NEW YORK, (Reuters) – Sovereign wealth funds in the Middle East are increasingly looking for reciprocal investments from companies they do business with, as they try to develop their local economies, lawyers who work with these funds said.
The practice has picked up steam recently in Gulf Arab states, as local economies present more attractive investment avenues, the West is crippled by the credit crisis and these funds have more leverage as some of the few remaining sources of fresh capital, one expert said.
“In terms of investing, there is like a quid pro quo,” said Paul Homsy, chief executive of Crescent Asset Management, which works with sovereign wealth funds in the Middle East. “They want to see these institutions get engaged. ‘We are going to invest in you, but you come out here and participate.'”
In one such recent deal, Abu Dhabi investment agency Mubadala Development Co entered into an $8 billion joint venture with General Electric Co that initially will focus on providing commercial finance in the Middle East and Africa.
The companies plan to invest about $40 billion in commercial and infrastructure projects in the region over the next 18 months. They also plan to set up a clean energy technology center in Masdar City, a new city in Abu Dhabi that aims to be carbon neutral.
GE plans to commit up to $50 million for Masdar’s second clean-tech fund and Mubadala plans to become one of GE’s 10- largest shareholders by acquiring shares in the open market.
Last November, Mubadala and casino operator MGM Mirage said they planned to jointly develop a hotel resort in Abu Dhabi at a cost of about $3 billion.
A Mubadala spokesman said the company has had a long-term strategy of seeking competitive returns for the fund and helping to diversify Abu Dhabi’s economy.
“What’s happening because of the growth of the UAE economy and Abu Dhabi economy specifically, is people want to get into the market,” the spokesman said. “Their interest in the market and their aggressiveness is certainly reflected in how people reach deals, but has less to do with the overall condition of the global economy.”
Gulf economies, which have traditionally relied on government spending of oil revenues, have tried to develop private sectors to create self-sustaining expansion that does not hinge entirely on oil.
Making some form of reciprocal investment makes sense for foreign companies such as GE for which the Middle East has been a major focus in recent years.
Paul Hastings, a global law firm, is looking at the region as well, said Philip Feder, chairman of the firm’s global real estate practice.
Abu Dhabi, like Dubai, is aggressively developing land into major hotel resorts and office buildings, said Feder, who was one of the advisers for state-owned Dubai World in a major joint venture investment in MGM Mirage last year.
“We have done quite a bit of work with UAE emirates and they have specifically asked us the question: Tell us when you are opening in Dubai?” Feder said. “They have not given us a quid pro quo in saying, ‘we are not going to give you any work until you open up an office here,’ but the suggestion has been fairly strong.
“Our intentions as an international law firm with a global strategy is to follow our clients where we can add the most value. And it seems to us that we can add a lot of value by being in that region,” he added.
Sovereign wealth funds, which are estimated to hold assets worth as much as $3 trillion, have ballooned in recent years as large Asian exporting countries such as China and oil-rich nations such as UAE and Russia started putting part of their currency reserves into investment vehicles.
These state-backed funds are expected to control $10 trillion in assets between them by 2012. They invested $25.5 billion to buy stakes in global companies such as Citigroup Inc and Merrill Lynch & Co Inc through Aug. 28 this year, up 66 percent from a year earlier, according to Thomson Reuters data.
The practice is not unique to the Middle Eastern funds. In general, sovereign funds tend to invest up to two-thirds of their money in their own regions, said Marco Mazzucchelli, head of coverage of Sovereign Wealth Funds at Credit Suisse globally.
“It’s perfectly logical that a country which has a one-off benefit from a nonrenewable resource decides to invest that money in a way that maximizes its long-term return,” he said.