Gulf Sovereign Wealth Funds Eye Israel, but Need Time to Make Their First Moves

Energy, manufacturing, water, space, health care, agri-tech likely to be prime targets

שדה סולארי אבו דאבי
Credit: Kamran Jebreili / AP

When Prime Minister Benjamin Netanyahu boasted two weeks ago that the United Arab Emirates planned to set up a $10 billion fund to invest in Israel, he elicited an angry reaction from UAE Crown Prince Mohammed bin Zayed.

Netanyahu’s announcement came in the final days of a bitterly fought election campaign and framed as a personal accomplishment to be sold to the voters, none of which went down well with the Emiratis. “The UAE will not be a part of any internal electioneering in Israel, now or ever,” tweeted Anwar Gargash, a diplomatic adviser to the president of the UAE.

Despite the kerfuffle, the fund is for real. But it will take time before the first investments begin. The UAE is still “at a very early stage in studying the laws and policies in Israel,” Sultan Al Jaber, the UAE’s minister of industry and advanced technology, said the week the fund was announced.

The Gulf’s giant sovereign wealth funds, which hold about $2 trillion in assets, could one day be major investors in Israel, but six months after ties were established between Israel and the UAE and Bahrain, declarations of intent have yet to turn into action.

People familiar with the ways the funds work say that because they are such long-term investors, they don’t put their money anywhere until they have conducted an in-depth analysis aimed at limiting risks. Not just Netanyahu, but all Israelis will have to be patient.

“Technical analysis-wise, the UAE is among the top, its sovereign wealth funds especially. Their due diligence is some of the longest and most detailed that I have seen,” said Talha-Khan Aquil, managing partner at the UAE-based private capital placement firm Gulf Equity Partners.

Aquil, who has close working relations with family offices and sovereign wealth funds in the Gulf region, told Haaretz: “The people that I know are not people who are going to invest overnight in something because it looks nice and shiny.”

Learning process

The learning process had already begun in a small way even before the Abraham Accords. While data from the International Forum of Sovereign Wealth Funds show no direct equity investments by Gulf sovereign wealth funds in Israel from 2015 to end-2020, at least one – Mubadala, the $230 billion Abu Dhabi state investor – has been co-investing with Israeli investors in the U.S. and Europe.

The Israeli economy, and in particular, its high-tech industry, will eventually pass muster and investments by Gulf sovereign wealth funds will begin to flow. But not every sector will benefit.

The overall Israeli economy is “not very appealing” in term of market size, so Gulf funds are expected to focus on a handful of strategic industries and select companies, said Zafrir Asaf, partner at the New York-based consulting firm Blue Laurel and former director of financial institutions and emerging markets at the Israeli Economy and Industry Ministry.

For example, the projected $10 billion UAE fund will prioritize investments in Israel’s energy, manufacturing, space, health care, water and agri-tech sectors.

The funds’ concerns are not purely financial; they are also about gaining access to innovation.

The UAE, for instance, is coping with extreme climatic conditions. It is ranked the 10th most water-stressed country in the world and imports about 90% of its food. Thus, it is looking to invest in technology for improving energy efficiency and developing high-tech food production.

“The perspective that could be interesting is looking at the strategic objectives of GCC [Gulf Cooperation Council] governments and then trying to find which of these objectives can benefit from an innovative push and direct investments towards those niche opportunities,” Asaf said.

An Israeli F-35 stealth fighter jet landing at the Nevatim Air Force base.Credit: IDF Spokesperson's Unit

While the Gulf states are not ready to decouple from their reliance on oil and natural gas in the era of global realignment toward cleaner energies, the region does aim to make forays into global renewable markets, in particular, to export hydrogen.

Israel’s ambition to phase out coal use and produce 30% of its energy from renewable sources by 2030 is whetting Gulf investor appetites. Mubadala-owned clean energy firm Masdar signed a strategic agreement in January to explore renewable energy opportunities in Israel.

“Mubadala is a game changer. It’s a fund that can change the face of an economy,” said in an interview with TheMarker University of Haifa President Ron Robin, a rare Israeli who has spent an extended period in the UAE since 2007. “I assume that if the fund comes to Israel, it will make strategic investments - not buying some startup but something strategic.”

Normalization holdouts

Unlike the UAE and Bahrain, other Gulf states have resisted normalizing relations with Israel. Saudi Arabia, home to Islam’s two holiest sites, remains committed to the Arab Peace Initiative, which established a two-state solution as the pre-condition to any normalization.

Saudi Arabia’s Public Investment Fund, the Kuwait Investment Authority, the Qatar Investment Authority and the Oman Investment Authority did not respond to a request for comment on whether they have or plan to invest in companies headquartered in Israel.

King Salman might, however, be the last Saudi ruler calling for the two-state solution as controversial Crown Prince Mohammed bin Salman, the country’s de-facto ruler, reportedly met with Netanyahu and Mossad chief Yossi Cohen in November.

People enjoy their weekend with the view of city skyline and the world tallest tower, Burj Khalifa, in Dubai, United Arab Emirates. Credit: Kamran Jebreili/AP Photo

If Saudi Arabia were to normalize relations with Israel, and the Public Investment Fund to explore investment opportunities in Israel, a backlash from the public is unlikely, said Aziz Alghashian, a Saudi researcher specializing in the kingdom’s foreign policy towards Israel.

“Saudi Arabia is a very much top-down society. There is a culture of obedience and, in many aspects, a blind loyalty to the leadership. If the Public Investment Fund takes the decision to invest in Israel, the Saudi population will go along with it,” Alghashian told Haaretz.

Mubadala’s investment strategy in Israel is expected to include collaborating with “some of the best funds in Israel” in addition to identifying “high-growth good opportunities” in the ‘start-up nation’ ecosystem, Ibrahim Ajami, the fund’s head of ventures told CNBC.

Beyond return on investments, Gulf sovereign wealth funds also seek to bring expertise back home.

“I will give you the money, but what are you bringing back to my nation,” is how Talha-Khan Aquil of Gulf Equity Partners explained it, noting Israel’s expertise in building a startup ecosystem is know-how Gulf nations are keen to acquire.

Growing social and cultural exchanges – more than 130,000 Israelis have visited the UAE since the U.S.-brokered Abraham Accords were signed, and Kosher restaurants opened in Dubai – are likely to facilitate Gulf sovereign wealth funds ties with Israel. But those will take time. “Let’s get to know each other before we talk about investments,” Aquil said.

In Israel, the prospect of Gulf investments has neither been received with indifference by the business community nor with “outstanding enthusiasm,” Asaf said. “There is a very clear interest, curiosity, and active efforts to engage, but everybody is very realistic.”

About a decade ago, Asaf headed the Economic and Trade Mission at the Embassy of Israel in Vietnam. “We really expected to see Vietnamese investments in Israel, 10 years later, I have not seen a single Vietnamese investment in Israel, so I’d really advocate for patience.”

People waking past a banner showing Saudi King Salman, right, and Crown Prince Mohammed bin Salman in Jiddah last month.Credit: Amr Nabil/AP

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