Middle East becomes 'ATM of the world'

With large amounts of cash, Gulf countries are considered the "ATM of the world", playing a major role in global mergers and acquisitions.

Five years ago, the investment event organized by the Saudi government called the "Future Investment Initiative" was likened to "Davos in the desert" without American investors. Wall Street CEOs withdrew after the US accused the country of being behind the deaths of two journalists from their country.

But this year, the Riyadh Conference next month organized by Saudi Crown Prince Mohammed bin Salman is expected to be so crowded that CEOs will have to pay a fee of $15,000 each to attend.

A guest attending the Future Investment Initiative conference in Riyadh, Saudi Arabia on October 25, 2022. Photo: Reuters

The need to receive capital from the Gulf country has begun to increase from 2022, when money from other places tightens. Last year's conference was attended by the leaders of two of the world's largest investment management companies: Stephen Schwarzman, CEO of Blackstone, and Ray Dalio, Founder of Bridgewater Associates. At a conference sponsored by the Public Investment Fund (PIF) in the spring, Ben Horowitz, Co-founder of venture capital firm Andreessen Horowitz (USA), evaluated Saudi Arabia as a "startup country" and called Thailand Prince Mohammed is creating a new culture and vision for the country.

Middle Eastern countries now have the opportunity to appear on the world financial stage to expand their global influence. Just when traditional Western investors had to withdraw from investment deals because of high interest rates, the Middle East was in the midst of an energy boom. Thanks to that they are flooded with cash. State investment funds in this region have become "ATM machines" - places to pump money for private equity, venture capital and real estate funds that are finding it difficult to raise money elsewhere, according to WSJ .

The mergers and acquisitions (M&A) market has received increasing attention from the Gulf region. Notable recent deals include the Abu Dhabi fund buying investment management company Fortress for more than $2 billion, and a Saudi fund buying Standard Chartered's aviation unit for $700 million.

Companies and funds overseen by Abu Dhabi National Security Adviser Sheikh Tahnoun bin Zayed Al Nahyan have been racing to buy Standard Chartered and investment bank Lazard. It also struck recent deals to buy a $1.2 billion British healthcare company and take partial control of a Colombian food giant worth nearly $6 billion.

Peter Jädersten, Founder of fundraising consulting firm Jade Advisors, said it is difficult to raise capital elsewhere. "Now, everyone wants to go to the Middle East - just like the gold rush in America in the old days," he said.

Fund managers come to the Middle East and often wait for opportunities in the waiting rooms of sovereign wealth funds. Silicon Valley and New York executives are a near-constant presence in the white marble lobbies of the Four Seasons Abu Dhabi, as well as other top hotels.

The Gulf's new dominance is most evident in capital injections into private funds. Figures from two of the region's largest sovereign funds reflect that. At Saudi Arabia's Public Investment Fund (PIF), commitments to "investment securities" - a category that includes private funds - have increased to $56 billion in 2022, from $33 billion a year before. Abu Dhabi (UAE) Mubadala Fund reported its commitment to double its capital to $18 billion by 2022.

Leaders of giant private equity firms such as TPG, KKR and Carlyle Group assess that interest from the Middle East remains strong while other regions of the world decline. At a conference in June, Carlyle CEO Harvey Schwartz said Middle Eastern investors were "very proactive, dynamic."

While the sector has accelerated, capital from traditional Western investors has declined. The reason is that higher global interest rates have caused losses in large parts of their portfolios - especially stocks and bonds.

According to PitchBook, investors poured $33 billion into US-based venture capital funds in the first half of 2023, less than half the $74 billion in the same period in 2021. Global capital mobilization of all Private funds as a whole fell 10% last year, to $1,500 billion, according to Preqin.

Many in the industry believe this downward trend will continue. "Raising capital has become a lot more difficult over the past 12 months," said Brenda Rainey, executive vice president at Bain & Co, which advises private equity funds.

On the contrary, the explosion of investment deals from the Gulf region comes from two reasons. First, rising energy prices, partly due to the Ukraine conflict, have given the region's oil- and gas-dependent wealth funds tens of billions of dollars more.

At the same time, Saudi Crown Prince Mohammed and top UAE officials want to develop greater influence on the world stage - in geopolitics, finance and sports. They pumped more money into state funds to carry out transactions.

The intersection of politics and finance in the region has made Saudi Arabia, UAE and Qatar foundations the main financial backers of two key figures of the Trump administration: Jared Kushner and the former Treasury Secretary. Steven Mnuchin, together raised billions of dollars from here.

Fund managers say Gulf funds have pushed their US peers to open offices in the Middle East to make it easier to receive investments. Investment company BlackRock (USA) said it will establish a specialized team in Riyadh to promote investment in infrastructure projects in the Gulf.

New York-based Millennium Management established an office in Dubai in 2020 and other offices later, including private equity firm CVC Capital Partners and ExodusPoint Capital Management - the largest hedge fund startup ever Up to now with an initial capital of 8 billion USD. Europe's Tikehau Capital and Ardian both established dedicated teams in Abu Dhabi.

Alternative investment manager Pretium (USA) has hired an industry veteran in Dubai. Dalio Family Office - a company that manages the assets of wealthy families - also established an office in Abu Dhabi. Rajeev Misra, SoftBank's longtime backer, has secured a commitment of more than $6 billion to a new joint venture with multiple investment funds linked to Abu Dhabi. They are moving their offices from the UK to the UAE.

The venture capital firm part of Tiger Global has struggled to raise capital for its latest fund, repeatedly cutting its target by billions of dollars. Because of the losses and the gloomier fundraising environment, many US investors ignored it. But this company found a savior in Sanabil, a unit of PIF. This past spring, Sanabil added Tiger to its public list of fund managers it supports. Some other names on the list include Founders Fund of Peter Thiel and Andreessen Horowitz.

Ibrahim Ajami, Manager of Startup Investments at Abu Dhabi's state fund Mubadala, said the current world environment gives Mubadala the ability to be "very thoughtful and selective" about which funds to participate in funding .

He said Mubadala could negotiate terms that would allow it to buy shares in the fund management company itself or invest together with others. "What we're doing is going deeper, more focused and more engaged with a select group of managers," he said.