Saudi Arabia looks for diversification

Saudi Arabia looks for diversification

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While the proposed Aramco IPO has dominated the headlines it is far from the only ground breaking Saudi initiative. Innovative funding solutions have been working their way into other parts of the Gulf kingdom’s energy sector, adding capital market ballast to the government’s long-term diversification ambitions as articulated by the Nation Transformation Programme released earlier in the year. Opportunities for banks, intermediaries and investors are sure to follow.

On 19 July, the Saudi-based pan-Arab multilateral development bank Apicorp announced the launch of the $1.5bn Apicorp Bahri Oil Shipping Fund. Framed as an attractive investment opportunity for large and sophisticated local and regional investors it also, crucially, seeks to support economic diversification by creating a bulk shipping giant (although focused on oil transportation).

The closed-end fund, launched in association with the state-owned National Shipping Company of Saudi Arabia (Bahri), will target the acquisition of approximately 15 very large crude carriers (VLCCs) over three phases with total investments of up to $1.5bn composed of debt and equity. It will have a 10-year life period and deliver returns derived from the commercial employment of the VLCCs.

Apicorp will be the main investor and fund manager, while Bahri will serve as the exclusive commercial and technical manager. The bank will cover 85% of the investment in the fund with Bahri investing the remaining 15%. Essentially, Apicorp and Bahri will be the anchor or seed investors, which will subsequently sell down to a wider pool of investors.

This venture into maritime funds is not a step into the unknown for Apicorp. The bank, which has made equity investments worth $13bn, launched its first such fund, the $150m Apicorp Petroleum Shipping Fund, in early 2013. That five-year closed-end fund achieves returns by leveraging growth opportunities in the petroleum products tanker charter market and is co-managed by Tufton Oceanic, a global fund manager in the maritime and energy related industries.

That earlier fund’s success provided the grounding for Apicorp’s launch of the new fund. The link with Bahri, whose mandate is to transport Aramco’s crude oil, is significant. According to Ibrahim al-Omar, CEO of Bahri, the company’s current fleet extends to 36 VLCCs and ten new build orders scheduled for delivery in 2017-18. The 15 crude carriers proposed for acquisition under this fund would, he said, “propel Bahri into becoming the largest operator of VLCCs in the world.”

Strategic significance

Apicorp and Bahri’s investment is strategically important to the kingdom and other Arab oil exporting countries as it materially increases the locally and regionally-controlled capacity for crude transport, says Bennie Burger, executive vice president and acting head of investments at Apicorp.

Observers see a broader regional trend going beyond Saudi borders that new fund innovations are helping develop. “Important developments are happening in the fund management industry in the region,” says M R Raghu, head of research at Kuwait-based investment house Markaz, who points out those high-profile recruitments are also being made to increase the amount of assets that is being managed internally.

“Amid a lower oil price environment, sovereign wealth funds in the Gulf region are overhauling their structures and processes in a bid to make them agile and more accountable. For instance, to realise economies of scale and subsequently contain costs, the UAE merged its IPIC and Mubadala funds.”

The new Apicorp fund, says Burger, provides an opportunity for the bank to reinforce its ability to structure large and complex financial transactions.

With 17% of its shares owned by the Saudi government (the remainder being accounted for by other Arab oil producing states) its remit is to support the growth and development of the energy and related sectors in its member countries and the broader Arab region.

Discussions between the two firms resulted in a realisation that the problem that Bahri was looking to solve created an opportunity for Apicorp to develop an aspect of its business that would be of interest to strategic investors.

“From a strategic perspective it is important to have control over your ability to export and transport crude oil. We were facing a situation where the available capacity for the transportation of crude was not sufficient to cover for the demand for Saudi Arabian oil. With the creation of this new fund there was an opportunity to do exactly this,” says Burger.

Above all, the bank believes the shipping fund could offer some potentially very attractive returns for investors. According to Burger, Bahri has a stellar track record as VLCC fleet owner and manager. “Bahri’s enviable status as national shipping company to Saudi Arabia provides the fund with some significant sustainable competitive advantages, which underpins our positive outlook,” he says.

The funds themselves have been structured into three digestible chunks worth around $500m each, thereby avoiding exposure to execution risk that a $1.5bn fund might involve.

Reaching out to investors

There will be a limited sell down of a portion of the equity in each stage. It is anticipated that the sell down will be targeted at selected large, sophisticated and strategic investors, whose interests are aligned with the founders of the fund.

The fund fits with a broader evolution of Apicorp’s business model in which it is actively growing its various business lines as well as product and service ranges, including its equity investment franchise.

Burger points out that the bank would be keen to work with strategic partners in the establishment of similar funding vehicles, especially if it supports the growth and development of the energy or energy-related sectors. It is also highly likely that this fund will assist Apicorp and Bahri in playing a role in the further growth and development of Islamic capital markets.

Apicorp is in discussions with a wide range of existing and potential new strategic partners, including a global investment manager. “We believe in working with like-minded professionals who are experts in their field,” says Burger. “A good partner will assist you in avoiding the potential pitfalls of investing in their areas of expertise, whether that is a specific industry, sector or geography. It would be very arrogant of us to think we have all the answers to all the questions.”

The partnership approach can be illustrated in fairly recent investments that Apicorp has made with Fajr and Waha Capital in National Petroleum Services and Fajr and Jadwa, a Riyadh based asset manager, in Saudi Mechanical Industries. It has also in the recent past committed to investment funds in partnerships with the International Finance Corporation and ACWA, a Saudi power company, both for infrastructural development purposes in the region.

“One of the big spin-off benefits in creating a bigger investment franchise was also that it enabled us to create a fund that provided an investment opportunity for large, sophisticated local investors. It is known that we have a number of large pension funds and asset managers in the region and that there is a scarcity of available quality local assets to invest in, especially income-generating investments. This creates an attractive investment vehicle for them,” says Burger.

The government agenda, driven by the ambitious young deputy crown prince Mohammed Bin Salman, is heavily focused on ending the state’s dominance of the economy so new fund instruments will play an important role in promoting diversification away from oil. The marriage of the kingdom’s oil export prowess to capital market instruments may well emerge as a significant investment theme.

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