High NOON in the Kingdom

It’s noon, no, not that noon, but Noon.com. The Middle East’s newest e-commerce site opens its doors this month. Noon represents the ever expanding technology portfolio of the Saudi Arabia Public Investment Fund (PIF). In 2016, the PIF invested $3.5 billion in Uber, up to $45 billion in the Softbank Global Vision Fund, and now $500 million in Noon.

PIF’s activities are part of a broader strategy to diversify the Kingdom’s oil-based economy. Unlike the petro-states of Abu Dhabi, Qatar, and Kuwait, the Kingdom is a very, very, very, late player in the Sovereign Wealth Fund arena. For example, the Abu Dhabi Investment Authority was established in the 1970s and is now one of the largest sovereign wealth funds with over $800 billion in assets.

To catch up, the Saudi’s are monetizing their holdings in Saudi Aramco through a coming public offering. Over the time, the PIF is supposed to diversify from oil into other assets, such as technology, and provide revenue to the Government. The PIF will also developed non-oil based industries. The PIF’s $3.5 billion Uber investment could in theory provide employment to young Saudis and provide needed mobility to transportation poor cities such as Riyadh.

While the PIF may have lots of money, that won’t necessarily make the Kingdom richer. Ever since they discovered oil, the Saudis have been trying to diversify from oil. In the past decade, lots of money was spent developing cities and projects, such as King Abdullah Financial District or King Abdullah Economic City, to expand the economy, without much success.

So what the Kingdom really needs is better intellectual capital, rather than more financial capital. And while it’s currently staffing the PIF to handle the coming funds, the Kingdom really needs deal-makers. Thus the PIF investment in the Softbank Global Vision is the first right step. For its $45 billion, the Kingdom gets access to Masayoshi Son’s brain and his M&A team. And this another reason for the Noon investment.

By investing in Noon, the Kingdom is also investing in the always youthful, very smart, and master builder, Mohammed Alabbar. Mr. Alabbar is the other part of Noon. To achieve his goals, Mr. Alabbar has purchased stakes in the logistics company, Aramex, and the fashion company, Yoox Net-a-Porter. His goal is to create an e-commerce site that will compete with Souq.

 

New Score: Uber Won and Saudis Lost

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Uber recently received more money. This time, the amount of $3 billion was received from the Saudi Public Investment Fund or PIF. Reaction was varied and mixed due to the source of the money (Saudi) and use of the money (China) by Uber. Overlooked in the discussion were the poor people of Saudi Arabia. It’s the Saudi citizens who are expected to benefit from the performance of the Fund.

Sovereign wealth funds are investments established and run by Governments. In the Gulf, Qatar, Kuwait and Abu Dhabi set up such funds with oil and natural gas revenue.  One the earliest and and largest is the Abu Dhabi Investment Authority which manages nearly $800 billion. Now the Saudi Royal Family plans to increase its sovereign wealth fund, the PIF, with an IPO of Saudi Aramco.

But having lots of money, doesn’t necessarily make you the smart money. Case and point here is the King Abdullah Financial District (KAFD) on the fringes of Riyadh. In better times, the idea was to create a financial international center to rival Dubai. After being completed or near completion, the project is now in need of tenants. When the project opened back in 2013, the vacancy rate was 90%. That’s probably worse than the vacancy rate for Hotels on Baltic Avenue.

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And now the Saudi Public Investment Fund is the proud owner of at least part of the KAFD. Sovereign wealth funds are active investors in real estate due the steady rents and opportunity for appreciation. Unlike people, sovereign wealth funds have an unlimited life. People need to save for retirement and some day the money is needed back. Sovereign wealth funds can invest for longer periods of time. The Saudi Public Investment Fund will need to wait a long, long time before its sees a return on its money from the KFAD.

In the investment realm, you judge money managers by alpha and beta returns. Beta returns are earned by riding the wave, being on the bandwagon, or following the herd. Here the money manager doesn’t need to have any special knowledge, other than know the direction of the market.  Alpha returns are those generated by people with skill, knowledge, or insight about a market. Alpha returns in the venture space could be those earned by early Facebook investors, such as the near legendary, Peter Thiel and the Russian, Yuri Milner.

Beta returns are average and alpha returns are above average. For Uber, the alpha investors (Chris Sacca) are those who  recognize the immense value to be created by Travis Kalanick, Garrett Camp, and the rest of the management team. Beta investors are those who are along for the ride. The returns of the later, beta investors depends on the price paid for their Uber stock. If the price is near the top value for Uber, the of chance of loss is greater.

In this situation, the later, beta investors now include the Saudi people.

 

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