oman Technology Fund’s geographic focus is Oman and the Middle East, and its goal is “to make Oman the preferred destination for emerging tech companies in the region” as well as a destination for venture capital. Ibtikar Development Oman’s investment strategy seeks innovative and disruptive international companies that not only provide lucrative investment opportunities but also products and solutions for challenges confronting Oman.

Kuwait Investment Authority, the country’s sovereign wealth fund, tends to be more risk averse than its regional counterparts. The Kuwaiti government announced plans to create a $200 million tech-focused investment fund in January 2019 but only committed to contributing $50 million to the fund. Facing uncertain interest from the private sector, it appears that little progress has been made on this initiative.

Though the launch of Jada will impact Saudi small and medium-sized enterprises, the $1.07 billion fund remains less than 0.4% of the Public Investment Fund’s estimated value. That lowers the stakes as Saudi officials try to determine the best model for the deployment of investments to Saudi small and medium-sized enterprises. As a late entrant, Jada has the opportunity to learn from more established regional counterparts. The true test of the new fund may be whether it can accept slow, modest returns for the larger good of the domestic economy.

The views represented herein are the author's or speaker's own and do not necessarily reflect the views of AGSI, its staff, or its board of directors.