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Overview of recent activity

The Saudi Arabian economy is the largest in the Arab world (nearly twice the size of the United Arab Emirates) and is currently on the upswing following a severe drop in oil prices and the spread of the covid-19 pandemic. While the economy is still driven by abundant oil reserves and related hydrocarbon industries, the country's leadership has adopted a national transformation plan named 'Vision 2030' to modernise and diversify the economy, and has entrusted a vast amount of assets under the authority of the Public Investment Fund (PIF), which is now one of the world's largest sovereign wealth funds. Vision 2030 focuses on increasing the country's non-oil revenue and employment, particularly in the private sector, in retail, education and healthcare. The effects of Vision 2030 have been felt, as non-oil sector private sector growth has substantially increased since the start of 2017.

Saudi Arabia has raised tens of billions of dollars in sovereign issuances in the past five years (after nearly a decade without any public debt issuances). Public debt issuance increased by nearly 50 per cent in 2020 to 163 billion riyals and non-government debt issuance increased by more than 250 per cent reaching 31 billion riyals compared to 9 billion riyals in 2019.

The government is also focusing on increasing foreign investment into the country. In a long-awaited and very welcome move, the government opened the Saudi Arabian Stock Exchange (Tadawul) to foreign investment in June 2015, and liberalised the foreign ownership rules in May 2016, August 2016, January 2018 and June 2019. In February 2021, the government announced that it will no longer work with or enter into contracts with foreign companies whose regional headquarters are not in Saudi Arabia, in an attempt to lure multinational companies to increase their presence in the Kingdom. The Capital Market Authority (CMA) has also been encouraging many of the country's blue chip and large family-operated companies and financial services companies to list, and created a small cap market, the Parallel Market, in February 2017, which has seen seven listings to date. Further, Saudi Arabia has introduced a real estate investment trust (REIT) regime, and in November 2016, Riyad REIT was the first REIT to be listed in Saudi Arabia (and only the second REIT to be listed in the Middle East), and was followed by another 16 REITs up to July 2021, with a number of them also increasing their capital to acquire additional assets. More recently, the CMA has published regulations for listed funds with the Alkhabeer Diversified Income Traded Fund to be the first non-real estate fund to be listed on the Tadawul. It is hoped that the successful listing of this fund will spur the development of exchange-traded private equity funds.

Over the past three years, the CMA has released numerous regulations covering the establishment of new corporate vehicles, the IPO process and foreign investment in Saudi Arabia, and has promised a complete revamp of existing financial services regulations. Three regulations in particular are pivotal for asset managers looking to raise Saudi Arabia-targeted funds: the rules on the offer of securities and continuing obligations, the investment funds regulations and the real estate investment funds regulations. These regulations provide opportunities to investment banks, private equity firms and asset managers to expand their product offerings and access additional investor bases, particularly with the rules on the offer of securities and continuing obligations, which would potentially allow foreign companies to list their shares on the Tadawul main market.

Saudi Arabia is home to the largest number of investment funds domiciled in the Gulf Cooperation Council (GCC). Funds and asset managers have been gradually diversifying from primarily real estate investments into other parts of the economy, with a particular focus on venture capital and private equity, as these sectors are being supported by the CMA, PIF (directly and through its fund of funds established under the name of Jada), Sanabil Investments, the Saudi Venture Capital Company (a government-owned venture capital investment firm), the Ministry of Commerce, the Ministry of Investment, the Ministry of Labour, Social Development Bank, the Small and Medium Enterprise Authority (SMEA), the Saudi Technology Development and Investment Company (TAQNIA) and other government institutions.

Key trends

i Equity capital markets

The government is encouraging significant investment into the economy from both local and foreign investors. There were many IPOs in the last decade, including the IPO of the National Commercial Bank (NCB), which was the largest ever regional IPO, and the second-largest globally in 2014. In second half of 2020 and the first half of 2021, the CMA announced the approval of six IPOs in Saudi Arabia, including those for Alkhorayef Water and Power Technologies Company and Acwa Power . It has been speculated that a number of prominent Saudi companies, including units of Saudi Arabian Airlines, Bateel International, Dar Al-Arkan Properties are preparing for listing in the near future on the main market of the Tadawul.

In June 2015, foreign investors were permitted to directly own shares listed on the Tadawul through the QFI framework. Only foreign institutions that have a minimum of US$500 million in assets under management and five years of experience will be permitted to register with the CMA as a QFI. Once registered, a QFI can purchase or arrange for its clients to purchase shares of companies listed on the Tadawul (except for six companies that have substantial real estate holdings in Mecca and Medina, where ownership of real property is limited to Saudi Arabian nationals). Holdings in a single company by a QFI or its clients will be limited to 10 per cent, and holdings in a single company by QFIs in the aggregate will be limited to 49 per cent.

Prior to June 2015, foreign investors could participate in listed companies through swap arrangements only, which allowed investors to participate in the profits of the companies but did not provide for voting rights. It is expected that, as a result of the QFI framework, foreign investment in the Saudi Arabian stock market will grow from US$7 billion to nearly US$35 billion in the future. In addition to the QFI framework, the CMA announced on 26 June 2019 the introduction of the Instructions for the Foreign Strategic Investors' Ownership in Listed Companies, which were widely welcomed as they pave the way for relaxing the regulatory framework for foreign investment in Saudi listed companies. The newly introduced instructions allow non-financial entities to invest in Saudi listed companies and it is hoped that foreign strategic shareholders will be permitted to own shares in excess of 49 per cent of a company's share capital without being subject to overly restrictive lock-up periods.

In February 2017, the CMA and Tadawul created the Parallel Market to allow for alternative and small-cap listings. This move was widely anticipated and well received, improves SMEs' access to capital and encourages better corporate governance. As of July 2021, 10 companies are listed on the Parallel Market, with a number of companies that have been approved to list on the Parallel Market in recent months, with the latest being Canadian Medical Center Company whose approval for listing on the Parallel Market was announced by the CMA on 28 June 2021.

In October 2016, the CMA's Real Estate Investment Traded Funds Instructions (REIT Regulations) were introduced, which allow managers to list certain public real estate funds on the Tadawul. As of the end of July 2021, the Tadawul is host to 17 listed REITs and it is widely expected that the REIT Regulations will further spur the real estate market in Saudi Arabia. Furthermore, the REIT Regulations were consolidated with the Real Estate Investment Funds Regulations as of 1 May 2021.

In October 2018, the CMA issued the Closed-Ended Investment Traded Funds Instructions, which govern the establishment and listing of certain non-real estate funds on the Tadawul. The first fund to be established pursuant to these regulations is the Alkhabeer Diversified Income Traded Fund. It is anticipated that listing of private equity funds under these instructions will gain traction as retail investors are given exposure to privately held companies with minimal investment. Furthermore, the Closed-Ended Investment Traded Funds Instructions were consolidated with the Investment Funds Regulations as of 1 May 2021.

In addition, the market has recently started to witness signs of consolidation among various sectors, in particular the banking and insurance sectors, which already saw the successful merger between the Saudi British Bank and Alawwal Bank earlier in 2019 in addition to the recent merger between National Commercial Bank and SAMBA Bank approved by the CMA on 31 May 2021, which created a combined group with more than US$200 billion in assets. In line with the consolidations in the banking sector, there have also been a few announcements regarding consolidations in the insurance sector, with the latest being between Al-Ahlia Insurance Company and Gulf Union Cooperative Insurance Company and Aljazira Takaful Taawuni Company and Solidarity Saudi Takaful Company.

ii Debt capital markets

Historically, the majority of debt issues from Saudi Arabia have been in the form of sukuk. While it is expected this trend will continue in the long term, the government has recently launched several large conventional bond programmes – including a €1.5 billion bond sole in 2021 (only the second ever time the country has issued sovereign debt denominated in euros).

Sukuk and bond issuances are regulated by the CMA. It is expected that the CMA will issue regulations in the near future governing the process to list and trade sukuk and bonds on the Tadawul.

iii Investment funds

The CMA has increasingly scrutinised blind-pool investment funds and real estate development funds. Owing to this heightened scrutiny and the relative ease with which managers can establish private CMA funds, there has been a significant shift toward single asset funds, particularly single asset real estate funds with very limited numbers of investors. However, an exception to this has been the rise in venture capital and private equity funds that are supported by the government through Jada or Saudi Venture Capital Company, which support and encourage blind pool funds as they are pushing for the development and growth of the asset management industry in Saudi Arabia.

The local turbulence within Saudi Arabia has led many investors to look outside of Saudi Arabia (and the wider MENA region) towards the more established markets of Europe and the United States, which, despite the geopolitical events in those jurisdictions, are widely seen as significantly more stable than Saudi Arabia. This sentiment has not gone unnoticed by foreign asset managers, who are increasingly approaching high net worth individuals, families, sovereigns and institutions and marketing their foreign funds as being better alternative investments vehicles to those available in Saudi Arabia (which has experienced a turbulent past year). Noticing this trend, Saudi-based asset managers are increasingly setting up investment funds whose investment strategy is focused on investing mainly in the United States and Europe, with a particular focus on the real estate sector, and foreign asset managers are becoming increasingly interested in offering their funds to Saudi investors.

Foreign funds may only be offered in Saudi Arabia as a private placement to 'qualified clients' or 'institutional clients' and the minimum amount payable per offeree is not less than 200,000 riyals or an equivalent amount. In addition, the CMA has mentioned on its website that direct cross-border offerings and reverse solicitation will be considered tolerated practice under certain circumstances.