The past year has seen much financial unrest, but three players—Asian sovereign investors, oil exporters, and private equity firms—have helped stabilize the market
Many market participants have struggled to cope with the financial turmoil of the past year. But three players have continued to grow in wealth and clout: Asian sovereign investors, oil exporters, and private equity firms. Moreover, several of these actors gained new prominence by using their vast pools of capital to help recapitalize the balance sheets of other financial institutions and help contain the crisis. Their actions highlighted the benefits they offer—but also heighten concerns about the potential risks they pose.
In an October 2007 McKinsey Global Institute report, we labeled these three investor groups, as well as hedge funds, "the new power brokers" because their rising influence reflects a dispersion of financial power away from traditional Western institutions and toward new players and other parts of the world. In a new update, we examine how the four power brokers have fared through the crisis. And we find that collectively, they have done very well: their combined financial assets grew 22% in 2007—faster than before—to $11.5 trillion in 2007.
Much of this gain reflects the Asian countries' swelling trade surpluses and the oil exporters' soaring petro-profits. Additionally, both private equity and hedge funds saw their assets under management grow in 2007, but had to adjust to a sudden loss in the leverage they had used to amplify returns. Private equity survived in reasonably good shape by employing new investment strategies—including taking minority stakes in publicly traded companies and expanding in emerging markets. Overall, private equity continues to attract investor capital. But hedge funds were harder-hit; several closed, many posted large losses linked to credit products, and fund-raising slowed to nearly nothing by early 2008.
Clearly, the power brokers have financial influence because of their sheer size. Three individual institutions in this group—the central bank of China, the Bank of Japan, and the Abu Dhabi Investment Authority (ADIA)—rank among the top 10 largest asset managers in the world. And Russia's oil revenues have made it the third-largest holder of foreign reserves, after Japan and China.
But it was by using their riches to help recapitalize and stabilize other financial institutions that the power brokers emerged as key players in the crisis. We calculate that together, Asian and oil-based sovereign investors invested $59 billion in Western financial institutions from March 2007 through June 2008. ADIA, for example, provided Citigroup (C) with $7.5 billion in emergency capital. Sovereign wealth funds such as the Kuwait Investment Authority and Korean Investment provided new funding for Merrill Lynch (MER). And the Qatar Investment Authority is injecting $3.5 billion into Barclays (BCS).