GCC sovereign wealth funds and global deal making

GULF petrodollars increasingly influence corporate deal making on Wall Street and the City of London. Qatar’s Delta Two’s bid for British retailer Sainsbury, Dubai’s purchase of Kirk Kirkorian’s holdings in MGM Grand and stakes in HSBC, Standard Chartered, Deutsche Bank and EADS, Kuwait’s strategic pre-IPO bid for Chinese megabank ICBC, Abu Dhabi’s stake in Austrian oil and gas OMV, Italy’s Ferrari and Pakistan Telecom demonstrate the range and scale of GCC offshore investments.

By Matein Khalid

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Published: Sat 1 Sep 2007, 8:49 AM

Last updated: Sun 5 Apr 2015, 1:33 AM

Increasingly, sovereign wealth funds in the Gulf have emerged as aggressive bidders for trophy banks, property, infrastructure assets, listed companies in the West, the Pacific Rim and the MENA region. Unlike the 1970’s, Gulf petrodollar recycling is no longer limited to US Treasury bonds or three month Eurodollar deposits in New York money centre banks. The exponential rise in Gulf investments in the global markets reflects $70 crude oil and the attendant liquidity tsunami recycled through the GCC’s constellation of sovereign wealth funds, investment agencies and central banks.

At $350 billion, the GCC current account surplus is almost comparable to China. Moreover, the rise in GCC inflation as the dollar devalues against the yen, sterling and the Euro forces GCC governments to seek higher yields just to protect the purchasing power of their oil revenues. GCC governments have also integrated their international investment strategy with the imperatives of their domestic development models. So Dubai Borse’s rival bid to NASDAQ’s takeover deal for the Swedish stock exchange and Dubai Financials stakes in Bahrain’s TAIB, Oman’s Bank Muscat and Greece’s Bank Marfin accelerates Dubai’s emergence as the Gulf’s international financial hub. Abu Dhabi has spun Abu Dhabi Investment Council from ADIA, rebranded ADIC as a regional investment bank, created Mubadala to recycle its oil wealth into strategic assets abroad that range from oil and gas, telecoms and aluminum smelters.

The Gulf has been a creditor to the world financial markets since the 1970’s. Abu Dhabi’s ADIA, with almost a trillion dollar in assets and a thirty year track record, is unquestionably the most successful sovereign wealth fund ever to have emerged from the Middle East. ADIA does not only manage far more money than Calpers, Singapore’s Temasek or the investment agencies of Kuwait and Qatar, but has also played a seminal role in the seeding of iconic asset managers in such niches as commodities futures, private equity and emerging markets real estate. The Kuwait Investment Authority (KIA) was an investor in British Petroleum and Daimler Benz AG in the 1970’s but its evolution as a global money management colossus was hurt by the Gropo Torras scandal in Spain, the Souk Al-Manakh crash, the Iraqi invasion of Kuwait, the Gulf war and the collapse of oil prices in the 1990’s. However, the KIA has now restructured its investment fund, using Yale’s Endowment Fund as a model, to expand into new asset classes, currencies and geographies. The KIA is increasingly focused on strategic investments in Turkey, India, China Southeast Asia, Egypt and the Maghreb, the new lodestars of Gulf petrodollars.

GCC petrodollars will increasingly rival hedge funds and private equity firms as bidders in corporate deal making. Qatar’s Delta Two investment funds lost out to Macquarie Bank (which has a joint venture with Abu Dhabi’s ADCB) for UK utility Thames Water but emerged a strategic shareholder in British retailer Sainsbury. The Gulf’s sovereign investment managers favour stakes in international banking empires, with the sector’s landmark deal Prince Walid bin Talal Al Saud’s white knight investment in Citigroup just after Desert Storm, a $10 billion profit windfall. It is no coincidence that Barclays enlisted Singapore’s Temasek and China’s Development Bank as equity partners in its bid for Dutch bank ABN Amro, the largest banking takeover in history. If Barclays acquires ABN Amro, the largest shareholder of the 300 year old UK bank will be a Marxist-Leninist development bank in Beijing. Blackstone, the New York private equity firm where China invested $3 billion before its NYSE floatation, midwifed Barclay’s deal with China and Singapore.

The investment strategies of GCC sovereign funds will increasingly influence the rules of the game in Wall Street deal making and the valuation metrics of stocks, bonds and currencies in the global financial markets. The Gulf’s secular shift from investing in US and Europe to the Arab world, the Indian sub continent, Southeast Asia and China means emerging market relative valuation multiples will raise. The dollar and the US Treasury bond markets will no longer be the safe haven instruments for the GCC sovereign funds and investment banks, eroding the currency pegs and diplomatic alliances that anchor GCC-Washington relations. Moreover, investments from the Arab world are guaranteed to provoke a political backlash in the Congress and the American media, as DP World’s bid for the ports operator Peninsula and Orient and China’s takeover bid for California oil and gas Unocal proved. GCC governments could unwittingly become embroiled in domestic power politics or inflamed nationalism abroad, as Singapore’s Temasek found out the hard way when its investment in Prime Minister Thanksin’s Shin Corp led to riots, a botched election and a coup d'état in Thailand.

For instance, General Musharaff’s military regime in Pakistan was accused by its opponents of selling state crown jewels to GCC investors in a succession of the privatisation deals that benefited Islamabad insiders and middlemen. President Sarkozy and Chancellor Merkel have both voiced opposition to foreign buyers in strategic French and German companies such as banks, telecoms, utilities, oil and gas.

This is particularly true since GCC governments offer no reciprocity to foreign investors in precisely such strategic sectors. Coalition politics can also derail strategic deals.

The Marxists, junior partners in India’s Congress governments, are visceral opponents of privatisation and offshore investors.

It is impossible to execute a cross–border deal in Egypt without the approval of President Hosni Mubarak’s inner circle of bankers and industrialists, relationships that make bellwether deals possible but also raise political risk. Foreign investment can also become an issue in Gulf politics. Kuwait’s KIA, which receives ten per cent of the emirates oil revenues by law, is frequently grilled by members of parliament.

The Gulf’s money managers will need increasingly sensitive political antennae to navigate the global markets.

Matein Khalid is a Dubai-based investment banker and economic analyst

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