A whopping $4 trillion in Middle Eastern capital is available for investment, in both private and public sectors, according to a new report from AT Kearney, a global strategic management consulting firm.

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 per cent between 2006 and 2007 to reach $3.3 trillion with Middle East SWF accounting for 50 per cent of it.

The SWFs are expected to reach $5 trillion in 2010 and $10 to $15 trillion in 2015, the study said.

“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,” it said.
With the rapid growth of the assets, SWFs 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, it said.

SWFs are now favouring 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, it said.

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.

The SWF could also be an opportunity for the developed countries, when most of their economies are slowing down, the report said.

 “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, AT 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 AT 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, it said.

The study 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, AT Kearney Middle East.

The report shows 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, AT Kearney Middle East. –TradeArabia News Service