The new power brokers

By Charles Roxburgh, Susan Lund

How petrodollar, Asian sovereign investors, hedge funds, and private equity are faring in the financial crisis.

The global financial crisis and recession has altered the paths of four influential groups of investors: oil exporters, Asian sovereign investors, hedge funds and private equity. In a 2007 report, we labeled these four the "new power brokers" because their growing wealth and influence reflected a dispersion of financial power away from traditional institutions in developed Western economies and toward new players and other parts of the world. But today, with trade at its lowest level in years, crude prices far below their peaks, and credit markets still constrained, it's fair to ask: are they still power brokers?

For petrodollar and Asian investors, the answer is clearly yes, according to new research by the McKinsey Global Institute. The source of their wealth—trade surpluses—has continued, albeit at declining levels late in 2008. And their future growth prospects are strong in nearly any scenario for the global economy. Indeed, we envision their future wealth will be higher now than in our original report. For hedge funds and private equity buyout funds, however, the crisis has abruptly halted their rapid growth. Our projections for their future growth are lower now, but we still expect the best funds in each industry will survive and even thrive.

Petrodollar investors and Asian sovereign investors became even more important players in global capital markets last year. 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 our conservative, base-case scenario—which assumes oil at $70 a barrel and a substantial decline in China's current account surplus—we project 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.

Contrary to some published reports, we find that the world's sovereign wealth funds (SWFs)—including those of oil exporters and Asian countries—held their ground last year, with a combined total of $3.2 trillion in assets, about the same as in 2007. It's true that those SWFs that were heavily invested in equities and alternative assets recorded losses in 2008. But those losses were offset by the gains posted by the large, conservative SWFs that invest heavily in government bonds—such as Russia's two funds and the Saudi Arabian Monetary Authority, who also enjoyed strong inflows. Some SWFs are reviewing their investment strategies, but overall remain committed to generating returns over the long term. Our base-case projections show SWFs with $4.3 trillion in assets by 2013.

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, our research shows that a significant portion of hedge funds has delivered higher and less volatile returns than investments in portfolios comprised of public equities and bonds over time. We expect investors will remain committed to hedge funds as an important asset class within their overall investment portfolios. Although hedge fund assets have declined further this year, we project 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 over $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.

There is no denying that the global financial crisis and recession has abruptly halted the four power brokers' rapid ascent. But our research shows they will remain influential forces in global capital markets for years to come. Their growing wealth will create interesting opportunities for companies, banks, and asset managers. It also will present a serious challenge: how to ensure that these large pools of capital are invested wisely, in productive opportunities that will raise living standards, rather than contribute to future asset bubbles—and future crises.

Charles Roxburgh is a leader in McKinsey's Financial Institutions Group, and Susan Lund is a senior fellow at the McKinsey Global Institute.

This article originally ran in Forbes.

MGI In the news
Survey

How to create an agile organization

Article - McKinsey Quarterly

Where is technology taking the economy?

Commentary - McKinsey Quarterly

Creating an innovation culture

Article - McKinsey Quarterly

Culture for a digital age