A brief word on the geopolitics, though not the focus of the article. The US-Israel miscalculation has placed world leaders navigating a kind of uncertainty that diplomatic tools are poorly equipped to handle. When political rhetoric is rarely believed, when off-ramps are as elusive as the war’s original rationale, and when each escalation reshapes the conditions for de-escalation, the end state remains genuinely unclear. What is clear is this: any resolution will leave the Middle East, and the world economy, structurally different. This is not 1979, nor 2003. This is a tectonic shift, one built on 35 years of relative stability that quietly became load-bearing.

The objective here is narrower. To identify the key shifts that will shape how sovereign wealth funds in the region allocate, protect and deploy capital, during and after the conflict. The analysis focuses on three tenets: fiscal pressure, economic shock and the path forward.

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1. Fiscal Pressure: Defence, Oil and the Budget Reckoning

Gulf states entered 2026 with defence budgets already at elevated levels. Saudi Arabia allocated approximately $74 billion to defence for the year, the sixth-largest defence budget globally. The GCC collectively had been spending at record levels, driven by a decade of regional instability, Yemen’s protracted conflict and the ever-present Iranian threat calculus. What none of those budgets accounted for was the cost of intercepting nearly 2,000 Iranian missiles and drones, as the UAE alone experienced in the first three weeks of conflict. Defending against a sustained barrage of projectiles was not a line item in any 2026 budget cycle.

Oil at $100 per barrel would, under normal circumstances, provide relief. In prior years, Gulf states would have absorbed ambitious development spending precisely because elevated prices supplied the fiscal capacity. Those circumstances no longer apply. The Strait of Hormuz, through which approximately 20 million barrels per day normally transit, has ground to a trickle. The UAE’s Fujairah bypass pipeline and Saudi Arabia’s Yanbu corridor on the Red Sea provide some relief: the EIA estimates roughly 2.6 million barrels per day of bypass capacity is available. That is a partial offset against a near-total disruption. High prices matter little when export volumes collapse. Iraq and Kuwait have already begun curtailing production as Gulf storage fills without viable export routes.

The result is a fiscal paradox. Oil revenues are structurally constrained precisely when defence expenditures are climbing and reserve drawdowns are accelerating. Balancing budgets through 2027 and into 2028 will require careful management of reserves, restrained discretionary spending and, in some cases, a formal drawdown on fiscal stabilisation funds. The KIA, ADIA and the stabilisation tranches of PIF were built for precisely this moment. Their size and liquidity mean this is a manageable stress, not a solvency crisis. But the soft budget constraint, already under pressure before February 28, has now hardened considerably.

The final fiscal variable is the prioritisation of existing spending plans. Gulf states will, as they did post-COVID, pivot toward national resilience: energy and logistics infrastructure, food security investment and economic support mechanisms for a private sector navigating genuine uncertainty. The scale and sequencing of those pivots will not be clear until the ‘day after’, but the direction is not in doubt.

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2. The Economic Shock: State Assets, Global Markets and the Security Premium

The most immediate economic pain falls on the state-owned asset portfolios of Gulf governments. National oil companies face constrained export revenue despite elevated prices. Gulf carriers, Emirates, Etihad and Qatar Airways, which together normally process around 526,000 passengers per day through their hubs, are operating a fraction of pre-war capacity. The conflict is costing the Middle East travel and tourism sector an estimated $600 million per day in lost visitor spending, according to the World Travel and Tourism Council. Port operators in the Gulf, the most structurally exposed of the state-owned assets, face the dual burden of diverted shipping routes and elevated insurance premiums that make normal operations economically unviable. These are not portfolio problems that can be managed with a reallocation. They require acute and direct state support.

Goldman Sachs estimates that Saudi Arabia’s GDP could contract by 5 percent, the UAE’s by 3 percent and Kuwait and Qatar’s by as much as 14 percent if the conflict extends through April. That is not a forecast to be dismissed. Against that backdrop, the reaffirmation by UAE Ambassador Yousef Al Otaiba that the UAE’s $1.4 trillion investment framework with the United States “will stay on track with plans to accelerate deployment and funding” is a significant signal, one of geopolitical commitment as much as financial confidence. The message, delivered on March 17, is the right one to send. The execution, over the coming quarters, will be the harder test.

The honest question for sovereign allocators is one of sequencing, not intent. It is difficult to envisage AI capex, private equity commitments and venture capital as the top priorities for SWF deployment when domestic portfolios are under stress and reserve drawdowns are beginning. Analyst commentary at the recent FII Miami gathering reflected the same tension: Gulf investment pledges to the US were made as diplomatic instruments as much as financial ones, and implementation will largely fall to sovereign wealth funds already managing a crisis at home. The longer the conflict runs, the more that reprioritisation toward resilience-oriented capital becomes not a preference but a necessity.

The most immediate and visible effect of the crisis is seen across the tourism sector. Tourism contributed approximately 11 percent of GCC GDP heading into 2026, a sector that had been growing with genuine momentum. Estimates indicate that Dubai welcomed close to 20 million tourists in 2025, inching close to $200 billion in visitor spend in Dubai alone. Tourism numbers across the GCC were rising and predicted to continue that trajectory. Those projections are now academic.

The structural damage is not merely a loss of footfall. It is a loss of the premium that the Gulf had, over two decades, embedded into its economic identity: a reputation for safety, stability and connectivity. Aviation analysts are direct on this point. Returning aircraft to the skies once a ceasefire is declared is operationally straightforward. Rebuilding traveler confidence is not. The implicit understanding between Gulf states and Iran, that civilian hubs were off-limits, has been broken. That recalibration will be priced into insurance premiums, airline route decisions and conference bookings for years. Estimates suggest inbound arrivals to the Middle East could fall between 11 and 27 percent year-on-year in 2026, representing a $34 to $56 billion loss in visitor spending relative to pre-war forecasts.

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3. The Day After: Cold War Economics and the Opportunity in Reconstruction

The most probable post-conflict scenario is not regime change in Iran. It is a ceasefire followed by a cold war, one defined by persistent threat, elevated shipping premiums and a structural standoff between the GCC and Tehran that forecloses any near-term rapprochement. Even when the Strait of Hormuz reopens, markets will not immediately price that risk away. The tanker market of the 1980s, where on average one vessel was struck per day at the height of the conflict, is an instructive precedent: shipping continued, but at a permanent premium. That premium will be a structural feature of Gulf logistics for the foreseeable future.

Cyber warfare compounds the picture. The ramp-up in digital attacks prior to the conflict was not incidental; it was preparatory. A geopolitical and geo-economic standoff between the GCC and Iran, sustained over years, creates a persistent threat environment for critical infrastructure, financial systems and digital assets. Sovereign funds will need to price cyber resilience into their domestic investment mandates, not as a line item but as an organising principle.

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The Cold War analogy, however, is not only a cautionary one. The original Cold War between superpowers accelerated innovation, drove infrastructure investment and, in its own way, created economic momentum alongside its existential risk. The GCC-Iran dynamic is a different order of magnitude, but the logic holds. Gulf states will direct sovereign capital, as they have after every prior crisis, toward rebuilding what was damaged and hardening what remains. Logistics infrastructure, port resilience, food security systems, energy diversification: these are the categories where state capitalism has always acted decisively in the Gulf, and this moment will be no exception.

Tourism and reputation are the longer-horizon opportunity. The Gulf hub model, with its structural advantages as a connector between Europe, Asia and Africa, remains fundamentally intact. The underlying demographics, infrastructure and geography have not changed. What has changed is the timeline for recovery and the investment required to restore confidence. Sovereign capital, directed toward destination marketing, hospitality infrastructure and anchor events, has done this before. It will do it again, with the added urgency that the region now understands the cost of the security premium it had, until recently, never tested.

The path forward is not a return to the pre-war equilibrium. That equilibrium is gone. It is the construction of a more resilient model, one that is explicit about its risks, honest about its constraints and grounded in the recognition that diversification, always the Gulf’s strategic ambition, is now also its most urgent economic imperative.

The black swan has landed. The question now is what sovereign wealth builds in its wake.

Establishment of L’imad: Consolidating Domestic Strategic Assets

The announcement of L’imad Holding Company in early 2025 formalised the transfer of a wide portfolio of operating companies previously held under ADQ. L’imad now houses assets across infrastructure, property, financial services, advanced industries, technology, mobility, and smart cities. It is effectively becoming the central repository for Abu Dhabi’s domestic strategic enterprises.

The appointment of HH Sheikh Khaled bin Mohammed Al Nahyan, Crown Prince of Abu Dhabi, as Chairman signals the political and economic significance of the new entity. L’imad is positioned not as a traditional sovereign wealth fund but as a strategic development institution, designed to shape the emirate’s economic trajectory through coordinated oversight of its most consequential SOEs.

ADQ: From SOE Aggregator to Expansive Investment Vehicle

When ADQ was established in 2018, its mandate was intentionally narrow:
to consolidate Abu Dhabi’s state‑owned enterprises under a single holding company, introducing corporate governance, financial discipline, and strategic alignment. Prior to ADQ, these SOEs reported directly to the Executive Council, the central policy‑making body of the emirate, through their respective boards and later through the Office of State‑Owned Enterprises. This was a shift from administrative oversight of SOEs to corporate governance structures that clarify ownership, accountability, and performance expectations.

For a primer on the difference between SOEs and Strategic Development Funds see Codifying Capital: A Taxonomy of Sovereign Wealth

As with many sovereign holding companies, ADQ’s remit expanded. Over time, it moved beyond its original role and began investing in venture capital, food and agriculture security, international transactions and sectoral development initiatives.

This “mandate drift” is neither unusual nor accidental. Once governance structures mature and capital pools deepen, sovereign institutions often evolve from passive asset holders into active investors. ADQ’s trajectory fits this pattern.

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The Supreme Council for Financial and Economic Affairs: Centralising Sovereign Governance

Running parallel to ADQ’s expansion was the establishment of the Supreme Council for Financial and Economic Affairs (SCFEA) on 27 December 2020, created by a law issued by the late President Sheikh Khalifa bin Zayed Al Nahyan. SCFEA became the apex body responsible for Abu Dhabi’s financial, investment, economic, petroleum, and natural resources affairs.

Its oversight extends across the emirate’s principal sovereign institutions:

• Abu Dhabi Investment Authority (ADIA) - Fiscal Stablisation Fund

• Mubadala Investment Company - Strategic Development Fund

• L’imad Holding Company - Strategic Development Fund

• Abu Dhabi National Oil Company (ADNOC) - National Oil Co / SOE

This consolidation of supervisory authority reflects the increasing complexity of Abu Dhabi’s sovereign ecosystem. What began decades ago as the Supreme Petroleum Council, later the Supreme Investment Council, has now evolved into a comprehensive governance body overseeing hydrocarbons, sovereign wealth, and economic strategy.

SCFEA’s role is not operational but architectural; it ensures that sovereign entities with the same ultimate shareholder do not duplicate efforts, compete for similar transactions, or drift into misaligned mandates.

Why L’imad, and Why Now?

The restructuring of ADQ and the creation of L’imad can be understood through two strategic drivers; ADQ’s mandate drift and the economic stewardship of the Crown Prince

1. ADQ’s mandate had expanded beyond its original purpose

Under H.E. Mohammed Al Suwaidi, who also serves as the UAE’s Minister of Investment, ADQ’s portfolio had grown into areas far removed from its initial SOE‑holding function. Separating its domestic operating assets into L’imad allows Abu Dhabi to refocus, though the future of ADQ’s structure and existence remains unclear.

2. HH Sheikh Khaled bin Mohammed’s stewardship of Abu Dhabi’s economic development

As Crown Prince, Sheikh Khaled is shaping the emirate’s next phase of economic transformation. L’imad provides a consolidated platform for executing domestic development priorities. Its stated focus — infrastructure, property, financial services, advanced industries, technology, mobility, and smart cities — is explicitly aligned with Abu Dhabi’s long‑term economic strategy.

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The Evolution of Sovereign Capital alongside Stronger Governance in Abu Dhabi

The establishment of L’imad fits a familiar pattern in the evolution of sovereign wealth institutions: mandates rarely remain static. As domestic priorities mature and asset bases expand, diversification becomes a natural progression, much as Mubadala evolved into a global investor following its merger with IPIC.

L’imad may ultimately follow a similar trajectory, balancing its domestic development role with the need to avoid crowding out private enterprise while eventually deploying capital abroad to generate returns.

Throughout this process, governance remains the stabilising force. Concerns about duplication across Abu Dhabi’s sovereign funds are mitigated by the overarching authority of the Supreme Council for Financial and Economic Affairs, which ensures strategic coherence across ADIA, Mubadala, L’imad, and ADNOC under a single ultimate shareholder: the Government of Abu Dhabi.

In the golden decade of sovereign wealth, Gulf states deployed capital with conviction — anchoring domestic industries, acquiring global assets, shaping, and being shaped by, geo-economics. As oil prices hover near $60 per barrel, the fiscal tide is ebbing. The soft budget constraint that once enabled bold strategic development is giving way to a hard budget reality. With this shift in tides, the ability of sovereign wealth funds to rebalance portfolios toward Asia — despite clear geopolitical logic — is increasingly constrained.

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Petro-State Capitalism and the Rising Breakeven

The Gulf’s model of petro-state capitalism — using sovereign capital to seed domestic sectors — is now facing its most difficult test. Projects like Neom in Saudi Arabia, Stargate in Abu Dhabi will require sustained, long-term capital (and energy) deployment. Yet the fiscal breakeven on oil, a key metric of spending capacity, is climbing. While this metric is estimated by global institutions, crucially, it excludes future capital commitments and replacement capex. The result: a misleading picture of fiscal flexibility.

As AI ambitions grow and real estate megaprojects scale, the breakeven rises — not just in theory, but in practice. Saudi Arabia and the UAE are now navigating a landscape where domestic obligations crowd out global optionality. The fiscal room to rebalance portfolios eastward is narrowing.

The Illusion of Optionality: Debt or Extraction

Faced with hard budget constraints, SWFs must choose: issue debt or extract value from existing portfolios. Both options are fraught. Debt issuance, while increasingly common, carries long term structural and macroeconomic risks — especially if AI fails to deliver promised returns. Portfolio extraction, meanwhile, is hampered by DPI challenges in private markets. Private market DPI ratios have fallen sharply — from an average of 23.6% pre-2020 to just 9.5% in 2024 — leaving SWFs with limited liquidity and few clean exit paths.

Patient Capital is Losing its Patience

This tension is already playing out. In November 2025, Saudi Arabia’s Public Investment Fund (PIF) exited nine U.S. stocks, dragging its holdings to a multi-year low — a signal that fiscal pressure is already forcing capital discipline and portfolio contraction.

Geo-Economic Rebalancing Meets Fiscal Reality

The strategic case for pivoting east is compelling. Asia is now the Gulf’s largest trading partner and public markets are significantly underpriced compared to Western benchmarks. However, geo-economic rebalancing will require new capital, not just reallocation. And that capital is increasingly tied up in domestic mandates.

SWFs overweight in U.S. markets may struggle to diversify meaningfully without sacrificing domestic priorities. The hard budget constraint forces challenging deployment decisions, domestic development or global rebalancing. Something has to give.

The End of the Soft Budget Era

The fiscal breakeven is no longer just a number — it is a constraint. A constraint on ambition, on optionality and on geo-economic strategy. Gulf SWFs, especially those with dual mandates, must now navigate a world where capital is finite and trade-offs are real. Unless oil rallies or AI delivers outsized returns, the pivot east will remain more thesis than reality.

For asset allocators, the message is clear: expect more discipline, less deployment. For those watching the Gulf’s sovereign story unfold, this is the sequel to the soft budget era — one shaped not by ambition, but by arithmetic.

In the Arabian Gulf, Strategic Development Funds are tasked with a singular challenge: to diversify economies away from oil. This mandate is not merely fiscal—it is existential. Petro-state capitalism, long anchored in hydrocarbon rents, now seeks to manufacture competitive advantage in other sectors. The formula is familiar: subsidised capital, cheap energy, abundant labour, and strategic geography. Temasek in Singapore, Mubadala in Abu Dhabi, and the Investment Corporation of Dubai have demonstrated that, with time and institutional discipline, mid-sized economies can evolve beyond resource dependence. Their success has inspired replication—but rarely duplication. Diversification is a slow burn, and city-states with technocratic policy-makers have been more successful than (geographically and economically) larger petro-economies.

These funds operate at the intersection of economic policy-making and global capital markets. Their success depends not only on asset allocation, but on institutional credibility, regulatory clarity, and the ability to onshore private co-investment. In many cases, they serve as both investor and market-maker—catalyzing sectors that anchor their competitive advantage (think Dubai or Singapore) or strategically invest in sectors that pave their influence in our current state of geo-economics. One challenge remains: how to transition from oil-driven GDP to a dynamic economic model that diversifies away from hydrocarbons.

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Saudi’s Super Fund: Vision, Velocity, and the Soft Budget Constraint

Saudi Arabia’s Public Investment Fund (PIF) was established to lead the charge under Vision 2030—a bold reimagining of the Kingdom’s economic future. Petro-state capitalism, in its most ambitious form, was deployed across sectors from tourism to tech, anchored by giga-projects designed to reshape infrastructure and global perception. The listing of oil giant Aramco provided liquidity and structurally high oil prices enabled a soft budget constraint—a fiscal environment where spending outpaces revenue. Buffered by sovereign reserves, it was a bet on transformation, underwritten by hydrocarbons.

The giga-projects—NEOM, The Line, Red Sea Global—were not just infrastructure plays; they were narrative instruments. Designed to signal a new Saudi Arabia to global investors, they aimed to reposition the Kingdom as a hub of innovation, sustainability, and openness. By now, it is clear to most that the scale of ambition came with fiscal implications. In economic terms, the soft budget constraint refers to a situation where state-backed firms can survive through a sustained period of losses due to the financial aid of a paternalistic state (Kornai). The soft constraint, while enabling rapid deployment, also masked underlying fragilities—particularly the reliance on oil-linked liquidity to sustain non-oil growth.

The Return of the Hard Budget Constraint

In early 2024, I argued that Saudi would need to re-enter a hard budget constraint. Non-oil GDP was expanding, but so was debt—and oil revenues were no longer sufficient to sustain the scale of giga-project ambitions. The increasing footprint of the state in domestic markets raised concerns among foreign investors, wary of competing with PIF’s capital and mandate. It is a paradox: the very instrument designed to attract investment can, if overextended, deter it. From late 2025 through 2027, a recalibration is inevitable. Figure 1 outlines the fiscal inflection point I predicted in 2024.

This shift is not a retreat, but a recognition of economic gravity. As the state assumes a larger role in shaping market outcomes, the need for fiscal discipline becomes more acute. The transition from soft to hard budget constraint is not a failure of Vision 2030—it is a maturation of its implementation. It reflects the reality that diversification, to be durable, must be financially sustainable.

Impairment, Not Retreat: The Long Road to Transition

PIF’s 2024 annual report confirmed the first write-down in its giga-project portfolio ($8 Bn) —an impairment that signals fiscal realism, not strategic retreat. The ambition remains, but the path is steep. PIF has returned to debt markets, issuing $2 billion in dollar bonds to finance its investment plans amid an oil price shock. Liquidity, not solvency, is the constraint. Debt-to-GDP remains healthy, but the scale of infrastructure, a new airline, and urban development—alongside preparations for Expo and the World Cup—requires sustained capital flows. Petro-state capitalism thrives in times of surpluses – but regional challenges and domestic demographic pressures alongside ambitious development goals has moved fiscal breakeven to barrel higher. Figure 2 highlights that since the launch of Vision 2030, the Kingdom has sustained a prolonged period of fiscal deficits in pursuit of its development agenda. It underscores the reality that economic transformation is not linear, and that setbacks are part of the process. Diversification demands patience, and patience demands liquidity.

Asset Transfers and the Petro-Dollar Paradox

In 2024, PIF’s AUM grew significantly, driven by the transfer of Aramco shares. The rationale was clear: bolster the asset base, improve credit ratings, and unlock debt capacity. But the paradox is unavoidable. While the long-term vision is to decouple from oil, the short-term mechanism remains petro-dollar dependent. PIF’s portfolio is increasingly strategic, but only 8% is allocated internationally. It resembles a Development Fund more than a Stabilisation Fund—focused on domestic transformation rather than global hedging. Transparency is commendable, but the balance sheet tells a story of transition, not completion.

This transfer also reflects a broader trend in petro-state capitalism: the recycling of oil wealth into state-led diversification vehicles. It is a form of internal monetisation, where sovereign assets are reshuffled to create fiscal space. The risk is that it also reinforces the structural reliance on hydrocarbons, even as the narrative shifts toward post-oil futures.

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2025: A Year of Reckoning

The year ahead will test PIF’s resilience. Aramco’s share price has underperformed, and the energy sector faces headwinds. Year-to-date it is down 17.5%. According to the IEA, global demand remains subdued despite geopolitical tensions. A conservative outlook on oil prices will constrain liquidity, slowing the pace of Saudi’s growth agenda. Vision 2030 remains a strategic imperative, and Saudi’s scale and demographics ensure eventual transformation. But the timeline is stretching. The next five years will be defined not by acceleration, but by adjustment.

Investor sentiment is shifting. The initial euphoria around giga-projects is giving way to questions about execution, returns, and governance. PIF must now navigate a more sceptical market, balancing ambition with accountability. The challenge is not whether Saudi can diversify—but at what cost.

Saudi will remain and rely on its oil economy for this lifetime and its development agenda cannot be counter-cyclical to oil prices. The industrial revolution took a century, Singapore is 60 years into its journey; the UAE 50. Petro-states seeking structural shifts in their economic models will need to adjust their timelines with a hard budget constraint. The path forward is clear: it is long term economic diversification, not dislocation.

The post-Cold War promise of liberal economic order has given way to a more contested terrain—one where capital is no longer neutral. In this new era of geo-economics, states are retooling their economic instruments to serve strategic ends. Industrial policy, investment screening, and supply chain realignment are no longer technocratic exercises; they are expressions of power. Sovereign Wealth Funds, once viewed as passive custodians of surplus, now play a significant role as holders of capital in this transformation in International Political Economy.

From Stabilization to Strategic Deployment

The origins of SWFs lie in fiscal prudence—vehicles designed to smooth commodity cycles and preserve wealth for future generations. As global capital markets liberalised and geopolitical competition intensified, their role evolved, capitalizing the now global financial markets. Today, SWFs manage over $13 trillion in assets, with leading funds in Norway, Abu Dhabi, and China shaping investment flows across sectors and continents. These funds are not merely financial actors; they are strategic instruments, calibrated to advance national interests in a multipolar world. Strategic Development Funds do not hold minority interests in listed firms; they act more like Private Equity funds with an investment thesis aligned with strategic national interests.

Sovereign Advantage: Deploying Capital with Intent

States with high Sovereign Wealth-to-GDP ratios possess a unique form of strategic agility. Freed from the constraints of electoral cycles and short-term fiscal pressures, they can deploy capital with patience and precision. In sectors like semiconductors, AI, and infrastructure, this long-horizon investment capacity offers a sovereign advantage—one that Western democracies, lacking institutional equivalents, struggle to match. Trump has called for the establishment of a national (federal) Sovereign Wealth Fund, but political fragmentation may render it aspirational.

Shaping Markets, Nudging Firms

Sovereign Wealth influences markets not through overt control, but through strategic alignment. With the rise of shareholder activism, the long term capital commitment and representation on boards allow these funds to steer corporate behaviour subtly but effectively. In doing so, they redefine value—not solely focused on financial return to shareholder, but strategic coherence. A subsidy, or in our terms, a political discount to their cost of equity, valued in terms of national strategic interest. This is geo-economic statecraft by other means, where capital becomes a lever for national positioning in critical industries.

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The New Scrutiny: Capital Under the Microscope

As Sovereign Wealth becomes more visible in strategic sectors, they will face growing scrutiny. Investment screening regimes are tightening and protectionist sentiment is rising. Policymakers must now grapple with a new dimension of sovereignty: control over capital itself. While no state may achieve total capital hegemony, the ability to deploy sovereign wealth with geo-economic intent will remain a defining feature of global power in the decades ahead.

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The Kuwait Investment Authority’s Sheikh Saoud Salem Al-Sabah recently delivered a warning to private equity fund managers at the Qatar Economic Forum. His concern? A perfect storm brewing across large buyout and venture capital funds that raised significant capital during their peak years—2012-2017 for private equity and 2018-2022 for venture capital.

His argument was direct. Poor underwriting, an overreliance on cheap debt, and an unclear exit strategy are putting pressure on value creation. Using a $20 billion fund example, he asked:

"If your base case is a 2X return, that means you need to realize $40 billion in assets. Question is—who’s going to buy them? The answer is 'I don’t know.' Put them all together, and you have the perfect storm."

The concern is growing. As vintages mature and investors expect multiples on their capital, a lack of viable exit options could spell trouble for funds that overestimated market liquidity.

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A Primer on SWFs in Private Markets

Over 40 years ago, select managers at Sovereign Wealth Funds diversified out of public markets and into private equity and alternatives, shifting their portfolios toward long-term, illiquid assets. Over time, two things became clear—SWFs assets kept growing, and the largest ones rarely faced liquidity calls. Today, over half of all SWFs invest in private equity, making them central players across large buyouts and anchors of Venture Capital Funds.

Source: Cumming D, Monteiro P. Sovereign wealth fund investment in venture capital, private equity, and real asset funds. Journal of International Business Policy. 2023 May 16:1–26

Data on SWF commitments remains opaque, but research highlights a significant rise in private equity deal activity between 2012 and 2017. Many of these funds now face maturity without a clear exit strategy. Adding to the challenge, volatility in public markets since the start of 2025 suggests that private market liquidation events will likely struggle against downward valuation pressures.

The Venture Capital Dilemma

SWF investments into venture capital are a more recent phenomenon, driven by two key ideas; 1) The historical outperformance of technology giants in public markets, and 2) The need to incubate domestic VC ecosystems, anchoring local funds to drive innovation

The former, however, has been hit-or-miss. Softbank’s Vision Fund was marred by the spectacular collapse of WeWork. Today, Temasek announced a reduction in VC commitments going forward. Their lessons were learned after the write-downs of FTX and eFishery, wiping out over $500 million from their portfolio.

Incubating domestic VC ecosystems is less pressured. Strategic Development Funds, unlike other SWF allocations, can take on outsized risk to fuel startup ecosystems, anchoring local venture funds with patient capital. These VC funds, now in their third or fourth vintages, are being assessed on performance. The results are becoming clearer and winners will be separated from the losers.

Source: International Forum of Sovereign Wealth Funds

Funds raised during the COVID-era tech boom (2018-2022) are now approaching maturity. These vintages, which rode the valuation surge, will soon need liquidity events to justify their multiples. Venture funds seeking fresh SWF capital will have to prove strong DPI from earlier funds. For newer funds, a clear value creation thesis is no longer optional—it is necessary.

Patient Deployment

Sovereign wealth funds were once known for their patient capital, but in private markets, their patience may be waning. SWFs may characterize patience in a different form; deployment. They may watch and wait for the next few years to determine whether their existing portfolios deliver, or if a reckoning awaits for funds that failed to build a viable path to exits.

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Defining Sovereign Wealth: Four Core Categories

A clearer classification of SWFs reveals four distinct groups, each serving a unique economic function:

1. Fiscal Stabilization Funds – The initial use of SWF referred to these funds. They act as financial buffers, helping governments manage commodity (read: oil) price fluctuations and economic shocks. Examples include the Norwegian Pension Fund (not to be confused with a pension fund) Kuwait Investment Authority (KIA) and the Abu Dhabi Investment Authority (ADIA), which prioritize stability over aggressive growth.

2. Pension Funds – Structured to secure future benefits, pension-focused funds, like the Government Pension Investment Fund of Japan, are designed to manage intergenerational wealth without direct influence over domestic economies.

3. State-Owned Enterprises Hold Cos – Some funds consolidate ownership of key industries. ADQ in Abu Dhabi and South Africa’s Department of Public Enterprises oversee portfolios of national corporations, blending sovereign investment with the private sector-like governance of key industries and utilities.

4. Strategic Development Funds – Unlike stabilization-focused SWFs, these entities actively shape national economic strategy. Mubadala in the UAE exemplifies this model, investing across industries to drive diversification and innovation. The obsession with SWFs in recent years refers to these Strategic Development Funds.

The Rise of Super Funds

While most sovereign investors fit neatly into these categories, some states have opted for a hybrid approach, merging multiple mandates under a super fund. Saudi Arabia’s Public Investment Fund (PIF) is a prime example—it functions as a fiscal stabilization vehicle, a direct investor in domestic industries, a manager of state assets, and a global investor in emerging sectors. This approach allows states to consolidate financial and strategic influence under a single umbrella. With consolidation comes complexity in governance and execution; a blurring of mandates that can de-prioritize or re-allocate capital from one mandate to another.

Sovereign Wealth on the Global Stage

As more nations explore the creation of sovereign investment vehicles—including Indonesia, Ireland, and the United States—the challenge lies in ensuring these funds align with national priorities while navigating global markets. Three key considerations must be addressed:

1. Political Systems – Political systems dictate how funds operate, whether independently or as extensions of state policy. Transparency and accountability frameworks must be established to maintain trust. Citizen engagement in SWFs can bring with it a growing tension between domestic fiscal challenges and long term strategic capital deployment.

2. Mandate Definition – A fund’s purpose should be clearly articulated. Whether designed for stabilization, investment, or state enterprise management, strategic clarity prevents misalignment between financial goals and national strategy.

3. Economic Context – The interplay between sovereign investment and private sector dynamics is critical. Some nations operate state-driven economies, while others prioritize market competition—a fund’s role must complement the broader economic structure.

With sovereign wealth playing an ever-greater role in global finance, the need for clear taxonomies and governance frameworks is more pressing than ever. Understanding the distinct functions of these funds will be crucial as more governments enter the arena, shaping markets, industries, and diplomatic relations in the process.

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The UAE and Saudi Arabia are making big moves in artificial intelligence, and their latest announcements show just how seriously they are investing in the industry. The UAE has committed to building what will be the largest AI campus outside of the United States—a massive five-gigawatt facility in Abu Dhabi. It is being developed by G42 in partnership with major U.S. tech companies and is part of a broader initiative called the U.S.-UAE AI Acceleration Partnership. Saudi Arabia, meanwhile, has launched its own ambitious AI project under its SWF, the Public Investment Fund. The new subsidiary, HumAIn, will work alongside NVIDIA to establish AI factories with an initial five-hundred-megawatt capacity. These investments are not just about tech—they are key to positioning these Gulf nations as central figures in the global AI economy.

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Why the Gulf is Betting Big

There are two key drivers behind this strategy. First, AI is emerging as an economic power play, much like oil was in previous decades. The UAE and Saudi Arabia do not want to be end consumers of foreign AI technologies; they want to shape them and hold meaningful stakes in the industry. If data is the new oil, they are making sure they hold a commanding stake.

The second reason has to do with the resources that AI development requires—namely, access to cheap energy and significant capital. AI factories demand huge amounts of power, and the Gulf is uniquely positioned to supply it, whether through oil, gas, or renewable energy projects. On top of that, the SWFs of these nations have the financial flexibility to take a long-term strategic view, investing in AI infrastructure with patience that many private investors simply cannot afford.

Announcements Are One Thing—Deployments Are Another

There is a significant gap between announcements and actual deployment. It is one thing to 'commit' billions to AI infrastructure, and another to ensure these investments translate into operational successes. Large-scale projects of this nature require extensive cross-border negotiations, with technology firms on one side seeking funding and sovereign wealth funds on the other determining where and how to deploy their capital. Intellectual property is not on the table.

Beyond that, building an AI ecosystem is not just about data centres—it is about attracting talent, securing supply chains for advanced semiconductors and establishing regulatory frameworks that balance innovation with security concerns. While the UAE and Saudi Arabia have taken confident steps forward, turning these commitments into fully functional AI hubs will take time. The UAE, with investments into Arabic LLMs and early investments in the space are one step ahead.

Saudi vs. UAE: Two Different Games

Despite their shared ambition, the two countries are approaching AI investment from different angles. The UAE, with its strong foreign direct investment flows, has the agility to move quickly, making targeted investments even amid fluctuations in oil prices. Saudi Arabia, on the other hand, is still closer to the starting line in its race for economic diversification, driven by petro-state capitalism. It has multiple priorities to balance, including domestic social spending, its portfolio of giga projects and its broader efforts to reposition itself as a global investment hub. AI is a priority, but it is one line in a number of expenses in a long list of CAPEX leading to 2030.

The Bottom Line

AI firms and Gulf’s SWFs are a match made in heaven. It is at the apex of Capital, Energy and Technology. There is the hope that these early investments will anchor the region’s position in AI over the long term, yet AI remains a young and rapidly evolving industry. The challenge will be ensuring that these investments translate into meaningful influence rather than expensive experiments.

The UAE and Saudi Arabia are both aiming high, but success in AI will not come down to capital—it will depend on strategy, execution, and the ability to navigate the geo-economic complexities of a sector that is still taking shape.

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In a surprising turn of events, the United States is now considering the establishment of its own Sovereign Wealth Fund. This move, while ambitious, is fraught with challenges, but in Trump's world, capital is king. The allure of a SWF is undeniable, as it has become a hallmark of modern technocratic policy.

Trump's GCC Visit: A Deal-Maker's Dream

Next week, President Trump will embark on a visit to the Gulf Cooperation Council (GCC) countries. Known for his deal-making and his blurred lines between public and private interests, Trump is particularly enamored with the bold investment strategies of SWFs. These funds, often operating under the umbrella of political agreements, resonate with Trump's approach to international diplomacy. His admiration for SWFs is no secret, and his visit is likely to underscore this sentiment.

Anticipating Grand Announcements

During or shortly after Trump's visit, we can expect a flurry of grand investment announcements. These cross-border agreements typically set ambitious targets across various sectors.

Saudi Crown Prince Mohammed bin Salman has committed to investing $600 billion in the United States over the next four years. Following suit, the UAE has announced a $1.4 trillion investment plan that aims to deploy over the next ten years. Meanwhile, Qatar is anticipated to unveil its own substantial investment pledge during President Trump's visit to Doha.

Bold Announcements; Uncertain Outcomes

Like entrepreneurs pitching on "Dragons' Den, the political commitments of SWFs are subject to due diligence. Specific targets are often vague, and the investment rationale may not be fully fleshed out.

A case in point is the UAE-UK Sovereign Investment Partnership, where the UAE pledged £10 billion to invest in key UK industries. However, despite such bold proclamations, the actual follow-through often leaves much to be desired. The UAE-UK partnership has seen limited progress due to recent political frictions.

Over the next week, we can anticipate bold investment announcements following President Trump's visit to the GCC. It will likely be pushed by his administration. The lesson here, however, is that while SWFs advocate for the benefits of 'patient capital' and multi-year, multi-sector investment programs, the actual execution remains uncertain. With Trump having four years left in his term, the true impact of these announcements will unfold over time.

#SWFs are Trending.

Nearly 75 years since the creation of the world’s first SWF, the United States has decided it wants to examine establishing its own. While the country’s own political economy [and fiscal challenges] may present roadblocks, establishing a SWF is the latest trend in modern technocratic policy circles. Indonesia is setting one up. Abu Dhabi is the “capital of capital”.

A Growing Need for Discourse.

SWFs are evolving. As an increasingly strategic, and larger, investor in global financial markets, regulators and the private sector will need to build a better understanding of them. I worked in SWFs and in public policy on state-ownership for a number of years and started my formal research at the University of Cambridge. The decision to start this community stemmed from a growing need to widen the access and discussion around Sovereign Wealth outside of the conferences I speak at and the classrooms I teach.

Sovereign Wealth is shaping Industry.

Subscribing to The Sovereign Wealth of Nations will keep you up-to-date and informed of Sovereign Wealth trends. The bi-monthly memo will address current affairs and long form analysis of trends shaping, and being shaped by, sovereign wealth. With the largest funds based in the GCC, expect a slight lean towards to the region. I traditionally work with in-person briefings for those in the financial sector or industries being shaped by increasing Sovereign Wealth investments.

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