DUBAI (Reuters) – Turmoil in global credit markets may open more investment opportunities for state-controlled Gulf Arab firms by hampering private equity rivals in their ability to compete for assets, Gulf executives told Reuters.
Concerns about defaults on U.S. subprime, or high risk, mortgages have raised the cost of corporate borrowing, threatening to end years of relatively cheap credit for private equity funds which finance most of their investments with debt.
That will force private equity to make more sober assessments of the risks of borrowing, three United Arab Emirates-based investors said.
“Some people see it as: ‘Oh my God, it’s the end of private equity.’ We think it’s great news,” said Sameer al-Ansari, chief executive of Dubai International Capital, which manages about $6.5 billion of assets.
“It’s going to force buyers to be get a bit more realistic about how much debt they can raise and therefore valuations should get a bit more realistic,” he said.
Dubai International, owned by the ruler of Dubai, bought into Airbus parent EADS and HSBC Holdings Plc for a Gulf fund it manages, among the more than $40 billion worth of foreign assets regional investors acquired in the first half of 2007.
That is already more than the total for any previous year.
With U.S. oil prices hitting a record high on Wednesday, Gulf funds and firms are scouring the globe for assets for government investors who want to reduce their nations’ dependence on crude exports.
The rising capital cost of private equity funds could help firms looking for such long-term investments, said Peter Barker-Homek, chief executive Abu Dhabi National Energy Co. (Taqa).
“Given the higher cost-to-capital ratio and shorter time horizon for investing of private equity funds … it’s a very good time for strategic buyers,” said Barker-Homek, whose company is 75 percent owned by the government of Abu Dhabi, the world’s sixth-largest oil exporter.
Taqa, which bought Canadian energy firm Northrock Resources for $2 billion this year, plans to borrow $9 billion to finance acquisitions. Spreads on Taqa’s investment-grade bonds had narrowed as investors sought better quality debt, Barker-Homek said on Wednesday.
Spooked by defaults and ratings downgrades on U.S. subprime mortgages, investors added more than 50 percent in July to the premium sellers of higher-risk bonds must pay over top-rated government debt.
Lack of investor appetite has forced banks to shelve financing for about $200 billion of planned leveraged buyouts worldwide, including purchases of pharmaceuticals trader Alliance Boots and DaimlerChrysler’s Chrysler unit.
By contrast Gulf investors are working on more deals.
Taqa wants to complete $4 billion worth of acquisitions in the next year, Barker-Homek said. Dubai International plans as much as $10 billion in investments this year, Ansari said.
Dubai government-owned Istithmar is working on four deals worth as much as $2 billion, according Chief Executive David Jackson, and has offered to pay $825 million for luxury retailer Barney’s New York Inc.
“We are still looking for good management teams with good companies where we can finance them,” said Jackson, whose agency bought into Standard Chartered Plc last year.
“We have a longer-term view and we don’t have the artificiality that other funds have to harvest their investments just so they can plough them back and put some points on the board,” he said on July 23.
Although Dubai exports little oil compared with its neighbors, the government is tapping the region’s windfall through the real estate market, tourism and trade.
“Capital and liquidity isn’t our biggest problem,” Jackson said.
Istithmar, Dubai International and other Gulf funds typically borrow about 70 percent of their investment cost. Abu Dhabi-owned Mubadala Development Co. said in March it leveraged its investments to help maintain financial discipline.
“Just because the debt markets will finance something doesn’t mean you should go out and do it,” said Jackson.