The decision marks the first known instance that the Saudi Public Investment Fund’s cash will be directed to Israel, a sign of the kingdom’s increasing willingness to do business with the country, even though they have no diplomatic relations. This could help lay the groundwork for a breakthrough normalization pact between the two countries.

Israel is deepening business and security ties with Arab states, including the United Arab Emirates, nearly two years after the U.S. brokered historic normalization deals. Mr. Kushner, former President

Donald Trump’s

son-in-law and a former senior White House adviser, played an instrumental role in the so-called Abraham Accords. He has also established strong ties with Saudi Arabia’s Crown Prince

Mohammed bin Salman,

the kingdom’s de facto ruler. Since leaving the White House, Mr. Kushner has tapped his White House contacts across the Middle East to develop his private-equity firm, a venture likely to earn him lucrative fees regardless of the success or failure of its investments.

As part of the negotiations to secure the kingdom’s funding, Saudi officials agreed that Affinity Partners could invest in Israeli firms, the people familiar with the firm’s plans said. The kingdom could also open its economy to Israeli businesses via work with Mr. Kushner, they noted.

In talks with Saudi leaders, Mr. Kushner and his team warned them that their country could lose out on access and opportunities in what they called “the Silicon Valley of the Middle East” to neighbors who had signed the Abraham Accords with the country, the people said.

In an interview, Mr. Kushner said he viewed his investment plans as an extension of his work in the White House in advancing ties between Israel and its Arab neighbors, which have long refused to normalize relations with Israel until its leaders agreed to the creation of a Palestinian state.

“If we can get Israelis and Muslims in the region to do business together it will focus people on shared interests and shared values,” he said. “We kicked off historic regional change which needs to be reinforced and nurtured to achieve its potential.”

Mr. Kushner and his team declined to discuss which companies they are working with or how much cash is likely to be directed to Israel. Mr. Kushner also declined to discuss his talks with Prince Mohammed, who oversees the Saudi investment fund’s strategic decisions. People familiar with the talks said Prince Mohammed would have had to approve any decision to invest directly in Israel.

A spokesman for Saudi Arabia’s $600 billion Public Investment Fund, whose board is chaired by Prince Mohammed and includes senior government ministers, declined to comment. The government’s media office didn’t respond to requests for comment.

The PIF is tasked with transforming the domestic Saudi economy via investments in new industries and sprawling real-estate developments, such as a $500 billion futuristic city-state called Neom. Prince Mohammed has told advisers and diplomats he hopes Israelis will play a big part in developing Neom, with potential investments in biotechnology and cybersecurity. In November 2020, the prince met at Neom with then-Israeli Prime Minister

Benjamin Netanyahu

in a sign Saudi Arabia could join the Abraham Accords. But new administrations in the U.S. and Israel slowed momentum.

After securing Saudi investment, Mr. Kushner and his team traveled in March to Israel to meet with dozens of Israeli companies looking for financial support from Affinity, according to those involved in the meetings. Mr. Kushner held meetings with Israeli startups working on everything from healthcare and agriculture to software and cyber, they said.

“Increasing prosperity in the region and building business bridges across the region has the ability to cement long-term relationships developed when the Abraham Accords were signed,” said Elie Wurtman, co-founder of PICO Venture Partners, who helped arrange meetings for Mr. Kushner and his team.

Mr. Kushner has pitched his investment firm to other oil-rich Arab states, including the U.A.E., and Qatar, which isn’t a party to the Abraham Accords, The Wall Street Journal reported.

Even before the accords, the U.A.E. allowed access to its market to Israeli companies with operations out of other countries. The Persian Gulf state is now able to make direct investments itself in Israel and has done deals. Abu Dhabi’s Mubadala Investment Co., which manages $250 billion in assets, invested up to $20 million in six Israeli-based or focused venture-capital firms. Another Abu Dhabi sovereign-wealth fund, ADQ, led a $105 million investment into Aleph Farms, an Israeli firm that makes lab-grown meat.

Saudi Arabia isn’t the only country without diplomatic relations with Israel that Mr. Kushner is wooing. Affinity is also looking to bring Israeli technology to Indonesia, the world’s largest Muslim-majority nation, according to people familiar with the discussions. Before leaving the White House, Mr. Kushner and his team were working to secure a normalization deal with Indonesia and Israel, but the deal didn’t come together before President Biden took office.

Indonesian officials didn’t respond to requests for comment.

Mr. Kushner’s decision to focus his post-government business on the Middle East has drawn criticism from some Democratic lawmakers who have questioned whether Saudi Arabia’s support is payback for his steadfast support of Prince Mohammed while at the White House. Mr. Kushner and the Trump administration stood by Prince Mohammed after U.S. intelligence concluded that he approved a plan to kill or capture Jamal Khashoggi, a Saudi columnist for the Washington Post who was killed by a Saudi hit team in Istanbul in 2018. Prince Mohammed has denied that he ordered the operation.

Affinity said it was proud of its partnership with the Saudi fund and dismissed suggestions it was linked in any way to Mr. Kushner’s support for Prince Mohammed while he was working at the White House.

Affinity faces competition among investors for Israel’s best startups. A glut of global capital has driven a boom in Israel’s tech scene over the past few years, with 2021 a record year for fundraising, though the market cooled in the first quarter of this year.

Ayelet Frish, an Israeli strategic adviser and branding expert who helped arrange meetings for Affinity, said Mr. Kushner’s pitch resonated with many companies.

“Jared Kushner can open doors for you,” said Ms. Frish, who served as chief strategic adviser to the late Israeli President

Shimon Peres.

“He can open doors for Israeli companies even in countries where we don’t have real relationships, like Saudi Arabia and Indonesia.”

Mr. Kushner said the prospect of Saudi Arabia normalizing relations with Israel would be accelerated by deepening economic ties.

“The more that we can create business ties and introduce the innovators from the region to each other the more we strengthen people who want to take this new path while weakening those stuck in the old paradigm,” Mr. Kushner added.

Write to Dion Nissenbaum at dion.nissenbaum@wsj.com and Rory Jones at rory.jones@wsj.com