A new report from A.T Kearney, a global strategic management consulting firm, showed that the potential of Middle Eastern capital available for investment, in both private and public sectors, is approximately $4 trillion. This high investment power is largely linked to Sovereign Wealth Funds. The assets under management of these Funds have, at a global level, risen by 18 percent between 2006 and 2007 to reach $3.3 trillion, Middle East SWF accounting for 50 percent. They are expected to reach $5 trillion in 2010 and $10 to $15 trillion in 2015. This dramatic growth is supported by the rising oil revenues and by the increasing foreign exchanges reserves of some Asian countries. The objectives of these funds are to protect the budget and the economy from excess volatility in exports and / or to diversify from non-renewable commodity exports. With the rapid growth of the assets, SWF are under growing pressure to invest. They have accomplished a strategic shift in the way the money is being invested. Traditionally, countries turned their surpluses into risk-averse financial assets. China, for example, supported the US consumption economy by buying government bonds. SWF are now favoring equity-type investments to benefit from higher revenues and to gain exposure to strategic companies with more capabilities and know-how in industries that are crucial to their own economies. With the world's biggest sovereign wealth fund - the Abu Dhabi Investment Authority -as one example, the UAE is moving towards these private equity-style deals. Because of this new way to invest, concern about the political purpose and influence of these funds, and developing countries' investors in general, has risen among Western countries. The criticisms raised when Dubai Ports World planned to purchase operating rights to several US ports through the acquisition of P&O, or when the Chinese energy firm CNOOC tried to buy Unocal, are vivid examples. International bodies such as the International Monetary Fund and OECD are working on rules to prevent discrimination against SWF (e.g. progressive liberalization of limits on foreign investment) but also to answer to the need of more transparency in their investment processes (e.g. declaration of ownership rights, use of leverage). Moreover, the SWF could also be an opportunity for the developed countries, when most of their economies are slowing down. “In the short term, the SWF can help to absorb the liquidity crisis; in the long run, they will be valuable partners for Western companies to back their growth and to finance innovation” said Cyril Garbois, principal and expert for SWF, A.T. Kearney Dubai. Early this year, SWF from Asia and Middle East injected billions of dollars of new capital into troubled financial institutions and contributed this way to the stability of the whole system. The A.T. Kearney report points out the fact that investors from developing countries typically promise to make significant capital investment to grow the business. This approach usually offers a more attractive value proposition for the management team of the targeted firm. The rising power of the regional SWF and their private equity oriented investments are also an opportunity for the Middle East economy itself. The study by A.T. Kearney revealed that private equity and SWF investments accelerate the growth of job creations: “More than one million jobs have been created through private equity investments in Europe in the last four years” said Dr. Dirk Buchta, managing director, A.T. Kearney Middle East. The report further showed that companies financed by private equity and SWF grow faster than those traditionally financed. Private equity firms often invest in mid-size companies, mostly former family owned businesses - of which the Middle East has many. With the help of Private Equity investors, these companies usually invest more heavily in R&D and become more international. “With $4 trillion available in the Middle East for investment and very healthy Sovereign Wealth Funds, the outlook for economic development in the region is very positive” said Dr. Alexander von Pock, manager of Financial Services, A.T. Kearney Middle East. __
