October 25, 2017 / 3:55 PM / a year ago

Huge Saudi fund to be conservative borrower, chief says

RIYADH (Reuters) - Saudi Arabia’s Public Investment Fund will be a conservative borrower when it enters international debt markets to obtain leverage for its expansion, the fund’s managing director Yasir al-Rumayyan said on Wednesday.

The PIF, with assets of $224 billion, is being built into a key instrument of Saudi policy, investing at home to develop the economy and abroad to increase returns on the kingdom’s oil wealth. It aims to expand to $400 billion by 2020.

In addition to obtaining capital injections and assets from the government, plus retained earnings, it plans to fund itself with loans, bonds or a combination of the two - raising the prospect of a big new debt issuer in international markets.

But Rumayyan told Reuters that the PIF would take a disciplined approach, basing its borrowing on specific assets that it intended to finance, rather than on the total value of its portfolio.

“We achieve two things with this approach - we limit our risk, and we increase our returns,” said Rumayyan, who took his post in September 2015 after serving as chief executive of investment bank Saudi Fransi Capital.

The PIF is still studying the level of leverage which it wants to accept and expects to make a decision in two or three months, he added.

The fund has set targets for long-term returns that seem ambitious to some money managers in an era of low interest rates. For example, it expects an annual return of 8.5 percent from its Saudi equity holdings and 6.5 percent from a diversified pool of international assets.

Rumayyan argued that the targets were very much achievable because of a shift in the PIF’s business model. In the years after it was established in 1971, it made low-interest loans to industries which Saudi Arabia wanted to develop, such as oil refining and petrochemicals.

Now the responsibility for such loans is being transferred to another organization, the Saudi Industrial Development Fund, and the PIF is winding down the business, Rumayyan said.

“We were lending money at less than 100 basis points...Now we are no longer doing that, it gives us room to increase our equity investments,” he said. The PIF’s historical returns on Saudi equity investments have in any case not been far from 8.5 percent, he added.

Over the last two years, Rumayyan has been building up the PIF’s staff for its new role by hiring financial professionals from around the world. The fund now has over 200 staff and expects eventually to have over 1,000, he said.

Reporting by Andrew Torchia, editing by Alister Doyle

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