The new power brokers: How oil, Asia, hedge funds, and private equity are faring in the financial crisis

By Charles Roxburgh, Susan Lund, Matt Lippert, Olivia L. White, Yue Zhao
The new power brokers: How oil, Asia, hedge funds, and private equity are faring in the financial crisis

Asian sovereign and petrodollar investors emerged as more influential than ever from the financial crisis, while hedge funds and private equity saw their previously rapid growth interrupted.

The global financial crisis and recession altered the paths of four influential groups of investors: oil exporters, Asian sovereign investors, hedge funds and private equity. While Asian sovereigns and petrodollar investors emerged as more influential than ever, hedge funds and private equity saw their previously rapid growth interrupted.

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In a 2007 report, MGI labeled these four groups of investors the “new power brokers” because they had gained enough wealth and clout to influence global financial markets. MGI revisited the power brokers to examine how their fortunes diverged during the financial crisis that unfolded in 2008 and projects where they may go from here, using a scenario approach.

Petrodollar investors and Asian sovereign investors became even more important players in global capital markets in 2008. Their foreign financial assets grew in 2008, in sharp contrast to other large investors, such as pension funds, mutual funds, and endowments. Oil exporters and Asian sovereign investors made $1.7 trillion—or more than $4.5 billion per day—in new foreign investments last year. And their assets are likely to grow further. In a conservative, base-case scenario—which assumes oil at $70 a barrel and a substantial decline in China's current account surplus—MGI projects oil exporters' foreign financial assets will grow to $8.9 trillion in 2013, while Asian sovereign foreign assets rise to $7.5 trillion. This growth would be twice as fast as that of other institutional investors.

Hedge funds and private equity buyout funds are down but not out. Hedge funds' total assets under management fell 27 percent in 2008, to $1.4 trillion, reflecting both investment losses and net asset withdrawals. However, many individual funds—nearly 40 percent in one database—delivered positive returns for the year. Moreover, MGI research shows that a significant portion of hedge funds has delivered higher and less volatile returns than investments in public equities and bonds over time. Investors will remain committed to such funds. Although their assets have declined further this year, MGI projects their growth will resume, with assets reaching $1.5 trillion by 2013 in our base-case scenario.

Meanwhile, the leveraged buyout boom of 2005 through 2007 came to an abrupt end last year. It remains unclear today whether or when the “megadeals,” worth more than $3 billion each, will make a comeback, given tight credit markets and slack investor appetite for such deals. Moreover, the industry has $535 billion in capital committed by investors but not yet deployed. Therefore, buyout fund assets are projected to remain flat over the next five years at $1 trillion. However, other types of private equity funds—including distressed debt, infrastructure, real estate, and other investments—will likely continue to grow modestly.

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