The new power brokers: Gaining clout in turbulent markets

By Diana Farrell, Susan Lund, Koby Sadan
The new power brokers: Gaining clout in turbulent markets

Four financial market power brokers have grown in size and clout during the financial crisis, which underscored one of the biggest benefits offered by the power brokers: vast pools of liquidity. Yet risks remain.

Four new power brokers—Asian sovereign investors, petrodollars, hedge funds, and private equity firms—are having a growing impact on global capital markets. In this update to a 2007 report, MGI examines how the new power brokers have fared since then, during the turmoil of skyrocketing oil prices, evaporating liquidity, and disappearing leverage.

MGI finds that the financial and economic events since mid-2007 have, if anything, accelerated the trends identified earlier: The power brokers' wealth and clout have grown. They have adapted by expanding their investment strategies. And they have increased the use of private financing as an alternative to public markets. Their actions have brought clear benefits in containing the financial market crisis but also have highlighted the risks associated with their rise.

MGI reveals that all four power brokers grew in 2007, with their combined financial assets rising by 22 percent, even faster than before, to $11.5 trillion.

Propelled by soaring oil prices, the foreign financial assets of oil exporters rose to an estimated $4.6 trillion by the end of 2007, an 18 percent increase over the previous year.

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MGI's director Diana Farrell answers questions about the "new power brokers."

Asian sovereign foreign assets have grown rapidly over the past decade as a result of rising trade surpluses combined with government monetary policies. This trend continued in 2007, with Asian sovereign foreign assets reaching $4.6 trillion. Of this, $3.9 trillion are central banks' foreign exchange reserves, and approximately $670 billion are held by sovereign wealth funds.

Private equity firms around the world saw new fund–raising soar in the first two quarters of 2007–only to plummet in the third quarter after the US subprime mortgage crisis began. But fund–raising rose a bit in the last three months of the year, bringing total assets under management in leveraged buyout funds to $900 billion.

Hedge funds have been most adversely affected by the credit crisis of the last year. Although their total assets under management grew to $1.9 trillion in 2007, new capital inflows from investors declined throughout the year and into the first quarter of 2008. The decline affected all hedge fund strategies.

Despite the financial crisis, MGI projects that the power brokers will continue to grow in wealth and clout. Under a conservative, base–case scenario, their combined assets will grow to $21 trillion (excluding overlap between them) by 2013. If, instead, they grow more briskly, at their 2000 to 2007 pace, their wealth would rise to $31 trillion, equivalent to roughly 60 percent the expected size of global pension funds or mutual funds in 2013.

The rapid rise of the new power brokers also poses potential risks. The report examines four main concerns: that the additional liquidity might foster asset price inflation; that state investors might use their wealth for political purposes; that hedge fund failures might destabilize the financial system; and that private equity firms' heavy leverage might increase credit defaults. MGI concludes these concerns remain on the table and justify careful consideration and monitoring. But overall, the rise of these new power brokers has been largely beneficial to global capital markets.

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