The Dec 2007 article by McKinsey outlines the world's new financial power brokers. In summary
The new financial power brokers are oil-rich countries, Asian Central banks, hedge funds and Private Equity firms. Their assets have tripled since 2000. Even though it constitutes only 5% of the total global assets, their rise over the last 5 years has been astounding.
The 4 entities (oil-rich countries, Asian Central banks, hedge funds and Private Equity firms – in that order) have helped lower the cost of capital for borrowers around the world. In the United States, it is estimated that long-term interest rates are as much as 0.75 of a percentage point lower thanks to purchases of US fixed-income securities by Asian central banks and petrodollar investors—$435 billion of net purchases in 2006 alone.
At the end of 2006, the oil exporters collectively owned $3.4 trillion to $3.8 trillion in foreign financial assets. Second in size to petrodollars are the reserves of Asia's central banks. In 2006, Asia's central banks held $3.1 trillion in foreign-reserve assets, 64 percent of the global total and nearly three times the amount they held in 2000. China alone had amassed around $1.4 trillion in reserves by mid-2007.
Hedge funds have added to global liquidity through high trading turnovers and investments in credit derivatives, which allow banks to shift credit risk off their balance sheets and to originate more loans. Private-equity firms are having a disproportionate impact on corporate governance through leverage-fueled takeovers and subsequent restructurings.
Net/net - Regardless of whether interest rates rise or oil prices drop, the four new power brokers will continue to grow and shape the future development of capital markets. In particular pay close attention to the Middle East. The Gulf Cooperation Council (GCC) states—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)—are the largest oil exporters. Recently, an Abu Dhabi based fund bought 5% stake in Citigroup. Dubai has reinvented itself as a financial powerhouse not just dependent on oil. Since the Gulf is situated between Asia and Europe, it is becoming a hub for travel and logistics.
Taking this to the next level, I predict that the Gulf would be a major source of opportunity for software vendors - since development in economic areas would necessitate software automation and streamlining of processes. The other 2 areas for software vendors are India and China - due to the sustained high rate of growth. from Sunny Kumar
I would add to this from the Life Science and Healthcare perspective as well as the continued growth in infrastructure and facilities investments is also creating a global hub for these activities.
See some interesting videos about Dubai
CBS 60 minutes - Part 1 (the cheapest room at the Burj-al-Arab hotel is $2000 a night)
http://www.cbsnews.com/sections/i_video/main500251.shtml?id=3366044n
CBS 60 minutes - Part 2
http://www.cbsnews.com/sections/i_video/main500251.shtml?id=3366046n
A nice report by Richard Edelman - CEO of Edelman PR firm
http://www.edelman.com/speak_up/blog/archives/2007/09/dubai_image_and.html
from Sunny Kumar
20.12.07
Are All Sovereign Investors Becoming More Activist?
Are All Sovereign Investors Becoming More Activist?
Morgan Stanley announced a $5 billion investment from the Chinese Investment Corporation (CIC) which will convert to a 9.9% share in the company. This is now the third purchase by a relatively large sovereign wealth fund in a major US or EU financial institution in the last month or so.
Last week, Singapore's GIC and an undisclosed middle eastern investor invested in UBS helping take its Tier 1 capital ratio to 12%. Two weeks before that Abu Dhabi Investment Authority (ADIA) paid $7.5 billion for a stake in Citi. Other smaller investors such as Qatar and Dubai's Istithmar suggests that this is an ideal time for investment in western financial institutions.
In a time when the heady dealmaking of only half a year ago has slown, the purchases by these sovereign funds have stood out. However, the increasing willingness to make and announce these strategic stakes has reached a new level. and clearly these funds are big enough to move markets...
It seems a simple story– banks needing to shore up troubled balance sheets meet cash-rich sovereign investor seeking higher returns/distressed assets. In fact their cash holdings helped make them attractive capital sources. Morgan Stanley data had already suggested that in 2007, SWFs bought $46 billion in western financial institutions – and Chinese banks another $8 billion.
These financial sector recipients have an interest in disclosing the funding. They lock in long-term investors for a considerable period rather than a series of smaller, potentially shorter term ones to shore up capital base amid write downs – in an attempt to persuade investors of their solvency. In a sense they are borrowing both the capital and the reputation of these long-standing long-term investors. But is their strategy shifting?
Wessel noted last week in the WSJ:
The best, oldest SWFs are at least as shrewd as Citigroup, UBS and Merrill Lynch, and that is scary enough. The new ones, swollen with oil revenues or proceeds of currency-market dealings, are like teenagers with more inherited wealth than they can handle.
the most challenging thing is what we don't know about these funds. We don't yet know the effect of sovereign funds being a key capital source and what strings are attached. of course many sovereign funds were already large contributors to funds - and certain asset classes. But surely the nature of the investors affects the intermediary role of their targets.
Such deals do build on pre-existing relationships. In many cases these asset managers had already been involved in managing some of the funds, so it is natural who to turn to in a time of need. But there are challenges. These funds are not transparent. ADIA may be a long-standing investor about whom we know almost nothing. Will the availability of such funds that do not demand a board stake affect corporate governance? Influence is possible without management stakes.
What is somewhat surprising for me was the relatively significant stake size - about 9% for GIC's stake in UBS and just under 5% for ADIA's citi stake. Surprising because these two funds have tended to take only small stakes and to avoid disclosure.
When I tried to categorize the sovereign investment universe sometime ago, both GIC and ADIA seemed fit in a more conservative sovereign wealth fund category, in contrast to the more strategic, activist new investment vehicles in the gulf which modeled themselves on private equity firms.
perhaps with the number of splashy deals these more reticent-to-disclose investors are more willing to make their holdings public and seek higher returns like their counterparts are doing. but does it mean the line between the likes of Temasek and GIC is blurring?
Even ADIA may be becoming more activist. In addition to the Citi stake, ADIA has made a few other larger purchases, stakes in Apollo, EFG-Hermes among others. None are management/controlling roles. It also made its first significant London purchase in decades. Perhaps it is taking somewhat larger stakes, perhaps it is also more willing to disclose the stakes it has.
yet, ADIA's investments remain different from those of more active investment vehicles in the gulf but because of its size (arounf $650?) any move is significant.
But what about China? Where does it fit in?
CIC's strategy is an unknown quantity. Lou Jiwei, its main manager has stressed that the CIC will be a stabilizing investor and noted the role of SWFs in supporting financial institutions. So perhaps today’s news about the stake in Morgan Stanley should not come as a surprise. But Keith Bradsher suggests that the decision to invest in Morgan Stanley came from the highest levels of Chinese government– perhaps reminiscent of the Blackstone deal which happened before CIC was officially launched. Quick, nimble decision making is thought to have characterized the but given the lack of transparency and political oversight, it may become clearer where the buck stops on China’s investment.
CIC's ultimate goal may be to be a coordinating body for Chinese foreign investment. 2/3 of CIC’s initial $200 billion are spoken for - 1/3 accounted for central Huijin - its stakes in state banks another 1/3 will recapitalize policy banks. And CIC is seeking bids to manage part of the remaining $60 or so billion from asset managers. Overall, given its stakes in the banks and other holdings, CIC has a considerable financial sector weighting. So far not very diversified?
the CIC is clearly under pressure not to invest in a loss-making investment and to make enough money to cover its financing costs. Especially as more funds may be sent its way as China seeks to farm out its dollars to a variety of institutions (state banks are now holding more reserves in dollars) rather than just the central bank. And equity investment outflows are still in early stages.
In the case of both China and Abu Dhabi, investment in US financial institutions may reflect a shift between dollar assets. Both tend to have significant dollar holdings, especially on a flow basis, though China has much more than Abu Dhabi. In China’s case, they might prefer to own part of a US investment bank rather than US treasuries, especially if there are potential for spinoffs. After all, overall the chinese government and most gulf states have to collectively buy a lot of dollars or watch their currencies appreciate.
Several funds are or may support the outward investment of national companies or strategically investing in sectors in which they might hope either to gain technology transfer or synergies with SOEs and financial institutions. several questions emerge - how effective are governments at picking winners? there is also a risk that the sovereign investors might be expected to bear the greater risk of such investment and if so. what will be the implications of their broader strategy? and this might increase asset protectionism.
Some Chinese officials have suggested it support external purchases of Chinese funds. It was recently suggested that CIC along with several Chinese companies might bid for Rio Tinto, though this was denied.
Libya's fund suggested that it plans to invest in foreign (US) companies that were best placed to help Libya develop and diversify its economy. Little information is available but some form of joint venture is not impossible. Whilst in Paris, Qaddafi suggested investment of as much as $100b abroad.
Brazil's foreign ministry has touted a fund that would support Brazilian investments abroad – and reduce further reserve accumulation and possibly reduce. But the institutional structure is uncertain – current plans include using a national development fund. and the central bank has opposed using reserves.
Many GCC funds are investing abroad in sectors of strength or future development for their states. These joint ventures include aluminum, manufacturing, consumer goods of interest in the gulf. Watch this space for a closer look.
Finally - While these strategic stakes are considerable and have significant political and regulatory implications… including the impact of sovereign funds as the new go-to capital source, the imbalances are so significant that these strategic stakes show only part of the story. Because of exchange rate policies – ie a reluctance to allow currencies to appreciate against a falling dollar, many countries are scaling up central bank intervention to neutralize speculative inflows – adding to their reserves. As such they are adding to their conservative - primarily dollar - assets. In a paper released yesterday, Brad Setser and I argue that on the whole, currency diversification by the GCC investment funds this year has been offset by – largely dollar – reserve accumulation. A trend that will likely remain unless official and de facto dollar peggers allow more appreciation and slow their dollar purchases.
Rachel Ziemba | Dec 19, 2007
Morgan Stanley announced a $5 billion investment from the Chinese Investment Corporation (CIC) which will convert to a 9.9% share in the company. This is now the third purchase by a relatively large sovereign wealth fund in a major US or EU financial institution in the last month or so.
Last week, Singapore's GIC and an undisclosed middle eastern investor invested in UBS helping take its Tier 1 capital ratio to 12%. Two weeks before that Abu Dhabi Investment Authority (ADIA) paid $7.5 billion for a stake in Citi. Other smaller investors such as Qatar and Dubai's Istithmar suggests that this is an ideal time for investment in western financial institutions.
In a time when the heady dealmaking of only half a year ago has slown, the purchases by these sovereign funds have stood out. However, the increasing willingness to make and announce these strategic stakes has reached a new level. and clearly these funds are big enough to move markets...
It seems a simple story– banks needing to shore up troubled balance sheets meet cash-rich sovereign investor seeking higher returns/distressed assets. In fact their cash holdings helped make them attractive capital sources. Morgan Stanley data had already suggested that in 2007, SWFs bought $46 billion in western financial institutions – and Chinese banks another $8 billion.
These financial sector recipients have an interest in disclosing the funding. They lock in long-term investors for a considerable period rather than a series of smaller, potentially shorter term ones to shore up capital base amid write downs – in an attempt to persuade investors of their solvency. In a sense they are borrowing both the capital and the reputation of these long-standing long-term investors. But is their strategy shifting?
Wessel noted last week in the WSJ:
The best, oldest SWFs are at least as shrewd as Citigroup, UBS and Merrill Lynch, and that is scary enough. The new ones, swollen with oil revenues or proceeds of currency-market dealings, are like teenagers with more inherited wealth than they can handle.
the most challenging thing is what we don't know about these funds. We don't yet know the effect of sovereign funds being a key capital source and what strings are attached. of course many sovereign funds were already large contributors to funds - and certain asset classes. But surely the nature of the investors affects the intermediary role of their targets.
Such deals do build on pre-existing relationships. In many cases these asset managers had already been involved in managing some of the funds, so it is natural who to turn to in a time of need. But there are challenges. These funds are not transparent. ADIA may be a long-standing investor about whom we know almost nothing. Will the availability of such funds that do not demand a board stake affect corporate governance? Influence is possible without management stakes.
What is somewhat surprising for me was the relatively significant stake size - about 9% for GIC's stake in UBS and just under 5% for ADIA's citi stake. Surprising because these two funds have tended to take only small stakes and to avoid disclosure.
When I tried to categorize the sovereign investment universe sometime ago, both GIC and ADIA seemed fit in a more conservative sovereign wealth fund category, in contrast to the more strategic, activist new investment vehicles in the gulf which modeled themselves on private equity firms.
perhaps with the number of splashy deals these more reticent-to-disclose investors are more willing to make their holdings public and seek higher returns like their counterparts are doing. but does it mean the line between the likes of Temasek and GIC is blurring?
Even ADIA may be becoming more activist. In addition to the Citi stake, ADIA has made a few other larger purchases, stakes in Apollo, EFG-Hermes among others. None are management/controlling roles. It also made its first significant London purchase in decades. Perhaps it is taking somewhat larger stakes, perhaps it is also more willing to disclose the stakes it has.
yet, ADIA's investments remain different from those of more active investment vehicles in the gulf but because of its size (arounf $650?) any move is significant.
But what about China? Where does it fit in?
CIC's strategy is an unknown quantity. Lou Jiwei, its main manager has stressed that the CIC will be a stabilizing investor and noted the role of SWFs in supporting financial institutions. So perhaps today’s news about the stake in Morgan Stanley should not come as a surprise. But Keith Bradsher suggests that the decision to invest in Morgan Stanley came from the highest levels of Chinese government– perhaps reminiscent of the Blackstone deal which happened before CIC was officially launched. Quick, nimble decision making is thought to have characterized the but given the lack of transparency and political oversight, it may become clearer where the buck stops on China’s investment.
CIC's ultimate goal may be to be a coordinating body for Chinese foreign investment. 2/3 of CIC’s initial $200 billion are spoken for - 1/3 accounted for central Huijin - its stakes in state banks another 1/3 will recapitalize policy banks. And CIC is seeking bids to manage part of the remaining $60 or so billion from asset managers. Overall, given its stakes in the banks and other holdings, CIC has a considerable financial sector weighting. So far not very diversified?
the CIC is clearly under pressure not to invest in a loss-making investment and to make enough money to cover its financing costs. Especially as more funds may be sent its way as China seeks to farm out its dollars to a variety of institutions (state banks are now holding more reserves in dollars) rather than just the central bank. And equity investment outflows are still in early stages.
In the case of both China and Abu Dhabi, investment in US financial institutions may reflect a shift between dollar assets. Both tend to have significant dollar holdings, especially on a flow basis, though China has much more than Abu Dhabi. In China’s case, they might prefer to own part of a US investment bank rather than US treasuries, especially if there are potential for spinoffs. After all, overall the chinese government and most gulf states have to collectively buy a lot of dollars or watch their currencies appreciate.
Several funds are or may support the outward investment of national companies or strategically investing in sectors in which they might hope either to gain technology transfer or synergies with SOEs and financial institutions. several questions emerge - how effective are governments at picking winners? there is also a risk that the sovereign investors might be expected to bear the greater risk of such investment and if so. what will be the implications of their broader strategy? and this might increase asset protectionism.
Some Chinese officials have suggested it support external purchases of Chinese funds. It was recently suggested that CIC along with several Chinese companies might bid for Rio Tinto, though this was denied.
Libya's fund suggested that it plans to invest in foreign (US) companies that were best placed to help Libya develop and diversify its economy. Little information is available but some form of joint venture is not impossible. Whilst in Paris, Qaddafi suggested investment of as much as $100b abroad.
Brazil's foreign ministry has touted a fund that would support Brazilian investments abroad – and reduce further reserve accumulation and possibly reduce. But the institutional structure is uncertain – current plans include using a national development fund. and the central bank has opposed using reserves.
Many GCC funds are investing abroad in sectors of strength or future development for their states. These joint ventures include aluminum, manufacturing, consumer goods of interest in the gulf. Watch this space for a closer look.
Finally - While these strategic stakes are considerable and have significant political and regulatory implications… including the impact of sovereign funds as the new go-to capital source, the imbalances are so significant that these strategic stakes show only part of the story. Because of exchange rate policies – ie a reluctance to allow currencies to appreciate against a falling dollar, many countries are scaling up central bank intervention to neutralize speculative inflows – adding to their reserves. As such they are adding to their conservative - primarily dollar - assets. In a paper released yesterday, Brad Setser and I argue that on the whole, currency diversification by the GCC investment funds this year has been offset by – largely dollar – reserve accumulation. A trend that will likely remain unless official and de facto dollar peggers allow more appreciation and slow their dollar purchases.
Rachel Ziemba | Dec 19, 2007
16.12.07
Emirates Aluminium closes a $4.9bn record financing deal
Emirates Aluminium closes a $4.9bn record financing deal
Emirates Aluminum Company (EMAL), the joint venture equally owned by Mubadala Development Company (Mubadala) and Dubai Aluminum, announced today that it has closed its $4.9bn limited recourse bank financing.
EMAL received over $15bn of commitments for the facilities, which consist of a $1.8bn, sixteen year term loan, a $270m letter of credit facility and a $2.8bn six year equity bridge loan. Further financing for EMAL of up to $2bn is expected to be launched into the credit markets during the construction of the smelter, bringing the total financing to almost $7bn.
This is the largest single commercial financing, to date, for any project in the Arabian Gulf. EMAL was advised in relation to the funding by Citigroup and Sullivan and Cromwell LLP.
The investment is being arranged by a syndicate of international and regional banks led by Abu Dhabi Commercial Bank, BNP Paribas, Calyon, Royal Bank of Scotland, Standard Chartered, Sumitomo Mitsui Banking Corporation, Citigroup, Emirates Bank International, Export Development Canada, Export Finance and Insurance Corporation, Goldman Sachs Credit Partners, Mashreqbank and National Bank of Abu Dhabi.
'The aluminum smelter project is a cornerstone of the enhanced industrial sector that is planned to help pursue Abu Dhabi's vision for a diverse and sustainable economy,'
said HE Khaldoon Khalifa Al Mubarak, CEO and Managing Director, Mubadala and Chairman of the Board of EMAL.
'This financing demonstrates the strength of the project and its sponsors. It is important to hold the confidence and optimism of the lending community in respect to the future of development of Abu Dhabi'.
Abdulla J M Kalban, Chief Executive Officer of DUBAL and Vice Chairman of EMAL, echoes these sentiments, saying that both DUBAL and Mubadala have solid track records with regard to devising and implementing successful projects in the past, that have more than delivered on their promises.
'This engenders confidence among investors,' says Kalban. 'The excellent growth potential for the aluminum industry in the region boosts the overall confidence of the marketplace even further.'
The financing is for the first phase of EMAL's planned development of constructing a 700,000 tonnes per year aluminum smelter at the Khalifa Port and Industrial Zone in Abu Dhabi. Upon completion of the additional pot lines intended in the second phase, EMAL will be the largest single site aluminum smelter in the world with total annual production capacity of 1,400,000 tonnes of aluminum.
EMAL commenced site works on the first phase of the smelter at Al Taweelah in Abu Dhabi earlier this year. The smelter project represents Abu Dhabi's entry into the aluminium industry as it joins the ranks of major regional and international producers. The smelter is scheduled to commence production in 2010.
Commenting on the financial close, EMAL's CEO, Duncan Hedditch, said: 'Our finance team has achieved an outstanding and historic result which reflects, I believe, the very strong fundamentals of our project.'
General Manager Project Finance, Fahad Saeed Al Raqbani, commented: 'The results achieved in no small way reflect the efforts of our advisors Citigroup and Sullivan and Cromwell, who have met the challenge of what was a tight timetable for a financing of this scale. We are very pleased with the overall result.'
http://www.ameinfo.com/142067.html
Emirates Aluminum Company (EMAL), the joint venture equally owned by Mubadala Development Company (Mubadala) and Dubai Aluminum, announced today that it has closed its $4.9bn limited recourse bank financing.
EMAL received over $15bn of commitments for the facilities, which consist of a $1.8bn, sixteen year term loan, a $270m letter of credit facility and a $2.8bn six year equity bridge loan. Further financing for EMAL of up to $2bn is expected to be launched into the credit markets during the construction of the smelter, bringing the total financing to almost $7bn.
This is the largest single commercial financing, to date, for any project in the Arabian Gulf. EMAL was advised in relation to the funding by Citigroup and Sullivan and Cromwell LLP.
The investment is being arranged by a syndicate of international and regional banks led by Abu Dhabi Commercial Bank, BNP Paribas, Calyon, Royal Bank of Scotland, Standard Chartered, Sumitomo Mitsui Banking Corporation, Citigroup, Emirates Bank International, Export Development Canada, Export Finance and Insurance Corporation, Goldman Sachs Credit Partners, Mashreqbank and National Bank of Abu Dhabi.
'The aluminum smelter project is a cornerstone of the enhanced industrial sector that is planned to help pursue Abu Dhabi's vision for a diverse and sustainable economy,'
said HE Khaldoon Khalifa Al Mubarak, CEO and Managing Director, Mubadala and Chairman of the Board of EMAL.
'This financing demonstrates the strength of the project and its sponsors. It is important to hold the confidence and optimism of the lending community in respect to the future of development of Abu Dhabi'.
Abdulla J M Kalban, Chief Executive Officer of DUBAL and Vice Chairman of EMAL, echoes these sentiments, saying that both DUBAL and Mubadala have solid track records with regard to devising and implementing successful projects in the past, that have more than delivered on their promises.
'This engenders confidence among investors,' says Kalban. 'The excellent growth potential for the aluminum industry in the region boosts the overall confidence of the marketplace even further.'
The financing is for the first phase of EMAL's planned development of constructing a 700,000 tonnes per year aluminum smelter at the Khalifa Port and Industrial Zone in Abu Dhabi. Upon completion of the additional pot lines intended in the second phase, EMAL will be the largest single site aluminum smelter in the world with total annual production capacity of 1,400,000 tonnes of aluminum.
EMAL commenced site works on the first phase of the smelter at Al Taweelah in Abu Dhabi earlier this year. The smelter project represents Abu Dhabi's entry into the aluminium industry as it joins the ranks of major regional and international producers. The smelter is scheduled to commence production in 2010.
Commenting on the financial close, EMAL's CEO, Duncan Hedditch, said: 'Our finance team has achieved an outstanding and historic result which reflects, I believe, the very strong fundamentals of our project.'
General Manager Project Finance, Fahad Saeed Al Raqbani, commented: 'The results achieved in no small way reflect the efforts of our advisors Citigroup and Sullivan and Cromwell, who have met the challenge of what was a tight timetable for a financing of this scale. We are very pleased with the overall result.'
http://www.ameinfo.com/142067.html
8.12.07
Shuaa Partners closes 'Frontier Opportunities Fund I, L.P.'
Shuaa Partners Ltd, the private equity arm of Shuaa Capital psc, today announced the close of its 'Frontier Opportunities Fund I, L.P.' (the 'Fund') with total commitments of $100m.
related stories
Dedicated SHUAA Capital RSS feed SHUAA Capital RSS feed
1. SHUAA Capital ranks 23rd in global equity offerings
2. Shuaa Capital launches custody services on Dubai International Financial Exchange
3. Shuaa Asset Management launches the SG S&P/IFCI UAE Price Return Fund
4. Dubai Banking Group and SHUAA Capital sign Dhs1.67bn financing agreement
5. Shuaa Capital increases revenues by 62% to Dhs277.2m during the first half of its financial year
» more SHUAA Capital news
The objective of the Fund is to provide its limited partners with long-term capital appreciation through select equity investments in both existing and start-up businesses in the Levant region.
The Fund will have a four-year investment horizon and its focus will be on Syria, but it will also consider investments in Lebanon and Jordan. The fund will target both existing and new opportunities in the telecommunications, financial services, real estate and hospitality sectors, but will also consider investing in other sectors on an opportunistic basis.
'With recent economic growth picking up, clear liberalization trend, a young and growing population, and under-investment for the past three decades, Syria represents an early investment opportunity. Over the last few years, Syria has attracted significant foreign investment commitments from neighboring and GCC countries. Several large projects have been announced in industries ranging from building materials, to oil refineries, real estate and financial institutions. Syria has demonstrated its progress in its ability to encourage the capital inflows, and our investors wanted to allocate a small part of their portfolios to have an exposure at what could potentially prove to be a very high growth market,'
said Mr. Iyad Duwaji, Chief Executive Officer of Shuaa Capital and Chairman and founder of Shuaa Partners.
'This is a unique opportunity and the first ever such product that allows its investors a professionally managed exposure to a country that has not yet been targeted by a wide range of investors before. We are well positioned to attract and execute transactions in Syria given our first-hand knowledge of the country and our first-mover advantage,' added Mr. Duwaji.
The Fund has already deployed capital by investing in Syriatel the leading GSM operator in Syria with over 55% market share, 2.8 million customers, and a low penetration rate by regional standards. It is also understood that the Fund is considering partnering with UAE companies to set up in Syria.
Shuaa Partners is regulated by the Dubai Financial Services Authority ('DFSA') and is incorporated in the Dubai International Financial Centre ('DIFC') as Shuaa Partners Ltd.
http://www.ameinfo.com/141029.html
related stories
Dedicated SHUAA Capital RSS feed SHUAA Capital RSS feed
1. SHUAA Capital ranks 23rd in global equity offerings
2. Shuaa Capital launches custody services on Dubai International Financial Exchange
3. Shuaa Asset Management launches the SG S&P/IFCI UAE Price Return Fund
4. Dubai Banking Group and SHUAA Capital sign Dhs1.67bn financing agreement
5. Shuaa Capital increases revenues by 62% to Dhs277.2m during the first half of its financial year
» more SHUAA Capital news
The objective of the Fund is to provide its limited partners with long-term capital appreciation through select equity investments in both existing and start-up businesses in the Levant region.
The Fund will have a four-year investment horizon and its focus will be on Syria, but it will also consider investments in Lebanon and Jordan. The fund will target both existing and new opportunities in the telecommunications, financial services, real estate and hospitality sectors, but will also consider investing in other sectors on an opportunistic basis.
'With recent economic growth picking up, clear liberalization trend, a young and growing population, and under-investment for the past three decades, Syria represents an early investment opportunity. Over the last few years, Syria has attracted significant foreign investment commitments from neighboring and GCC countries. Several large projects have been announced in industries ranging from building materials, to oil refineries, real estate and financial institutions. Syria has demonstrated its progress in its ability to encourage the capital inflows, and our investors wanted to allocate a small part of their portfolios to have an exposure at what could potentially prove to be a very high growth market,'
said Mr. Iyad Duwaji, Chief Executive Officer of Shuaa Capital and Chairman and founder of Shuaa Partners.
'This is a unique opportunity and the first ever such product that allows its investors a professionally managed exposure to a country that has not yet been targeted by a wide range of investors before. We are well positioned to attract and execute transactions in Syria given our first-hand knowledge of the country and our first-mover advantage,' added Mr. Duwaji.
The Fund has already deployed capital by investing in Syriatel the leading GSM operator in Syria with over 55% market share, 2.8 million customers, and a low penetration rate by regional standards. It is also understood that the Fund is considering partnering with UAE companies to set up in Syria.
Shuaa Partners is regulated by the Dubai Financial Services Authority ('DFSA') and is incorporated in the Dubai International Financial Centre ('DIFC') as Shuaa Partners Ltd.
http://www.ameinfo.com/141029.html
6.12.07
Large forces in the global capital markets
Four rising players will continue to grow in wealth and importance, even if interest rates rise and oil prices drop.
December 2007
One glance at the distribution of wealth around the world and the shift is obvious: financial power, so long concentrated in the developed economies, is dispersing. Oil-rich countries and Asian central banks are now among the world’s largest sources of capital. What’s more, the influx of liquidity these players have brought is enabling hedge funds and private-equity firms to soar in the pecking order of financial intermediation.
New research from the McKinsey Global Institute shows that the assets of these four groups of investors—the new power brokers—have nearly tripled since 2000, reaching roughly $8.5 trillion at the end of 2006 (Exhibit 1).1 This sum is equivalent to about 5 percent of total global financial assets ($167 trillion) at the end of 2006, an impressive number for players that lay on the fringes of global financial markets just five years ago.
The impact and visibility of this quartet exceed its relative size, despite the discreet way its members operate. Among other things, they have helped lower the cost of capital for borrowers around the world. In the United States, we estimate, long-term interest rates are as much as 0.75 of a percentage point lower thanks to purchases of US fixed-income securities by Asian central banks and petrodollar investors—$435 billion of net purchases in 2006 alone. Meanwhile, investors from the Middle East, pursuing returns they believe will exceed those generated by fixed-income instruments or equities in developed economies, are fueling investment in Asia and other emerging markets. Hedge funds have added to global liquidity through high trading turnovers and investments in credit derivatives, which allow banks to shift credit risk off their balance sheets and to originate more loans. Private-equity firms are having a disproportionate impact on corporate governance through leverage-fueled takeovers and subsequent restructurings.
And over the next five years, the size and impact of the four new power brokers will continue to expand.2
Oil rises to the top
In 2006 oil-exporting countries became the world’s largest source of global capital flows, surpassing Asia for the first time since the 1970s (Exhibit 2). These investors—from Indonesia, the Middle East, Nigeria, Norway, Russia, and Venezuela—include sovereign wealth funds, government-investment companies, state-owned enterprises, and wealthy individuals.
This flood of petrodollars comes from the tripling of world oil prices since 2002 and the steady growth in exports of crude oil, particularly to emerging markets. A large part of the higher prices paid by consumers ends up in the investment funds and private portfolios of investors in oil-exporting countries. They then invest most of it in global financial markets, adding liquidity that helps to explain what US Federal Reserve Board of Governors chairman Ben Bernanke described as a "global savings glut" that has kept interest rates down over the past few years. In 2006 alone, we estimate at least $200 billion of petrodollars went to global equity markets, more than $100 billion to global fixed-income markets, and perhaps $40 billion to global hedge funds, private-equity firms, and other alternative investments. This capital is invested chiefly in Europe and the United States, but regions such as Asia, the Middle East, and other emerging markets are also significant beneficiaries.
Although the added liquidity from petrodollars has helped buttress global financial markets, it may also be creating inflationary pressure in illiquid markets, such as those for real estate and art. The unanswered question is whether the world economy will continue to accommodate higher oil prices without a notable rise in inflation or an economic slowdown.
Where the wealth is . . .
The Gulf Cooperation Council (GCC) states—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)—are the largest oil exporters. Together, we estimate, they had foreign assets of $1.6 trillion to $2 trillion by the end of 2006 (Exhibit 3). Other states in the region, including Algeria, Iran, Libya, Syria, and Yemen, held an estimated $330 billion; the other oil exporters combined, about $1.5 billion. At the end of 2006, the oil exporters collectively owned $3.4 trillion to $3.8 trillion in foreign financial assets.
Much attention around the world has recently been devoted to the oil exporters’ sovereign wealth funds, which are indeed large. By some estimates, the Abu Dhabi Investment Authority (ADIA) holds nearly $875 billion in foreign assets, Norway’s Government Pension Fund $300 billion, Russia’s Oil Stabilization Fund $100 billion, and the Kuwait Investment Authority $200 billion. But oil investors as a whole are a more diverse group, with hundreds of individual players. We calculate that private individuals who actively invest in global financial markets hold at least 40 percent of the foreign wealth purchased with petrodollars. Also important are the oil-exporting states’ central banks (such as the Saudi Arabian Monetary Agency) and private-equity-like funds, including Dubai International Capital.
. . . and where it’s going
Compared with traditional players such as pension funds and mutual funds, the assets of petrodollar investors are relatively modest. Still, they have been growing at an impressive rate of 19 percent a year since 2000 and will continue to increase their impact on world financial markets because of escalating energy demand from China, India, and other emerging markets. Even in a base case with oil prices reverting to $50 a barrel,4 the oil-exporting countries would have net capital outflows5 of $387 billion a year through 2012—an infusion of more than $1 billion a day of capital into global financial markets. Over the next five years, we estimate, this flow would generate investments of $1.4 trillion in equities, $800 billion in fixed-income securities, and $300 billion for private-equity firms, hedge funds, and real estate. The oil exporters’ total foreign assets would grow to at least $5.9 trillion in 2012.
If oil prices remained at $70 a barrel until 2012—and they neared $100 in November 2007 as this article went to press—foreign assets purchased with petrodollars would grow to $6.9 trillion by then. This figure implies an inflow of almost $2 billion a day into global financial markets. Even if oil prices declined to $30 a barrel, foreign assets purchased with petrodollars would grow robustly (Exhibit 4). This enormous pool will continue to provide liquidity for capital markets but may also cut investment returns and create inflationary pressures in areas such as real estate.
Reserves: Asia’s opportunity cost
Second in size to petrodollars are the reserves of Asia’s central banks—reserves that have grown rapidly as a result of rising trade surpluses, foreign-investment inflows, and exchange rate policies. In 2006, Asia’s central banks held $3.1 trillion in foreign-reserve assets, 64 percent of the global total and nearly three times the amount they held in 2000. Compared with petrodollars, these assets are concentrated in just a handful of institutions. China alone had amassed around $1.4 trillion in reserves by mid-2007.
Unlike investors with petrodollars, Asia’s central banks have channeled their funds into conservative investments, such as US treasury bills. We estimate that by the end of 2006, these institutions had $1.9 trillion more in foreign reserves than they needed for exchange rate and monetary stability.6 Because they could have invested that sum in higher-yielding opportunities, the forgone returns represent a significant opportunity cost (Exhibit 5). On the relatively conservative assumption that alternative investments in a higher-yielding capital market portfolio might yield 5 percent more than US Treasury bills, that cost for Asia’s major economies, in 2006 alone, was almost $100 billion—1.1 percent of their total GDP.
What to do with growing reserves?
As trade surpluses accumulate, the opportunity cost of Asia’s reserves will become even greater. If recent growth continues, they will reach $7.3 trillion in 2012. Even if China’s current-account surplus declined dramatically over the next five years and Japan’s remained the same, Asia’s reserve assets would grow to $5.1 trillion by 2012 (Exhibit 6).
n a quest for higher returns, some Asian governments have begun to diversify their assets by channeling some of their reserves to sovereign wealth funds similar to those of oil-exporting nations. The Government of Singapore Investment Corporation (GIC), established in 1981, now has an estimated $150 billion to $200 billion in assets and according to public statements has plans to increase them to $300 billion. Korea Investment Corporation (KIC) has $20 billion in assets, the new China Investment Corporation (CIC) $200 billion. The assets of Asia’s sovereign wealth funds could collectively reach $700 billion in the next few years, with the potential for even more growth.
Such a shift will benefit Asian nations through higher investment returns and spread the "Asian liquidity bonus" beyond the US fixed-income market. Given the large and rapidly growing amounts of reserves used to purchase assets, however, US interest rates won’t necessarily rise as a result. Over time, a greater share of the investments made by the sovereign wealth funds may stay within Asia, spurring the development of its financial markets.
Beneficiaries of liquidity
Hedge funds and private-equity funds are among the beneficiaries of the added liquidity that Asian and oil-rich countries bring to global markets. Assets under management in hedge funds totaled $1.7 trillion by the middle of 2007. But after taking into account leverage, we estimate that their gross investment assets could amount to as much as $6 trillion, more than the foreign assets of investors from oil-producing countries or Asia’s central banks.8
Although the failure of several multibillion-dollar hedge funds in mid-2007 may slow the sector’s growth, investors usually look to the long term; it would take several years of low returns before these vehicles lost their appeal. What’s more, oil investors are big clients of hedge funds and private-equity funds, with around $350 billion committed today, and high oil prices could more than double that sum over the next five years. Even if the growth of the hedge funds’ assets were to slow significantly—say, to 5 percent a year—by 2012 they could still reach $3.5 trillion (Exhibit 7). Taking into account leverage, hedge funds would then have gross investments of $9 trillion to $12 trillion, about a third of the assets that mutual funds around the world will have in that year.
Hedge funds as financial engines
Thanks to the size and active-trading styles of hedge funds, they play an increasingly significant role in global financial markets: in 2006 they accounted for 30 to 60 percent of trading volumes in the US and UK equity and debt markets, and in some higher-risk asset classes, such as derivatives and distressed debt, they are the largest type of player (Exhibit 8). Although petrodollar investors and Asia’s central banks add liquidity by bringing in new capital, hedge funds do so by trading actively and playing a large role in credit derivative markets. In this way, they increase the number of financing options available to borrowers (including private-equity firms) that might have found it hard to attract financing in the past, and their active trading improves the pricing efficiency of financial markets.
How risky?
Worries persist that the hedge funds’ growing size and heavy borrowing could destabilize financial markets. But our research finds that over the past ten years several developments have reduced—though certainly not eliminated—the risk of a broader crisis if one or more funds collapsed.
For one thing, their investment strategies are becoming more diverse (Exhibit 9). Ten years ago more than 60 percent of their assets were invested in directional bets on macroeconomic indicators. That share has shrunk to just 15 percent today. Arbitrage and other market-neutral strategies have become more common, thereby reducing herd behavior—one reason most hedge funds withstood the US subprime turmoil in 2007. Several large quantitative-equity arbitrage funds simultaneously suffered large losses, indicating that their trading models were more similar than previously thought. But, overall, the sector emerged relatively unscathed.
In addition, banks now manage risk more capably; the largest appear to have enough equity and collateral to cover losses from their hedge fund investments. Our analysis indicates that the top ten banks’ total exposure to credit and derivatives risk from hedge funds is 2.4 times equity—a relatively high capital adequacy ratio of 42 percent.
Private equity: small but powerful
Private equity has gained prominence less because of its size than its impact on corporate governance. Although assets under management rose 2.5 times, to $710 billion, from 2000 to 2006, the private-equity industry is roughly half the size of the hedge funds, smaller than the largest petrodollar fund (the ADIA), and growing more slowly than either.
Even so, thanks to typical investment horizons of four to five years, concentrated ownership positions, and seats on the board of directors, private-equity funds can embark upon longer-term, and therefore potentially more effective, corporate-restructuring efforts. Not all private-equity firms live up to that billing, however. Our research shows that only the top-performing ones sustainably improve the operations of the companies in their portfolios and generate high returns.
The growing size of individual firms—and "club deals" combining the muscle of several firms or investors—have enabled them to buy ever-larger companies. Private-equity investors accounted for one-third of all US mergers and acquisitions in 2006 and for nearly 20 percent in Europe (Exhibit 10). This wave of buyouts has prompted CEOs and boards at some companies to find new ways of strengthening their performance.
Size limits risk
Private-equity firms may also amplify the risks in financial markets—particularly credit risk—because they like to finance takeovers with leveraged loans and use their growing clout to extract looser lending covenants and better terms from banks. The credit market correction of mid-2007, however, jeopardized the financing for many private-equity deals.
Even if private-equity defaults rose sharply, they would not be likely to have broader implications for financial markets. In 2006 private-equity firms accounted for just 11 percent of overall corporate borrowing in Europe and the United States. If their default rates rose to 15 percent of all deals—the previous high was 10 percent—the implied losses would equal only 3 and 7 percent, respectively, of 2006 syndicated-lending issuance in Europe and the United States (Exhibit 11).
Growth signals a structural shift
Despite the difficult experience of some recent buyout deals, we believe that global private-equity assets under management will double to $1.4 trillion by 2012. Our projection assumes that fund-raising remains at its 2006 level in Europe and the United States and grows at half its previous rate in Asia and the rest of the world. If current growth rates in fund-raising continued, private-equity assets would reach $2.6 trillion in 2012 (Exhibit 12).
Either way, that kind of growth represents a fundamental shift in the development of financial markets. For the past 25 years, financial intermediation in mature economies has migrated steadily from bank lending to the public-equity and debt markets. The rise of private equity and the private pools of capital in sovereign wealth funds herald the resurgence of private forms of financing.
The road ahead
Regardless of whether interest rates rise or oil prices drop, the four new power brokers will continue to grow and shape the future development of capital markets. To ease the transition to the coming financial order, the players can take some useful steps.
Because capital markets function on the free flow of information, sovereign wealth funds and other types of government-investment units9 in Asia and in oil-exporting nations should consider disclosing more information about their investment strategies, target portfolio allocations, internal risk-management procedures, and governance structures. (Norway’s Government Pension Fund is a model in this respect.) Funds can allay concerns that politics will play a role in their decisions—and reduce the likelihood that regulators will act too aggressively—by publicly stating their investment goals.
Policy makers in Europe and the United States should base any regulatory response to the activities of the new power brokers on an objective appraisal of the facts. In particular, they ought to distinguish between direct foreign acquisitions of companies and passive investments by diversified players in financial markets.
Banks must protect themselves against the risks posed by hedge funds and private-equity funds. In particular, they need tools and incentives to measure and monitor their exposure accurately and to maintain enough capital and collateral to cover these risks. Currently, it is difficult to assess the dangers stemming from illiquid collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs). Ratings agencies and investors alike must raise their risk-assessment game.
With the growth of credit derivatives and collateralized debt obligations, banks have in many cases removed themselves from the consequences of poorly underwritten lending. As institutions originate more and more loans without putting their own capital at risk for the long-term performance of those loans, regulators should find ways to check a decline in standards. Concerns about the rise of the four power brokers are rational. But we find cause for qualified optimism that the benefits of liquidity, innovation, and diversification they bring will outweigh the risks.
Diana Farrell and Susan Lund
http://thinkingmoose.blogspot.com/2007/12/large-forces-in-global-capital-markets.html
December 2007
One glance at the distribution of wealth around the world and the shift is obvious: financial power, so long concentrated in the developed economies, is dispersing. Oil-rich countries and Asian central banks are now among the world’s largest sources of capital. What’s more, the influx of liquidity these players have brought is enabling hedge funds and private-equity firms to soar in the pecking order of financial intermediation.
New research from the McKinsey Global Institute shows that the assets of these four groups of investors—the new power brokers—have nearly tripled since 2000, reaching roughly $8.5 trillion at the end of 2006 (Exhibit 1).1 This sum is equivalent to about 5 percent of total global financial assets ($167 trillion) at the end of 2006, an impressive number for players that lay on the fringes of global financial markets just five years ago.
The impact and visibility of this quartet exceed its relative size, despite the discreet way its members operate. Among other things, they have helped lower the cost of capital for borrowers around the world. In the United States, we estimate, long-term interest rates are as much as 0.75 of a percentage point lower thanks to purchases of US fixed-income securities by Asian central banks and petrodollar investors—$435 billion of net purchases in 2006 alone. Meanwhile, investors from the Middle East, pursuing returns they believe will exceed those generated by fixed-income instruments or equities in developed economies, are fueling investment in Asia and other emerging markets. Hedge funds have added to global liquidity through high trading turnovers and investments in credit derivatives, which allow banks to shift credit risk off their balance sheets and to originate more loans. Private-equity firms are having a disproportionate impact on corporate governance through leverage-fueled takeovers and subsequent restructurings.
And over the next five years, the size and impact of the four new power brokers will continue to expand.2
Oil rises to the top
In 2006 oil-exporting countries became the world’s largest source of global capital flows, surpassing Asia for the first time since the 1970s (Exhibit 2). These investors—from Indonesia, the Middle East, Nigeria, Norway, Russia, and Venezuela—include sovereign wealth funds, government-investment companies, state-owned enterprises, and wealthy individuals.
This flood of petrodollars comes from the tripling of world oil prices since 2002 and the steady growth in exports of crude oil, particularly to emerging markets. A large part of the higher prices paid by consumers ends up in the investment funds and private portfolios of investors in oil-exporting countries. They then invest most of it in global financial markets, adding liquidity that helps to explain what US Federal Reserve Board of Governors chairman Ben Bernanke described as a "global savings glut" that has kept interest rates down over the past few years. In 2006 alone, we estimate at least $200 billion of petrodollars went to global equity markets, more than $100 billion to global fixed-income markets, and perhaps $40 billion to global hedge funds, private-equity firms, and other alternative investments. This capital is invested chiefly in Europe and the United States, but regions such as Asia, the Middle East, and other emerging markets are also significant beneficiaries.
Although the added liquidity from petrodollars has helped buttress global financial markets, it may also be creating inflationary pressure in illiquid markets, such as those for real estate and art. The unanswered question is whether the world economy will continue to accommodate higher oil prices without a notable rise in inflation or an economic slowdown.
Where the wealth is . . .
The Gulf Cooperation Council (GCC) states—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)—are the largest oil exporters. Together, we estimate, they had foreign assets of $1.6 trillion to $2 trillion by the end of 2006 (Exhibit 3). Other states in the region, including Algeria, Iran, Libya, Syria, and Yemen, held an estimated $330 billion; the other oil exporters combined, about $1.5 billion. At the end of 2006, the oil exporters collectively owned $3.4 trillion to $3.8 trillion in foreign financial assets.
Much attention around the world has recently been devoted to the oil exporters’ sovereign wealth funds, which are indeed large. By some estimates, the Abu Dhabi Investment Authority (ADIA) holds nearly $875 billion in foreign assets, Norway’s Government Pension Fund $300 billion, Russia’s Oil Stabilization Fund $100 billion, and the Kuwait Investment Authority $200 billion. But oil investors as a whole are a more diverse group, with hundreds of individual players. We calculate that private individuals who actively invest in global financial markets hold at least 40 percent of the foreign wealth purchased with petrodollars. Also important are the oil-exporting states’ central banks (such as the Saudi Arabian Monetary Agency) and private-equity-like funds, including Dubai International Capital.
. . . and where it’s going
Compared with traditional players such as pension funds and mutual funds, the assets of petrodollar investors are relatively modest. Still, they have been growing at an impressive rate of 19 percent a year since 2000 and will continue to increase their impact on world financial markets because of escalating energy demand from China, India, and other emerging markets. Even in a base case with oil prices reverting to $50 a barrel,4 the oil-exporting countries would have net capital outflows5 of $387 billion a year through 2012—an infusion of more than $1 billion a day of capital into global financial markets. Over the next five years, we estimate, this flow would generate investments of $1.4 trillion in equities, $800 billion in fixed-income securities, and $300 billion for private-equity firms, hedge funds, and real estate. The oil exporters’ total foreign assets would grow to at least $5.9 trillion in 2012.
If oil prices remained at $70 a barrel until 2012—and they neared $100 in November 2007 as this article went to press—foreign assets purchased with petrodollars would grow to $6.9 trillion by then. This figure implies an inflow of almost $2 billion a day into global financial markets. Even if oil prices declined to $30 a barrel, foreign assets purchased with petrodollars would grow robustly (Exhibit 4). This enormous pool will continue to provide liquidity for capital markets but may also cut investment returns and create inflationary pressures in areas such as real estate.
Reserves: Asia’s opportunity cost
Second in size to petrodollars are the reserves of Asia’s central banks—reserves that have grown rapidly as a result of rising trade surpluses, foreign-investment inflows, and exchange rate policies. In 2006, Asia’s central banks held $3.1 trillion in foreign-reserve assets, 64 percent of the global total and nearly three times the amount they held in 2000. Compared with petrodollars, these assets are concentrated in just a handful of institutions. China alone had amassed around $1.4 trillion in reserves by mid-2007.
Unlike investors with petrodollars, Asia’s central banks have channeled their funds into conservative investments, such as US treasury bills. We estimate that by the end of 2006, these institutions had $1.9 trillion more in foreign reserves than they needed for exchange rate and monetary stability.6 Because they could have invested that sum in higher-yielding opportunities, the forgone returns represent a significant opportunity cost (Exhibit 5). On the relatively conservative assumption that alternative investments in a higher-yielding capital market portfolio might yield 5 percent more than US Treasury bills, that cost for Asia’s major economies, in 2006 alone, was almost $100 billion—1.1 percent of their total GDP.
What to do with growing reserves?
As trade surpluses accumulate, the opportunity cost of Asia’s reserves will become even greater. If recent growth continues, they will reach $7.3 trillion in 2012. Even if China’s current-account surplus declined dramatically over the next five years and Japan’s remained the same, Asia’s reserve assets would grow to $5.1 trillion by 2012 (Exhibit 6).
n a quest for higher returns, some Asian governments have begun to diversify their assets by channeling some of their reserves to sovereign wealth funds similar to those of oil-exporting nations. The Government of Singapore Investment Corporation (GIC), established in 1981, now has an estimated $150 billion to $200 billion in assets and according to public statements has plans to increase them to $300 billion. Korea Investment Corporation (KIC) has $20 billion in assets, the new China Investment Corporation (CIC) $200 billion. The assets of Asia’s sovereign wealth funds could collectively reach $700 billion in the next few years, with the potential for even more growth.
Such a shift will benefit Asian nations through higher investment returns and spread the "Asian liquidity bonus" beyond the US fixed-income market. Given the large and rapidly growing amounts of reserves used to purchase assets, however, US interest rates won’t necessarily rise as a result. Over time, a greater share of the investments made by the sovereign wealth funds may stay within Asia, spurring the development of its financial markets.
Beneficiaries of liquidity
Hedge funds and private-equity funds are among the beneficiaries of the added liquidity that Asian and oil-rich countries bring to global markets. Assets under management in hedge funds totaled $1.7 trillion by the middle of 2007. But after taking into account leverage, we estimate that their gross investment assets could amount to as much as $6 trillion, more than the foreign assets of investors from oil-producing countries or Asia’s central banks.8
Although the failure of several multibillion-dollar hedge funds in mid-2007 may slow the sector’s growth, investors usually look to the long term; it would take several years of low returns before these vehicles lost their appeal. What’s more, oil investors are big clients of hedge funds and private-equity funds, with around $350 billion committed today, and high oil prices could more than double that sum over the next five years. Even if the growth of the hedge funds’ assets were to slow significantly—say, to 5 percent a year—by 2012 they could still reach $3.5 trillion (Exhibit 7). Taking into account leverage, hedge funds would then have gross investments of $9 trillion to $12 trillion, about a third of the assets that mutual funds around the world will have in that year.
Hedge funds as financial engines
Thanks to the size and active-trading styles of hedge funds, they play an increasingly significant role in global financial markets: in 2006 they accounted for 30 to 60 percent of trading volumes in the US and UK equity and debt markets, and in some higher-risk asset classes, such as derivatives and distressed debt, they are the largest type of player (Exhibit 8). Although petrodollar investors and Asia’s central banks add liquidity by bringing in new capital, hedge funds do so by trading actively and playing a large role in credit derivative markets. In this way, they increase the number of financing options available to borrowers (including private-equity firms) that might have found it hard to attract financing in the past, and their active trading improves the pricing efficiency of financial markets.
How risky?
Worries persist that the hedge funds’ growing size and heavy borrowing could destabilize financial markets. But our research finds that over the past ten years several developments have reduced—though certainly not eliminated—the risk of a broader crisis if one or more funds collapsed.
For one thing, their investment strategies are becoming more diverse (Exhibit 9). Ten years ago more than 60 percent of their assets were invested in directional bets on macroeconomic indicators. That share has shrunk to just 15 percent today. Arbitrage and other market-neutral strategies have become more common, thereby reducing herd behavior—one reason most hedge funds withstood the US subprime turmoil in 2007. Several large quantitative-equity arbitrage funds simultaneously suffered large losses, indicating that their trading models were more similar than previously thought. But, overall, the sector emerged relatively unscathed.
In addition, banks now manage risk more capably; the largest appear to have enough equity and collateral to cover losses from their hedge fund investments. Our analysis indicates that the top ten banks’ total exposure to credit and derivatives risk from hedge funds is 2.4 times equity—a relatively high capital adequacy ratio of 42 percent.
Private equity: small but powerful
Private equity has gained prominence less because of its size than its impact on corporate governance. Although assets under management rose 2.5 times, to $710 billion, from 2000 to 2006, the private-equity industry is roughly half the size of the hedge funds, smaller than the largest petrodollar fund (the ADIA), and growing more slowly than either.
Even so, thanks to typical investment horizons of four to five years, concentrated ownership positions, and seats on the board of directors, private-equity funds can embark upon longer-term, and therefore potentially more effective, corporate-restructuring efforts. Not all private-equity firms live up to that billing, however. Our research shows that only the top-performing ones sustainably improve the operations of the companies in their portfolios and generate high returns.
The growing size of individual firms—and "club deals" combining the muscle of several firms or investors—have enabled them to buy ever-larger companies. Private-equity investors accounted for one-third of all US mergers and acquisitions in 2006 and for nearly 20 percent in Europe (Exhibit 10). This wave of buyouts has prompted CEOs and boards at some companies to find new ways of strengthening their performance.
Size limits risk
Private-equity firms may also amplify the risks in financial markets—particularly credit risk—because they like to finance takeovers with leveraged loans and use their growing clout to extract looser lending covenants and better terms from banks. The credit market correction of mid-2007, however, jeopardized the financing for many private-equity deals.
Even if private-equity defaults rose sharply, they would not be likely to have broader implications for financial markets. In 2006 private-equity firms accounted for just 11 percent of overall corporate borrowing in Europe and the United States. If their default rates rose to 15 percent of all deals—the previous high was 10 percent—the implied losses would equal only 3 and 7 percent, respectively, of 2006 syndicated-lending issuance in Europe and the United States (Exhibit 11).
Growth signals a structural shift
Despite the difficult experience of some recent buyout deals, we believe that global private-equity assets under management will double to $1.4 trillion by 2012. Our projection assumes that fund-raising remains at its 2006 level in Europe and the United States and grows at half its previous rate in Asia and the rest of the world. If current growth rates in fund-raising continued, private-equity assets would reach $2.6 trillion in 2012 (Exhibit 12).
Either way, that kind of growth represents a fundamental shift in the development of financial markets. For the past 25 years, financial intermediation in mature economies has migrated steadily from bank lending to the public-equity and debt markets. The rise of private equity and the private pools of capital in sovereign wealth funds herald the resurgence of private forms of financing.
The road ahead
Regardless of whether interest rates rise or oil prices drop, the four new power brokers will continue to grow and shape the future development of capital markets. To ease the transition to the coming financial order, the players can take some useful steps.
Because capital markets function on the free flow of information, sovereign wealth funds and other types of government-investment units9 in Asia and in oil-exporting nations should consider disclosing more information about their investment strategies, target portfolio allocations, internal risk-management procedures, and governance structures. (Norway’s Government Pension Fund is a model in this respect.) Funds can allay concerns that politics will play a role in their decisions—and reduce the likelihood that regulators will act too aggressively—by publicly stating their investment goals.
Policy makers in Europe and the United States should base any regulatory response to the activities of the new power brokers on an objective appraisal of the facts. In particular, they ought to distinguish between direct foreign acquisitions of companies and passive investments by diversified players in financial markets.
Banks must protect themselves against the risks posed by hedge funds and private-equity funds. In particular, they need tools and incentives to measure and monitor their exposure accurately and to maintain enough capital and collateral to cover these risks. Currently, it is difficult to assess the dangers stemming from illiquid collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs). Ratings agencies and investors alike must raise their risk-assessment game.
With the growth of credit derivatives and collateralized debt obligations, banks have in many cases removed themselves from the consequences of poorly underwritten lending. As institutions originate more and more loans without putting their own capital at risk for the long-term performance of those loans, regulators should find ways to check a decline in standards. Concerns about the rise of the four power brokers are rational. But we find cause for qualified optimism that the benefits of liquidity, innovation, and diversification they bring will outweigh the risks.
Diana Farrell and Susan Lund
http://thinkingmoose.blogspot.com/2007/12/large-forces-in-global-capital-markets.html
5.12.07
A major new private investment firm has been formed in Dubai, the official WAM news agency reported yesterday.
Dubai Infinity Holdings was set up by a group of prominent local investors and will focus on information technology, education, healthcare, lifestyle, real-estate and entertainment sectors in the region.
Dubai is busy expanding its portfolio of foreign assets.
Government-controlled or backed firms and investment funds have chased strategic targets such as European aerospace giant EADS in which Dubai International Capital bought a 3.12 per cent stake.
Another target was the upscale Barneys New York retail chain, which Dubai investment company Istithmar wrested from a rival Japanese bidder.
Dubai is busy expanding its portfolio of foreign assets.
Government-controlled or backed firms and investment funds have chased strategic targets such as European aerospace giant EADS in which Dubai International Capital bought a 3.12 per cent stake.
Another target was the upscale Barneys New York retail chain, which Dubai investment company Istithmar wrested from a rival Japanese bidder.
29.11.07
PE funds tap into new group of Asian investors
India-focused private equity (PE) funds have historically sourced money from so-called limited partners, or LPs, (institutions and individuals who invest in such funds) in the US and Europe.
But, the singular dependence on these markets may now be on the wane, albeit slowly, as Asian LPs begin to make inroads into the Indian PE market.
PE investors say that the interest from LPs in the region has consistently grown during the last two-three years. Some of these institutions have deployed money as part of global or pan-Asia funds, with a mandate to also invest in India. Some have invested directly in India-specific funds.
For instance, Asian LPs composed 70% of IDFC Private Equity Co. Ltd’s second fund, which raised $440 million (about Rs1,747 crore); the firm is a subsidiary of Infrastructure Development Finance Co. Other instances include Beacon India Advisors Pvt. Ltd (sponsored by Dubai-based Baer Capital Partners), Helion Venture Partners and Baring Private Equity Partners (I) Pvt. Ltd.
According to industry estimates, Asian LPs account for upwards of 10% of the PE money currently raised or allocated to India. In 2006, the total PE money raised for India was $2.88 billion, according to the Emerging Markets Private Equity Association (Empea). For 2007, the estimate is $663 million through June; this not factoring in the surge of billion-dollar and half-billion-dollar funds announced later in the year. There is no publicly available data on the region-wise sources of LP money flowing into India, and consultants to LPs such as US-based Cambridge Associates Llc. do not release their data.The Asian LPs most often named by PE investors include Abu Dhabi Investment Co., Asian Development Bank, Dubai International Capital Llc. and Government of Singapore Investment Corp. But LPs scoping out India run across the region.
As Asian LPs expand their footprint in India, fund managers have an opportunity to diversify their investor portfolio and protect themselves from the ripple effects of foreign economic slumps. Fund managers felt the need for a diversified investor base acutely after the US Internet bust that started in 2001 and led to a three-year slump in investing activity. With more than 90% of India’s PE money inflows dependent on the US at the time, fund managers often found themselves unable to close deals because the money committed by their US LPs never came through.
Deepak Shahdadpuri, founder and managing director at Beacon, says there should be a mix of investors—endowments, fund-of-funds, family offices, corporates, etc.—and geographical diversity so that there is a mix of LPs from across the US, Europe, Asia and Western Asia. “The ideal mix and geographical diversity depends on each fund,” he says. “At Beacon, we are looking at 40% from Europe, 40% from West Asia and 20% from the rest of the world.” The factors that pull any LP to India have been simple and universal: a chance for returns upward of 30%. But the difference in Asia is that, besides the most prominent investors mentioned, its LPs have been late to recognize or prioritize the India story. Their interest in India is picking up now as this market has shown profitable exits. “All along it was a notional mark to market,” says Luis Miranda, president and CEO of IDFC Private Equity. “Today people are seeing cash returns.”
India might also have some advantages over its Bric (Brazil, Russia, India and China) peers in having a more open way of conducting business.
“The biggest single source of increased interest in fund-of-fund investment in recent times is from the Middle East,” says Somak Ghosh, president of corporate finance at Yes Bank Ltd. This shift seems to come as various factors push those economies to look to new places for investment like never before.
But, most importantly, “the Middle East interest will increase because of oil prices creating a huge surplus there,” says Jayanta Banerjee, managing director and head of PE and growth capital at Lehman Brothers. “There are relatively less questions about India than other emerging markets from a risk-return profile.”
Meanwhile, Mizuho Bank Ltd, Sumitomo Trust and Japan Alternative Investment Co. have made investments, according to industry sources who did not want to be named. The sources added that Japan has great untapped potential as a source of LPs.
Varun Sood, managing partner at LP Capvent India Advisors Pvt. Ltd, said: “Normally, they (the Japanese) are the last to come in.” The investment level from any of Asia’s LPs will largely depend on how much extra cash they have and how they allocate to PE as an asset class. Says Sood: “You can’t just invest in PE when you don’t have a surplus.”
But, the singular dependence on these markets may now be on the wane, albeit slowly, as Asian LPs begin to make inroads into the Indian PE market.
PE investors say that the interest from LPs in the region has consistently grown during the last two-three years. Some of these institutions have deployed money as part of global or pan-Asia funds, with a mandate to also invest in India. Some have invested directly in India-specific funds.
For instance, Asian LPs composed 70% of IDFC Private Equity Co. Ltd’s second fund, which raised $440 million (about Rs1,747 crore); the firm is a subsidiary of Infrastructure Development Finance Co. Other instances include Beacon India Advisors Pvt. Ltd (sponsored by Dubai-based Baer Capital Partners), Helion Venture Partners and Baring Private Equity Partners (I) Pvt. Ltd.
According to industry estimates, Asian LPs account for upwards of 10% of the PE money currently raised or allocated to India. In 2006, the total PE money raised for India was $2.88 billion, according to the Emerging Markets Private Equity Association (Empea). For 2007, the estimate is $663 million through June; this not factoring in the surge of billion-dollar and half-billion-dollar funds announced later in the year. There is no publicly available data on the region-wise sources of LP money flowing into India, and consultants to LPs such as US-based Cambridge Associates Llc. do not release their data.The Asian LPs most often named by PE investors include Abu Dhabi Investment Co., Asian Development Bank, Dubai International Capital Llc. and Government of Singapore Investment Corp. But LPs scoping out India run across the region.
As Asian LPs expand their footprint in India, fund managers have an opportunity to diversify their investor portfolio and protect themselves from the ripple effects of foreign economic slumps. Fund managers felt the need for a diversified investor base acutely after the US Internet bust that started in 2001 and led to a three-year slump in investing activity. With more than 90% of India’s PE money inflows dependent on the US at the time, fund managers often found themselves unable to close deals because the money committed by their US LPs never came through.
Deepak Shahdadpuri, founder and managing director at Beacon, says there should be a mix of investors—endowments, fund-of-funds, family offices, corporates, etc.—and geographical diversity so that there is a mix of LPs from across the US, Europe, Asia and Western Asia. “The ideal mix and geographical diversity depends on each fund,” he says. “At Beacon, we are looking at 40% from Europe, 40% from West Asia and 20% from the rest of the world.” The factors that pull any LP to India have been simple and universal: a chance for returns upward of 30%. But the difference in Asia is that, besides the most prominent investors mentioned, its LPs have been late to recognize or prioritize the India story. Their interest in India is picking up now as this market has shown profitable exits. “All along it was a notional mark to market,” says Luis Miranda, president and CEO of IDFC Private Equity. “Today people are seeing cash returns.”
India might also have some advantages over its Bric (Brazil, Russia, India and China) peers in having a more open way of conducting business.
“The biggest single source of increased interest in fund-of-fund investment in recent times is from the Middle East,” says Somak Ghosh, president of corporate finance at Yes Bank Ltd. This shift seems to come as various factors push those economies to look to new places for investment like never before.
But, most importantly, “the Middle East interest will increase because of oil prices creating a huge surplus there,” says Jayanta Banerjee, managing director and head of PE and growth capital at Lehman Brothers. “There are relatively less questions about India than other emerging markets from a risk-return profile.”
Meanwhile, Mizuho Bank Ltd, Sumitomo Trust and Japan Alternative Investment Co. have made investments, according to industry sources who did not want to be named. The sources added that Japan has great untapped potential as a source of LPs.
Varun Sood, managing partner at LP Capvent India Advisors Pvt. Ltd, said: “Normally, they (the Japanese) are the last to come in.” The investment level from any of Asia’s LPs will largely depend on how much extra cash they have and how they allocate to PE as an asset class. Says Sood: “You can’t just invest in PE when you don’t have a surplus.”
24.11.07
Opportunities in Islamic Private Equity
Opportunities in Islamic Private Equity
Mr. David Rubenstein, founder of the worlds largest private equity firm The Carlyle Group, has in his many industry presentations cited Christopher Columbus (the famous early voyager to the Americas) as a first in Private Equity! To fund his voyage to discover the “new world,” Columbus pitched his plans to Queen Isabel of Castille for the $10,000 he was trying to raise. The Queen after three years of ‘due diligence' finally made the deal with Columbus promising him 10% of the profits, 5% of the gold, reimbursement for all expenses in advance, and a title of admiral for life. Nice deal!
Similarly, as a reflection of the historic role Arab voyagers and traders have played in world civilization, Mr. Arif Naqvi, CEO of one of the largest Private Equity funds in the MENA (Middle East North Africa) region, has also been referencing the voyages of Sinbad the Sailor and the early Arab seafarer traders and the spice routes carrying frankincense from Yemen. This historical role is certainly being manifested today as well in the form of the economic boom the MENA region is experiencing.
An Industry Emerges
Driven by a three-fold oil price increase in the last four years, the Gulf Cooperative Council (GCC) nations have experienced extraordinary economic boom clocking an average 6.1% GDP growth in the last three years and liquidity estimated by KMPG to be in excess of US$2.3 trillion.
At the same time, the Islamic Finance industry continues to grow un-abated with an estimated US$ 750 billion in global assets growing 15-20% annually – with the GCC accounting for 2/3 rd of its size (S&P and HSBC analysis.)
The result of these two trends is a boom in Private Equity investments in the GCC and the broader MENA (Middle East & North Africa) which includes a growing trend of Islamic Private Equity funds as well. According to the 2007 Dow Jones Private Equity report, the MENA region has raised $16 billion since 1994 out of which $10 billion were raised in 2006. $1.1 billion are estimated to be Islamic Private Equity funds.
Today – local Private Equity players Abraaj Capital, Global Investment House, Millenium Finance Corp.(MFC) and even the global PE behemoth Carlyle Group have setup mega funds in excess of $1 billion focused on the region. Of these mega funds, the MFC funds are marketed as Islamic PE funds.
So what is Islamic Private Equity anyway? What is driving this trend and what is the impact of this trend?
Convergence of Islamic Finance & Private Equity
Commenting on Islamic Private Equity, Mr. Fuad Al-Shehab, General Manager of Investment Group at Kuwait based Boubyan Bank which together with Ryada Capital recently launched the $150 million Ryada Islamic Private Equity Fund said, “Private Equity is a natural fit for Islamic investors since at the core of Shari'ah principles money should be directed to the real economy through investing in businesses that offer ethically acceptable products and services. This means that returns should be earned through active involvement and participation in the business risk in Shari'ah compliant investments.”
There's certainly a growing realization that private equity amongst its other benefits is quite compatible with Islamic finance.
To understand the principles that are driving this convergence it's important to understand some core underlying principles. Aamir A. Rehman, a former Global Head of Strategy at HSBC Amanah, and Boston Consulting Group consultant, explains that Islamic finance is more than just financial contracts. He has identified the following core basic tenets of Islamic finance that Sharia' scholars draw upon:
1. If something is immoral, one cannot profit from it
2. To share reward, one must also share risk
3. One cannot sell what he or she does not own
4. In any transaction, one must clearly specify what he or she is buying or selling and one price is being paid
Mr. Rehman says that as the Islamic Finance industry is growing it is also maturing in terms of its richness of products being offered—from commercial banking, insurance to structured products, the Industry has near like-for-like parity with conventional offering. However, he points out that the Industry still needs to deepen and address a variety of investment product gaps. As real estate and equity assets have matured, and structured products and cash management products are maturing--sophisticated products such as Private Equity, Fixed income or hedging products are just emerging in the markets.
Mr. Rehman sees the Islamic private equity sector specially poised for expansion. He bases the natural partnership between Islamic Finance and Private Equity on conceptual and commercial grounds.
Conceptually, he contends that Islamic finance ethos actually seeks “real economy” impact which Private Equity is geared to deliver. Infact he says that the Private equity model represents classic Mudarabah with the GP / LP structure being a strikingly pure example of what a Mudarabah is envisioned to be. Meanwhile, he says that the traditional “Banking” model is inherently constraining with risk-free deposit and lending, and limited equity positions resulting in clients not sharing the upside.
Commercially, Mr Rehman highlights the growing interest and comfort within family businesses to seek private equity in rationalizing their assets. At the same time Sharia compliance is also becoming an important ‘exit' consideration. Another commercial aspect is the affect of the GCC markets that have severely corrected themselves giving private equity additional prominence.
Fundamentals of Private Equity in the MENA Region
MENA region is seeing a tremendous interest by the global Private Equity industry. David Rubenstein, the Managing Director of Carlyle Group recently commented that, “My proposition is that [the Middle East ] will be the fourth private equity center of the world five to 10 years from now.” Meanwhile a report titled “The most influential people in global private equity,” published by "Private Equity International'' magazine, four regional players were recognized as movers and shakers of the industry. These are Mr. David Jackson of Istithmar, Mr. Arif Naqvi of Abraaj Capital, Mr. Sameer Al Ansari of Dubai International Capital and Mr. Hareb Al Darmaki of Abu Dhabi Investment Authority.
Today there are a total of approximately 40 plus MENA region based Private Equity players which have grown manifolds in the past two years. In a recent report by Zawya and KPMG, as of mid-2006 there were an estimated US$13 billion in private equity capital currently under management off which 90% had been raised in the last two years.
MENA Region Private Equity Funds Raised, 1997-2006
Source: Zawya/ KPMG 2006
Also in 2006, the average fund size had increased to US$ 284 million, a three fold increase from that in 2003, when the average fund size was between US$ 80 million and US$ 100 million.
Sector Focus of PE Investment, 1997-2006
Source: Zawya/ KPMG 2006
Three of the key fundamentals that are also driving this trend are governments' tremendous strides in improving the regulatory environment, liberalization of the economies, and major infrastructure development demands.
The latest 2008 Doing Business– World Bank Report which investigates the regulations that enhance business activity and those that constrain it covering 178 economies showed Egypt and Saudi Arabia as the Top 10 reformers globally, with Egypt being #1. Similarly, the 2007 Global Competitiveness Report , by the World Economic Forum , has several countries in the Middle East and North Africa region in the upper half of the rankings led by Kuwait (30th), Qatar (31st), Tunisia (32nd), Saudi Arabia (35th) and the United Arab Emirates (37th).
Also, according to an Abraaj Capital analysis the privatization pipeline in the MENA region is expected to cross US$ 1 trillion with approximately 147 privatization transactions either announced or planned in the next ten years. Majority of these privatizations are for infrastructure assets such as roads, airports, bridges, public transit systems, seaports, power stations, power lines, gas pipelines, and communications networks.
‘Exit' Strategies and Other Challenges
While US$ 6.5 billion has been invested by Private Equity firms since 1998, only 5% (US$ 0.3 billion) has been realized in exits.
The industry is still in the investing phase so the jury is still out on the success and returns by the industry. However, viable exit strategies remain perhaps the biggest challenge for the industry. Even with the massive correction that the regions public markets recently faced, IPO market in the GCC is still one of the most promising exit routes for private equity managers to exit.
Some notable exits include Injazat Technology Funds recent sale of their investment in Atos Origin Middle East (AOME) through the sale of the company to HP, achieving a significant internal rate of return (IRR) of 75%. Also, Raya Holding, yielding a return of over 40 per cent for Injazat and was soon after listed on the Cairo Exchange. The most celebrated early exits for the industry was Abraaj Capitals sale of logistic company Aramex to Arab International Logistic for US$ 189 million in cash.
Some of the other challenges facing the industry include still evolving regulatory limits to foreign ownership, and the regions' family and government dominated businesses rather unstructured relationship style of negotiating, agreeing to equity terms, and board management expectations.
No Pain No Gain
However, it's in the midst of these challenges that those with a vision are investing and realizing tremendous opportunities. Mr. Rubenstein of the Carlyle Group recently in his comments differentiated between ‘emerged' and ‘emerging' markets. He made the argument that these two type of markets need to be treated differently and that the best investors will go beyond just ‘emerged' markets (ie China, India) and look to truly emerging economies that are slowly turning the corner and where returns will be maximized.
Given the relative infancy of the PE industry in the MENA region, its fair to say that the Christopher Columbus and Sindbad's have just set sail, but there's no denying that a tremendous opportunity awaits for those seeking this ‘new world.'
By Rafi-uddin Shikoh
Posted, Nov 22, 2007
Mr. David Rubenstein, founder of the worlds largest private equity firm The Carlyle Group, has in his many industry presentations cited Christopher Columbus (the famous early voyager to the Americas) as a first in Private Equity! To fund his voyage to discover the “new world,” Columbus pitched his plans to Queen Isabel of Castille for the $10,000 he was trying to raise. The Queen after three years of ‘due diligence' finally made the deal with Columbus promising him 10% of the profits, 5% of the gold, reimbursement for all expenses in advance, and a title of admiral for life. Nice deal!
Similarly, as a reflection of the historic role Arab voyagers and traders have played in world civilization, Mr. Arif Naqvi, CEO of one of the largest Private Equity funds in the MENA (Middle East North Africa) region, has also been referencing the voyages of Sinbad the Sailor and the early Arab seafarer traders and the spice routes carrying frankincense from Yemen. This historical role is certainly being manifested today as well in the form of the economic boom the MENA region is experiencing.
An Industry Emerges
Driven by a three-fold oil price increase in the last four years, the Gulf Cooperative Council (GCC) nations have experienced extraordinary economic boom clocking an average 6.1% GDP growth in the last three years and liquidity estimated by KMPG to be in excess of US$2.3 trillion.
At the same time, the Islamic Finance industry continues to grow un-abated with an estimated US$ 750 billion in global assets growing 15-20% annually – with the GCC accounting for 2/3 rd of its size (S&P and HSBC analysis.)
The result of these two trends is a boom in Private Equity investments in the GCC and the broader MENA (Middle East & North Africa) which includes a growing trend of Islamic Private Equity funds as well. According to the 2007 Dow Jones Private Equity report, the MENA region has raised $16 billion since 1994 out of which $10 billion were raised in 2006. $1.1 billion are estimated to be Islamic Private Equity funds.
Today – local Private Equity players Abraaj Capital, Global Investment House, Millenium Finance Corp.(MFC) and even the global PE behemoth Carlyle Group have setup mega funds in excess of $1 billion focused on the region. Of these mega funds, the MFC funds are marketed as Islamic PE funds.
So what is Islamic Private Equity anyway? What is driving this trend and what is the impact of this trend?
Convergence of Islamic Finance & Private Equity
Commenting on Islamic Private Equity, Mr. Fuad Al-Shehab, General Manager of Investment Group at Kuwait based Boubyan Bank which together with Ryada Capital recently launched the $150 million Ryada Islamic Private Equity Fund said, “Private Equity is a natural fit for Islamic investors since at the core of Shari'ah principles money should be directed to the real economy through investing in businesses that offer ethically acceptable products and services. This means that returns should be earned through active involvement and participation in the business risk in Shari'ah compliant investments.”
There's certainly a growing realization that private equity amongst its other benefits is quite compatible with Islamic finance.
To understand the principles that are driving this convergence it's important to understand some core underlying principles. Aamir A. Rehman, a former Global Head of Strategy at HSBC Amanah, and Boston Consulting Group consultant, explains that Islamic finance is more than just financial contracts. He has identified the following core basic tenets of Islamic finance that Sharia' scholars draw upon:
1. If something is immoral, one cannot profit from it
2. To share reward, one must also share risk
3. One cannot sell what he or she does not own
4. In any transaction, one must clearly specify what he or she is buying or selling and one price is being paid
Mr. Rehman says that as the Islamic Finance industry is growing it is also maturing in terms of its richness of products being offered—from commercial banking, insurance to structured products, the Industry has near like-for-like parity with conventional offering. However, he points out that the Industry still needs to deepen and address a variety of investment product gaps. As real estate and equity assets have matured, and structured products and cash management products are maturing--sophisticated products such as Private Equity, Fixed income or hedging products are just emerging in the markets.
Mr. Rehman sees the Islamic private equity sector specially poised for expansion. He bases the natural partnership between Islamic Finance and Private Equity on conceptual and commercial grounds.
Conceptually, he contends that Islamic finance ethos actually seeks “real economy” impact which Private Equity is geared to deliver. Infact he says that the Private equity model represents classic Mudarabah with the GP / LP structure being a strikingly pure example of what a Mudarabah is envisioned to be. Meanwhile, he says that the traditional “Banking” model is inherently constraining with risk-free deposit and lending, and limited equity positions resulting in clients not sharing the upside.
Commercially, Mr Rehman highlights the growing interest and comfort within family businesses to seek private equity in rationalizing their assets. At the same time Sharia compliance is also becoming an important ‘exit' consideration. Another commercial aspect is the affect of the GCC markets that have severely corrected themselves giving private equity additional prominence.
Fundamentals of Private Equity in the MENA Region
MENA region is seeing a tremendous interest by the global Private Equity industry. David Rubenstein, the Managing Director of Carlyle Group recently commented that, “My proposition is that [the Middle East ] will be the fourth private equity center of the world five to 10 years from now.” Meanwhile a report titled “The most influential people in global private equity,” published by "Private Equity International'' magazine, four regional players were recognized as movers and shakers of the industry. These are Mr. David Jackson of Istithmar, Mr. Arif Naqvi of Abraaj Capital, Mr. Sameer Al Ansari of Dubai International Capital and Mr. Hareb Al Darmaki of Abu Dhabi Investment Authority.
Today there are a total of approximately 40 plus MENA region based Private Equity players which have grown manifolds in the past two years. In a recent report by Zawya and KPMG, as of mid-2006 there were an estimated US$13 billion in private equity capital currently under management off which 90% had been raised in the last two years.
MENA Region Private Equity Funds Raised, 1997-2006
Source: Zawya/ KPMG 2006
Also in 2006, the average fund size had increased to US$ 284 million, a three fold increase from that in 2003, when the average fund size was between US$ 80 million and US$ 100 million.
Sector Focus of PE Investment, 1997-2006
Source: Zawya/ KPMG 2006
Three of the key fundamentals that are also driving this trend are governments' tremendous strides in improving the regulatory environment, liberalization of the economies, and major infrastructure development demands.
The latest 2008 Doing Business– World Bank Report which investigates the regulations that enhance business activity and those that constrain it covering 178 economies showed Egypt and Saudi Arabia as the Top 10 reformers globally, with Egypt being #1. Similarly, the 2007 Global Competitiveness Report , by the World Economic Forum , has several countries in the Middle East and North Africa region in the upper half of the rankings led by Kuwait (30th), Qatar (31st), Tunisia (32nd), Saudi Arabia (35th) and the United Arab Emirates (37th).
Also, according to an Abraaj Capital analysis the privatization pipeline in the MENA region is expected to cross US$ 1 trillion with approximately 147 privatization transactions either announced or planned in the next ten years. Majority of these privatizations are for infrastructure assets such as roads, airports, bridges, public transit systems, seaports, power stations, power lines, gas pipelines, and communications networks.
‘Exit' Strategies and Other Challenges
While US$ 6.5 billion has been invested by Private Equity firms since 1998, only 5% (US$ 0.3 billion) has been realized in exits.
The industry is still in the investing phase so the jury is still out on the success and returns by the industry. However, viable exit strategies remain perhaps the biggest challenge for the industry. Even with the massive correction that the regions public markets recently faced, IPO market in the GCC is still one of the most promising exit routes for private equity managers to exit.
Some notable exits include Injazat Technology Funds recent sale of their investment in Atos Origin Middle East (AOME) through the sale of the company to HP, achieving a significant internal rate of return (IRR) of 75%. Also, Raya Holding, yielding a return of over 40 per cent for Injazat and was soon after listed on the Cairo Exchange. The most celebrated early exits for the industry was Abraaj Capitals sale of logistic company Aramex to Arab International Logistic for US$ 189 million in cash.
Some of the other challenges facing the industry include still evolving regulatory limits to foreign ownership, and the regions' family and government dominated businesses rather unstructured relationship style of negotiating, agreeing to equity terms, and board management expectations.
No Pain No Gain
However, it's in the midst of these challenges that those with a vision are investing and realizing tremendous opportunities. Mr. Rubenstein of the Carlyle Group recently in his comments differentiated between ‘emerged' and ‘emerging' markets. He made the argument that these two type of markets need to be treated differently and that the best investors will go beyond just ‘emerged' markets (ie China, India) and look to truly emerging economies that are slowly turning the corner and where returns will be maximized.
Given the relative infancy of the PE industry in the MENA region, its fair to say that the Christopher Columbus and Sindbad's have just set sail, but there's no denying that a tremendous opportunity awaits for those seeking this ‘new world.'
By Rafi-uddin Shikoh
Posted, Nov 22, 2007
Strong economic growth sparks Gulf IPO boom
DUBAI: Stock flotations are booming in the Gulf region, spurred by strong economic growth, a wealth of spare cash created by record-high oil prices and government encouragement, market specialists say.The most recent case, an initial public offering by Dubai port operator DP World, shows the magnitude of demand. The state-owned company yesterday said it had raised $4.96bn in an IPO that was 15 times oversubscribed.
The Middle East's largest IPO ever, it compared with $5.9bn for all 26 offerings made in the GCC in the first nine months of this year.
"Strong GDP growth averaging eight per cent per year, excess liquidity due to high oil prices, structural reforms by regional governments and privatisation initiatives have all contributed to an increase in the number of IPOs," said Tamer Bazzari, a partner in the Dubai-based Rasmala investment bank.
Before DP World's IPO, the largest public share offer was made by Saudi Telecom in 2003.
It raised more than $4bn dollars by selling a 30pc stake, a third of which went to two public pension funds.
"Saudi Arabia and the UAE are at the forefront of IPO activity in the region, having accounted for 70pc of all GCC IPOs over the last decade," Bazzari said.
Saudi IPOs in the first nine months of this year amounted to $3.7bn, compared with $1.6bn in the UAE and $389 million in Qatar.
The trend had been growing in the GCC, with total closed IPOs reaching $1.5bn in 2004, $6bn in 2005 and $7.5bn last year, according to Abu Dhabi-based private equity firm Gulf Capital.
The region accounted for the bulk of IPOs in the Middle East, which Ernst and Young said numbered 87 last year with a total value of $10.8bn.
"It will continue to grow sharply ... The appetite continues to be high," said Brad Bourland, chief economist at Riyadh-based Jadwa Investment.
"There are about 100 (new) IPOs in the pipeline," he said, while Gulf Capital said IPOs between this year and 2010 should exceed 106.
"Regional liquidity, combined with increasing interest by international investors, is expected to contribute to the success of future IPOs," Bazzari said.
Gulf countries are enjoying handsome windfalls on the back of record-high crude prices, which have pumped huge funds into their economies and jumpstarted multi-billion-dollar infrastructure projects that had been delayed.
Abundant liquidity appears also to face a shortage in investment opportunities as almost all IPOs in the region are over-subscribed.
Early last year, investors from GCC countries slept in tents and cars in Doha as they swamped the Qatari capital for an IPO by Al Rayan bank. The newly formed lender had offered 55pc of its capital for $1.13bn and ended up six times oversubscribed.
The Middle East's largest IPO ever, it compared with $5.9bn for all 26 offerings made in the GCC in the first nine months of this year.
"Strong GDP growth averaging eight per cent per year, excess liquidity due to high oil prices, structural reforms by regional governments and privatisation initiatives have all contributed to an increase in the number of IPOs," said Tamer Bazzari, a partner in the Dubai-based Rasmala investment bank.
Before DP World's IPO, the largest public share offer was made by Saudi Telecom in 2003.
It raised more than $4bn dollars by selling a 30pc stake, a third of which went to two public pension funds.
"Saudi Arabia and the UAE are at the forefront of IPO activity in the region, having accounted for 70pc of all GCC IPOs over the last decade," Bazzari said.
Saudi IPOs in the first nine months of this year amounted to $3.7bn, compared with $1.6bn in the UAE and $389 million in Qatar.
The trend had been growing in the GCC, with total closed IPOs reaching $1.5bn in 2004, $6bn in 2005 and $7.5bn last year, according to Abu Dhabi-based private equity firm Gulf Capital.
The region accounted for the bulk of IPOs in the Middle East, which Ernst and Young said numbered 87 last year with a total value of $10.8bn.
"It will continue to grow sharply ... The appetite continues to be high," said Brad Bourland, chief economist at Riyadh-based Jadwa Investment.
"There are about 100 (new) IPOs in the pipeline," he said, while Gulf Capital said IPOs between this year and 2010 should exceed 106.
"Regional liquidity, combined with increasing interest by international investors, is expected to contribute to the success of future IPOs," Bazzari said.
Gulf countries are enjoying handsome windfalls on the back of record-high crude prices, which have pumped huge funds into their economies and jumpstarted multi-billion-dollar infrastructure projects that had been delayed.
Abundant liquidity appears also to face a shortage in investment opportunities as almost all IPOs in the region are over-subscribed.
Early last year, investors from GCC countries slept in tents and cars in Doha as they swamped the Qatari capital for an IPO by Al Rayan bank. The newly formed lender had offered 55pc of its capital for $1.13bn and ended up six times oversubscribed.
23.11.07
Middle East Series: Finance and Investments
SM Goh was quoted recently as stating that he was disappointed at Singapore’s inability to gain a larger share of the investment funds coming out of the Middle East….. and when you consider that this segment of the local banking industry has been growing at 20-30% per year, it gives a hint of how prodigiously the liquidity in the Middle East must be growing.
This segment centres around three main themes (in my view), which will be outlined below. It is worth noting that the liquidity relating to these themes mainly relate to the six richer GCC (Gulf Cooperation Council) countries: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, which are relatively more stable politically, foreigner-friendly, and boast strong services industries due to their affluence and consequent strong soft capital — all necessary ingredients\for a strong financial industry infrastructure. Equally importantly, they are strong direct beneficiaries of high oil prices — with the probable exception of Bahrain.
The first thread is the development of the domestic financial markets. The booming regional economy has boosted the profits of banks, with tailwinds in the form of huge and growing business volumes and a low cost of funds and labor (due to high liquidity as a result of easy oil money) providing the momentum. Given the excellent demographics (one of the fastest growing regional populations) and oil money, foreign banks have been fast getting into the act by setting up branches in the region, leading to rapid growth of assets under management, a phenomenal increase in debt issuance; and accelerated innovation of new products, especially in the area of Islamic finance, with the creation of new Islamic banks. In the capital markets, the stock exchanges in Saudi Arabia and the UAE grew >100% in 2005, and that in Kuwait and Qatar grew >60%; this was due to high oil prices, entry of foreign funds (private equity, hedge funds) as well as a private sector investment boom in areas such as real estate, financial services, industrials and telco infrastructure. In recognition of global interest coming into the region, the UAE launched the Dubai International Financial Exchange (DIFX), the first exchange in its region created to list securities from many different countries, targeted to attract large numbers of international brokers and investment banks and hence establish the city as a regional financial hub. The first theme is one of expanding and liberalising local capital markets and financial services industries in the region.
In particular, Islamic finance has become the largest growth sector within banking globally - growing by 10 to 15 per cent a year. It is worth US$300-500B as of September 2006. This is the second major theme. This banking concept is based on interpretations from the Qur’an, and its two central tenets are that no interest can be earned on loans, and socially responsible investing. The first is self-explanatory, the second means investing responsibly to assure that the money does not go for “bad” purposes, such as investments in drugs, weapons, alcohol, pornography, and terrorism — not much different from the Western concepts of ethical investing. Islamic financial instruments are not only available within the Middle East bond markets; they are increasingly being made available in foreign markets eager to attract Arab money. There are now Sukuk (Islamic) bonds listed on the London Stock Exchange, and Islamic countries like Malaysia, with decade-long experience in Islamic funds and with legal infrastructure in place, are looking to capture the market with their Islamic credentials. Key Islamic finance instruments include Sukok bonds (Islamic bonds, mentioned above), takaful insurance (cooperative insurance compliant with Islamic beliefs), and Islamic investment funds. Given the need to raise foreign capital (through infrastructure bonds) to invest in new infrastructure projects in the Middle East (oil money not enough) as well as offshore banking services to manage their burgeoning petrodollar assets, Middle East demand for Islamic banking services are expected to grow further.
The third theme relates to the overseas investments being made by the Middle East nations, especially the GCC member states. This is mainly done through their cash-rich state investment agencies, and also partly by corporates looking at other markets outside the GCC region to diversify and hedge market risk (of operating in a single market facing increasing foreign competition). Generally, their investment markets may be divided into several categories: stable Western markets, including the US (less so since Sep 11) and Europe (their old colonial masters and also in close proximity), moderate/relatively stable Muslim countries like Pakistan, Malaysia and Indonesia, high-potential/hotspots such as China (especially their banks) and India, and neighbouring countries like Jordan, Egypt and North Africa. Investments can be portfolio-type (ie. no controlling interest) or direct investments, which tend to be strategic (eg. Dubai Ports’ port acquisitions in Hong Kong and P&O in Europe); real estate is a major preference, especially Asian property. Again, the rules apply: no companies that traffic in alcohol, pork, pornography or gambling, and also Islamic financing is typically used to avoid violating religious rules. This trend also partly explains the growth in Islamic financing.
In the Singapore stock market, the most obvious beneficiary from growth in the Middle East financial and investments sector are not banks, but real estate. The former has not achieved any significant penetration into the Middle East nor developed any strong exposure to outflowing Middle Eastern funds, while the latter fit the profile for the investment preferences of Middle East investors: Asian, prime real estate, key regional hub, friendly population and Muslim neighbours. One may note the ease with which large placements by Ho Bee and SC Global were taken up as evidence of interest in the local real estate sector.
This segment centres around three main themes (in my view), which will be outlined below. It is worth noting that the liquidity relating to these themes mainly relate to the six richer GCC (Gulf Cooperation Council) countries: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, which are relatively more stable politically, foreigner-friendly, and boast strong services industries due to their affluence and consequent strong soft capital — all necessary ingredients\for a strong financial industry infrastructure. Equally importantly, they are strong direct beneficiaries of high oil prices — with the probable exception of Bahrain.
The first thread is the development of the domestic financial markets. The booming regional economy has boosted the profits of banks, with tailwinds in the form of huge and growing business volumes and a low cost of funds and labor (due to high liquidity as a result of easy oil money) providing the momentum. Given the excellent demographics (one of the fastest growing regional populations) and oil money, foreign banks have been fast getting into the act by setting up branches in the region, leading to rapid growth of assets under management, a phenomenal increase in debt issuance; and accelerated innovation of new products, especially in the area of Islamic finance, with the creation of new Islamic banks. In the capital markets, the stock exchanges in Saudi Arabia and the UAE grew >100% in 2005, and that in Kuwait and Qatar grew >60%; this was due to high oil prices, entry of foreign funds (private equity, hedge funds) as well as a private sector investment boom in areas such as real estate, financial services, industrials and telco infrastructure. In recognition of global interest coming into the region, the UAE launched the Dubai International Financial Exchange (DIFX), the first exchange in its region created to list securities from many different countries, targeted to attract large numbers of international brokers and investment banks and hence establish the city as a regional financial hub. The first theme is one of expanding and liberalising local capital markets and financial services industries in the region.
In particular, Islamic finance has become the largest growth sector within banking globally - growing by 10 to 15 per cent a year. It is worth US$300-500B as of September 2006. This is the second major theme. This banking concept is based on interpretations from the Qur’an, and its two central tenets are that no interest can be earned on loans, and socially responsible investing. The first is self-explanatory, the second means investing responsibly to assure that the money does not go for “bad” purposes, such as investments in drugs, weapons, alcohol, pornography, and terrorism — not much different from the Western concepts of ethical investing. Islamic financial instruments are not only available within the Middle East bond markets; they are increasingly being made available in foreign markets eager to attract Arab money. There are now Sukuk (Islamic) bonds listed on the London Stock Exchange, and Islamic countries like Malaysia, with decade-long experience in Islamic funds and with legal infrastructure in place, are looking to capture the market with their Islamic credentials. Key Islamic finance instruments include Sukok bonds (Islamic bonds, mentioned above), takaful insurance (cooperative insurance compliant with Islamic beliefs), and Islamic investment funds. Given the need to raise foreign capital (through infrastructure bonds) to invest in new infrastructure projects in the Middle East (oil money not enough) as well as offshore banking services to manage their burgeoning petrodollar assets, Middle East demand for Islamic banking services are expected to grow further.
The third theme relates to the overseas investments being made by the Middle East nations, especially the GCC member states. This is mainly done through their cash-rich state investment agencies, and also partly by corporates looking at other markets outside the GCC region to diversify and hedge market risk (of operating in a single market facing increasing foreign competition). Generally, their investment markets may be divided into several categories: stable Western markets, including the US (less so since Sep 11) and Europe (their old colonial masters and also in close proximity), moderate/relatively stable Muslim countries like Pakistan, Malaysia and Indonesia, high-potential/hotspots such as China (especially their banks) and India, and neighbouring countries like Jordan, Egypt and North Africa. Investments can be portfolio-type (ie. no controlling interest) or direct investments, which tend to be strategic (eg. Dubai Ports’ port acquisitions in Hong Kong and P&O in Europe); real estate is a major preference, especially Asian property. Again, the rules apply: no companies that traffic in alcohol, pork, pornography or gambling, and also Islamic financing is typically used to avoid violating religious rules. This trend also partly explains the growth in Islamic financing.
In the Singapore stock market, the most obvious beneficiary from growth in the Middle East financial and investments sector are not banks, but real estate. The former has not achieved any significant penetration into the Middle East nor developed any strong exposure to outflowing Middle Eastern funds, while the latter fit the profile for the investment preferences of Middle East investors: Asian, prime real estate, key regional hub, friendly population and Muslim neighbours. One may note the ease with which large placements by Ho Bee and SC Global were taken up as evidence of interest in the local real estate sector.
17.10.07
Changing patterns of Investment in the Gulf region:The case of Dubai
Introduction
The massive increase in oil revenues in most of the six members of the Gulf Cooperation Council (GCC)—Saudi Arabia, United Arab Emirates, Qatar, Bahrain, Oman and Kuwait—has created unprecedented opportunities for the building of infrastructure, the provision of social services and, at the same time, for investments overseas.
These investments have been channeled through two principal pipelines—acquisition of assets and the purchase of shares in high quality financial and industrial firms. According to the London daily al-Sharq al-Awsat of August 13, the Gulf countries have channeled $140 billion into overseas investments in the last three years. In a relatively short time, some of the Gulf countries have become respectable actors on the international financial scene.
At the same time, a hospitable investment environment, the privatization of state-owned entities and the prospects of mutually profitable deals have attracted a massive influx of Western financial services and industry to the Gulf region. The opening of the real estate market for foreign investors, particularly in Dubai, has created a massive construction boom which is fueling economic growth at a rapid rate.
The purpose of this article is to shed light on the investment activities of Dubai, and how an enlightened and entrepreneurial leadership has turned what was a small desert outpost just a few decades ago into a bustling metropolis with a vigorous economy that is subject to both envy and emulation.
Increased Investment Power
Economies in the Middle East and North Africa [MENA] in general have grown by more than 5% in each of the last three years on account of substantial oil revenues. As the main suppliers of oil in the region, the Gulf countries—and, chiefly among them, the United Arab Emirates [UAE]—have experienced unprecedented levels of growth.
In contrast to the earlier oil booms of the 1970’s and 1980’s, however, these countries are not squandering their oil revenues on spending sprees, but rather are focusing on diversifying their assets and buttressing their fiscal solvency through massive investment schemes.
Dubai, one of the seven emirates that make up the UAE, in particular, exemplifies the investment trends of the Middle East, mostly on account of the fact that it is an investment powerhouse out of necessity. The emirate seeks to open itself to and extend its reach within international markets in order to hedge any risk it faces due to the steady decline of its oil and gas reserves, which are expected to reach depletion within twenty years. Dubai currently has a strong penchant for the real-estate sector, but is learning to thoroughly diversify its assets in its search for some high-yielding financial instruments.
Large current account surpluses have allowed much of this investment to take place through sovereign funds, which, in the past, were traditionally held only to protect domestic currencies and banks. Sovereign fund investment is a trend not limited to Gulf countries; the global total of sovereign funds[1] may be $2.5 trillion by the end of this year, and could reach $12 trillion by 2015 on account of capital appreciation.[2] Sovereign wealth funds may soon become the most important buyers of stocks and bonds, and oil countries account for about two-thirds of such assets globally.
[www.memrieconomicblog.org will soon present a more detailed discussion of sovereign fund investment and some possible complications of their proliferation.]
Attracting Western Industries
The current generation of economic and industry ministers in the Gulf region is largely composed of men who began their careers in the private sector. This correlates with efforts in almost all MENA countries to increase the privatization of state-owned entities in an attempt to create an “open market” atmosphere. As the Middle East daily al-Sharq al-Awsat reported on August 8, 2007, an international investment firm in Kuwait noted that privatization trends in Gulf countries—which are competing amongst themselves to become the next global “financial capitol”—are reflected in the flow of private capital into publicly traded stocks and other financial instruments. In 2006 this amount totaled $7.07 billion, which was a 61.6% increase over the previous year.
As regional investment levels skyrocket, from both private and public sources, local private investment funds are scrambling to attain access to European and American markets so that shareholders can enjoy even higher returns on their assets. In the end, this has pulled many Western services and industries, attracted to the copious amount of funds that proximity to potential investors can yield, into the Gulf region.
The Carlyle Group LP says that the Middle East is now the “hot spot” for private equity deals, and HSBC reports that as much as one third of all project finance involves Middle Eastern projects.[3] Dubai is a particular hub of this activity. The chief executive of oil services company Halliburton has recently opted to relocate at least part of the company’s corporate and executive headquarters from Houston to Dubai. Other prospective buyers of property in the emirate include Oracle, Cisco and Microsoft.[4]
Indeed, Dubai has made itself fertile ground for a Western economic presence with its free trade zones, in which companies are not held to the standard UAE requirement that all entities be majority-owned by a UAE national. Various information technology firms, investment banks and media corporations have holed themselves up in these territories, and officials expect finance alone to quadruple its contribution to the emirate’s GDP to $15 billion by 2015.[5]
Low tariffs, low currency risk, the absence of restrictions on repatriation of profits, a small national bureaucracy, and UAE laws that forbid corporate and sales taxes helped the number of Greenfield projects [certain types of investment ventures] within Dubai alone to rise from 88 in 2002 to 215 in 2005. As such, non-oil growth has average 10.6% annually over the past five years. [6] In turn, state-oriented investment facilities such as Dubai International Capital, Istithmar [investment holding company] and DIFC Investments have taken stakes in HSBC, Standard Chartered Bank, Blackstone [private equity fund] and Deutsche Bank.
Qatar is following in Dubai’s footsteps, announcing on July 16, 2007 the unification of its regulatory system, and its intention to rewrite outdated legal codes for commercial and financial transactions that may act as barriers to entry for international firms.
On a smaller scale, many US companies are moving into the region to bolster the sugar industry, which has had to quickly develop after the World Trade Organization capped exports of sugar from the EU in July, 2006. With the Gulf’s large number of transport vessels, it is a magnet for much of the half-billion dollars being invested in sugar output production.
A Mastercard survey also indicated that consumer confidence in the region is at an all time high, and so spending is soaring in Kuwait, Saudi Arabia, Qatar and the UAE. Owing to this and the decline of the dollar, to which all of the Gulf currencies are pegged with the exception of Kuwait’s, some American products are getting a boost. For instance, June was the best month for General Motors in the Persian Gulf because its cars were enjoying an advantage over Japanese and European cars.[7] If the spending trend continues, other Western manufacturing may be pulled into the Gulf’s orbit.
Expanding Horizons
While Western banking, financial and information technology industries are rapidly being drawn to the Gulf countries, Gulf investment is not necessarily giving preferential treatment to the Western hemisphere that has largely responsible for its explosion of financial power.
While it is true that various emirate companies invested $3.5 billion in the US last year[8], many of those same companies are also shifting their interest to Asian markets on account of the falling dollar and for the sake of diversification:
- Dubai International Capital and DIFC Investments are working to extend their reach into Pakistan, India and South Korea.
- Istithmar’s real estate arm, which is part of the Dubai World group of companies, plans to increase the 5% of its assets it has invested in Asia to 30% within five years.[9]
- The Dubai government firm Emaar is responsible for the housing boom taking place across Asia, most recently securing a deal to construct a 1,200-hectare project, set on the pristine Mandalika Beach, estimated at $600 million in worth.[10]
- Remaining oil exports in the Dubai are being used to help launch the Dubai Mercantile Exchange, a joint venture with Nymex that is to create a futures market for Mideast crude oil exported to Asia.
- Dubai Ports World, in its attempt to double its capacity in 10 years, is developing terminals in China, India, Vietnam and Pakistan.
There has also been a trend of increased cross-border investment within the Gulf and larger MENA regions. Part of the reason behind this trend is a post-9/11 sentiment in the Arab world that the West, and especially the US, is unwelcoming of Arab investment. This fear did not seem entirely unfounded in 2006, when the House of Representatives passed legislation forbidding Dubai Ports World from gaining operations of ports in major American cities, citing that al-Qa’ida funding had passed through UAE banks, albeit unbeknownst to the government, prior to 9/11. [This caused a showdown between Congress and the White House, which supported the deal, and much controversy ensued.]
As an example, construction company Emaar’s most recent press releases discuss not Western development, but a $500 million deal to build Samara Dead Sea Golf and Beach resort in Jordan, and a memorandum on understanding with a Saudi energy company on plans for the construction of an open-cycle gas turbine power plant for King Abdullah Economic City in Saudi Arabia.
Mergers and Acquisitions
Arabic satellite television has allowed Gulf companies to develop strong regional brands, and then take their business to a global level. The substantial revenues produced by this trend have enabled more mergers and acquisitions to take place. For example, Qatar Telecommunications Co. paid $3.7 billion for a 51% stake in Kuwait’s National Mobile Telecommunications Co., while Abraaj Capital, MENA’s largest private equity firm, paid around $1.4 billion for Egypt’s largest private sector fertilizer manufacturer.[11]
The Gulf’s stepped up trans-shipment and trading hub status means that it is also increasing its trading links with Iran. Each year, chemicals, oil production equipment and computer technology enter into Iran via the UAE, and especially the ports of Dubai. This, in theory, assists Iran in its quest to develop its industry and become more economically autonomous. The US also suspects that some equipment transshipped through Dubai ports may have been used by Iran for its nuclear program.
Conclusion
These investment patterns place the Gulf region, and especially Dubai, in a unique position. As relationships increase in number and depth within certain markets, namely Iran and China, diplomatic ties with Washington and Europe will probably occasionally feel a squeeze.
Sovereign wealth funds are set to grow in the short and medium-term at least, and as they do so it is inevitable that the economic sway held by Gulf countries, by nature of their voracious appetite for foreign investment, will increase dramatically. Of course, there will be repercussions to this new scheme of sovereign investment. But one should expect Western industries, especially financial services, to continue to converge upon and cater to the burgeoning market of the Gulf. At the same time, Asian markets—especially real-estate sectors—will be able to count on continued attention from oil-producing asset powerhouses such as Dubai.
[1] Countries with the top-ten largest sovereign wealth funds include, in descending order: UAE, Singapore, Norway, Saudi Arabia, China, Kuwait, Australia, United States, Qatar and Russia.
[2] The Economist. “Sovereign-wealth funds: The world’s most expensive club”. May 26, 2007.
[3] The Wall Street Journal. “Boom in Investment Powers Mideast Growth”. July 19, 2007.
[4] Financial Times. “Drilling minds: Dubai’s ruler has big ideas for his little city-state”. May 4, 2007.
[5] Financial Times. “Emirate sets its sights on trebled GDP by 2015”. July 24, 2007.
[6] The Middle East. “The Success Story Surges Onwards and Upwards”. June, 2007.
[7] al-Riyadh. Saudi Arabia, August 7, 2007.
[8] Financial Times. “Drilling minds: Dubai’s ruler has big ideas for his little city-state”. May 4, 2007.
[9] Financial Times. “’Bubble economy’ defies gravity”. July 24, 2007.
[10] Asia Property Report. “Lombok lifted by Emaar project”. July 23, 2007.
[11] The Wall Street Journal. “Boom in Investment Powers Mideast Growth”. July 19, 2007.
Changing Patterns of Investment in the Gulf Region: The Case of Dubai
Bianca Gersten* - taken from memrieconomicblog
The massive increase in oil revenues in most of the six members of the Gulf Cooperation Council (GCC)—Saudi Arabia, United Arab Emirates, Qatar, Bahrain, Oman and Kuwait—has created unprecedented opportunities for the building of infrastructure, the provision of social services and, at the same time, for investments overseas.
These investments have been channeled through two principal pipelines—acquisition of assets and the purchase of shares in high quality financial and industrial firms. According to the London daily al-Sharq al-Awsat of August 13, the Gulf countries have channeled $140 billion into overseas investments in the last three years. In a relatively short time, some of the Gulf countries have become respectable actors on the international financial scene.
At the same time, a hospitable investment environment, the privatization of state-owned entities and the prospects of mutually profitable deals have attracted a massive influx of Western financial services and industry to the Gulf region. The opening of the real estate market for foreign investors, particularly in Dubai, has created a massive construction boom which is fueling economic growth at a rapid rate.
The purpose of this article is to shed light on the investment activities of Dubai, and how an enlightened and entrepreneurial leadership has turned what was a small desert outpost just a few decades ago into a bustling metropolis with a vigorous economy that is subject to both envy and emulation.
Increased Investment Power
Economies in the Middle East and North Africa [MENA] in general have grown by more than 5% in each of the last three years on account of substantial oil revenues. As the main suppliers of oil in the region, the Gulf countries—and, chiefly among them, the United Arab Emirates [UAE]—have experienced unprecedented levels of growth.
In contrast to the earlier oil booms of the 1970’s and 1980’s, however, these countries are not squandering their oil revenues on spending sprees, but rather are focusing on diversifying their assets and buttressing their fiscal solvency through massive investment schemes.
Dubai, one of the seven emirates that make up the UAE, in particular, exemplifies the investment trends of the Middle East, mostly on account of the fact that it is an investment powerhouse out of necessity. The emirate seeks to open itself to and extend its reach within international markets in order to hedge any risk it faces due to the steady decline of its oil and gas reserves, which are expected to reach depletion within twenty years. Dubai currently has a strong penchant for the real-estate sector, but is learning to thoroughly diversify its assets in its search for some high-yielding financial instruments.
Large current account surpluses have allowed much of this investment to take place through sovereign funds, which, in the past, were traditionally held only to protect domestic currencies and banks. Sovereign fund investment is a trend not limited to Gulf countries; the global total of sovereign funds[1] may be $2.5 trillion by the end of this year, and could reach $12 trillion by 2015 on account of capital appreciation.[2] Sovereign wealth funds may soon become the most important buyers of stocks and bonds, and oil countries account for about two-thirds of such assets globally.
[www.memrieconomicblog.org will soon present a more detailed discussion of sovereign fund investment and some possible complications of their proliferation.]
Attracting Western Industries
The current generation of economic and industry ministers in the Gulf region is largely composed of men who began their careers in the private sector. This correlates with efforts in almost all MENA countries to increase the privatization of state-owned entities in an attempt to create an “open market” atmosphere. As the Middle East daily al-Sharq al-Awsat reported on August 8, 2007, an international investment firm in Kuwait noted that privatization trends in Gulf countries—which are competing amongst themselves to become the next global “financial capitol”—are reflected in the flow of private capital into publicly traded stocks and other financial instruments. In 2006 this amount totaled $7.07 billion, which was a 61.6% increase over the previous year.
As regional investment levels skyrocket, from both private and public sources, local private investment funds are scrambling to attain access to European and American markets so that shareholders can enjoy even higher returns on their assets. In the end, this has pulled many Western services and industries, attracted to the copious amount of funds that proximity to potential investors can yield, into the Gulf region.
The Carlyle Group LP says that the Middle East is now the “hot spot” for private equity deals, and HSBC reports that as much as one third of all project finance involves Middle Eastern projects.[3] Dubai is a particular hub of this activity. The chief executive of oil services company Halliburton has recently opted to relocate at least part of the company’s corporate and executive headquarters from Houston to Dubai. Other prospective buyers of property in the emirate include Oracle, Cisco and Microsoft.[4]
Indeed, Dubai has made itself fertile ground for a Western economic presence with its free trade zones, in which companies are not held to the standard UAE requirement that all entities be majority-owned by a UAE national. Various information technology firms, investment banks and media corporations have holed themselves up in these territories, and officials expect finance alone to quadruple its contribution to the emirate’s GDP to $15 billion by 2015.[5]
Low tariffs, low currency risk, the absence of restrictions on repatriation of profits, a small national bureaucracy, and UAE laws that forbid corporate and sales taxes helped the number of Greenfield projects [certain types of investment ventures] within Dubai alone to rise from 88 in 2002 to 215 in 2005. As such, non-oil growth has average 10.6% annually over the past five years. [6] In turn, state-oriented investment facilities such as Dubai International Capital, Istithmar [investment holding company] and DIFC Investments have taken stakes in HSBC, Standard Chartered Bank, Blackstone [private equity fund] and Deutsche Bank.
Qatar is following in Dubai’s footsteps, announcing on July 16, 2007 the unification of its regulatory system, and its intention to rewrite outdated legal codes for commercial and financial transactions that may act as barriers to entry for international firms.
On a smaller scale, many US companies are moving into the region to bolster the sugar industry, which has had to quickly develop after the World Trade Organization capped exports of sugar from the EU in July, 2006. With the Gulf’s large number of transport vessels, it is a magnet for much of the half-billion dollars being invested in sugar output production.
A Mastercard survey also indicated that consumer confidence in the region is at an all time high, and so spending is soaring in Kuwait, Saudi Arabia, Qatar and the UAE. Owing to this and the decline of the dollar, to which all of the Gulf currencies are pegged with the exception of Kuwait’s, some American products are getting a boost. For instance, June was the best month for General Motors in the Persian Gulf because its cars were enjoying an advantage over Japanese and European cars.[7] If the spending trend continues, other Western manufacturing may be pulled into the Gulf’s orbit.
Expanding Horizons
While Western banking, financial and information technology industries are rapidly being drawn to the Gulf countries, Gulf investment is not necessarily giving preferential treatment to the Western hemisphere that has largely responsible for its explosion of financial power.
While it is true that various emirate companies invested $3.5 billion in the US last year[8], many of those same companies are also shifting their interest to Asian markets on account of the falling dollar and for the sake of diversification:
- Dubai International Capital and DIFC Investments are working to extend their reach into Pakistan, India and South Korea.
- Istithmar’s real estate arm, which is part of the Dubai World group of companies, plans to increase the 5% of its assets it has invested in Asia to 30% within five years.[9]
- The Dubai government firm Emaar is responsible for the housing boom taking place across Asia, most recently securing a deal to construct a 1,200-hectare project, set on the pristine Mandalika Beach, estimated at $600 million in worth.[10]
- Remaining oil exports in the Dubai are being used to help launch the Dubai Mercantile Exchange, a joint venture with Nymex that is to create a futures market for Mideast crude oil exported to Asia.
- Dubai Ports World, in its attempt to double its capacity in 10 years, is developing terminals in China, India, Vietnam and Pakistan.
There has also been a trend of increased cross-border investment within the Gulf and larger MENA regions. Part of the reason behind this trend is a post-9/11 sentiment in the Arab world that the West, and especially the US, is unwelcoming of Arab investment. This fear did not seem entirely unfounded in 2006, when the House of Representatives passed legislation forbidding Dubai Ports World from gaining operations of ports in major American cities, citing that al-Qa’ida funding had passed through UAE banks, albeit unbeknownst to the government, prior to 9/11. [This caused a showdown between Congress and the White House, which supported the deal, and much controversy ensued.]
As an example, construction company Emaar’s most recent press releases discuss not Western development, but a $500 million deal to build Samara Dead Sea Golf and Beach resort in Jordan, and a memorandum on understanding with a Saudi energy company on plans for the construction of an open-cycle gas turbine power plant for King Abdullah Economic City in Saudi Arabia.
Mergers and Acquisitions
Arabic satellite television has allowed Gulf companies to develop strong regional brands, and then take their business to a global level. The substantial revenues produced by this trend have enabled more mergers and acquisitions to take place. For example, Qatar Telecommunications Co. paid $3.7 billion for a 51% stake in Kuwait’s National Mobile Telecommunications Co., while Abraaj Capital, MENA’s largest private equity firm, paid around $1.4 billion for Egypt’s largest private sector fertilizer manufacturer.[11]
The Gulf’s stepped up trans-shipment and trading hub status means that it is also increasing its trading links with Iran. Each year, chemicals, oil production equipment and computer technology enter into Iran via the UAE, and especially the ports of Dubai. This, in theory, assists Iran in its quest to develop its industry and become more economically autonomous. The US also suspects that some equipment transshipped through Dubai ports may have been used by Iran for its nuclear program.
Conclusion
These investment patterns place the Gulf region, and especially Dubai, in a unique position. As relationships increase in number and depth within certain markets, namely Iran and China, diplomatic ties with Washington and Europe will probably occasionally feel a squeeze.
Sovereign wealth funds are set to grow in the short and medium-term at least, and as they do so it is inevitable that the economic sway held by Gulf countries, by nature of their voracious appetite for foreign investment, will increase dramatically. Of course, there will be repercussions to this new scheme of sovereign investment. But one should expect Western industries, especially financial services, to continue to converge upon and cater to the burgeoning market of the Gulf. At the same time, Asian markets—especially real-estate sectors—will be able to count on continued attention from oil-producing asset powerhouses such as Dubai.
[1] Countries with the top-ten largest sovereign wealth funds include, in descending order: UAE, Singapore, Norway, Saudi Arabia, China, Kuwait, Australia, United States, Qatar and Russia.
[2] The Economist. “Sovereign-wealth funds: The world’s most expensive club”. May 26, 2007.
[3] The Wall Street Journal. “Boom in Investment Powers Mideast Growth”. July 19, 2007.
[4] Financial Times. “Drilling minds: Dubai’s ruler has big ideas for his little city-state”. May 4, 2007.
[5] Financial Times. “Emirate sets its sights on trebled GDP by 2015”. July 24, 2007.
[6] The Middle East. “The Success Story Surges Onwards and Upwards”. June, 2007.
[7] al-Riyadh. Saudi Arabia, August 7, 2007.
[8] Financial Times. “Drilling minds: Dubai’s ruler has big ideas for his little city-state”. May 4, 2007.
[9] Financial Times. “’Bubble economy’ defies gravity”. July 24, 2007.
[10] Asia Property Report. “Lombok lifted by Emaar project”. July 23, 2007.
[11] The Wall Street Journal. “Boom in Investment Powers Mideast Growth”. July 19, 2007.
Changing Patterns of Investment in the Gulf Region: The Case of Dubai
Bianca Gersten* - taken from memrieconomicblog
Changing patterns of Investment in the Gulf region:The case of Dubai
Introduction
The massive increase in oil revenues in most of the six members of the Gulf Cooperation Council (GCC)—Saudi Arabia, United Arab Emirates, Qatar, Bahrain, Oman and Kuwait—has created unprecedented opportunities for the building of infrastructure, the provision of social services and, at the same time, for investments overseas.
These investments have been channeled through two principal pipelines—acquisition of assets and the purchase of shares in high quality financial and industrial firms. According to the London daily al-Sharq al-Awsat of August 13, the Gulf countries have channeled $140 billion into overseas investments in the last three years. In a relatively short time, some of the Gulf countries have become respectable actors on the international financial scene.
At the same time, a hospitable investment environment, the privatization of state-owned entities and the prospects of mutually profitable deals have attracted a massive influx of Western financial services and industry to the Gulf region. The opening of the real estate market for foreign investors, particularly in Dubai, has created a massive construction boom which is fueling economic growth at a rapid rate.
The purpose of this article is to shed light on the investment activities of Dubai, and how an enlightened and entrepreneurial leadership has turned what was a small desert outpost just a few decades ago into a bustling metropolis with a vigorous economy that is subject to both envy and emulation.
Increased Investment Power
Economies in the Middle East and North Africa [MENA] in general have grown by more than 5% in each of the last three years on account of substantial oil revenues. As the main suppliers of oil in the region, the Gulf countries—and, chiefly among them, the United Arab Emirates [UAE]—have experienced unprecedented levels of growth.
In contrast to the earlier oil booms of the 1970’s and 1980’s, however, these countries are not squandering their oil revenues on spending sprees, but rather are focusing on diversifying their assets and buttressing their fiscal solvency through massive investment schemes.
Dubai, one of the seven emirates that make up the UAE, in particular, exemplifies the investment trends of the Middle East, mostly on account of the fact that it is an investment powerhouse out of necessity. The emirate seeks to open itself to and extend its reach within international markets in order to hedge any risk it faces due to the steady decline of its oil and gas reserves, which are expected to reach depletion within twenty years. Dubai currently has a strong penchant for the real-estate sector, but is learning to thoroughly diversify its assets in its search for some high-yielding financial instruments.
Large current account surpluses have allowed much of this investment to take place through sovereign funds, which, in the past, were traditionally held only to protect domestic currencies and banks. Sovereign fund investment is a trend not limited to Gulf countries; the global total of sovereign funds[1] may be $2.5 trillion by the end of this year, and could reach $12 trillion by 2015 on account of capital appreciation.[2] Sovereign wealth funds may soon become the most important buyers of stocks and bonds, and oil countries account for about two-thirds of such assets globally.
[www.memrieconomicblog.org will soon present a more detailed discussion of sovereign fund investment and some possible complications of their proliferation.]
Attracting Western Industries
The current generation of economic and industry ministers in the Gulf region is largely composed of men who began their careers in the private sector. This correlates with efforts in almost all MENA countries to increase the privatization of state-owned entities in an attempt to create an “open market” atmosphere. As the Middle East daily al-Sharq al-Awsat reported on August 8, 2007, an international investment firm in Kuwait noted that privatization trends in Gulf countries—which are competing amongst themselves to become the next global “financial capitol”—are reflected in the flow of private capital into publicly traded stocks and other financial instruments. In 2006 this amount totaled $7.07 billion, which was a 61.6% increase over the previous year.
As regional investment levels skyrocket, from both private and public sources, local private investment funds are scrambling to attain access to European and American markets so that shareholders can enjoy even higher returns on their assets. In the end, this has pulled many Western services and industries, attracted to the copious amount of funds that proximity to potential investors can yield, into the Gulf region.
The Carlyle Group LP says that the Middle East is now the “hot spot” for private equity deals, and HSBC reports that as much as one third of all project finance involves Middle Eastern projects.[3] Dubai is a particular hub of this activity. The chief executive of oil services company Halliburton has recently opted to relocate at least part of the company’s corporate and executive headquarters from Houston to Dubai. Other prospective buyers of property in the emirate include Oracle, Cisco and Microsoft.[4]
Indeed, Dubai has made itself fertile ground for a Western economic presence with its free trade zones, in which companies are not held to the standard UAE requirement that all entities be majority-owned by a UAE national. Various information technology firms, investment banks and media corporations have holed themselves up in these territories, and officials expect finance alone to quadruple its contribution to the emirate’s GDP to $15 billion by 2015.[5]
Low tariffs, low currency risk, the absence of restrictions on repatriation of profits, a small national bureaucracy, and UAE laws that forbid corporate and sales taxes helped the number of Greenfield projects [certain types of investment ventures] within Dubai alone to rise from 88 in 2002 to 215 in 2005. As such, non-oil growth has average 10.6% annually over the past five years. [6] In turn, state-oriented investment facilities such as Dubai International Capital, Istithmar [investment holding company] and DIFC Investments have taken stakes in HSBC, Standard Chartered Bank, Blackstone [private equity fund] and Deutsche Bank.
Qatar is following in Dubai’s footsteps, announcing on July 16, 2007 the unification of its regulatory system, and its intention to rewrite outdated legal codes for commercial and financial transactions that may act as barriers to entry for international firms.
On a smaller scale, many US companies are moving into the region to bolster the sugar industry, which has had to quickly develop after the World Trade Organization capped exports of sugar from the EU in July, 2006. With the Gulf’s large number of transport vessels, it is a magnet for much of the half-billion dollars being invested in sugar output production.
A Mastercard survey also indicated that consumer confidence in the region is at an all time high, and so spending is soaring in Kuwait, Saudi Arabia, Qatar and the UAE. Owing to this and the decline of the dollar, to which all of the Gulf currencies are pegged with the exception of Kuwait’s, some American products are getting a boost. For instance, June was the best month for General Motors in the Persian Gulf because its cars were enjoying an advantage over Japanese and European cars.[7] If the spending trend continues, other Western manufacturing may be pulled into the Gulf’s orbit.
Expanding Horizons
While Western banking, financial and information technology industries are rapidly being drawn to the Gulf countries, Gulf investment is not necessarily giving preferential treatment to the Western hemisphere that has largely responsible for its explosion of financial power.
While it is true that various emirate companies invested $3.5 billion in the US last year[8], many of those same companies are also shifting their interest to Asian markets on account of the falling dollar and for the sake of diversification:
- Dubai International Capital and DIFC Investments are working to extend their reach into Pakistan, India and South Korea.
- Istithmar’s real estate arm, which is part of the Dubai World group of companies, plans to increase the 5% of its assets it has invested in Asia to 30% within five years.[9]
- The Dubai government firm Emaar is responsible for the housing boom taking place across Asia, most recently securing a deal to construct a 1,200-hectare project, set on the pristine Mandalika Beach, estimated at $600 million in worth.[10]
- Remaining oil exports in the Dubai are being used to help launch the Dubai Mercantile Exchange, a joint venture with Nymex that is to create a futures market for Mideast crude oil exported to Asia.
- Dubai Ports World, in its attempt to double its capacity in 10 years, is developing terminals in China, India, Vietnam and Pakistan.
There has also been a trend of increased cross-border investment within the Gulf and larger MENA regions. Part of the reason behind this trend is a post-9/11 sentiment in the Arab world that the West, and especially the US, is unwelcoming of Arab investment. This fear did not seem entirely unfounded in 2006, when the House of Representatives passed legislation forbidding Dubai Ports World from gaining operations of ports in major American cities, citing that al-Qa’ida funding had passed through UAE banks, albeit unbeknownst to the government, prior to 9/11. [This caused a showdown between Congress and the White House, which supported the deal, and much controversy ensued.]
As an example, construction company Emaar’s most recent press releases discuss not Western development, but a $500 million deal to build Samara Dead Sea Golf and Beach resort in Jordan, and a memorandum on understanding with a Saudi energy company on plans for the construction of an open-cycle gas turbine power plant for King Abdullah Economic City in Saudi Arabia.
Mergers and Acquisitions
Arabic satellite television has allowed Gulf companies to develop strong regional brands, and then take their business to a global level. The substantial revenues produced by this trend have enabled more mergers and acquisitions to take place. For example, Qatar Telecommunications Co. paid $3.7 billion for a 51% stake in Kuwait’s National Mobile Telecommunications Co., while Abraaj Capital, MENA’s largest private equity firm, paid around $1.4 billion for Egypt’s largest private sector fertilizer manufacturer.[11]
The Gulf’s stepped up trans-shipment and trading hub status means that it is also increasing its trading links with Iran. Each year, chemicals, oil production equipment and computer technology enter into Iran via the UAE, and especially the ports of Dubai. This, in theory, assists Iran in its quest to develop its industry and become more economically autonomous. The US also suspects that some equipment transshipped through Dubai ports may have been used by Iran for its nuclear program.
Conclusion
These investment patterns place the Gulf region, and especially Dubai, in a unique position. As relationships increase in number and depth within certain markets, namely Iran and China, diplomatic ties with Washington and Europe will probably occasionally feel a squeeze.
Sovereign wealth funds are set to grow in the short and medium-term at least, and as they do so it is inevitable that the economic sway held by Gulf countries, by nature of their voracious appetite for foreign investment, will increase dramatically. Of course, there will be repercussions to this new scheme of sovereign investment. But one should expect Western industries, especially financial services, to continue to converge upon and cater to the burgeoning market of the Gulf. At the same time, Asian markets—especially real-estate sectors—will be able to count on continued attention from oil-producing asset powerhouses such as Dubai.
[1] Countries with the top-ten largest sovereign wealth funds include, in descending order: UAE, Singapore, Norway, Saudi Arabia, China, Kuwait, Australia, United States, Qatar and Russia.
[2] The Economist. “Sovereign-wealth funds: The world’s most expensive club”. May 26, 2007.
[3] The Wall Street Journal. “Boom in Investment Powers Mideast Growth”. July 19, 2007.
[4] Financial Times. “Drilling minds: Dubai’s ruler has big ideas for his little city-state”. May 4, 2007.
[5] Financial Times. “Emirate sets its sights on trebled GDP by 2015”. July 24, 2007.
[6] The Middle East. “The Success Story Surges Onwards and Upwards”. June, 2007.
[7] al-Riyadh. Saudi Arabia, August 7, 2007.
[8] Financial Times. “Drilling minds: Dubai’s ruler has big ideas for his little city-state”. May 4, 2007.
[9] Financial Times. “’Bubble economy’ defies gravity”. July 24, 2007.
[10] Asia Property Report. “Lombok lifted by Emaar project”. July 23, 2007.
[11] The Wall Street Journal. “Boom in Investment Powers Mideast Growth”. July 19, 2007.
Changing Patterns of Investment in the Gulf Region: The Case of Dubai
Bianca Gersten* - taken from memrieconomicblog
The massive increase in oil revenues in most of the six members of the Gulf Cooperation Council (GCC)—Saudi Arabia, United Arab Emirates, Qatar, Bahrain, Oman and Kuwait—has created unprecedented opportunities for the building of infrastructure, the provision of social services and, at the same time, for investments overseas.
These investments have been channeled through two principal pipelines—acquisition of assets and the purchase of shares in high quality financial and industrial firms. According to the London daily al-Sharq al-Awsat of August 13, the Gulf countries have channeled $140 billion into overseas investments in the last three years. In a relatively short time, some of the Gulf countries have become respectable actors on the international financial scene.
At the same time, a hospitable investment environment, the privatization of state-owned entities and the prospects of mutually profitable deals have attracted a massive influx of Western financial services and industry to the Gulf region. The opening of the real estate market for foreign investors, particularly in Dubai, has created a massive construction boom which is fueling economic growth at a rapid rate.
The purpose of this article is to shed light on the investment activities of Dubai, and how an enlightened and entrepreneurial leadership has turned what was a small desert outpost just a few decades ago into a bustling metropolis with a vigorous economy that is subject to both envy and emulation.
Increased Investment Power
Economies in the Middle East and North Africa [MENA] in general have grown by more than 5% in each of the last three years on account of substantial oil revenues. As the main suppliers of oil in the region, the Gulf countries—and, chiefly among them, the United Arab Emirates [UAE]—have experienced unprecedented levels of growth.
In contrast to the earlier oil booms of the 1970’s and 1980’s, however, these countries are not squandering their oil revenues on spending sprees, but rather are focusing on diversifying their assets and buttressing their fiscal solvency through massive investment schemes.
Dubai, one of the seven emirates that make up the UAE, in particular, exemplifies the investment trends of the Middle East, mostly on account of the fact that it is an investment powerhouse out of necessity. The emirate seeks to open itself to and extend its reach within international markets in order to hedge any risk it faces due to the steady decline of its oil and gas reserves, which are expected to reach depletion within twenty years. Dubai currently has a strong penchant for the real-estate sector, but is learning to thoroughly diversify its assets in its search for some high-yielding financial instruments.
Large current account surpluses have allowed much of this investment to take place through sovereign funds, which, in the past, were traditionally held only to protect domestic currencies and banks. Sovereign fund investment is a trend not limited to Gulf countries; the global total of sovereign funds[1] may be $2.5 trillion by the end of this year, and could reach $12 trillion by 2015 on account of capital appreciation.[2] Sovereign wealth funds may soon become the most important buyers of stocks and bonds, and oil countries account for about two-thirds of such assets globally.
[www.memrieconomicblog.org will soon present a more detailed discussion of sovereign fund investment and some possible complications of their proliferation.]
Attracting Western Industries
The current generation of economic and industry ministers in the Gulf region is largely composed of men who began their careers in the private sector. This correlates with efforts in almost all MENA countries to increase the privatization of state-owned entities in an attempt to create an “open market” atmosphere. As the Middle East daily al-Sharq al-Awsat reported on August 8, 2007, an international investment firm in Kuwait noted that privatization trends in Gulf countries—which are competing amongst themselves to become the next global “financial capitol”—are reflected in the flow of private capital into publicly traded stocks and other financial instruments. In 2006 this amount totaled $7.07 billion, which was a 61.6% increase over the previous year.
As regional investment levels skyrocket, from both private and public sources, local private investment funds are scrambling to attain access to European and American markets so that shareholders can enjoy even higher returns on their assets. In the end, this has pulled many Western services and industries, attracted to the copious amount of funds that proximity to potential investors can yield, into the Gulf region.
The Carlyle Group LP says that the Middle East is now the “hot spot” for private equity deals, and HSBC reports that as much as one third of all project finance involves Middle Eastern projects.[3] Dubai is a particular hub of this activity. The chief executive of oil services company Halliburton has recently opted to relocate at least part of the company’s corporate and executive headquarters from Houston to Dubai. Other prospective buyers of property in the emirate include Oracle, Cisco and Microsoft.[4]
Indeed, Dubai has made itself fertile ground for a Western economic presence with its free trade zones, in which companies are not held to the standard UAE requirement that all entities be majority-owned by a UAE national. Various information technology firms, investment banks and media corporations have holed themselves up in these territories, and officials expect finance alone to quadruple its contribution to the emirate’s GDP to $15 billion by 2015.[5]
Low tariffs, low currency risk, the absence of restrictions on repatriation of profits, a small national bureaucracy, and UAE laws that forbid corporate and sales taxes helped the number of Greenfield projects [certain types of investment ventures] within Dubai alone to rise from 88 in 2002 to 215 in 2005. As such, non-oil growth has average 10.6% annually over the past five years. [6] In turn, state-oriented investment facilities such as Dubai International Capital, Istithmar [investment holding company] and DIFC Investments have taken stakes in HSBC, Standard Chartered Bank, Blackstone [private equity fund] and Deutsche Bank.
Qatar is following in Dubai’s footsteps, announcing on July 16, 2007 the unification of its regulatory system, and its intention to rewrite outdated legal codes for commercial and financial transactions that may act as barriers to entry for international firms.
On a smaller scale, many US companies are moving into the region to bolster the sugar industry, which has had to quickly develop after the World Trade Organization capped exports of sugar from the EU in July, 2006. With the Gulf’s large number of transport vessels, it is a magnet for much of the half-billion dollars being invested in sugar output production.
A Mastercard survey also indicated that consumer confidence in the region is at an all time high, and so spending is soaring in Kuwait, Saudi Arabia, Qatar and the UAE. Owing to this and the decline of the dollar, to which all of the Gulf currencies are pegged with the exception of Kuwait’s, some American products are getting a boost. For instance, June was the best month for General Motors in the Persian Gulf because its cars were enjoying an advantage over Japanese and European cars.[7] If the spending trend continues, other Western manufacturing may be pulled into the Gulf’s orbit.
Expanding Horizons
While Western banking, financial and information technology industries are rapidly being drawn to the Gulf countries, Gulf investment is not necessarily giving preferential treatment to the Western hemisphere that has largely responsible for its explosion of financial power.
While it is true that various emirate companies invested $3.5 billion in the US last year[8], many of those same companies are also shifting their interest to Asian markets on account of the falling dollar and for the sake of diversification:
- Dubai International Capital and DIFC Investments are working to extend their reach into Pakistan, India and South Korea.
- Istithmar’s real estate arm, which is part of the Dubai World group of companies, plans to increase the 5% of its assets it has invested in Asia to 30% within five years.[9]
- The Dubai government firm Emaar is responsible for the housing boom taking place across Asia, most recently securing a deal to construct a 1,200-hectare project, set on the pristine Mandalika Beach, estimated at $600 million in worth.[10]
- Remaining oil exports in the Dubai are being used to help launch the Dubai Mercantile Exchange, a joint venture with Nymex that is to create a futures market for Mideast crude oil exported to Asia.
- Dubai Ports World, in its attempt to double its capacity in 10 years, is developing terminals in China, India, Vietnam and Pakistan.
There has also been a trend of increased cross-border investment within the Gulf and larger MENA regions. Part of the reason behind this trend is a post-9/11 sentiment in the Arab world that the West, and especially the US, is unwelcoming of Arab investment. This fear did not seem entirely unfounded in 2006, when the House of Representatives passed legislation forbidding Dubai Ports World from gaining operations of ports in major American cities, citing that al-Qa’ida funding had passed through UAE banks, albeit unbeknownst to the government, prior to 9/11. [This caused a showdown between Congress and the White House, which supported the deal, and much controversy ensued.]
As an example, construction company Emaar’s most recent press releases discuss not Western development, but a $500 million deal to build Samara Dead Sea Golf and Beach resort in Jordan, and a memorandum on understanding with a Saudi energy company on plans for the construction of an open-cycle gas turbine power plant for King Abdullah Economic City in Saudi Arabia.
Mergers and Acquisitions
Arabic satellite television has allowed Gulf companies to develop strong regional brands, and then take their business to a global level. The substantial revenues produced by this trend have enabled more mergers and acquisitions to take place. For example, Qatar Telecommunications Co. paid $3.7 billion for a 51% stake in Kuwait’s National Mobile Telecommunications Co., while Abraaj Capital, MENA’s largest private equity firm, paid around $1.4 billion for Egypt’s largest private sector fertilizer manufacturer.[11]
The Gulf’s stepped up trans-shipment and trading hub status means that it is also increasing its trading links with Iran. Each year, chemicals, oil production equipment and computer technology enter into Iran via the UAE, and especially the ports of Dubai. This, in theory, assists Iran in its quest to develop its industry and become more economically autonomous. The US also suspects that some equipment transshipped through Dubai ports may have been used by Iran for its nuclear program.
Conclusion
These investment patterns place the Gulf region, and especially Dubai, in a unique position. As relationships increase in number and depth within certain markets, namely Iran and China, diplomatic ties with Washington and Europe will probably occasionally feel a squeeze.
Sovereign wealth funds are set to grow in the short and medium-term at least, and as they do so it is inevitable that the economic sway held by Gulf countries, by nature of their voracious appetite for foreign investment, will increase dramatically. Of course, there will be repercussions to this new scheme of sovereign investment. But one should expect Western industries, especially financial services, to continue to converge upon and cater to the burgeoning market of the Gulf. At the same time, Asian markets—especially real-estate sectors—will be able to count on continued attention from oil-producing asset powerhouses such as Dubai.
[1] Countries with the top-ten largest sovereign wealth funds include, in descending order: UAE, Singapore, Norway, Saudi Arabia, China, Kuwait, Australia, United States, Qatar and Russia.
[2] The Economist. “Sovereign-wealth funds: The world’s most expensive club”. May 26, 2007.
[3] The Wall Street Journal. “Boom in Investment Powers Mideast Growth”. July 19, 2007.
[4] Financial Times. “Drilling minds: Dubai’s ruler has big ideas for his little city-state”. May 4, 2007.
[5] Financial Times. “Emirate sets its sights on trebled GDP by 2015”. July 24, 2007.
[6] The Middle East. “The Success Story Surges Onwards and Upwards”. June, 2007.
[7] al-Riyadh. Saudi Arabia, August 7, 2007.
[8] Financial Times. “Drilling minds: Dubai’s ruler has big ideas for his little city-state”. May 4, 2007.
[9] Financial Times. “’Bubble economy’ defies gravity”. July 24, 2007.
[10] Asia Property Report. “Lombok lifted by Emaar project”. July 23, 2007.
[11] The Wall Street Journal. “Boom in Investment Powers Mideast Growth”. July 19, 2007.
Changing Patterns of Investment in the Gulf Region: The Case of Dubai
Bianca Gersten* - taken from memrieconomicblog
28.8.07
Emirates Post issues stamps to mark 30 years of Emirates Bank
Emirates Post has issued a set of commemorative stamps to celebrate 30 years of Emirates Bank, one of the UAE's leading banks. The stamps, issued in four denominations (Dh 1, Dh1.50, Dh3 and Dh3.50), are available at all post offices in the UAE. In addition, First Day Covers of Dh 10 and souvenir sheets of Dh 15 are available at the philatelic counters in Karama, Deira and Abu Dhabi post offices.
Abdulla Al Daboos, Director General of Emirates Post, said, "Emirates Bank has made a strong mark on the region's banking sector. In just 30 years, it has emerged as one of the major banking corporations with diversified products, making an effective contribution to the nation's growth. Emirates Post is pleased to salute Emirates Bank through these special stamps." Emirates Bank was established 30 years ago through a decree issued by Sheikh Rashid Bin Saeed Al Maktoum under the name Union Bank of the Middle East, which was later renamed Emirates Bank International, following its merger with Dubai Bank Ltd and Emirates National Bank Ltd. Sulaiman Al Mazroui, Chief Manager Group Affairs, Emirates Bank, said, "We highly appreciate that Emirates Post has issued commemorative stamps to mark Emirates Bank 30th anniversary celebrations. We are proud that we have been successful over these years and have grown from a small local bank into one of the largest and most profitable financial institutions in the region".
Today, Emirates Bank's range of products and services encompasses conventional and Islamic commercial banking, investment services, property development, insurance, credit card and brokerage services. The bank's network covers regional and international markets, including Riyadh, London, Tehran, Mumbai and Singapore. The bank has also established strategic alliances by acquiring a stake in Bank of Beirut and Al Baraka Banking Group.
Emirates Bank has also been active in launching major business initiatives to boost the national economy and has taken part in the financing of the nation's major projects. It also launched the Al Tomooh Scheme for financing young entrepreneurs, as well as supported different educational, philanthropic, sporting and cultural activities. (Emirates News Agency, WAM)
Abdulla Al Daboos, Director General of Emirates Post, said, "Emirates Bank has made a strong mark on the region's banking sector. In just 30 years, it has emerged as one of the major banking corporations with diversified products, making an effective contribution to the nation's growth. Emirates Post is pleased to salute Emirates Bank through these special stamps." Emirates Bank was established 30 years ago through a decree issued by Sheikh Rashid Bin Saeed Al Maktoum under the name Union Bank of the Middle East, which was later renamed Emirates Bank International, following its merger with Dubai Bank Ltd and Emirates National Bank Ltd. Sulaiman Al Mazroui, Chief Manager Group Affairs, Emirates Bank, said, "We highly appreciate that Emirates Post has issued commemorative stamps to mark Emirates Bank 30th anniversary celebrations. We are proud that we have been successful over these years and have grown from a small local bank into one of the largest and most profitable financial institutions in the region".
Today, Emirates Bank's range of products and services encompasses conventional and Islamic commercial banking, investment services, property development, insurance, credit card and brokerage services. The bank's network covers regional and international markets, including Riyadh, London, Tehran, Mumbai and Singapore. The bank has also established strategic alliances by acquiring a stake in Bank of Beirut and Al Baraka Banking Group.
Emirates Bank has also been active in launching major business initiatives to boost the national economy and has taken part in the financing of the nation's major projects. It also launched the Al Tomooh Scheme for financing young entrepreneurs, as well as supported different educational, philanthropic, sporting and cultural activities. (Emirates News Agency, WAM)
26.8.07
Dubai to Pay $5.1 Billion for MGM, Vegas Hotel Stakes
Dubai to Pay $5.1 Billion for MGM, Vegas Hotel Stakes
Dubai will invest as much as $5.1 billion in Kirk Kerkorian's MGM Mirage, giving the Las Vegas casino company a partner as it expands into real estate.
The investment helps the 90-year-old Kerkorian, who owns 54 percent of MGM, branch into hotels and condominiums as the company pursues wealthy travelers around the world. It adds to Dubai's $13.5 billion in planned acquisitions this year as the Persian Gulf state spends cash from an oil-fueled economic boom.
MGM ``is talking to partners who can help them transition from a heavy, capital-intensive business to a management business,'' said Chris Wiles, portfolio manager at Allegiant Asset Management in Pittsburgh, which owns about 300,000 MGM shares. In Dubai, ``they've got some willing-and-able buyers.''
Dubai World, owned by the government, said today that it will pay $84 each for as many as 28.4 million shares of MGM, 13 percent more than yesterday's closing price. It will invest $2.7 billion for a stake in CityCenter, a hotel and casino complex in Las Vegas, and MGM will use the cash to pay down debt.
``One of the issues that concerned me was the size of our debt'' to build CityCenter, a $7.4 billion project set to open in 2009, MGM Chief Executive Officer Terry Lanni said today. Dubai's cash will shave $3.9 billion off MGM's liabilities, he said.
MGM advanced $6.62, or 8.9 percent, to $80.94 at 4 p.m. in New York Stock Exchange composite trading for the biggest gain since May. The stock has more than doubled in the past 12 months.
Tender Offer
Dubai will purchase half the 9.5 percent stake from MGM's treasury and half from other investors via a public tender offer. Standard & Poor's Ratings Services said it may upgrade the BB rating on MGM's debt because of Dubai World's investment.
The price ``is a bargain for Dubai,'' said Larry Klatzkin, an analyst at Jefferies & Co. in New York, who has a ``buy'' rating on MGM stock and a target price of $112. ``Dubai is a passive and positive investor.''
MGM, the world's second-largest casino company, owns the Mirage, Luxor and Bellagio among its properties on the Las Vegas Strip. Its second-quarter profit more than doubled on increased condominium sales and higher spending at resorts.
Kerkorian, who was an investor in the Metro-Goldwyn-Mayer Inc. movie studio in the 1970s, bought and sold the studio three times over the years. In 1981, he opened the MGM Grand casino, building it into the world's largest, and in 2000 acquired Mirage Resorts Inc., owner of the Bellagio, for $6.4 billion.
Kerkorian Offer
In November, Kerkorian offered to buy as many as 15 million MGM shares for $55 each in a tender offer. The announcement drove the stock 16 percent higher. He ultimately purchased fewer than 450,000 shares.
In May, Kerkorian said he was considering ``alternatives'' for his stake in MGM, triggering a wave of interest in the company and sending the shares up 37 percent. A month later, he abandoned those plans, damping speculation that the company would be sold.
``It's very telling that Kerkorian didn't sell anything,'' Wiles said. ``He thinks it's a company headed in the right direction.''
Dubai will pay MGM an additional $100 million if the CityCenter project is completed on time and on budget. It also has an option to raise its MGM holding to 20 percent, and ``would like to go there once our gaming board approvals come,'' Dubai World Chairman Sultan Ahmed Bin Sulayem said in an interview.
High-End Market
``MGM is the No.1 entertainment company in Las Vegas,'' bin Sulayem said today. ``We're attracted to the high-end hotels market, and Las Vegas is high-end and high-growth.''
Gambling revenue on the Las Vegas Strip, the city's main casino corridor, climbed 5.9 percent to $6.75 billion for the year that ended July, according to the State of Nevada Gaming Control Board. That followed a 15 percent gain a year earlier.
MGM owns and operates 17 casinos in Nevada, Mississippi and Michigan and is involved in three joint ventures. Harrah's Entertainment Inc. is the biggest casino company by revenue.
Dubai World manages a range of businesses for the government, including the palm tree-shaped islands off the Gulf emirate's coastline. It owns container-port operator DP World and private-equity firm Istithmar, which this month paid $942.3 million to buy Barneys New York from Jones Apparel Group Inc.
Dubai's investment in MGM will give the casino company access to the wealthy Middle Eastern, Indian and Russian real- estate investors who are buying property in Dubai World's developments. They may also be interested in Las Vegas condominiums, Lanni said.
Marketing Potential
``We see a lot of cross marketing possibilities,'' he said, adding that MGM may eventually develop its own projects in Dubai.
Gambling is banned in the United Arab Emirates and Gulf states including Saudi Arabia and Kuwait because it contravenes Islamic Shariah law.
Through Istithmar, Dubai World owns 13 percent of Kerzner International Ltd., according to its Web site. Kerzner owns the Atlantis resort in its hometown of Paradise Island, Bahamas, and is building another in Dubai. Kerzner also will jointly develop a resort on the Las Vegas Strip with MGM.
``Through our Kerzner investment we're already into gambling, so this shouldn't come as a surprise,'' bin Sulayem said today. ``The important thing is that MGM's non-gambling revenue is rising.''
MGM is expanding into real-estate development and standalone hotels without casinos in Nevada, China and Abu Dhabi in the United Arab Emirates. The company owns 760 acres (308 hectares) on the Las Vegas strip and has contributed 40 acres to a joint venture with Kerzner International Ltd.
It was through the company's chairman, Sol Kerzner, that bin Sulayem approached MGM about buying a stake, Lanni said in an interview. The first talks were held in June on the Italian island of Sardinia, where both Lanni and bin Sulayem were attending a party hosted by billionaire investor Thomas Barrack.
The MGM deal is being made through Infinity World Development Corp., a new unit set up for that purpose.
Credit Suisse Securities was Dubai World's financial adviser. UBS Investment Bank advised MGM.
Selected from a report by Oliver Staley and Will McSheehy
Dubai will invest as much as $5.1 billion in Kirk Kerkorian's MGM Mirage, giving the Las Vegas casino company a partner as it expands into real estate.
The investment helps the 90-year-old Kerkorian, who owns 54 percent of MGM, branch into hotels and condominiums as the company pursues wealthy travelers around the world. It adds to Dubai's $13.5 billion in planned acquisitions this year as the Persian Gulf state spends cash from an oil-fueled economic boom.
MGM ``is talking to partners who can help them transition from a heavy, capital-intensive business to a management business,'' said Chris Wiles, portfolio manager at Allegiant Asset Management in Pittsburgh, which owns about 300,000 MGM shares. In Dubai, ``they've got some willing-and-able buyers.''
Dubai World, owned by the government, said today that it will pay $84 each for as many as 28.4 million shares of MGM, 13 percent more than yesterday's closing price. It will invest $2.7 billion for a stake in CityCenter, a hotel and casino complex in Las Vegas, and MGM will use the cash to pay down debt.
``One of the issues that concerned me was the size of our debt'' to build CityCenter, a $7.4 billion project set to open in 2009, MGM Chief Executive Officer Terry Lanni said today. Dubai's cash will shave $3.9 billion off MGM's liabilities, he said.
MGM advanced $6.62, or 8.9 percent, to $80.94 at 4 p.m. in New York Stock Exchange composite trading for the biggest gain since May. The stock has more than doubled in the past 12 months.
Tender Offer
Dubai will purchase half the 9.5 percent stake from MGM's treasury and half from other investors via a public tender offer. Standard & Poor's Ratings Services said it may upgrade the BB rating on MGM's debt because of Dubai World's investment.
The price ``is a bargain for Dubai,'' said Larry Klatzkin, an analyst at Jefferies & Co. in New York, who has a ``buy'' rating on MGM stock and a target price of $112. ``Dubai is a passive and positive investor.''
MGM, the world's second-largest casino company, owns the Mirage, Luxor and Bellagio among its properties on the Las Vegas Strip. Its second-quarter profit more than doubled on increased condominium sales and higher spending at resorts.
Kerkorian, who was an investor in the Metro-Goldwyn-Mayer Inc. movie studio in the 1970s, bought and sold the studio three times over the years. In 1981, he opened the MGM Grand casino, building it into the world's largest, and in 2000 acquired Mirage Resorts Inc., owner of the Bellagio, for $6.4 billion.
Kerkorian Offer
In November, Kerkorian offered to buy as many as 15 million MGM shares for $55 each in a tender offer. The announcement drove the stock 16 percent higher. He ultimately purchased fewer than 450,000 shares.
In May, Kerkorian said he was considering ``alternatives'' for his stake in MGM, triggering a wave of interest in the company and sending the shares up 37 percent. A month later, he abandoned those plans, damping speculation that the company would be sold.
``It's very telling that Kerkorian didn't sell anything,'' Wiles said. ``He thinks it's a company headed in the right direction.''
Dubai will pay MGM an additional $100 million if the CityCenter project is completed on time and on budget. It also has an option to raise its MGM holding to 20 percent, and ``would like to go there once our gaming board approvals come,'' Dubai World Chairman Sultan Ahmed Bin Sulayem said in an interview.
High-End Market
``MGM is the No.1 entertainment company in Las Vegas,'' bin Sulayem said today. ``We're attracted to the high-end hotels market, and Las Vegas is high-end and high-growth.''
Gambling revenue on the Las Vegas Strip, the city's main casino corridor, climbed 5.9 percent to $6.75 billion for the year that ended July, according to the State of Nevada Gaming Control Board. That followed a 15 percent gain a year earlier.
MGM owns and operates 17 casinos in Nevada, Mississippi and Michigan and is involved in three joint ventures. Harrah's Entertainment Inc. is the biggest casino company by revenue.
Dubai World manages a range of businesses for the government, including the palm tree-shaped islands off the Gulf emirate's coastline. It owns container-port operator DP World and private-equity firm Istithmar, which this month paid $942.3 million to buy Barneys New York from Jones Apparel Group Inc.
Dubai's investment in MGM will give the casino company access to the wealthy Middle Eastern, Indian and Russian real- estate investors who are buying property in Dubai World's developments. They may also be interested in Las Vegas condominiums, Lanni said.
Marketing Potential
``We see a lot of cross marketing possibilities,'' he said, adding that MGM may eventually develop its own projects in Dubai.
Gambling is banned in the United Arab Emirates and Gulf states including Saudi Arabia and Kuwait because it contravenes Islamic Shariah law.
Through Istithmar, Dubai World owns 13 percent of Kerzner International Ltd., according to its Web site. Kerzner owns the Atlantis resort in its hometown of Paradise Island, Bahamas, and is building another in Dubai. Kerzner also will jointly develop a resort on the Las Vegas Strip with MGM.
``Through our Kerzner investment we're already into gambling, so this shouldn't come as a surprise,'' bin Sulayem said today. ``The important thing is that MGM's non-gambling revenue is rising.''
MGM is expanding into real-estate development and standalone hotels without casinos in Nevada, China and Abu Dhabi in the United Arab Emirates. The company owns 760 acres (308 hectares) on the Las Vegas strip and has contributed 40 acres to a joint venture with Kerzner International Ltd.
It was through the company's chairman, Sol Kerzner, that bin Sulayem approached MGM about buying a stake, Lanni said in an interview. The first talks were held in June on the Italian island of Sardinia, where both Lanni and bin Sulayem were attending a party hosted by billionaire investor Thomas Barrack.
The MGM deal is being made through Infinity World Development Corp., a new unit set up for that purpose.
Credit Suisse Securities was Dubai World's financial adviser. UBS Investment Bank advised MGM.
Selected from a report by Oliver Staley and Will McSheehy
22.8.07
Private Equity Shows Robust Growth - KSA Kingdom of Saudi Arabia
Private Equity Shows Robust Growth - KSA
Private equity in the MENA region in general and the GCC in particular has continued its robust growth in 2006 and 2007 on the fund raising front, as well as fund sizes, according to Kuwait-based Global Investment House (Global).
This growth was made possible due to a lot of factors, mainly the increase in liquidity in the GCC region on the back of the recent surge in high oil prices. Other factors that contributed to the private equity rise relates to the governments' initiatives to foster this sector through privatizations, also the efforts exerted by fund managers and investment firms to encourage private equity as means of financing.
The GCC countries have also realized the importance of involving the private sector in this restructuring, so privatization has also played a pivotal part in the process. The diversification of their economic bases has most importantly led the GCC countries on a race toward the "financial capital of the GCC," thus easing regulations in terms of foreign interests in the regional financial sector. This has provided the right catalysts for the GCC economies to embark on restructuring their financial sectors, hence new regulations were imposed, financial systems were upgraded to allow for new financial instruments, and a myriad of financial companies have launched their products in the region. These recent trends in the GCC, had a positive spill-over effects on the Middle East and North Africa (MENA) regions. MENA countries have adopted "openness" to their economic and financial sectors, which gave cash rich private equity managers the incentive to seek investment opportunities within the region. To that end, private equity funds that invest in the MENA region have increased tremendously in numbers and sizes, whereby $13 billion in private equity capital are currently under management in the region and has been raised in 2005 and 2006.
As per a recent report produced by the Gulf Venture Capital Association in collaboration with KPMG, data extracted from Zawya, a leading source for financial data in the MENA, on private equity indicates that the total capital raised by private equity funds in 2006 reached $7.075 billion. This has increased by 61.6 percent from its level in 2005 of $4.379 billion.
Sizes of private equity funds in the MENA region have also exhibited an increase, where total fund sizes have reached the $14 billion mark, and as of June 2007 the fund size is at $9 billion. These are significant developments in the MENA private equity sector given that the total fund size was at $78 million in 2001, an increase of 121 folds. Two important reasons for this surge in fund sizes, the first relates to the increase in the number of private equity funds in the region, and the other relates to the increase in the sizes of the funds in the MENA region.
Throughout the period of 1994-2007, the majority of the private equity funds in the MENA region are in the "Investing" phase, where 55 funds with a total size value of $12.717 billion, 40.6 percent of total value, are classified as part of the group. Funds that are in the "fund raising" stage throughout the same period in the MENA region constituted 28.3 percent of total value of funds. Fully vested private equity funds in the MENA have a combined total of $629 million, two percent of total fund sizes, while funds that are in the liquidation process are only two, and they have a combined value of $58 million. Announced private equity funds in the MENA region through 1994-2006 are concentrated in the years 2006 and 2007, and they have a combined size of $3.842 billion, which constitutes 12.3 percent of the total fund sizes of private equity funds in the region. Closed funds, on the other hand, constitute a mere 1.8 percent of the total size of private equity funds in the MENA region with a combined value of $554 million.
selected from (MENAFN - Arab News) KUWAIT, 23 July 2007
Private equity in the MENA region in general and the GCC in particular has continued its robust growth in 2006 and 2007 on the fund raising front, as well as fund sizes, according to Kuwait-based Global Investment House (Global).
This growth was made possible due to a lot of factors, mainly the increase in liquidity in the GCC region on the back of the recent surge in high oil prices. Other factors that contributed to the private equity rise relates to the governments' initiatives to foster this sector through privatizations, also the efforts exerted by fund managers and investment firms to encourage private equity as means of financing.
The GCC countries have also realized the importance of involving the private sector in this restructuring, so privatization has also played a pivotal part in the process. The diversification of their economic bases has most importantly led the GCC countries on a race toward the "financial capital of the GCC," thus easing regulations in terms of foreign interests in the regional financial sector. This has provided the right catalysts for the GCC economies to embark on restructuring their financial sectors, hence new regulations were imposed, financial systems were upgraded to allow for new financial instruments, and a myriad of financial companies have launched their products in the region. These recent trends in the GCC, had a positive spill-over effects on the Middle East and North Africa (MENA) regions. MENA countries have adopted "openness" to their economic and financial sectors, which gave cash rich private equity managers the incentive to seek investment opportunities within the region. To that end, private equity funds that invest in the MENA region have increased tremendously in numbers and sizes, whereby $13 billion in private equity capital are currently under management in the region and has been raised in 2005 and 2006.
As per a recent report produced by the Gulf Venture Capital Association in collaboration with KPMG, data extracted from Zawya, a leading source for financial data in the MENA, on private equity indicates that the total capital raised by private equity funds in 2006 reached $7.075 billion. This has increased by 61.6 percent from its level in 2005 of $4.379 billion.
Sizes of private equity funds in the MENA region have also exhibited an increase, where total fund sizes have reached the $14 billion mark, and as of June 2007 the fund size is at $9 billion. These are significant developments in the MENA private equity sector given that the total fund size was at $78 million in 2001, an increase of 121 folds. Two important reasons for this surge in fund sizes, the first relates to the increase in the number of private equity funds in the region, and the other relates to the increase in the sizes of the funds in the MENA region.
Throughout the period of 1994-2007, the majority of the private equity funds in the MENA region are in the "Investing" phase, where 55 funds with a total size value of $12.717 billion, 40.6 percent of total value, are classified as part of the group. Funds that are in the "fund raising" stage throughout the same period in the MENA region constituted 28.3 percent of total value of funds. Fully vested private equity funds in the MENA have a combined total of $629 million, two percent of total fund sizes, while funds that are in the liquidation process are only two, and they have a combined value of $58 million. Announced private equity funds in the MENA region through 1994-2006 are concentrated in the years 2006 and 2007, and they have a combined size of $3.842 billion, which constitutes 12.3 percent of the total fund sizes of private equity funds in the region. Closed funds, on the other hand, constitute a mere 1.8 percent of the total size of private equity funds in the MENA region with a combined value of $554 million.
selected from (MENAFN - Arab News) KUWAIT, 23 July 2007
Abonohu te:
Postimet (Atom)