Asset Management Sector
SEDCO Capital is a world-class prudent ethical investment firm that wins numerous awards for its innovation and performance. The wholly-owned subsidiary was established in 2010.
Samer Abu Aker
Chief Executive Officer
Delivering excellent returns for investors was the key highlight of SEDCO Capital’s outstanding performance in 2019, one of the best years in the firm’s history.
A singularly notable success was the ‘Build to Suit’ project in Saudi Arabia, where the real estate team succeeded in delivering the property almost one year before due date.
Public equity was driven by Saudi Arabia’s inclusion on the MSCI that gave the market good momentum, coupled with SEDCO Capital’s market expertise.
The Real Estate Fund II and our SEDCO Capital REIT Public Fund performed well, as market sentiment improved and institutional investors appreciated the greater efficiency and benefits of a listed REIT managed by professionals.
The local, regional and international markets delivered excellent results across all capital markets — developed and emerging — which had a spill-over effect on related asset classes such as private equity.
Another key factor was the role of the Capital Market Authority (CMA), which has been dynamic and innovative, raising the image of the Kingdom globally and helping to make it an attractive proposition for investors. Similarly, Vision 2030 is providing significant impetus, domestically and internationally.
Overall, private equity performance was positive in 2019, with valuations continuing upward — particularly in the ‘growth’ asset class — comparing very favorably to longterm indices in the US, emerging markets and globally.
Despite challenges in allocation due to oversubscribed or highly-leveraged top-quartile funds in developed markets, the firm continued to invest in value-driven stable companies. Without changing the investment strategy, the team sourced fund managers with impressive records and willing to accommodate SEDCO’s ethical investment principles.
Following the firm’s guidelines, no investments were made in funds carrying a large proportion of portfolio companies with leverage ratios higher than 33% or dealing in non-ethical sectors. Growth funds in the $250,000 to $1 billion range were preferred, focusing on middle-market companies. The allocation strategy targeted investments in healthcare, technology and consumer goods.
Fund investment maintained the nature of the allocative thrust, tending to growth opportunities in developed markets. Although emerging market allocation remained at 58%, the target is to achieve a 50:50 split with developed markets.
Commitments were made into four new funds — two European growth managers, a consumer-focused US fund, and a US/Europe healthcare specialist.
SEDCO Capital clients enjoyed record distributions in 2019, receiving about half a billion riyals at 2.6x from the PE program. Given the slow growth outlook, distributions are expected to normalize in 2020.
Four co-investment deals in 2019 included closing the first ‘private investment in public equity’ (PIPE) deal — the acquisition of Venus Concept following a merger with Restoration Robotics. This resulted in a combined listed entity offering non-invasive energy-based medical devices for a broad range of esthetic procedures.
The acquisition of one of the largest gymnasium chains in Latin America was concluded, along with a regenerative medicine company in the US focused on birthtissue derived products. A Brazilian diagnostics and imaging services company was also acquired.
Looking to the future, the firm’s strategic principles will continue, seeking new managers in emerging and developed markets and re-ups (renewals) with good existing managers.
Regional public equity
The S&P GCC Shariah Index generated more than 10% in total returns. In the second half of the year, the retail and construction sectors in Saudi Arabia recovered, with the non-oil Purchasing Managers’ Index peaking in November.
A highlight for the Gulf region was the world’s largest IPO as Saudi Aramco went public, raising $25.6 billion. Trading on the Tadawul began on 11 December and shares immediately rose by 10% to SAR 35.2, giving Aramco a market capitalization of about $1.88 trillion. This made Aramco the world’s most valuable listed company and it subsequently became the first to achieve a $2 trillion valuation.
International public equity
SEDCO Capital’s public funds in Luxembourg comprise a broad array of diversified instruments, each in the care of a renowned asset manager. As in 2017 and 2018, Islamic indices outperformed their conventional counterparts, and SEDCO Capital funds outperformed most of their conventional and Islamic competitors.
The firm continued to optimize its core and satellite strategies, removing two active global funds and preparing for the launch of the new UCITs platform (Undertakings for the Collective Investment in Transferable Securities) in 2020.
Most major asset classes posted stellar returns in 2019, with risk appetite strongly improving in Q4, boosted by more accommodating central banks and the easing of US/ China trade tensions.
For the next cycle, expectations for a re-rating of equity valuations may be overdone. Improvement in growth is already priced in at a time when policy rates are already low. Elevated cross-asset valuations imply greater asymmetric tail risk. However, if the trade war evolves into a stable truce, we expect the US dollar to soften and emerging markets (especially Asia) to outperform, along with European equities.
Local and regional money market investments fared well in 2019 as higher short-term interest rates enabled the fund to place Islamic deposits at higher rates, thus improving absolute performance.
The improved market environment resulted from the Federal Reserve’s multiple interest rate hikes in 2018, and continued even as the tide shifted and the Fed began to cut short-term rates toward the second half of 2019. SEDCO Capital’s team was able to protect the fund yield by increasing tenure significantly just before these interest rate cuts took place.
The year was also exceptional for Sukuk, which posted double-digit returns driven by a significant downward shift in the US treasury yield curve. The yield component of Sukuk was particularly strong at the beginning of 2019, as a result of the Fed’s significant tightening throughout 2018.
SEDCO Capital’s funds were able to achieve strong returns without taking excessive credit risks because the firm confines its exposure to investment-grade counterparties only. The team focused on enhancing returns by implementing the right strategy in light of its interest rate outlook, expanding its network of counterparties, and further reducing any inefficiencies in administrative or structural costs.
Looking ahead to 2020, achieving returns as exceptional as 2019 may be challenging. SEDCO Capital will continue to manage its strategies with the same diligence to achieve best possible outcomes in both absolute and relative terms.