Who's Afraid of Mideast Money?

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Dubai's Jackson is keen on companies unfairly tarred by the subprime mess Jude Edington/Redux

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A standoff between Ba'alawy and Nasdaq CEO Robert Greifeld seemed likely. But Ba'alawy changed course, reasoning that Nasdaq's big-name brand might be more valuable than OMX. In a series of meetings with Greifeld in New York, London, and Stockholm, the two hammered out a complex deal in which Nasdaq would buy OMX, Dubai would take a stake in Nasdaq, and Nasdaq would take a stake in the Dubai exchange, which would carry the Nasdaq brand. The terms were approved by U.S. regulators in December. "Nasdaq is coming to a market that is still virgin," says Ba'alawy. "They will become an important catalyst for change." A banker involved in the transaction says Dubai was willing to pay a stiff price for a move it considered strategic.

Ba'alawy's team works late hours in the same new building as Al Ansari's crew. One former staffer complains of a "chaotic" atmosphere and high turnover. "The priorities change constantly," he says. "People find it very difficult." Ba'alawy can be brusque, too. He recently barked at a new European recruit during a staff meeting for "needless playing with your BlackBerry to show how important you are."

Westerners are still fairly rare at Gulf funds, some of which have existed since the 1950s. David Jackson, the 41-year-old American chief of Dubai's Istithmar fund, has had a meteoric rise. With degrees from Princeton and Yale's business school, Jackson had spent nine years at Lehman Brothers (LEH), most recently advising on buyout deals in Asia. In 2003 a friend who was advising Sultan Ahmed Bin Sulayem, one of Sheikh Mohammed's closest advisers and chairman of Dubai World, asked Jackson to help him set up an investment fund, subsequently named Istithmar, or "investment" in Arabic, which launched a few months later.

At first Jackson was a one-man show. "It was difficult to get people to return my calls," he says. Jackson made his buyout bones in 2006 when he acquired resort and casino operator Kerzner International for $3.9 billion alongside Goldman Sachs and other partners. Later that year he took a $1 billion stake in London-listed Standard Chartered Bank. Last June he bought a 3% stake in the $20 billion European hedge fund GLG Partners (GLG). And in September his fund bought retailer Barney's, paying $942 million—after having been warned for 18 months that Barney's owner, Jones Apparel Group (JNY), was interested only in bids for the whole conglomerate.

STEP INTO THE VOID

Now, Jackson says he's keen on mortgage companies unfairly tarred by the subprime mess. He's also eyeing stakes in private equity firms along the lines of Abu Dhabi's $1.35 billion stake in Carlyle Group. And he's weighing several co-investment deals with buyout firms.

Once Istithmar buys into a company, Jackson turns up the heat. In 2005, just months after the fund acquired a tiny 3% stake in Indian airline SpiceJet, the company installed a new CEO. "We needed people with more expertise," says Jackson. SpiceJet has since quadrupled its revenues, to $327 million, and plans to nearly double again by 2010. (Istithmar increased its stake to 14.7% last year.) Jackson expects a lot from his own people as well. In one management meeting recently, about a dozen investment officers ran through an array of deals at various stages in industries ranging from live entertainment to finance. Twice, Jackson tossed a box of tissues to team members who confessed that their investments weren't meeting expectations.

A bachelor who says he doesn't even have time for a pet, Jackson spends 40% of his year on the road scouring for deals—sometimes brushing up against fellow Dubai fund managers. He rattles off his record against Al Ansari: "One time we won. Two times they won. One time neither of us won. I don't think of them as any different from when I'm competing with Carlyle or TPG."

Jackson encourages his team, which has swelled to 85, to think thematically rather than engage in the traditional "check-box investing" that other fund managers follow. "I don't want to get into any rules," says Jackson. The GLG Partners deal, for example, was a bet that mutual fund investors will migrate either to cheap index funds or expensive hedge funds. The Standard Chartered deal sought to gain exposure to many emerging markets at once.

As the credit crisis deepens, investment banks and private equity firms are stepping away from dealmaking to nurse their wounds. Gulf funds are eagerly filling the void. "Sovereign funds have been shown every interesting idea in the last quarter," says Jeff Holzschuh, a Morgan Stanley banker who advised buyout firms on the TXU sale. "There is no question that they will change the deal world." But there is a question as to whether the change will be for the better. "This is capital we need desperately," says Felix Rohatyn, former Lazard Frères managing director and U.S. Ambassador to France. "But I don't think we should have any illusions that these are totally benign investments."

With Nandini Lakshman in Mumbai