The constant of change, volatility and uncertainty
Much has happened over the last 12-18 months that we couldn’t have anticipated. Ten years ago, there was no ‘Trump mark one’ and Covid had not yet entered our vocabulary. The world has changed dramatically, and so has our need to approach investment assumptions and scenario planning differently.
Asset allocation frameworks now require greater flexibility. Dynamic adjustments and strategic buffers are essential to enable agile rebalancing. Regularly updating capital market assumptions is no longer optional, it’s critical.
While agility is vital, maintaining discipline is challenging. Embedding both qualities into the investment approach creates the opportunity to act tactically when markets are dislocated – without losing sight of long-term objectives.
Saudi Arabia is balancing local development with international access
Geographic allocations remain just as critical in the Middle East as in any other region. While questions persist around US dominance, demand for US exposure continues, highlighting the importance of a balanced approach. Market fluctuations are temporary, so the key is to monitor closely and be ready to reinvest when conditions improve.
From an investment consultant’s perspective, Asia presents attractive opportunities. Although investing in China currently poses high levels of uncertainty, given the speed at which access can be restricted, countries such as South Korea, Australia and Japan are currently seen as highly investable.
US and European markets can be easier to position for Middle Eastern clients, given their familiarity with these regions. There’s also broad consensus that the US continues to drive much of global growth. In the strategic competition between the US and China, the US remains the more accessible and better-understood option. Familiarity with Chinese corporates is limited, although STEM specialists suggest China is rapidly closing the tech gap. In sectors such as automotive manufacturing, the journey from emergence to global acceptance is accelerating – with China’s ascent occurring far faster than Japan’s historical path.
Saudi Arabia itself is an emerging economy, so when diversifying across emerging markets, there’s a natural caution against overextending, given the existing exposure. Locally, private equity is still nascent but plays a vital role in funding SME growth. For these businesses, PE is often the only viable route to scale.
Investment appetite across the asset class spectrum
Private markets can be both rewarding and unforgiving. Venture capital, in particular, presents a unique profile that is characterised by limited DPI and a loss ratio that diverges significantly from other private market strategies. But investors shouldn’t be deterred as this is the nature of VC: bold bets driven by conviction. The risk is substantial, and investors need to embrace that.
Meanwhile, sophisticated allocators are showing renewed interest in hedge funds as a diversifier. Their focus is clear: paying for true, uncorrelated performance, not overpriced beta. The rising cost of alpha is a growing concern. However, Sharia compliance remains the most significant barrier, particularly due to interest-based borrowing required for short-selling and the complexity of screening restricted industries. These challenges are especially pronounced in multi-manager platforms.
Positioning private credit for Sharia needs
Private credit is gaining traction in the region, driven by the same motivations as global investors – income generation and geographic diversification. What was once considered the most ‘boring’ asset class is becoming more compelling, thanks to access to specialty finance opportunities such as music-royalty finance and other forms of asset-based lending.
Sharia compliance is a key consideration, but it need not be a barrier. It introduces an additional layer of operational diligence, often addressed using SPVs as wrappers or by reframing private credit as ‘private income’ to better align with investor requirements. Some investors also apply LTV thresholds to ensure compliance.
Ultimately, decisions rest with the investment committee, and approvals will vary. However, where managers can simplify the proposition and structure appropriately, there is clear appetite to pursue these opportunities.
Concerns remain around the volume of dry powder in the space and the reliance on warrants and PIKs for returns. Questions are also being raised about whether investors are being adequately compensated for the risks, and what ‘senior secured debt’ truly means in practice.
Secondaries filling the gap and a new tool for liquidity and rebalancing
Momentum is building in the secondaries market. Investors are evolving their processes to incorporate secondaries from the outset, embedding optionality and agility into their strategies from day one.
For newcomers to private markets, secondaries offer a compelling entry point: capital can be deployed efficiently, vintage year diversification is achievable and blind pool risk is avoided. For those with existing allocations, secondaries are proving to be a valuable tool for rebalancing, whether buying or selling. Notably, the number of bids for assets is rising, with markets seeing four to six bids compared to just one or two previously.
It’s increasingly common to hold multiple secondary funds within a portfolio, allowing for a more nuanced approach across different focus areas. There’s growing expectation that the secondary market will soon mirror the primary side, with similar stratification emerging among buyers and sellers.
Investors are becoming more confident in bringing portfolios to market, supported by a dramatically improved broking environment. Investors are now approaching secondaries more systematically, recognising their value for both rebalancing and liquidity.
Large institutional investors in the region are preparing to be more active in this space, with strong interest in SMA structures for both investors and fund manager-led transactions.
Evergreen vehicles are also gaining traction, offering diversification and cash velocity for more liquid portfolios. While still in early stages, they may help democratise access to private markets. A few years of track record will be needed to validate their effectiveness, but early signs are encouraging.
Investors can no longer be passive. The investment lifecycle now demands greater engagement, well beyond the fundraising window. This includes decisions around continuation vehicles (CVs) and whether to bring parts of a portfolio to the secondary market. Of course, with increased activity comes greater complexity and sophistication.
CVs remain a topic of debate. They offer liquidity and the ability to maintain exposure to underlying assets, but investors often question fund managers motivations, wondering whether CVs are being used to mask underlying issues. In single- asset CVs, transactions are typically priced close to par, based on fundamental value and future potential. But ultimately, it comes down to whether the entry multiple is attractive.
A key challenge with CVs is the compressed due diligence timeline, often just two to three weeks. Access to deal flow is another hurdle, where strong relationships can make a significant difference.
The co-investment question
Co-investments continue to attract interest, largely due to their low or no-fee structure, which can reduce overall portfolio costs. However, it’s important to clearly define the role co-investments play within a broader portfolio strategy. One of the key challenges for investors is maintaining a consistent deal flow, essential for selecting the most compelling opportunities.
To build a resilient co-investment portfolio, region-based Ps pointed to 15–20 investments, allowing for diversification and risk management. Co-investments also offer a valuable opportunity to lean into specific thematic exposures, aligning with strategic priorities or convictions.
The emerging opportunity
Allocating to emerging managers offers a powerful opportunity to build long-term, I strategic relationships. Many are individuals spinning out from larger firms, often seeking greater alignment through improved profit share or carry. Teams often blend complementary skill sets, producing differentiated approaches and strategies.
Ideally, investors include a handful of emerging managers in their portfolios to diversify risk. One key advantage is the ability to grow together: investors support managers early and, in turn, gain access and influence as those managers mature and succeed.
Importantly, the incentive to perform is high. For emerging managers, failure can mean the end of future fundraising prospects, which drives a strong commitment to deliver results and build credibility.
Hype isn’t a buy signal, but there are real opportunities with emerging managers.
Venture capital is often misunderstood as a fast-track to success, fuelled by media hype and high-profile start-up stories. In reality, VC is a long game with investments typically following a 10+ year cycle. Expecting DPI within two to three years reflects a fundamental misunderstanding of the asset class. The best-performing assets have historically required long hold periods, and while the current exit environment is more challenging, quality assets will always find buyers.
Demographic shifts, such as declining birth rates and shrinking workforces, are driving interest in AI and robotics as essential tools to fill labour gaps. Immigration has previously helped bridge these gaps, but in markets like the US, that’s no longer a reliable solution. Automation is now critical, especially in sectors facing both labour shortages and safety concerns.
“.ai” is the new “.com”. Adding “AI” to a company name can amplify attention and valuations, whether justified or not, so distinguishing hype from durable value is essential. Long-term sustainability requires looking beneath the surface. The most promising companies are often courted by multiple investors, and founders will choose capital partners who can truly add value, not just funding.
Spotting early winners in venture requires specific skill s. Early-stage investing isn’t about vast datasets, it’s about assessing intangibles, vision and potential – a different kind of analysis.
For fund managers, long-term commitment to the Middle East means investing in relationships with local allocators. Fundraising alone (parachute in, raise capital and leave) isn’t enough. Presence in the region should be part of a broader strategy to grow and add value. Fund mangers must demonstrate their contribution before expecting commitment; value add before value ask.
The Middle East’s young, digital-native population will be a key driver of future growth. Opportunities here will differ significantly from those in mature economies with older, more traditional demographics.
As in any region, investor preferences vary. Some want to see a portfolio build from the start and will be keen to be part of the first close. Others prefer to assess a partially constructed portfolio and lean towards investing nearer to final close. Understanding these nuances is essential for successful engagement.
Investing in entertainment
Direct investing, especially at the early stage, requires clarity on risk appetite, return expectations and time horizon. Then, due diligence is key. With early-stage opportunities, having three or more years of historical data is helpful. Building a portfolio with a selection of assets, perhaps containing one or two trophy assets for diversification, is preferred.
Within entertainment, video games with in-game economies were highlighted. Identifying games that involve ‘skins’ that attract highvalue collectors (‘whales’) can also provide good opportunities. Due diligence focuses on identifying unique IP and judging whether opportunities represent enduring value or short-lived trends. Other examples cited included artist merchandise, VHS tapes and Pokémon cards.
There are clear parallels with early-stage tech investing, where partnerships across the ecosystem can be critical. A practical entry point to entertainment investing may be through music catalogues, which are easier to size and have data that helps the valuation.
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