To: News articles
Date: Tue, Feb 5 2008 5:46 pm
Who's Afraid of Mideast Money?
The men who manage the region's sovereign wealth funds are using the billions
from Persian Gulf oil revenues to change the face of global finance
by Emily Thornton and Stanley Reed
Deep inside a fortress of government ministries in Kuwait City, Bader M. Al
Sa'ad moves billion-dollar chunks of wealth around the world like chess pieces.
Slim and stately, the head of the Kuwait Investment Authority manages $213
billion on behalf of his government. His portfolio, one of the biggest
so-called sovereign wealth funds in the world, is constantly replenished with
money that flows into Kuwait in exchange for the oil that flows out. As prices
top $100 a barrel, Kuwait's coffers are swelling.
With portraits of the emir and crown prince looming above Al Sa'ad's desk, one
might expect the 50-year-old money manager to be tight-lipped about his
investment strategy. But Al Sa'ad, who has held his post for just four years,
is in a chatty mood. He says he wants to invest more in China and Brazil and
other hot emerging markets—and less in Britain and France. He's also keenly
interested in leveraged buyouts and wants to spend at least $4 billion on big
stakes in blue chip companies, especially American ones, on top of the roughly
$17 billion he already holds. He's even interested in U.S. mortgage-backed
securities, a contrarian play if there ever was one. Al Sa'ad says he has about
15% of the fund in emerging markets, hedge funds, and private equity, up from
almost zero when he started. "We have been quiet for a while," he says. "But
now we are knocking on doors."
Pounding is more like it. Sovereign wealth funds from the Persian Gulf are
changing the face of global finance in ways that unnerve many Westerners. In
recent months Gulf funds have bought large chunks of Citigroup (C), the private
equity giant Carlyle Group, semiconductor heavyweight Advanced Micro Devices
(AMD), planemaker European Aeronautic Defense & Space (EADS), and many other
big companies. Gulf funds are also getting into leveraged buyouts, sometimes
alongside private equity firms and sometimes by themselves—despite having
little experience operating companies. "Large sovereign wealth funds have
become major players in private equity, not only as investors but also as
competitors," says David Rubenstein, a founder of Carlyle, which sold a 7.5%
stake to an Abu Dhabi fund in September. Soon, says Gregory A. White, managing
director at Thomas H. Lee Partners, "they will be the industry. We will be
working for them."
BusinessWeek recently paid visits to four of the region's most powerful money
managers: Kuwait's Al Sa'ad and Dubai's Sameer Al Ansari, Soud Ba'alawy, and
David Jackson. Their rise from relative obscurity has been breathtaking; rarely
have so few come to control so much, so quickly.
The fund managers insist that Western businessmen and politicians have nothing
to fear. Al Sa'ad ticks off a well-rehearsed list of reasons why CEOs should
rejoice at the prospect of having Kuwait as a major shareholder. Reason 1: His
fund will agree to multiyear lockups, providing long-term capital. Reason 2: Al
Sa'ad expresses concerns to CEOs behind closed doors, not in the press. "If I
were a CEO, I'd look for stability," he says.
But recent actions by some funds belie those soothing sentiments. The $50
billion Qatar Investment Authority, run by Qatar's Prime Minister, Sheikh Hamad
bin Jassim bin Jabir al-Thani, is working with hedge fund activist Nelson Peltz
to shake up British beverage company Cadbury Schweppes (CSG). Dubai Holding was
so aggressive in its pursuit of OMX Group of Sweden last summer that it ran
afoul of regulators there. Even companies that do business with Gulf funds are
on alert. Dubai International Capital, which manages a $12 billion fund for
Dubai's ruler, Sheikh Mohammed bin Rashid Al Maktoum, flabbergasted Wall Street
last fall when its chief, Sameer Al Ansari, shot off letters to Morgan Stanley
(MS), UBS (UBS), Goldman Sachs (GS), Citigroup (C), and other top investment
banks asking them to pony up $50 million each for a new fund or risk losing
future business. Several, including Goldman and UBS, complied. "So far," says
Roger Altman, chairman of Evercore Partners (EVR) and a former U.S. Deputy
Treasury Secretary, "sovereign wealth funds have been more stabilizing than
otherwise. But everyone is waiting to see how this evolves."
SHORT ON EXPERIENCE
Combine the Gulf funds' new, tougher tactics with their staggering wealth and
relative inexperience managing companies, and you have the potential for
trouble. Six Gulf states—Abu Dhabi, Dubai, Kuwait, Oman, Qatar, and Saudi
Arabia—account for nearly half of the world's sovereign wealth fund assets.
They control some $1.7 trillion, as much as all of the hedge funds in the world
and more than the $1 trillion private equity industry—and Morgan Stanley
predicts the total will grow by about $400 billion annually over the next
several years. There's even talk that Saudi Arabia may soon unleash a new $500
billion-plus fund. Bankers estimate that Gulf funds earned about $180 billion
from their sovereign wealth fund investments in 2007—more than half of the $315
billion they collected in oil and gas revenues.
Wall Street veterans worry in particular that Gulf funds are moving too far,
too fast into private equity. Buying and running companies is vastly different
from taking passive stakes in them. Even seasoned pros like Henry Kravis of
Kohlberg Kravis Roberts have trouble managing a company when its industry hits
the skids, debt payments become untenable, and key people jump ship. Nemir A.
Kirdar, CEO of Bahrain money management firm Investcorp, says Gulf funds
"should rely on professionals." In November, some bankers labeled Qatar's fund
an "amateur" after it backed out of a $19 billion deal for British grocery
chain Sainsbury at the 11th hour. "They've given Middle Eastern investors a bad
name," says one.
The Gulf funds' lack of experience shows in their compensation practices.
Historically, they've been unwilling to pay anywhere near as much as private
asset managers for top talent, a tendency that has hampered their recruiting
efforts and led to high turnover. Al Ansari acknowledges that the Gulf region
is "very talent-poor." A senior banker in Dubai says "90% of the people who
work in the region are second-rate. Only very recently are experienced
individuals coming in."
Such problems wouldn't be so worrisome but for the fact that these massive
funds are situated in a handful of tiny, oil-rich city-states in one of the
world's most volatile regions. The tiny Gulf emirates rely on the U.S. military
for protection from the likes of Iran and Iraq—and they rely on guest workers
for much of their labor. It's a precarious situation, to say the least.
The Gulf funds, meanwhile, are nervously preparing for the day when the oil
money stops flowing. For decades they mainly used the currency reserves that
piled up from oil sales to buy safe investments like U.S. Treasury bonds. Now
funds are trying to build the foundations for new, diversified, post-oil
economies. To do that they must take more risk.
Kuwait's Al Sa'ad feels intense pressure to generate returns, satisfy his
political bosses, and gain Wall Street's respect. In the 1990s, the fund, which
receives about 10% of Kuwait's revenues annually, lost as much as $5 billion in
Spanish investments just as plunging oil prices and the fallout from the 1991
Gulf War left the government struggling to balance its budget. "We want to
restore [our] name as a professional, global money manager," he says. The fund
already generates profits about the size of Kuwait's national budget, but he
plans to double its assets.
Al Sa'ad has long sought to outmaneuver markets. His father, Mohammed, was a
successful merchant, but finance mesmerized Al Sa'ad, the seventh of 10
children, from a young age. After graduating from Kuwait University in 1980
with a degree in accounting, he got a job as a foreign exchange trader with a
local bank, picking up new moves in the U.S. during training stints at Chase
Manhattan in New York and the First National Bank of Chicago. In the 1990s, a
local investment bank tapped Al Sa'ad to expand its merchant banking division,
and his attention shifted to buyouts. In 2003 Kuwait's Finance Minister asked
him to run the emirate's investment fund, already one of the biggest portfolios
in the world. Al Sa'ad, intrigued with the idea of managing money, accepted. He
asked to take a pay cut, he says, to reduce the salary gap with his
Al Sa'ad keeps the hours of any high-stakes money manager. He typically gets
into the office at 7 a.m. and leaves around 3:15 p.m. to have lunch with his
wife, Ola Al Mutairi, deputy editor of the women's magazine Osrati, and his
five children. Then it's back to the office for several more hours. So far, Al
Sa'ad has enjoyed success; his fund returned 13.3% in the fiscal year ended in
March, 2007. But he isn't content. "We can be more dynamic," he says.
TAKING A BACKSEAT
The fund seeks to keep the vast majority of its returns in line with
traditional market benchmarks like stock and bond indexes—60% of the portfolio
is in stocks—while putting a sliver into riskier ventures like private equity
and hedge funds. In 2006 it paid $720 million for a chunk of the initial public
offering of Beijing's Industrial & Commercial Bank of China, a deal Al Sa'ad
says kept him up at night. "If something goes wrong, I'll be under fire," he
says. (ICBC's stock has zoomed 156% since the IPO.) Last year the fund invested
$300 million in Texas utility TXU alongside private equity giants KKR and TPG.
But Al Sa'ad is taking private equity slowly. He admits the fund's 400
employees, mostly civil servants who had limited contact with major buyout
firms until recently, don't know how to operate companies. "We don't like to
own 100% of businesses," he says.
By contrast, Sameer Al Ansari, manager of Dubai International Capital's
relatively small $12 billion fund, displays some of the swagger of a private
equity king. A compact, athletic man, Al Ansari, 45, wears designer suits and
does business not from a drab civil service complex but sleek, sun-drenched
quarters high up in a gleaming office building. His investment capital comes
from Sheikh Mohammed's umbrella company, Dubai Holding, which invests 30% of
its cash flow in Dubai International Capital and other funds.
Born in Kuwait of Palestinian parents and brought up in Britain, Al Ansari
graduated from Loughborough University in 1985 with a degree in accounting and
financial management. In demand as an Arabic speaker who could make sense of
numbers, he soon moved to Dubai to take an accounting job with Ernst & Young.
His work in cleaning up Dubai Aluminum, a large government company beset by
problems, attracted the attention of Mohammed Gergawi, a close confidant of
Sheikh Mohammed and now chief executive of Dubai Holding. Gergawi hired Al
Ansari to be chief financial officer of the Sheikh's executive office, where he
helped straighten out the ruler's sprawling business interests and set up Dubai
Holding, which now manages most of those assets. After Al Ansari expressed
alarm that almost all of the Sheikh's wealth was tied up in real estate,
Gergawi gave him the go-ahead to set up Dubai International Capital, to
Despite his lack of buyout experience, Al Ansari has jumped in headlong,
allocating about 60% of his portfolio to private equity. (A quarter is devoted
to stakes in large companies and 15% to emerging markets.) In addition to
co-investment deals with private equity firms, he has engineered six solo
buyouts, including wax museum operator Tussauds Group, which he bought from
Charterhouse Capital Partners for $1.6 billion in 2005. (Less than two years
later he sold Tussauds to Blackstone Group for $2 billion in cash and a 20%
stake in an entertainment company valued at more than $200 million.) Last year
Al Ansari, who still speaks with a clipped British accent, nearly scooped up
his beloved Liverpool soccer club, but lost out to a North American group that
included buyout mogul Tom Hicks.
Al Ansari, like Al Sa'ad, seeks to double the size of his portfolio in a couple
of years. To boost his firepower, he has taken on lots of debt from such banks
as HSBC (HBC), Barclays, and Royal Bank of Scotland. His Global Strategic
Equities Fund, which now holds stakes in Sony (SNE), HSBC, and EADS, borrows $4
for every $1 of its own money. The fund also buys derivatives to limit its
losses. One former employee says: "Dubai plays a very shrewd game." But he
worries that "it's leverage on leverage on leverage."
Al Ansari spends much of his time hunting up deals abroad. When he's in Dubai
he typically spends 10 hours a day in the office, mostly taking meetings with
investment bankers and private equity people pitching ideas. He says he's
invited to three to six social events a day and usually goes to one or two.
"Dubai is a work-hard, play-hard kind of place," he says—for better and for
worse. "My career has gone from good to great in the past two years, but my
personal life from bad to worse." Al Ansari's two sons, 17 and 14, live with
him, while his daughter, 10, lives with his ex-wife. Over lunch at a Lebanese
restaurant near his office, he confesses that trotting the globe for buyouts
has only added to his exhaustion.
Looking for help in coming up with new deals, Al Ansari last year began
courting hedge funds. With the help of JPMorgan Chase he agreed last November
to a $1.1 billion, 9.9% stake in Och-Ziff Capital Management (OZM). Al Ansari
met with Och-Ziff founder Daniel S. Och several times in New York and London;
the two sealed their bargain over dinner at the swank New York restaurant
Daniel in a private, glass-walled room overlooking the kitchen. When Och
visited Dubai after his firm's November, 2007, IPO, Al Ansari took him to the
Al Muntaha restaurant, which rests 700 feet above the Gulf on top of the Burj
al Arab Hotel, where rooms start at $2,000 a night. The two talked of Al
Ansari's hopes to tap Och's global team for co-investment ideas and deal
research, while helping Och-Ziff raise money in the Gulf. "We are very pleased
with the relationship at this point," says Och.
Some financiers in Dubai think Al Ansari is in over his head. "He's a very
smart guy, but he's not a fund manager by training," says one. While Al
Ansari's people say privately that the fund is making 20% annual returns,
bankers are skeptical. "I question what that's based on," says a senior
Dubai-based investment banker, noting that the portfolio's private equity
investments might not be easy to sell in today's turbulent markets. Moreover,
the stock prices of EADS and HSBC are down some 20% and 10%, respectively,
since Al Ansari bought them, while Och-Ziff has tumbled 23%. Al Ansari stresses
that his big stock positions are hedged with derivatives. If HSBC's stock sinks
further, he says, he might buy more. Och-Ziff, he insists, is misjudged.
For all the fixation on returns, sometimes a sovereign fund manager's larger
strategic goals are just as important. Soud Ba'alawy, 46, a former Citigroup
vice-president in Dubai, was tapped in 2000 to become chief investment officer
of Sheikh Mohammed's office. His duties have since expanded greatly; he's now
chairman of Dubai Group and the point man for the ruler's quest to turn the
tiny emirate into the Wall Street of the Middle East. "We want to be the'
financial services company in the region," says Ba'alawy of the Dubai Financial
Group, one fast-growing wing of Dubai Group that he wants to take public this
year for as much as $12 billion.
Unlike the British-tinged Al Ansari, Ba'alawy is still very much a man of the
region. In Dubai he wears the traditional white robe and headdress and fasts
during the month of Ramadan even when he's on the road chasing deals, which he
says is 70% of the time. Intensely private, he resists talking about how much
money he manages (insiders peg his returns at around 20% annually), much less
his family life. He has two young daughters, but as to the rest he says "Our
personal lives are our personal lives." Ba'alawy, a Dubai native, obtained a
chartered accounting qualification from a small London school in the mid-1980s,
and then returned to Dubai to work for his father's printing business. He
joined Citigroup in 1990, rising to treasurer for the Gulf region. "I always
loved markets," he says. "I wanted to be in the financial sector from the
In 2000, while at Citi, Ba'alawy met Gergawi, the sheikh's right-hand man, who
was then running a real estate project called Dubai Internet City. Ba'alawy
joined that effort but left a few months later to set up an investment office
for the ruler that quickly mushroomed into what is now called Dubai Group, the
conglomerate that includes hotel management and financial services.
Over the past two years, Ba'alawy has been wooing financial institutions around
the globe to join that growing empire. Using the cachet of his boss, Sheikh
Mohammed, as an entrée, Ba'alawy has snapped up a 40% stake in Malaysia's Bank
Islam and a 15% chunk of Oman's Bank Muscat. In December, Ba'alawy raised
eyebrows when he slapped down $1.1 billion for a 25% stake in Cairo investment
bank EFG-Hermes—just two weeks after being contacted by its owner, private
equity firm Abraaj Capital, which had paid $500 million for it the previous
year. Ba'alawy insists EFG is worth the hefty price.
Ba'alawy's biggest deal came in September, when he agreed to take a 19.9%, $2.1
billion stake in Nasdaq, part of an effort to bulk up the emirate's new Dubai
International Financial Exchange, which had languished since its 2006 launch.
The deal capped a flurry of maneuvering that started with Ba'alawy's March
offer to take a stake in Sweden's OMX Group. But OMX declined and quickly
accepted a $3.7 billion offer from Nasdaq. On Aug. 9, Ba'alawy's team quietly
took steps to snatch up a 27% stake in OMX shares with the help of investment
banks, a move that brought a reprimand from Swedish regulators. The idea, says
someone close to the deal, was to make sure Dubai would be taken seriously.
Later Dubai made a formal $4 billion offer for OMX, enraging Nasdaq but
quelling the Swedish authorities.
A standoff between Ba'alawy and Nasdaq CEO Robert Greifeld seemed likely. But
Ba'alawy changed course, reasoning that Nasdaq's big-name brand might be more
valuable than OMX. In a series of meetings with Greifeld in New York, London,
and Stockholm, the two hammered out a complex deal in which Nasdaq would buy
OMX, Dubai would take a stake in Nasdaq, and Nasdaq would take a stake in the
Dubai exchange, which would carry the Nasdaq brand. The terms were approved by
U.S. regulators in December. "Nasdaq is coming to a market that is still
virgin," says Ba'alawy. "They will become an important catalyst for change." A
banker involved in the transaction says Dubai was willing to pay a stiff price
for a move it considered strategic.
Ba'alawy's team works late hours in the same new building as Al Ansari's crew.
One former staffer complains of a "chaotic" atmosphere and high turnover. "The
priorities change constantly," he says. "People find it very difficult."
Ba'alawy can be brusque, too. He recently barked at a new European recruit
during a staff meeting for "needless playing with your BlackBerry to show how
important you are."
Westerners are still fairly rare at Gulf funds, some of which have existed
since the 1950s. David Jackson, the 41-year-o