An international force to be reckoned with
Several Gulf funds helped to recapitalise Western banks during credit crunch of past year.
By Samia Nakhoul – LONDON
The oil-fired economies of the Gulf are an international force to be reckoned with, creating world-class companies and using their windfall profits to diversify away from oil, a top Middle East consultant said.Fear of Gulf sovereign wealth funds (SWF) is misplaced, says Jean-Marie Pean, Managing Director of Bain and Company Middle East. These funds, with trillions of dollars at their disposal, are pragmatic – not political – in their investments.
Furthermore, Gulf countries like the United Arab Emirates and Saudi Arabia are creating world leaders — Emaar in construction and real estate, Emirates among airlines and SABIC in chemicals. During the credit crunch of the past year several Gulf funds have helped to recapitalise Western banks, but their stakes have been modest as well as very timely.
“Unlike the previous oil booms of the 70s and 80s this time the region is investing in its own economy and its own future. I think they do recognise that they are dependent completely on oil and gas so they are trying to shift away,” said Dubai-based Pean, who advises family-owned businesses in the Middle East.
“You are going to see more and more global leaders emerge from this region and the sovereign wealth funds are going to become a major force but they will be good corporate citizens and gradually the governance and transparency is going to become more open…,” he added.
Pean said 1.9 trillion dollars worth of investments were either on the way or had been announced for the next 7 years in the oil-and-gas producing Gulf Cooperation Council (GCC) countries, grouping Saudi Arabia, Kuwait, the United Arab Emirates, Bahrain, Oman and Qatar.
A key driver for branching out and investing in other industries, he says, is the need to create jobs for a young population of 35 million people, 25 million of whom are in Saudi Arabia and two thirds of whom are under 30.
Despite their oil wealth the Gulf countries have failed to invest over the last 15 years in their own infrastructure and only realised the requirement to do so only recently, he said.
“They had not invested all that time in the refineries, in their petrochemical plants or more importantly in the utilities like energy, like water distribution and water desalination.
“So there is a huge shortage of energy which is surprising in a place like the Middle East. There is a huge shortage of water and desalination,” he said.
From Saudi Arabia to the United Arab Emirates, he said, many companies have emerged as global leaders with the market opening up after most countries signed the World Trade Agreement (WTO).
“If you have visited Dubai before it grew… there were few hotels and buildings. The important thing is that not only has Dubai built a lot of commercial and residential towers but they have created some companies that in their sectors are becoming world leaders.”
He said Emaar, one of the largest Real Estate developers worldwide, has been acquiring land in Morocco, Egypt, India, Tunisia and elsewhere. The Dubai-based luxury international hospitality Jumeirah Group is another project aimed at initiating growth, he added.
“They (Jumeirah) are looking at 100 acquisitions with a view of making 30 acquisitions in the future…Jumeirah is going to become a major brand in the upmarket hospitality business…
He said Emirates Airlines, the seventh biggest airline in the world, will overtake some other airlines with all the capacity it adds in the next few years.
He said not only have the Emiratis established new companies but they have built the capability to support them, expand and serve customers to very high standards.”
BEYOND THE REGION
He said Gulf policy is to go beyond the local and regional GCC market.
He pointed out that Saudi Arabian Basic Industries Corp (SABIC), one of the 10 largest chemical companies in the world, has made tremendous acquisitions in the UK and in Holland and would continue to expand. Other Saudi companies in other sectors like food were following suit.
He said sovereign wealth funds are already a formidable financial strength but that their assets would triple or quadruple in five to 10 years time if oil prices remain at current high levels. He said the cumulative sovereign wealth fund wealth in the Middle East is now about 1.5 trillion dollars, mostly in the United Arab Emirates.
“You can imagine the financial power that is going to be exerted by those sovereign wealth funds. Should we fear them?
“I don’t think so. My vision is that we should not be afraid of the sovereign wealth funds. We should live with them and make them part of the overall financial world, otherwise we will miss the opportunity to probably have some of the major financial players playing a key role in this environment.
“I have been in the region for some time, there is something about the Arabs, they are very pragmatic, they are very realistic about their own strength and they absolutely know that for many reasons they have to behave like good corporate citizens of the world.
“They will probably compete with some of the big private equity companies on a worldwide basis for some stakes in some large companies, so I think they are going to become a more visible player. Are they going to rock the boat or are they going to try to take positions which are going to shake the current system?
I don’t think so.”
He said sovereign wealth funds are focused on two approaches — direct investment to help develop the local market and the so-called “national treasure”, investing in low-risk assets for the future.
“Everybody knows in the region there is a huge windfall today in the oil and gas industry that 30, 40 years from now it is going to be a very different story so the risk management, the diversification are going to be supported by the development of the SWF,” said Pean.