How The Gulf Is Changing Global Capital Flows It's no news that wealthy Persian Gulf countries are investing outside the region. Look closer, though, and you see new patterns emerging.

It's no news that wealthy Persian Gulf countries are investing outside the region. Look closer, though, and you see new patterns emerging. Petroleum-rich states of the Gulf Cooperation Council (GCC) trade zone are changing how and where they invest, and what they invest in. They're also taking steps to build their home turf into an international nexus of technology and finance: think Silicon Valley meets New York. Given the resources that are in play, the combined effects of their efforts may well influence how tomorrow's industries and economies are financed worldwide.

The six GCC members are a noteworthy grouping on the world financial stage. Saudi Arabia, the largest by far, has a population of 36 million while Oman, Kuwait, Qatar and Bahrain each have under 5 million. The United Arab Emirates (about 10 million) is a federation of semi-autonomous monarchies including Dubai and Abu Dhabi, which hold the UAE's two major cities. Further, their populations are boosted by large numbers of foreign residents, extremely so in Qatar (which is 85% expats) and the UAE (89%). But a key commonality among GCC states, other than being Islamic societies, is their lineup of sovereign wealth funds with assets running from many billions to hundreds of billions of US dollars.

These SWFs are the main drivers of outbound investment. Although banks and family offices can play significant roles, and private-sector funds are starting to form, the SWFs are literally the financial crown jewels of the region. Along with being lavishly fueled by oil and gas revenues they are expertly staffed, to a degree that makes them distinctive among the world's state-backed investment funds. Most, like CalPERS, the California fund for public employee benefits, set general investment strategies in-house but rely heavily on external fund managers to place specific investments. Sovereign funds in the Gulf are trending away from this practice. In recent years they've been recruiting top-notch global talent, across a wide range of verticals and geographies, and they increasingly deploy that expertise to invest directly. One high-profile example came earlier this year, when the Qatar Investment Authority increased it's stake in Credit Suisse to almost 7%.

The Asian Connection

Meanwhile, another significant trend is unfolding. Fund managers in the Gulf are turning their eyes toward Asia. For years, they hadn't shown much interest in Asian investment aside from oil and petrochemical deals. GCC funds were notably absent from participation in the Chinese tech boom of the early 2000s. Their tech investing focused mostly on the U.S., and when two funds from the Gulf tried an Asia-related adventure in 2017, they got burned. The Saudis' PIF and the Emirati fund Mubadala placed a combined $60 billion in Masayoshi Son's SoftBank Vision Fund, which overpaid for assets and registered epic losses.

But it seems the main takeaway from that experience was to invest straight in, relying on their own due diligence. GCC funds are now doing that in Asia across a range of tech, media and entertainment industries. For example: In 2020, two Emirati funds and the PIF invested in Jio Platforms of India, active in niches from mobile networks to digital business solutions. In 2021, Qatar Investment Authority co-led a $150 million round in ONE Championship, the fast-growing Singaporean producer of combat sports events. That same year, Kuwait Investment Authority invested in ecommerce firm IndiaMART. And already in 2023, the PIF has invested in Nintendo Japan and South Korea's Kakao Entertainment.

One particular geography drawing interest for the future is the 10-country ASEAN region in Southeast Asia, where my venture capital fund invests. The ASEAN bloc includes big emerging markets like Indonesia and Vietnam, and there are waves of startup activity in those countries as well as Singapore, Malaysia and others. Now it appears that Gulf investors are tuning into the region's promise. In 2021, the Dubai Chamber of Commerce and Industry issued a research report titled "Uncharted Territory: Deepening trade and investment between ASEAN and the GCC." And, some numbers compiled by others are eye openers. From 2016 to 2020, overall trade and investment between the GCC and ASEAN regions totaled a mere $13.4 billion. During 2021 alone that number jumped to $85.2 billion, topping the previous 5-year total by 535 percent.

The vast majority of the surge came from export/import activity, with GCC countries buying both a wider variety and greater volume of goods and services from ASEAN firms. But closer ties are being built, accompanied by investment. Singapore-based Coda Payments (disclosure: they're in my VC fund's portfolio) is among the noteworthy global tech firms recently planting offices in the UAE. In February, Gulf Capital of Dubai — a private equity firm — announced a $750 million fund aimed at investing in Southeast Asian startups that plan to expand into the Middle East. Inter-region economic partnerships are forming, too, adding to the likelihood that GCC sovereign wealth funds will ramp up ASEAN deals.

Building a Tech-and-Talent Base

Another eye-opener is the breadth of efforts across the GCC to attract innovative talent, and to forge ongoing business connections with the rest of the world. These are vital because the Gulf region in the past hasn't necessarily been viewed as a potential talent magnet or global business hub. The countries' traditional, conservative cultures have been perceived as a barrier by many; the narrow industrial base has been dominated by oil and gas, and the immigrant populations have consisted largely of workers in those industries or in construction and basic services. That's all now changing or in the process of being changed.

Various Gulf states have "city" projects designed to serve as foundation pieces for seeding innovation and interaction. The Education City complex in Doha, Qatar draws both Qatari and international students to branch campuses of Carnegie Mellon, Georgetown, NYU and other prominent U.S. universities. Dubai Internet City, a sprawling tech-and-business facility, is home to local offices of up-and-coming foreign firms like Stripe, the Irish-American ecommerce software company, and the customer analytics firm CleverTap.

The region is building homegrown tech capacity, too. In an intriguing bid to join a new growth industry, Oman is targeting food technology. Date palm trees are grown in the Gulf region, and Oman Investment Authority has partnered with the U.S. firm MycoTechnology to build a production plant that will combine date and mushroom ingredients into a non-meat protein base. Other Gulf states have projects in renewable energy and climate-change mitigation (e.g., the Saudi and Middle East Green Initiatives). Fintech is widely viewed as another niche to exploit. And, in a promising sign, external growth capital is starting to flow into the Gulf. During recent months, two Dubai-based startups — the proptech firm Huspy and the BNPL fintech Tabby — each raised significant investment from Sequoia Capital India.

To spur international exchanges generally, conferences and events are blooming across the region. Saudi Arabia's annual Future Investment Initiative meeting, aka "Davos in the desert," attracts executives of major banks and investment funds. GITEX in Dubai, attended by more than 100,000 tech-industry types, is focused on developments in cutting-edge fields such as AI. Conferences like these provide ongoing traction to go with the splash generated by Qatar's hosting of the 2022 FIFA World Cup.

We're also seeing moves to bring in skilled foreign talent. In 2018, the UAE joined the short list of nations having a golden visa program. The program, now expanded, offers long-term residence visas to professionals, scientists, and high-performing students as well as to wealthy investors. In 2020 the UAE also enacted legal reforms that essentially formalized a more tolerant social approach, for example by lifting the country's ban on unmarried couples living together. More recently, Dubai was early to reopen as the Covid pandemic eased up, and became a magnet for executives wanting to work remotely but live IRL. The influx fed a population increase of about 100,000.

Finally, the Gulf region stands to benefit from some natural features it has always had. The plentiful sunshine is conducive to solar projects, and even the region's time zones become a competitive advantage. GCC nations are only a few hours ahead of those in Europe and a few hours behind India and Southeast Asia. This makes the Gulf an attractive location for doing international business, since you can communicate across a wide swath of big economies during standard working hours.

Looking ahead, nothing is guaranteed. Numerous places worldwide are well-established centers of finance, tech or some mixture thereof; many others are on the rise. The Gulf States will have to compete with all of them for influence and deal flow. But underestimating the GCC would be like underestimating an already-strong sports team that's adding superstars and has the resources to add more. Keep an eye out for the next moves from this region.