Diverse offerings and improved regulations support alternative investments in Saudi Arabia


Investment in alternative assets is taking place across an increasingly diverse array of financial instruments in Saudi Arabia. The Kingdom is a regional leader in mutual fund activity, with the deepest and most varied investment pool in the GCC. A large number of highnet-worth individuals and family offices, meanwhile, makes private equity (PE) one of the more active areas of the investment ecosystem. Furthermore, early-stage investment, which has traditionally been dominated by government funds and accelerator schemes, is starting to attract regional interest. With markets in turmoil as a result of the spread of Covid-19 in the first half of 2020, alternative assets may prove to be a more resilient part of the investment landscape.

Mutual Funds

Saudi Arabia was the first country in the GCC to establish a domestic mutual fund market, beginning in 1979 when National Commercial Bank (NCB) launched an open-ended, short-term dollar fund. A prohibition on foreign investment in the Saudi Stock Exchange (Tadawul) meant that, for decades, placing capital in Saudi mutual funds was one of the only ways global investors could gain exposure to local stocks. These restrictions – which remained fully in place until June 2015 – helped drive growth in the mutual fund segment. Market activity in the Kingdom saw further stimulation in 2003, with the government moving to formalise the industry through the adoption of a comprehensive regulatory framework for mutual funds. By 2015 the Kingdom had established itself as the biggest fund domicile in the MENA region by far, hosting approximately 77% of the $35.7bn worth of assets under management (AUM) in the GCC fund arena.

By global standards, however, the Kingdom’s fund market is still at a relatively early stage of development. The most recent detailed appraisal of the domestic fund ecosystem – which was carried out by the Capital Market Authority (CMA) in 2015 – showed that public mutual fund assets were equivalent to around 4.6% of GDP. This is modest in comparison to a global average of around 18% and rates as high as 90% in mature economies such as Japan. The Kingdom’s mutual fund segment, therefore, has considerable potential for expansion, and recent years have seen consistent double-digit growth in AUM. At the close of 2018 there were 542 authorised investment funds in the country, with an aggregate AUM of SR290bn ($77.3bn), a 15.2% increase on the year before, according to the CMA.

The diversity of fund types has also increased, from an initial focus almost entirely on money markets, and local, regional and global equities. This is in part due to the arrival of exchange-traded funds (ETFs) on the Tadawul in 2010 and, more recently, real estate investment trusts (REITs). As of the first quarter of 2020 there were three ETFs in operation, with a combined asset value of over SR35m ($9.3m). The Kingdom’s first REIT was listed on the exchange in 2016, and by early 2020 there were 16, with a combined asset value of over SR16bn ($4.3bn). Overall, however, equities and money market funds continue to dominate, accounting for 56.7% and 17.3%, respectively, of the assets of the 249 authorised public investment funds in 2018. These were followed by funds of funds at 10% of the total, REITs (6.4%), real estate (4%), debt instruments (2%), ETFs (1.2%), balanced funds (0.8%) and others (1.6%).

Private investment funds, meanwhile, are vehicles that typically cater to high-net-worth individuals and numbered 293 in the Kingdom in 2018. Real estate constituted the largest share of assets in these funds, at 37.5%. Other popular fund categories in this segment included PE and venture capital (VC) (23.5%), equities (15.7%) and multi-asset funds (15.7%).

Key Players

Saudi Arabia’s fund market is served by some of the biggest operators in the MENA financial sector. With AUM of SR165bn ($43.9bn) recorded in the fourth quarter of 2019, NCB Capital is one of the largest asset management firms in the region, according to the CMA. Four other asset managers form a leading group with AUM of more than SR20bn ($5.3bn) each, all but one of which are subsidiaries of local banking institutions. Riyad Capital is the second-biggest custodian of assets in the Kingdom, with SR46.4bn ($12.3bn) as of the fourth quarter of 2019, followed by Al Rajhi Capital with SR43.9bn ($11.7bn), Alinma Investment with SR41.3 ($11bn) and HSBC Saudi Arabia with SR20.5bn ($5.5bn). In addition to the local institutions, an increasing number of international players have secured licences to offer investment services in the country, including Blominvest of Lebanon, Egypt’s EFG Hermes, and financial giants such as Morgan Stanley.


While the country’s central bank, the Saudi Arabian Monetary Authority, oversees the financial system as a whole, the principal regulator of the Kingdom’s asset management industry is the CMA. This body is tasked with licensing both locally domiciled and foreign fund managers. Over recent years the CMA has made a number of changes to its regulatory framework, aimed at boosting the Kingdom’s asset management segment. In late 2016 it published a set of long-anticipated amendments to investment fund regulations. These reforms streamlined the process of establishing a fund, boosted investor protection, clarified the right of foreign nationals to invest in most funds and took into account the wider range of funds that have appeared in the market over the past decade. Furthermore, the regulatory amendments liberalised the fund governance framework through eliminating the obligation to establish a fund board, and abolished the previous limit on the number of investors that can be approached for a private placement. The same year saw the publication of the Kingdom’s REIT regulations. The new framework introduced several basic requirements, including the stipulation that at least 90% of a REIT’s net profits be distributed annually to the unit holders and that the REIT fund manager be licensed by the CMA as an authorised person.

In 2017 the CMA also liberalised the framework governing asset management firms by lowering the requirements for obtaining a management activity licence. The minimum capital requirement for investment firms was reduced from SR50m ($13.3m) to SR10m ($2.6m), while the requirement for management activities was reduced from SR50m ($13.3m) to SR20m ($5.3m). The professional experience and certification requirements necessary to qualify as a specialised investor were also broadened, making it easier for some individuals to invest in PE funds and private placements. The regulator continues to develop the framework governing investment activity in the Kingdom, and in doing so is guided by the Financial Sector Development Programme, one of the implementation programmes of Saudi Vision 2030 (see Economy chapter). The programme aims to develop deeper capital markets through more initial public offerings (IPOs) and security listings, in addition to encouraging the greater privatisation of government entities and boosting the role of mutual funds.

Venture Capital

While the Kingdom is a regional leader in fund management, other areas of its alternative investments landscape are at an earlier stage of development. Accurately tracking VC growth is complicated due to the fact that many seed and early-stage capital injections are not reported; however, available figures show that VC investment in Saudi Arabia expanded from $7m in 2015 to $67m in 2019, according to a report by MAGNiTT. While this represents an impressive expansion, the country has yet to fulfil the potential suggested by the size of its domestic market. Indeed, in 2018 just 9% of regional VC funds were deployed in Saudi Arabia, although the Saudi economy accounted for 35% of the MENA total. A recent report by entrepreneurship platform Wamda found that the number of VC funds in the Saudi market is not sufficient to meet the equity financing needs of the growing number of tech start-ups in the Kingdom.

If Saudi Arabia is to assume what many observers see to be its rightful position in the regional VC landscape, the next few years are likely to witness a considerable expansion of activity within this segment. “Saudi Arabia has shifted upwards in GCC and MENA rankings in terms of the number of VC deals completed and total VC investment funding,” Ivo Detelinov, head of private equity funds at Riyad Capital, told OBG. “The main reasons for this are the realisation of the importance of investment in small and medium-sized enterprises (SMEs); the availability of risk capital resulting in the creation of new or larger VC funds; and embracing entrepreneurship as a respectable career path.”

STC Ventures, an independently managed VC fund whose anchor investor is the Saudi Telecom Company (STC), estimates that VC investments in the Kingdom could reach $500m by 2025. The prediction assumes a CAGR of 40%, a lower rate than what has been seen in recent years that takes into account the anticipated slowdown in activity as the absolute amount of invested capital increases. Demand for smart tech solutions, for example, is particularly high in Saudi Arabia. According to Bain Company, a US-based management consultancy, 64% of Saudi shoppers make purchasers online, with their average spend per basket comparable to that of the US and the UK. The emergence of digital storefronts like Salla, logistics companies such as Salasa, and a raft of payment solutions including PayTap, Hyperpay and STC Pay means that entrepreneurs can establish new e-commerce businesses in an increasingly short time frame. A number of successful exits in the region have also raised the interest of investors in VC prospects. These include the Kuwaiti start-up Carriage, which was acquired by Delivery Hero for $100m in 2017, the purchase of Dubai-based Souq.com by Amazon for $580m in 2017 and the $3.1bn takeover of Careem, another Dubai-headquartered entity, by Uber in 2020.

Players in the Kingdom are working to provide a diverse offering of products for local and global investors to ensure the sector’s long-term growth and sustainability. “Islamic financial institutions are active in developing new products and tailoring sharia-compliant facilities so that they meet the needs of global partners and investors, while also complying with local regulatory requirements in 55 member countries,” Ayman Sejiny, CEO of the Islamic Corporation for the Development of the Private Sector, told OBG.

Public Backing

The concept of VC is a relatively new one in the country. In the early 2000s there was negligible VC activity and no formalised investment at the seed or angel end of the spectrum. Early development of the segment was driven by the public sector, with the creation of the Badir Technology Incubators and Accelerators Programme by the King Abdulaziz City for Science and Technology (KACST) in 2007. The incubator remains an important fixture of the country’s VC segment. In 2018 it raised nearly SR110m ($29.3m) across 63 funding deals, with individual investors accounting for the majority of capital injections, followed by VC firms and government funding.

Since the creation of Badir, the government-directed VC apparatus has continued to grow, largely through tertiary education institutions. King Abdullah University of Science and Technology (KAUST), King Abdulaziz University, King Fahd University of Petroleum and Minerals, and King Saud University all operate investment arms. Of these, the Riyadh Valley Company, the investment arm of King Saud University, has emerged as the most prominent, starting in 2010 with an initial fund of SR229m ($61m). The organisation operates as a private company, and had a portfolio of 14 firms in early 2020 weighted towards investment in health and life sciences, ICT, renewables and water resource technology. Other initiatives receiving government funding include Wadi Makkah, an accelerator and investment company owned by Umm Al Qura University, as well as the 9/10ths start-up accelerator, established by KAUST and the Human Resources Development Fund, which has emerged as one of the most active in the region.

Quasi-sovereign entities provide another public funding channel for the country’s VC activity. The majority government-owned STC established STC Ventures in 2017, recruiting private sector leadership expertise in the form of Abdulrahman Tarabzouni, an ex-Google executive. Since commencing operations STC Ventures has backed a number of success stories, including the education app Noon Academy, e-commerce platform Mrsool and ride-hailing app Careem. In October 2019 the VC investor revealed that it was considering raising a secondary fund of at least $500m, around the same size as its current assets. More recently, Saudi Arabia has tapped the Public Investment Fund (PIF) in a bid to drive entrepreneurship. As of April 2020 the PIF is ranked as the 11th-largest sovereign wealth fund in the world by the Sovereign Wealth Fund Institute, with assets of around $320bn. Its role in the domestic VC market is played out through its SR4bn ($1.1bn) fund of funds company Jada, which aims to support SMEs by investing in VC and PE funds. Launched in December 2019, Jada expects its investments to create 58,000 jobs and boost GDP by SR8.6bn ($2.3bn) by the close of 2027.

Private Growth

The government, therefore, continues to play a central role in the start-up and VC arena. However, it is also acting as a catalyst for private sector investment. For example, the angel investor network Sirb was founded by KACST in 2012, and as of early 2020 oversees a network of 32 individual investors in areas ranging from biotechnology to travel. Elsewhere, the government has joined forces with private sector VC institutions to provide funding channels. TAQNIA, a technology-focused government entity owned by the PIF, partnered with Riyad Capital to create the SR500m ($133.3m) VC vehicle Riyad Taqnia Fund in 2011.

Purely private VC entities began to emerge after 2011 in the form of small and loosely organised groupings of individual investors. An example of this is OQ al, in which membership is offered on a referral basis and subject to an annual fee of SR25,000 ($6665). Regional accelerators were quick to follow, with Egypt’s Flat6Labs beginning operations in Jeddah in 2013. The private VC vehicle has since assisted more than 150 entrepreneurs and 30 companies. Some of Saudi Arabia’s biggest corporations have added further momentum to private sector VC growth. Prominent initiatives include Saudi Aramco’s entrepreneurship centre Wa’ed, which offers grants and loans to entrepreneurs, along with its $200m VC fund Wa’ed Ventures, established in 2011. Other examples are MBC Ventures, the VC arm of the MBC Group, which concentrates on media and entertainment start-ups, and Mobily Ventures, the VC fund of Etihad Etisalat (Mobily) Saudi Arabia, which focuses on ICT, media and entertainment investment.

Private Equity

Saudi VC funds are primarily focused on early-stage financing, while growth-stage investment in the local market is negligible. However, there has been an uptick in PE activity spurred by a number of recent changes to the Kingdom’s legislative framework. The establishment of a commercial courts system in 2017, as well as an accompanying paperless court initiative, has reduced the period for executing judicial orders from two months to 72 hours, significantly lowering the cost associated with business disputes.

Meanwhile, in October 2018 Saudi Arabia’s new insolvency law came into effect, a development which has made it easier for indebted companies to maintain operations while rescheduling their debts. The primary challenge facing this end of the investment spectrum is a lack of exit opportunities. While VC investors might anticipate an exit in seven to 10 years in the form of PE for a strategic buyout, for investors coming in at the PE level the exit options are more limited. IPO exits, secondary buyouts and leveraged recapitalisation are relatively rare in Saudi Arabia, leaving trade sales – a stake sale to other corporate entities – as the only viable exit from PE transactions in most cases.

While the challenge of limited exit mechanisms remains, the increasing depth of the Kingdom’s capital markets is starting to generate solutions. In February 2017 the Tadawul and the CMA officially launched Nomu, a parallel market for smaller companies. Its listing requirements are designed to make it easier for expanding firms to approach the market for funding. Nomu remains at an early stage of development, but its potential as an exit route for PE investors is considerable. In February 2019 the Tadawul announced a number of structural changes to its parallel market, aimed at making the platform more attractive to potential listings. These included provisions to allow companies to list directly without an IPO, a move from quarterly reporting to biannual reporting of financial results and a streamlined process through which issuers make the transition from the parallel market to the main market.


The ongoing liberalisation of capital markets provides a positive long-term outlook for Saudi Arabia’s alternative investment segment. Nevertheless, some structural hurdles remain to fund expansion in Saudi Arabia. The lack of arrangements for the mutual recognition of fund licences between the GCC states means that regional funds face constraints to distribution. While the concept of a GCC fund passporting system similar to the European model has been discussed in the past, the complex process of regulatory alignment necessary for its introduction means that no short-term solution to this challenge is likely.

The industry will inevitably be affected by new technologies going forward, thus the government and local firms will need to work together to leverage the coming opportunities. “Strategic partnerships with key stakeholders are vital to developing the finance sector,” Hani Salem Sonbol, CEO of International Islamic Trade Finance Corporation, told OBG. “This will help to achieve an integrated approach combining trade finance, trade development opportunities and advisory services, while also promoting development, leveraging technology and digitalisation, and removing trade barriers.”

The CMA broadening its definition of a “sophisticated investor” means more investors are now able to direct capital into VC funds. The government’s commitment to funding entrepreneurship also means state-backed equity funding is expected to expand. The stock market volatility that has resulted from the Covid-19 pandemic is a clear indication of reduced investor sentiment, but for VC and PE investors turbulent economic conditions often result in periods of opportunity, as valuations on target start-ups and growing companies are reduced.


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The Report: Saudi Arabia 2020

Alternative Investments chapter from The Report: Saudi Arabia 2020

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