That night belonged to Saudi Arabia, not to the Chinese funds raising capital in the Middle East.

By Qian Ren

Edited by Jing Liu

On November 22, Beijing time, Saudi Arabia pulled off the first major upset of this World Cup, defeating "tournament favorite" Argentina 2-1. This nation — long synonymous with oil and obscene wealth, covering just 2.25 million square kilometers (roughly one-fifth of China's land area) yet boasting a GDP exceeding $1 trillion — is now attracting far more than just football fans.

Over the past year, apart from Singapore, the Middle East has probably been the most coveted destination for every dollar-denominated investor in Greater China. The reasons aren't hard to grasp: as dollar funds have hit rough waters, Chinese fund founders — whether motivated by LP diversification or the need to tap new sources of capital — have sought to reduce their reliance on "typical dollar LPs." And as an emerging market, Middle Eastern money has caught the eye of Chinese GPs.

Dark Waves has heard numerous accounts of investors traveling to the Middle East to raise capital. A partner at a locally based firm once received a quip from a friend: "If you haven't been invited for tea at their offices, you're not a top-tier VC." A Beijing-based head of a multi-family office even expressed optimism that GPs making the trip could "bring back at least $50 million." And looking at results, funds that announced closes this year — such as Hongshan and Cathay Capital — have explicitly included Middle Eastern LPs in their LP bases.

The Middle East is indeed awash in oil money. In terms of assets under management alone, the sovereign wealth funds of Saudi Arabia, the UAE, Kuwait, and Qatar occupy four of the top ten spots globally — totaling over $2.5 trillion combined. Beyond that, local family offices and major corporations — real estate magnates, business conglomerates, and the like — are also plentiful.

But how much of that capital will actually flow to Chinese GPs?

At least for now, the answer isn't particularly encouraging. Multiple investors and placement agents (PAs) who have been based in the Middle East for years told Dark Waves that "success rates are extremely low; it's basically a wasted trip."

First, the Middle East is a market with massive capital but a surprisingly small number of LPs. The founder of a PA firm with long-term Middle East presence told us: "The total number of institutional LPs here with professional investment committee processes actually doesn't exceed 80, yet they control over 90% of the region's capital." Beyond sovereign wealth funds, these LPs include state or government-affiliated funds and a small number of family offices with enormous scale.

For mid-sized and smaller GPs, an awkward reality emerges: the four major Middle Eastern sovereign funds typically commit $100 million or more per investment. Given the constraint that they can't exceed 20% of a fund's total raise, that means fund sizes need to be at least $600 million — with some requiring total commitments of $1 billion before they'll even engage. That filters out a massive swath of GPs.

In Western LP circles, there's a certain "herd effect" — when one influential LP commits, it often triggers follow-on investments from a cluster of others. But the Middle East doesn't work this way. The PA source noted: "The relationships between the major families and royal households are extremely delicate, with some unpredictable friction. The pack-mentality approach to fundraising that some GPs try simply doesn't fly here."

Meanwhile, for most Chinese funds, the Middle East remains unfamiliar territory compared to Europe, the US, or even Southeast Asia. A person at a local sovereign fund told us that many Chinese GPs have tried to approach them, but without understanding the local relationship networks, "a lot of funds come for a visit, and when you ask who they met, they can't even explain clearly what happened." One illustration: while Europe and the US have relatively established PA ecosystems, the Middle East still has very few.

Beyond that, significant cultural, linguistic, and personnel differences create additional barriers for GPs trying to break into core circles.

A local investor gave us an example: cultural differences embedded in ideology directly shape investment decisions. Religious statutes that are difficult to grasp without living locally contain detailed provisions governing financial investments. For instance, banking prohibits charging interest for commercial purposes, which means their understanding of "earning returns from managing assets" can diverge from conventional interpretations under their particular cultural framework. Thus in fundraising contexts, track record is an important metric, yet one that needs to be reconciled with religious doctrine to generate new interpretations — something many Chinese GPs simply don't understand.

Moreover, the Middle East is a relatively closed region where resources across industries have largely already been allocated. Foreign enterprises hoping for meaningful expansion typically must forge strong ties with local partners, and these partnerships usually favor locally dominant players.

"We've repeatedly verified that Middle Eastern sovereign funds wield enormous influence across domestic channels, with highly complex internal relationships," the investor noted. Many GPs struggle to grasp this before arriving.

Tim of the Zhongguancun UAE Office lived in Western countries for 15 years and has since 2018 shuttled regularly between the Middle East and China. While some Middle Eastern sovereign funds have invested in well-known Chinese companies like Megvii, Didi, and SenseTime, he believes the Middle East's understanding of China's investment industry remains limited: people in Middle Eastern investment circles mostly studied in the UK or US. Those returning from the US relatively easily grasp dollar fund logic, but the majority studied in Britain and hold relatively closed views of China.

Another frustrating factor may be the "collateral damage" from SoftBank Vision Fund's troubles.

In the $100 billion SoftBank Vision Fund I, Saudi Arabia's Public Investment Fund contributed $45 billion as the largest LP, with UAE sovereign wealth fund Mubadala putting in another $15 billion. That investment is now essentially unrecoverable.

The failure of SoftBank Vision Fund has left Middle Eastern LPs skittish about China — which sounds somewhat absurd, but the investor told us they've spent enormous effort explaining the situation, "yet still can't fully dispel their concerns."

In truth, the Middle East — long made fabulously wealthy by oil — isn't a new source of global LP capital; it merely stands out more starkly against the backdrop of dollar fund struggles. Years ago, the major sovereign funds began entering China and established local offices, though mostly investing in secondary markets — for example, Abu Dhabi Investment Authority's A-share holdings reached $3.5 billion, with positions in companies like Yili and JOINN Laboratories, and cornerstone investments in Hong Kong IPOs including Innovent Biologics and Joy Spreader. Primary market GP partnerships have been occasional.

But in the view of Fan Bao, Chairman and CEO of China Renaissance, Middle Eastern investment in China is clearly underweight. Several facts support this: first, with its oil and resources, the Middle East is an exceptionally large capital exporter. Its sovereign funds rank among the world's largest, and historically the region has been a significant source of outbound capital. "But their overall allocation remains primarily in European and US markets — which I think is increasingly disconnected from current realities."

In fact, since 2009 China has become the largest trading partner for the MENA (Middle East and North Africa) market. According to China Renaissance's research, in nearly every Middle Eastern country excluding Israel, China surpassed the US as the largest trading partner starting in 2009. Yet across the Middle East, particularly among sovereign funds, allocation to China mostly sits below 5%. That's disproportionate. Second, Chinese capital's weighting in Middle Eastern market indices is also underweight.

But for primary markets, how to move from "underweight" to "overweight" — or what form such "overweighting" might take — remains difficult to predict. A fund partner who recently completed a Middle East roadshow told us that while he sensed genuine goodwill from local investors toward Chinese funds, when the conversation turned to actual commitments, their stance remained "cautious expansion."

Image source | Visual China

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