Is now the right time for Gulf investments in global companies?

Posted on 23 March 2009 with no comments from readers

Having got their fingers burned on earlier investments into collapsing global stock markets, like Citi, Gulf investment groups have been cautious about taking advantage of the stock market crashes of last autumn to pick up bargains.

That might be about to change. Yesterday Abu Dhabi-based Aabar Investments bought a 9.1 per cent stake in Mercedes-Benz manufacturer Daimler for $2.7 billion and became its largest shareholder. Aabar Investments is an affiliate of the government-owned International Petroleum Investment Company.

Gulf investors

Aabar’s chairman told the Financial Times that the investment company could increase its stake to 15 or 20 per cent. Dubai is also a smaller stakeholder in Daimler, and Kuwait has a 6.9 per cent shareholding.

This is the first big purchase of foreign assets by Gulf interests since IPIC chairman Sheikh Mansour bin Zayed Al Nahyan invested $3.5 billion personally in Barclays Bank last autumn, allowing the bank to avoid tapping the UK government for funds.

Will Gulf investors now become braver again in making acquisitions? Will they follow Chinese state interests in looking to snap up commodities at bargain prices, for example?

Dubai is probably now out of the picture for new acquisitions, as the emirate has $80 billion in debt to refinance over the coming years. But the Abu Dhabi Investment Authority, local billionaires and para-state investment bodies are likely in the running along with sovereign wealth funds in Kuwait, Saudi Arabia and Qatar.

These organizations are conservatively run but always have money to invest. Last year was a particularly good one for GCC cash flow with hydrocarbon revenues of more than $500 billion. The large surplus from that revenue is understood to be mainly in US treasury bonds.

Mega investors

But investors with $100 billion to spend face the same dilemmas as the high net worth investor with $1 million. The US stock market, for example, may have tumbled more than 50 per cent, but the latest rally is probably only a rally before a further fall.

In that case, sovereign wealth funds are going to have to look for special situations where companies in need of capital will give them an attractive deal, and that means a purchase price for equity with a margin of safety that allows for a further market decline.

Last autumn Warren Buffett bought into Goldman Sachs, for instance, on terms which common stock holders could only dream about. The name and reputation of the investor had its own price.

Sovereign wealth funds can demand tight deals now but will no doubt be keeping an eagle eye on prospective investments in the finest global companies at probably the keenest prices likely to be available this century.