Page 62 - Aamir Rehman Gulf Capital and Islamic Finance The Rise of the New Global Players

CHAPTER 1 Floating on Wealth 47

“DRY POWDER” AND EXPANDING COFFERS

Like institutional investors everywhere, Gulf-based investors have
endured significant losses during the financial crisis and global reces-
sion. Though impossible to measure precisely, the losses are almost
certainly in the hundreds of billions of dollars, assuming that Gulf
institutions’ asset allocation models matched those of their interna-
tional counterparts. Such losses were no doubt painful for the
region’s sovereign and private investors, and the collapse of local
stock markets in 2008 was even more painful for the region’s retail
investors.
It is important, nonetheless, to keep in mind that Gulf institu-
tional investors have a number of advantages over other investors as
they seek to recoup their losses and make winning investments in the
years ahead.
First, many Gulf institutional investors are not time-bound in
their investment outlook. Unlike private equity funds, for example,
they are not required to liquidate their positions within a fixed num-
ber of years in order to return capital to their investors. The flexibility
of not being time-bound allows most Gulf-based investors to avoid
having to sell assets in “fire sales” or at low valuations; instead, they
can ride out a cycle and benefit when markets recover.
Second, Gulf investors—especially large, government-linked
ones—tend to have substantial allocations for Treasury bills and con-
servative fixed-income investments. These investments are very safe
ones, and in effect are like cash. Cashlike marketable securities act as
what is called “dry powder” in the realm of principal investments—
funds that are available for new investments and are not affected by
previous losses. In a world in which assets are far cheaper than they
were a short while ago, dry powder is a source of immense advantage
in enabling Gulf investors to pick up assets at attractive valuations.
Third—and perhaps most profound—many Gulf institutional
investors are continuing to enjoy fresh injections of cash even in the
current recession. Budget surpluses continue in key GCC markets,
and part of those surpluses is fed into investment vehicles. These
fresh injections of capital, adding to the dry powder of Gulf institu-
tions, extend those institutions’ advantage over comparable investing
institutions elsewhere. Whereas hedge funds see massive redemp-
tions and withdrawals of cash and endowment funds see new dona-
tions dry up in times of recession, surplus-generating Gulf states are
in the enviable position of being able to add to their cash coffers and
make new investments.