DUBAI/LONDON/NEW YORK (Sept 10): Goldman Sachs Group Inc is tapping its upper echelons to navigate a notoriously complicated region, where it has stumbled of late: the Middle East.
After missing out on at least US$25 billion in deals in Abu Dhabi — the emirate that snubbed the U.S. bank for its involvement in the 1MDB scandal — Goldman Sachs is making a push into Saudi Arabia.
Chief Executive Officer David Solomon — the first chief of a Wall Street bank to visit the kingdom, following the murder of government critic Jamal Khashoggi — has turned to international banking head Richard Gnodde and former Donald Trump adviser Dina Powell to help lead the push. They’ve all spent months wooing top officials in Riyadh, vying for a slice of the world’s biggest initial public offering, people with knowledge of the matter said.
The charm offensive is paying off: the bank is considered one of the strongest contenders to get a lead role on Saudi Aramco’s mammoth offering. The deal promises to open the door to more lucrative mandates as the nation opens up to foreign investment and plans to privatize hundreds of state assets.
Saudi Arabia is becoming the focus of Goldman Sachs’ Middle East strategy after the fallout from the 1MDB corruption scandal marked its abrupt downfall in Abu Dhabi, once one of its most lucrative markets in the region. Dealings with Qatar have become more complicated, amid its diplomatic clashes with the kingdom. Global banks, including JPMorgan & Co and Credit Suisse Group AG, are investing in Saudi Arabia as it promises some of the world’s biggest deals.
“Saudi Arabia is a goldmine of potential investment banking revenues for Goldman Sachs in the Middle East,” said Gary Dugan, chief executive officer of Singapore-based Purple Asset Management Pte. “They will need success on Aramco to offset the door closing in their face in Abu Dhabi.”
A spokesman for Goldman Sachs declined to comment.
Goldman Sachs had been the go-to bank for many of Abu Dhabi’s top dealmakers, but has missed out on billions of dollars of deals after being sued by two of its investment funds. The bank is accused of misleading investors when it helped 1MDB raise US$6.5 billion through bond deals in 2012 and 2013, while allegedly knowing that the funds would be misappropriated. The firm has denied culpability in the scandal and laid the blame on Tim Leissner, a former partner who has pleaded guilty.
Mubadala Investment Co publicly blacklisted the bank earlier this year, while a number of local lenders and state bodies have informally stopped doing business with the bank, people with knowledge have said.
“The 1MDB controversy has shaken Goldman severely,” said David Knutson, head of credit research for the Americas at Schroder Investment Management in New York. “The question is do they hunker down, go back into their shell and pause until they are confident they’ve reinstituted the culture that made Goldman what it was, or are they confident enough in the changes they have made to go back after something that is complex, challenging and potentially risky not unlike what they faced in Malaysia?”
Goldman Sachs is being sidelined as Abu Dhabi, home to 6% of global oil reserves, is in the midst of a consolidation wave as the emirate tackles lower oil prices and slowing economic growth. The government is merging banks and sovereign funds, selling non-core assets and bringing in international investors into core sectors such as oil and gas -- all of which mean big business for banks.
The U.S. bank advised on the initial public offering of Abu Dhabi National Oil Co’s retail distribution unit in 2017 that raised US$851 million and worked with Mubadala on the planned US$3 billion IPO of its Emirates Global Aluminium unit. It was also involved in a controversial deal to raise US$1.2 billion in bonds for a cluster of airlines linked to Etihad Airways.
Despite the fallout, Goldman Sachs continues to speak with companies in Abu Dhabi and seek new business there, one of the people said.
In Saudi Arabia, Goldman Sachs’s top executives have been cultivating relationships for years.
While the bank joined rivals in canceling its attendance at the nation’s marquee conference last year, CEO Solomon in April became the first head of a global U.S. bank to travel to the kingdom to boost ties after Khashoggi’s killing and dismemberment at a consulate in Istanbul.
Investment banker Gnodde has been courting Saudi officials since Aramco first announced plans for the listing more than two years ago, and is managing the bank’s efforts in the kingdom, the people said.
The Crown Prince is always impressive when he sets out his vision for the KSA. Can't remember WHEN my beard turned white, but I remember WHY. MBS is much younger and I'm sure handles stress better! — Lloyd Blankfein (@lloydblankfein) March 28, 2018
When Egyptian-born Powell returned to Goldman Sachs last year after time in the Trump administration, the firm carved out a new role for her in the investment-banking division. She was tasked with courting large sovereign wealth funds, especially in the Gulf. Her appointment was notable because she had no prior banking experience and it wasn’t until this year that she completed the required exams for Wall Street bankers.
Powell started visiting the country in the run up to Aramco’s record debut bond issue, which Goldman Sachs helped manage, one of the people said. The Arabic speaker and former U.S. deputy national security adviser has played a key role in pitching for business using her deep connections in the Middle East, the people said.
On the Ground
Goldman Sachs has been building its presence in Saudi Arabia for some time, boosting headcount, securing a stock-trading license and getting involved in key deals including the kingdom’s first euro-denominated bond sale. The bank hired JPMorgan’s Mohammed Nazer to join its investment banking team in the kingdom, people said in July.
These efforts are yielding results. The bank is closing in on HSBC Holdings Plc and JPMorgan that have for years dominated dealmaking in the kingdom. Goldman Sachs was the second top M&A adviser in the country last year, according to data compiled by Bloomberg.
The bank advised petrochemical giant Saudi Basic Industries Corp on its US$69 billion sale to Aramco and is working on Riyad Bank’s merger with National Commercial Bank. It also advised on Saudi British Bank’s US$5 billion combination with Alawwal Bank.
Still, operating Saudi Arabia isn’t without its risks. Investment banking fees are limited compared with other markets and the hype over deals masks a struggle to attract long-term foreign direct investments crucial to reduce the reliance on oil. While FDI more than doubled last year to about US$3 billion, it remains well below the average level of the past decade.
That’s in part due to uncertainty over the government’s economic plans, human rights record and its 2017 declared crackdown on corruption, which ensnared hundreds of billionaires and businessmen. Questions also remain over whether Crown Prince Mohammed bin Salman knew about or ordered Khashoggi’s killing, an allegation the kingdom denies.
“When you do business in emerging markets, your systems have to be much more robust,” said Schroder’s Knutson. “If that level of vigilance doesn’t stay high when the money comes thick and fast, it can dull your sensitivity to risks. If you let your guard down, emerging market risks will haunt you for a long time.”