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.
Abonohu te:
Postimet (Atom)