America should be thankful for canny Arab wealth
By John Gapper
Published: November 28 2007 19:00 | Last updated: November 29 2007 07:08
If you find yourself in Abu Dhabi, as I did the other day, it is worth driving westwards along the Corniche road to the Emirates Palace hotel, a $3bn edifice of marble and gold leaf, where a musician plays teatime tunes on a Steinway baby grand.
Abu Dhabi’s government could buy Steinway & Sons without a blink if it were interested in New York trophy assets, as Japanese investors were in the bubble years and Middle East sheikhs were in the 1970s. But one piano is enough – it has set its sights on altogether bigger things.
Here, on the Gulf coast, is the spot where the world’s wealth is most concentrated. Abu Dhabi, the biggest of the United Arab Emirates, has nine per cent of the world’s oil reserves and four per cent of its natural gas. The Abu Dhabi Investment Authority (ADIA) is thought to have $1,000bn (€677bn) in funds thanks to $90 oil, with billions more pouring in every month. Perhaps the peace and quiet and the distance from New York – a 14-hour flight away – accounts for the sanguine attitude of the ADIA, the world’s biggest sovereign wealth fund (SWF), to the US housing slump and credit crisis. As other investors lost their nerve this week, Abu Dhabi injected $7.5bn into Citigroup in return for bonds convertible into a 4.9 per cent equity stake.
It helps to be separated from Wall Street just at the moment. We have reached the point in the cycle where fear has definitively taken over from greed. Bad news about the US consumer or the housing market, which increases the risk of a recession, is seized on anxiously. Good news, such as last week’s buoyant Black Friday sales figures, is explained away gloomily.
In Abu Dhabi, that noise is less intrusive. The ADIA took the view that a bank with an unmatched global franchise, trading at 1.4 times book value, with a dividend yield of about 7 per cent, was either on the point of cutting its dividend and breaking apart, or was a bargain.
Perhaps it is that Abu Dhabi has a lot of cash, which it has to invest somewhere. The SWFs are taking over from private equity and mutual funds as the place for companies to go when they seek large slugs of risk capital. Investors in the Gulf states hold between $1,600bn and $2,000bn of foreign financial assets, according to a McKinsey study, and are no longer content docilely to buy bonds.
Given this, it makes sense to buy stakes in western banks such as Citigroup and in private equity and hedge funds. Abu Dhabi has acquired stakes in Leon Black’s Apollo Management and the Carlyle Group this year and Dubai International Capital has taken a 9.9 per cent stake in the hedge fund Och-Ziff.
These institutions are conduits through which SWF can make other investments. They get first look at deals in emerging markets in which SWFs can invest, either through or alongside them. McKinsey estimates that the ADIA allocates 50 to 60 per cent of its fund to equities and a further 20 per cent to private equity and other alternative assets, so it is hungry for opportunities.
One thing it is not is stupidity, which was the parochial explanation bandied about in New York this week for the willingness of Gulf investors to expose themselves to dollar weakness and US subprime mortgages. Those who want to believe that expertise is confined to the west whisper that “the Arabs” have more money than sense.
There is little evidence of that. Domestically, it makes sense for the Gulf governments to invest their financial holdings into a variety of assets and to take risk. Many oil-rich states suffer the “resource curse” – the tendency for oil wealth to lead to corruption and lassitude. Gulf states such as the UAE and Qatar are trying to escape the curse by diversifying their economies and assets.
They are doing so in a professional manner. As I wrote last week about Dubai, the Gulf states are buying in expertise in the form of expatriate professionals from consulting and financial firms. According to one banker who has worked with the ADIA, it has hired 1,300 professionals from Wall Street and City firms in the past five years. It does not simply take the word of companies and banks that roll up asking for cash.
They are also getting better at navigating the sensitivities raised by Arab governments investing in western companies, after the fiasco of DP World having to shed its management of US ports when it acquired P&O last year. The recent Gulf investments in financial institutions, and in AMD, the US chip company, and Sony of Japan have not raised too many hackles.
There is no reason why they should – quite the opposite, in fact. Funds such as the ADIA have a clear rationale for taking stakes in US companies and are content not to insist on board representation or strategic control. If these investments work, it will help them to broaden their economies and to avoid the social instability common in oil-dependent countries.
Meanwhile, the money spent on energy by US consumers and businesses is flowing back into the country in the form of capital at a time when it is urgently required. Financial crises call for deep-pocketed investors willing to support institutions in return for the chance of outsize returns and the Gulf states have arrived on cue.
If all of this capital were locked up in Swiss bank accounts and houses in Hampstead, or deposited solely in Treasury bonds and driving down yields while US financial institutions were starved of support, that would be a reason for Americans truly to worry. As it is, they have the luxury of working out what to think about an influx of Arab equity. Mainly, they ought to be thankful.
Copyright The Financial Times Limited 2007
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