Middle Eastern sovereign wealth funds must rethink their strategies post-pandemic

Dubai: — Steering effectively during a period of turbulence requires the ability to learn, adapt, and act quickly. Sovereign Wealth Funds (SWF) need to triage the most urgent needs, reinforce core processes, and identify opportunities for growth. In addition, they need to evaluate their underlying mission and vision for the new normal. To guide leaders through this interim phase following the crisis, Boston Consulting Group (BCG)  has launched a series of articles. The first, “A Principal Investor’s Guide for the Crisis and the Postcrisis World,” offers a detailed primer on the steps funds should take to shore up their organizations and effectively engage with their portfolio companies. The second, “Resetting Fund Strategy and Vision for the Postcrisis World,” describes how principal investors can drive value through a reimagination of their internal business and operating model.

“Principal investors who began 2020 with a clear strategic roadmap now find that the waypoints have shifted considerably,” said Markus Massi, Managing Director and Senior Partner, BCG. “This new reality is evident – more than 70% of our clients who purely invest in equity are now looking at alternative financing structures and sectors, in an attempt to improve the risk to reward balance for the postcrisis world.”

This internal remodeling of the investment strategy has added benefits beyond financial returns. Teams learn to assess opportunities in an agile manner, the organization moves towards rapid adaptability, and sustainability issues become top-of-mind.

“Principal investors have by nature a long-term investment horizon, and chase investment opportunities in sectors and markets with strong long-term fundamentals. The current market dislocations, however, create opportunities for attractive entry points into markets hitherto unexplored in-depth,” said Ihab Khalil, Managing Director and Partner, BCG. “For example, we’ve seen investment activity uptick in selected sub-sectors in the industrials and consumer discretionary space, which offer strong bounce-back potential, and in healthcare and technology, where the investment thesis is re-inforced.”

The reports highlight critical steps that principal investors should take to maximize the value of their portfolios:

Embrace a New Strategic Playbook

To enter the recovery with resilience, funds need to change their traditional management approach. Instead of developing an annual plan focusing primarily on the core organization, they need to develop a more granular plan that considers requirements at the investor level and the portfolio company level.

Reinforce the Core Organization

Given the demands on their business, principal investors need to bolster their operating model, realign coordination and staffing, assess the quality of their crisis response, and evaluate the engagement of their portfolio company leadership. Leaders also need to examine their infrastructure and take immediate action to strengthen their cybersecurity, virtual collaboration, and investment management processes.

Rebuild Portfolio Company Health and Resiliency

The crisis has disrupted nearly every business. To triage needs (and allocate the fund’s own time and resources most effectively), principal investors should conduct a weekly risk assessment. A simple color-coded risk matrix can help identify which portfolio companies have the most acute needs and which should get help first.

Reimagine the Fund’s Vision

Given what is likely to be an extended period of market turmoil, principal investors should clarify their mandate, investment strategy, and asset class allocations. Market upheaval can create white-space opportunities, whether in the form of strategic acquisitions, innovations to existing products, or expansion into adjacencies. Leaders need to embrace a disciplined approach to evaluate potential opportunities and ensure any changes are compatible with the fund’s mission, values, and resource capabilities.

Reinvigorate Engagement at the National Level

SWFs with a national mandate can play a crucial role in helping government leaders and policymakers determine the best ways to stimulate economic activity and advise on long-range economic development plans. SWFs should use this period to meet with stakeholders and formalize their roles and the rules of engagement in a detailed plan that outlines the best ways to partner going forward.

“A Principal Investor’s Guide for the Crisis and the Postcrisis World” may be downloaded here while “Resetting Fund Strategy and Vision for the Postcrisis World” may be found here.

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© Press Release 2020