UAE & Gulf Investment Report 2022 — Deploying a Surplus

2022 gave the Gulf economies something almost no other region had: a surplus of capital at a moment of global scarcity.

The energy price rise following the disruption of that year produced substantial fiscal surpluses in the major energy-exporting economies. Simultaneously, as the 2022 global and US venture reports describe, capital was contracting nearly everywhere else — rates were rising, exits were closing, and institutional allocators were constrained by the denominator effect.

The counter-cyclicality is the defining feature. A region with capital to deploy when others are withdrawing occupies an unusually favourable position: prices are lower, competition is reduced, and the terms available to a buyer are better than at any point in the preceding decade.

What is being optimised for is not only financial return. The stated strategic objective across the region is economic diversification — reducing dependence on hydrocarbon revenue by building other industries. That objective changes the calculus:

• A domestic investment that develops local capability may be justified at a return that a purely financial investor would decline.
• A foreign investment that brings technology, expertise or a company presence to the region carries value beyond its financial return.
• The time horizon is longer, since diversification is a multi-decade project without fund-life constraints.

The constraint was not capital. It was absorptive capacity. A very large pool of capital seeking deployment faces a finite number of opportunities capable of absorbing large cheques productively. This is the same dynamic the 2017 US private equity report describes for dry powder: when capital grows faster than the supply of assets, the difference appears in price.

The region's response included becoming a significant limited partner in global private markets — an efficient way to deploy at scale while acquiring expertise — precisely when other LPs were constrained.

What a strategic objective changes

The distinction between financially-motivated and strategically-motivated capital matters for anyone competing with it or receiving it, and it is worth being precise.

A financial investor optimises risk-adjusted return. Every investment competes with every alternative on that basis, and one that does not clear the hurdle is declined regardless of other merits.

A strategic investor has additional objectives. An investment may be justified by developing a domestic industry, acquiring capability, establishing a relationship, or advancing a national programme — and those benefits accrue outside the investment's own return.

The consequences:

• Strategic capital can rationally pay more for an asset that delivers strategic value, because it is buying something the financial investor is not.
• It can accept a longer horizon, since there is no fund life forcing an exit.
• It may accept a lower financial return where the strategic benefit compensates.
• Its participation changes market pricing in categories where it is significant — the same effect the 2016 US venture report describes for corporate venture at scale.

For a company receiving the capital, this can be attractive: patient capital with strategic value beyond money, and often with commitments about local presence or market access attached.

For a competing financial investor, it is a challenge: being outbid by a party buying something additional.

For anyone reading valuations, it is a caution that recurs throughout this archive. A valuation set partly by a strategic buyer is not evidence of financial value. A financial investor benchmarking against it is comparing against a price that includes something they are not buying — the identical point the 2016 US venture report makes about corporate venture and the 2024 Asia-Pacific report makes about state-supported capacity.

Absorptive capacity as the binding constraint

The constraint on deploying a large capital surplus is not finding investments. It is finding investments that can absorb capital at scale productively.

Why scale creates the problem:

• Small investments do not move the needle. A pool measured in hundreds of billions cannot deploy meaningfully in transactions of tens of millions — the number of transactions required exceeds what any organisation can source, diligence and govern.
• Large investments are scarce. The number of assets capable of absorbing very large cheques is limited, and they are competed for globally.
• Concentration risk rises. Deploying large amounts into few assets concentrates exposure.
• Domestic capacity is genuinely limited. A domestic economy of a given size can productively absorb only so much investment before returns fall — building capacity beyond what the market supports produces assets that do not earn.

The available responses, all of which the region pursued:

• Deploy internationally. The largest pools have historically done this, acquiring stakes in global companies and real assets.
• Become a limited partner in external funds. This deploys at scale with a single decision, accesses expertise, and builds relationships — which is why it grew substantially in this period.
• Build domestic capacity deliberately — new cities, industries and infrastructure — accepting that returns may be long-dated and partly non-financial.
• Attract external participants to the domestic market, which increases the number of investable opportunities rather than merely competing for existing ones.

That last approach is the most interesting, because it addresses the constraint at its source. A jurisdiction that attracts companies, funds and talent creates domestic investment opportunities that did not previously exist. It is also the hardest, requiring the infrastructure the 2020 Singapore report describes: legal certainty, financial services, talent and regulatory quality.

Becoming a limited partner at the right moment

The region's growth as a limited partner in global private markets was well timed, and the timing was structural rather than lucky.

The context, per the 2022 and 2023 US venture reports: institutional LPs globally were constrained. Distributions had collapsed with exits closed. The denominator effect had pushed private allocations above target. New commitments slowed sharply, and fundraising extended dramatically.

Into that environment, a source of capital that was not constrained had unusual leverage:

• Access improved. Funds that had been closed to new investors reopened, because their existing LPs could not re-up at previous levels.
• Terms improved. Fee negotiation, co-investment rights and advisory positions became available in ways they had not been when capital was abundant.
• Relationships were established with managers who would have been inaccessible in 2021.

This is the counter-cyclical advantage in its clearest form. The value of having capital is highest when others do not, and it is expressed in access and terms rather than only in price.

The strategic dimension reinforced it. Commitments were frequently accompanied by arrangements for the manager to establish a regional presence or to deploy a portion of capital regionally — which converts a financial commitment into a diversification instrument, addressing the absorptive capacity constraint by importing capability.

The general observation: the most valuable thing about counter-cyclical capital is not the price it pays for assets. It is the relationships and terms it can establish when the alternative sources of capital are absent. Those persist after the cycle turns, which is why the 2022–2023 period is likely to matter more for the region's position in global private markets than any individual transaction from it.

Domicile competition

Competition between Gulf financial centres to serve as the regional base intensified, and the dynamics mirror those the 2020 Singapore report describes.

What is being competed for is the base function: fund domiciliation, regional headquarters, the legal jurisdiction for structuring transactions, and the talent cluster that follows.

The components being built are the same ones: legal frameworks with commercial predictability, financial services infrastructure, regulatory quality, talent and immigration arrangements permitting it, and connectivity.

Why competition intensified:

• The prize is large and self-reinforcing. A base function attracts activity that attracts more activity.
• The region's capital growth made it worth competing for, since the capital needs somewhere to be administered.
• Multiple centres pursued it simultaneously, each with distinct regulatory frameworks.

The relevant lesson from Singapore is about durability. The base function is difficult to establish because the components reinforce each other and all take time — legal precedent accumulates over decades, service industries concentrate where volume already is, and talent clusters where the relevant jobs already exist. The advantage is durable once established and correspondingly hard to build.

For investors, the practical implications:

• The choice of domicile affects legal certainty, tax and regulatory treatment and should be assessed rather than defaulted.
• Competition between centres benefits users through better frameworks and lower costs.
• The eventual outcome is not determined, and a jurisdiction's current position is not a guarantee of its future one.

Why counter-cyclical capital is rarer than it should be

Having capital when others do not is obviously advantageous, and almost nobody manages it. The reasons are structural rather than a failure of discipline, and they explain why the Gulf's 2022 position was unusual.

Most capital pools are pro-cyclical by construction:

• Institutional allocations are funded by distributions. As the 2023 US venture report describes, an institution funds new commitments substantially from capital returned by prior ones. When exits close, distributions stop, and commitments fall — precisely when prices are attractive. The funding mechanism is synchronised with the market it funds.
• Allocation targets are percentages of a total that moves. The denominator effect pushes private allocations above target when public markets fall, which forces reduction at exactly the moment for increasing.
• Fundraising is easiest after good performance. A manager raises most readily after a strong period, which means capital arrives after prices have risen and is scarce after they have fallen.
• Career risk runs one way. Deploying into a falling market and being early is visibly wrong for a period. Deploying into a rising market and being late is conventional.

What makes a pool counter-cyclical:

• Funding independent of market performance. The Gulf surplus derived from energy revenue, which is uncorrelated with financial market conditions and was in fact inversely correlated in 2022 — the same disruption that raised energy prices tightened financial conditions.
• No fund life forcing a timetable. A permanent pool can wait, and can deploy when it chooses rather than when its investment period requires.
• No redemption liability. No obligation to return capital on a schedule means no forced selling and no pressure to hold liquidity.
• Governance that tolerates being early. The scarcest component, and the one that cannot be bought.

A counter-cyclical pool is not a pool with better judgement. It is a pool whose funding is uncorrelated with the market it invests in — and that is a structural property, not a skill.

The implication for anyone competing with such capital is that they will be outbid in the periods when their own capital is scarcest, and the disadvantage is structural rather than a matter of conviction.

What an allocator could act on

Recognise that strategic capital changes prices and is not evidence of financial value. A valuation set with significant participation from investors buying strategic benefit alongside financial return includes something a financial investor is not buying. This is the same caution the 2016 US venture report makes about corporate venture and the 2024 Asia-Pacific report makes about state-supported capacity — and it recurs because the mechanism is general.

Value the terms and the relationships, not only the price. The most durable advantage of deploying counter-cyclically was access to funds that had been closed, fee and co-investment terms that had been unavailable, and relationships with managers who would not have taken the meeting in 2021. Those persist after the cycle turns, which is why 2022–2023 is likely to matter more for the region's position than any individual transaction.

Treat absorptive capacity as the real constraint on a large pool. The number of assets capable of absorbing very large cheques productively is finite, and deploying beyond it either concentrates risk or funds capacity the market does not support. The responses — international deployment, LP commitments, deliberate domestic capacity building, and attracting external participants — address the constraint at different points, and only the last addresses it at source.

Assess base-function competition on the full component set. Legal precedent, financial services, talent, regulatory reputation and connectivity reinforce each other and all take decades. A jurisdiction offering one component more cheaply has not built a base, and the 2020 Singapore report describes why the switching costs protect the incumbent.

Note that sovereign disclosure is limited and much reported data is estimated. IMF Article IV consultation reports are free, published per country, and are the most rigorous independent source on fiscal position and diversification progress — better than industry estimates of fund size.

What 2022 established for the Gulf

• Counter-cyclical capital was demonstrated at scale, with its advantage expressed in access and terms rather than only in price.
• Strategic objectives change pricing, and valuations set with strategic participation are not evidence of financial value.
• Absorptive capacity, not capital, is the binding constraint on a large surplus.
• Becoming a limited partner at a moment of global LP constraint established relationships that persist beyond the cycle.
• Domicile competition intensified, following dynamics established elsewhere and subject to the same durability logic.