The four actors – petrodollar investors, Asian central banks, hedge funds, and private equity – had collectively amassed $8,400bn in assets by the end of 2006, excluding cross-investments between them, three times what they held in 2000.
global power brokers reshaping trends
By Joanna Chung
Published: October 3 2007 20:26 | Last updated: October 4 2007 06:06
Sovereign wealth funds – powerful state-backed investors – have been grabbing headlines lately.
Their emergence is controversial, not least because of fears that they will make investments driven by political, rather than financial, motives.
But these funds are only one element of a much bigger phenomenon that is reshaping the world’s financial markets.
Sovereign wealth funds are grouped within the four “power brokers” that are having an increasing impact on the world’s capital markets, says a new research report out on Thursday by McKinsey Global Institute, McKinsey & Company’s economics research division.
The four actors – petrodollar investors, Asian central banks, hedge funds, and private equity – had collectively amassed $8,400bn in assets by the end of 2006, excluding cross-investments between them, three times what they held in 2000.
The size and influence of these groups – which have helped fuel liquidity and kept interest rates low – will only grow, the report says.
“For the first time since Japanese investors gained financial clout in the 1980s, investors outside the United States and Europe are reshaping trends in financial markets,” it says.
Consequences of hyperactivity
The four new power-brokers are far more active than traditional investment institutions in the private capital markets, the report says.
Private equity, which uses privately raised funds from relatively small groups of investors to buy companies and delist them from public stock exchanges, is the clearest example of this. But hedge funds are starting to buy companies – or take private stakes in them – as well.
In recent years, global public-to-private transactions have exceeded global initial public offerings.
Similarly, private placements of equity, although still very small with a volume of $7.4bn in 2006, have been growing at an annual average rate of 60 per cent since 2002 while initial public offerings on stock exchanges have grown at a comparatively modest rate of 17 per cent.
Private placement of debt has expanded by 26 per cent a year, outstripping growth in public corporate debt issues and the leveraged loan market, which have both grown at 15 per cent a year.
However, their emergence is also fuelling public anxiety, not least because hard facts about some have been scarce. For instance, the report says: “The lack of transparency around huge government investment funds opens the possibility that they could use their financial heft for political purposes.”
Of the four, the petrodollar investors from oil-exporting countries are the biggest and arguably the most controversial. Thanks to the tripling of oil prices since 2002, this group controlled an estimated $3,400bn to $3,800bn in foreign financial assets at the end of 2006 – or just under half the total for the four groups.
Petrodollar foreign assets will continue to grow rapidly even if oil prices fall, the report indicates. If, for instance, the oil price was $50 per barrel, their assets would grow to $5,900bn in the next five years. This entails new investments of $387bn a year in capital markets – or about $1bn a day.
Sovereign wealth funds, state-owned investment funds that invest oil surpluses, are one of six actors investing petrodollars overseas, the report found.
The group includes central banks, which invest in foreign assets to help stabilise their currencies against balance of payment fluctuations. They tend to seek stability, not to maximise returns, and so hold reserves in the forms of cash and long-term government debt.
Also investing petrodollars are government investment corporations – smaller, more targeted investment funds, which invest directly into domestic and foreign corporate assets, shunning the portfolio investment approach of sovereign wealth funds.
The other three investor types are rich individuals who place a large portion of their wealth abroad, often using intermediaries in London and Switzerland; government-controlled and funded companies that invest abroad; and finally private companies that use retained earnings and capital increases to finance investments overseas.
That means that across all oil exporters, governments control 59 per cent of petrodollar foreign investments while individuals hold 41 per cent, the report estimates.
The report says more aggressive sovereign wealth funds and private wealthy oil investors are increasing their allocation to alternative assets such as real estate, private equity, and hedge funds and to emerging market investments.
A common factor uniting petrodollar investors with Asian central banks, hedge funds and private equity firms is an increasing willingness to take on more risk to achieve higher returns.
“In their search for higher returns, they are collectively pushing outward the risk-return frontier.
“They are also beginning to cross into each other’s investment territory.” Indeed, the simultaneous rise of all four groups is not accidental. “Their growth is to an extent mutually reinforcing,” the report says.
Asian governments, for instance, have plans to move up to $480bn of reserve assets into sovereign wealth funds that will diversify investments across asset classes.
Even if growth slowed, for example if oil prices fell, and China’s current account surplus declined and the expansion of hedge funds and private equity slowed – perhaps in the wake of the current credit squeeze – the assets of these four groups would nearly double to as much as $15,200bn by 2012.
But the report says: “Given the lack of transparency around the new power brokers’ investment strategies and objectives, this diversification will make their actions even more opaque to other investors and regulators, perhaps heightening concerns.”
It adds: “The four players would find it in their own interest to note public anxieties and voluntarily take steps to minimise them, much as the derivatives industry did a decade ago.”
Copyright The Financial Times Limited 2007 |
