New ‘power brokers’ offer vast pools of capital
Jul 10, 2008
Big money including SWFs shifts to equities
NEW YORK -- There are some big changes in the world’s investment landscape, according to McKinsey Global Institute, which has issued an update to a 2007 wealth report. The four new ‘power brokers’ – Asian sovereign investors, petrodollars, hedge funds and private equity firms – are amassing even more wealth and will soon rival pension funds as sources of capital.
All four power brokers grew in 2007, with their combined financial assets rising by 22 percent, even faster than recorded before, to $11.5 tn, report McKinsey authors Diana Farrell, Susan Lund and Koby Sadan.
From March 2007 through June 2008, sovereign wealth funds (SWFs) poured $59 bn into western financial institutions. Citi got the most ($17.4 bn), followed by UBS ($9.7 bn) and Merrill Lynch ($8.4 bn). ‘These rescues mark a step by Asian and sovereign oil investors toward more direct investments in companies,’ the authors write.
Propelled by soaring oil prices, the foreign financial assets of oil exporters rose to an estimated $4.6 tn by the end of 2007, an 18 percent increase over the previous year, McKinsey reports. Russia, Algeria, Iran and Venezuela are among the emerging oil rich.
Countries that invest a lot of money via central banks, usually in conservative instruments like US treasuries, are also moving more money into their SWFs, seeking higher returns in a wider variety of investments, the report says. Additionally, nations that don’t have SWFs, such as India and Japan, are contemplating them. Generally, the power brokers are also shifting their asset allocation away from fixed income and cash and into equities in a drive to increase returns.
Attention-grabbing private equity firms and hedge funds aren’t faring as well. Private equity firms saw new fund-raising soar in the first half of 2007, only to plummet in the third quarter after the subprime mortgage crisis. Still, it rose in the last three months of the year, bringing total assets under management in leveraged buyout funds to $900 bn.
Although the total assets under management by hedge funds grew to $1.9 tn in 2007, new capital inflows from investors declined sharply in the first quarter of 2008.
While the four new classes of power brokers are sources of vast pools of capital, their money does pose concerns. The report examines whether the increased liquidity will cause asset price inflation; whether state investors might use their wealth for political purposes; potential hedge fund failure; and problems with private equity firms' heavy leverage.
Despite the current financial crisis, the authors say ‘the power brokers will continue to grow in wealth and clout.’ Under a conservative scenario, their combined assets will grow to $21 tn by 2013.
By Anna Snider