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Gulf Arab funds loosen purse strings

Government-backed investors bankrolled by Persian Gulf oil wealth are back on the prowl for deals in the West after mostly sitting out the past year's turbulence.
/ Source: The Associated Press

Government-backed investors bankrolled by Persian Gulf oil wealth are back on the prowl for deals in the West after mostly sitting out the past year's turbulence.

It is difficult to say whether the often secretive investment vehicles believe the market has bottomed out. What is clear: the funds are regaining their dealmaking appetite and are willing to bet big despite the uncertainties still coursing through the global economy.

A series of high-profile deals struck in the span of a few months shows that even as they weathered big hits to their portfolios, the region's investment vehicles still have plenty of money, and they aren't afraid to use it.

"They're able to step in and take opportunities that other people may not be able to take," said Benjamin Newland, a partner at King & Spalding law firm in Dubai, who has been involved in deals for a number of Gulf investors. "They're filling a funding gap ... left by the credit crisis."

For bankers and policymakers from Washington to Berlin who are actively courting the funds, the acquisitions are a vote of confidence, even if they risk re-igniting fears that the deals might be politically motivated.

Since the start of spring:

_ Qatar's sovereign wealth fund agreed to spend 7 billion euros, or about $10 billion, to become the third-largest shareholder in Volkswagen AG, Europe's largest carmaker.

_ An investment company backed by the United Arab Emirates sheikdom of Abu Dhabi paid about $2.6 billion for a 9.1 percent stake in Mercedes-Benz parent Daimler AG, making it that automaker's biggest shareholder, just ahead of Kuwait's sovereign wealth fund.

_ Kuwait's leading Islamic bank, partly backed by the state, signed a $450 million deal with a U.S. real estate investment trust to buy high-end property in major American cities.

_ Another Abu Dhabi government-run firm, Abu Dhabi National Energy Co., bought Royal DSM's Dutch North Sea oil and gas operations in a deal worth more than $400 million.

"These funds want to lock in what they see as good deals" now because they expect the economy will eventually improve, said Rachel Ziemba, an analyst at RGE Monitor who tracks sovereign wealth funds.

The dealmaking is likely to continue.

Qatar Holding, the fund behind the Volkswagen deal, plans to become the biggest investor in a company that controls much of the real estate in London's Canary Wharf business district.

The fund already owns nearly 15 percent of Songbird Estates PLC, but said it wants a larger share because it is confident in the long-term strength of the property company's holdings.

Chief Executive Ahmad al-Sayed said in an e-mail the fund aims to "build up a diversified portfolio globally of (the) highest quality assets across a broad spectrum of asset classes."

Meanwhile, Abu Dhabi National Energy Co., which goes by the name Taqa, is looking to add to its stable of oil and gas businesses.

CEO Peter Barker-Homek told The Associated Press his company is eyeing energy transportation and distribution channels in North America and Europe, among other investments. He expects to announce additional acquisitions by the end of the year.

"A lot of opportunities have been coming in the door, and we continue to evaluate them," he said. "Prices have come down, credit is becoming available."

Since taking its stake in Daimler, Abu Dhabi's Aabar Investments has announced plans to pay about $280 million to buy nearly a third of Richard Branson's commercial space travel startup Virgin Galactic. That deal gives Aabar rights to launch space flights and develop a satellite launch program in the United Arab Emirates capital.

Aabar has also taken a 4 percent stake in Tesla Motors, a Silicon Valley startup developing electric cars, and is teaming with five German companies to build four-wheel drive vehicles in North Africa.

Aabar Chairman Khadem al-Qubaisi said in a statement Tuesday the company has been evaluating additional "investment opportunities" that would be announced later this year. Aabar is mostly owned by a government investment fund.

The latest spate of deals comes well over a year after sovereign wealth funds made headlines early in the financial crisis by taking big stakes in financial giants such as Citigroup Inc. and Merrill Lynch & Co. — investments that later proved costly as their values plummeted.

Those acquisitions, while welcomed by Wall Street, sparked concern among some U.S. lawmakers that the funds were seeking to invest for political rather than solely financial reasons. The funds and the governments that back them say such worries are unfounded.

President Barack Obama's administration has followed that of his predecessor in courting the funds, trying to persuade Arab leaders to pump their petrodollars back into the U.S. economy.

U.S. Treasury Secretary Timothy Geithner underscored the region's economic power when he met with the leaders of some of Abu Dhabi's sovereign wealth funds during his first official visit to the Middle East in July.

Germany, the beneficiary of Arab investors' biggest deals this year, is also ramping up its engagement with the region in an effort to boost investment.

"There's a very positive attitude toward Arab investors" in the country, said Juergen Friedrich, chief executive of government-sponsored Germany Trade and Invest. "I'm expecting they will play a substantial and positive role in the future."

In a sense, the funds are reflecting rising investor confidence generally. Stock markets the world over are up sharply from lows reached in the depths of the financial crisis — a sign traders are willing to bet the recession is winding down amid signs of recovery.

Rising energy prices also play a role in the revival. When oil — the region's chief export — plunged below $35 a barrel earlier this year, most Gulf Arab governments were faced with the prospect of budget deficits. But crude's subsequent rebound to around $70 per barrel is easing some of those concerns, analysts say.

Ziemba estimates the value of foreign assets held by Gulf funds and central banks has shot up to $1.24 trillion in August from their 2009 low of about $1.10 trillion in February because of investment gains and rising oil prices.

"The revival in oil prices and production has contributed to some new capital to these funds, even though domestic spending needs have also risen," she said.