Why the Saudi Investment Fund Put $3.5B Into Uber?

Why the Saudi Investment Fund Put $3.5B Into Uber
By Anthony Jerdine| June 5, 2016
Saudi Arabia’s Public Investment Fund yesterday became an unlikely investor in hot ride sharing startup Uber’s latest venture round with a $3.5 billion infusion into the service. Uber’s motivations for raising more cash are fairly clear. The service is a capital intensive business, which uses a combination of subsidies and cash bonuses to entice drivers. The $5 billion raised during this round will help it expand service at a rapid clip.

However, the reasoning behind the Saudi PIF’s funding is still a bit hazy.

After all, why did a Public Investment Fund, which was was set up to develop the country and invest in oil revenues, take a side turn to invest in a foreign company?

A Question Of Infrastructure
The answer to that question lies in the economics of low oil prices. The crash in price of the fuel has adversely affected the kingdom’s budget deficit. On top of that, the ruling family has had to increase spending on social service projects to maintain its contract with citizens and quell possible discontent of the sort that resulted in the Arab Spring five years ago.

Crown Prince Mohammed Bin Salman, who is the chief architect of economic reforms to move Saudi Arabia away from oil, fashioned a new public investment fund last year to raise funds . In an interview with Bloomberg earlier this year, he said the fund would eventually control $2 trillion, an amount that is greater than the combined market valuations of Apple Inc. (AAPL), Alphabet Inc. (GOOG), and Amazon.com Inc. (AMZN). Sale of Aramco’s shares is part of the kingdom’s strategy to raise cash for the PIF.

“What is left now is to diversify instruments,” he said, adding that the fund planned to increase its proportion of foreign investments to 50 percent by 2020 from current levels of 5 percent.

As an example, the fund invested $1.1 billion for a 38% stake in South Korean steel giant POSCO last July. It has also inked a $10 billion partnership with Russian Direct Investment Fund.

Such deals serve a dual purpose.

First, they are an investment opportunity to appreciate capital. Second, they are also a valuable source of knowledge and technology transfer for a region that is not sufficiently diversified in its industrial base to withstand a crash in oil prices. There is already a race between wealth funds in the Middle East to diversify holdings across a broad array of sectors to develop local expertise. For example, Abu Dhabi’s Mubadala fund has invested across the world in multiple sectors such as metals and entertainment. Similarly, Qatar Investment Authority has also invested in Uber and Flipkart, an Indian ecommerce startup.

When the agreement between POSCO and Saudi Arabia was announced, POSCO CEO Kwon Oh-Joon said the company would collaborate with PIF to set up a Saudi Government – run construction firm to help expedite mega-infrastructure projects that the kingdom has in works. Several such projects have been delayed because the kingdom lacks enough firms and competition in its local market.

So, what will Uber bring to the table for Saudi Arabia?
Quite possibly, a combination of technology expertise and financial returns. The company has had stratospheric growth, so far. Within slightly more than six years, it has managed to expand to 71 countries. It’s revenues are upwards of $10 billion and the company has a private market valuation of $68 billion. The purchase price for the investment funds’s stake in Uber is not known. However, it is safe to assume that investors in the startup will make a windfall, if and when the company makes its debut in the stock market.

Uber has also sketched out a grand vision of the future in its pitch to investors. This vision takes the form of an “urban logistics fabric,” wherein Uber’s service will serve as a logistics layer for a city and perform an assortment of functions, ranging from food delivery to trucking. The company is also at the forefront of the self-driving car revolution.

The San Francisco-based startup has already experimented with pilot programs for such services in its home base. The odds are stacked in its favor. Research firm Frost & Sullivan estimates that 16 percent of third-party logistics will be enabled by mobile platforms by 2025. Saudi Arabia is already poised to have the second largest mobile penetration in the Middle East this year. An Uber investment will help it develop local talent and competition to the service.

 

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