Over the last five years, Sovereign Wealth Funds (SWFs) have played an increasingly important role in providing capital globally. By attempting to maximize investment returns, SWFs have enhanced their traditional investment approaches by increasing direct investments, increasing their exposure to selective emerging markets and diversifying their portfolio across industries. Hand in hand with these developments the SWFs have built up in-house investment capabilities.
The GCC SWFs are among the largest SWFs in the world with an appetite for direct investments, including infrastructure investments. However, three challenges limit infrastructure investments by GCC SWFs in the FEMIP region. Firstly, SWFs seek to invest with equity (instead of debt). Secondly, SWFs favour investments in mature markets and selective emerging markets which provide more stable cash flows with lower regulatory and political liability (e.g. Asia and Latin America). Thirdly, most GCC SWFs require an internal return rate (IRR) of 15% and a minimum equity stake of at least USD 50 million. Despite a healthy pipeline of infrastructure-related projects in Egypt, Jordan, Tunisia and Morocco, only a handful match GCC SWF requirements. This third challenge is even more important as there are investment opportunities in mature markets and in emerging markets (e.g. Asia and Latin America) offering similar yields, while having more stable investment environments.