Private investors prepare to enter uncharted waters

A ready source of cash may come not from rich Arab governments, but rather from rich Arab businessmen

British prime minister Gordon Brown and other western officials scrounging for bailout funds have lately been beating a path to Gulf capitals. But in the harsher new economic environment, a readier source of cash may come not from rich Arab governments, but rather from rich Arab businessmen. Exhibit A: Sheikh Mansour bin Zayed's £3.5 billion (Dh20.5bn) investment last week in British bank Barclays. While some commentators have sought to connect Sheikh Mansour's investment to his various positions in the Abu Dhabi Government and its sovereign wealth funds, others point to it as an example of how individual Gulf investors will be able to drive the kind of hard bargains that enable them to venture where even sovereign funds now fear to tread.

Private investors have plenty to bargain with. In June, Cap Gemini and Merrill Lynch estimated that high net worth individuals in the Middle East controlled at least US$1.7 trillion (Dh6.24 trillion) in assets, as much as all the Gulf's sovereign wealth funds combined. And that only includes the roughly 400,000 people with over $1 million in assets. Oliver Wyman, the management consultancy, recently estimated the Gulf's total private wealth at $2.1 trillion.

It is the prospect of tapping that wealth - along with that of sovereign funds - that has drawn a steady stream of western investment bankers into Dubai in the past year. From Citigroup and Commerzbank to ING Group and UBS, banks have been moving top executives and their teams into the UAE as business dries up at home. Private wealth management is one of the fastest-growing segments of the industry.

In addition to ordinary millionaires, there are at least 4,400 people in the Middle East with more than $30 million in assets, according to Cap Gemini and Merrill Lynch. Most have inherited their fortunes, and continue to reap dividends from family-controlled companies. It isn't unusual, private bankers say, for these super-rich individuals to pull in $85 million a year in dividends from their holdings.

Predictably, the wealthiest of the wealthy are members of the region's royal families. Some businessmen are not far behind. Kuwait's Nasser al Kharafi heads a $14 billion fortune fed by a conglomerate that, among other things, owns the rights in the Middle East to Pizza Hut and KFC. Behind him is Saudi Arabia's Ethiopian-born magnate Mohammed al Amoudi, with $9 billion. According to Forbes, the UAE's richest businessman is Abdul Aziz al Ghurair, who heads Mashreq Bank, the bank his father founded in the 1960s and who now controls a fortune estimated at $8.9 billion. With a mere $3 billion is Majid al Futtaim, the mega-mall builder who built Mall of the Emirates and with it the world-famous Ski Dubai.

Some Gulf moguls have established companies to oversee their holdings, such as Saudi Prince Alwaleed bin Talal bin Abdul Aziz's Kingdom Holdings, which held $25 billion in assets at the end of 2006. Kingdom sold 5 per cent of its shares to the public last year for about $2.3 billion. It was through Kingdom that Prince Alwaleed became Citigroup's biggest shareholder in 1991 with a $590 million investment. Kingdom came to Citi's rescue again in January, joining the Kuwaiti Investment Authority and the Government of Singapore Investment Corporation, along with a passel of other investors, to inject $12.5 billion into the bank.

Another company is the Olayan Group of Saudi Arabia. Olayan was set up in 1947 by Suliman Olayan, who made a fortune in the oil business and started investing in global equities in the 1960s. Today, estimates of Olayan's assets range as high as $130 billion, which would make it larger than most sovereign wealth funds. Olayan has also lent a hand in the bailout, and in January joined the Kuwait Investment Authority, the Korea Investment Corporation and other investors to invest $6.6 billion in Merrill Lynch.

Other Gulf investors have been setting up special investment vehicles to snap up distressed financial assets. Qatar's prime minister Sheikh Hamad bin Jassim bin Jabr Al Thani, whom Forbes estimates is worth about $2 billion, set up Challenger Universal to invest £533 million in Barclays back in June alongside the country's own sovereign wealth fund, the Qatar Investment Authority. In September, Sheikh Hamad set up another vehicle, Q Iceland Finance, to buy a 5 per cent stake in Iceland's Kaupthing Bank for about $280 million.

Aside from Qatar, though, sovereign funds have been conspicuous by their recent absence. Some say that's a symptom of the fact that they've already taken a drubbing on their investments in western financial institutions. But another factor is undoubtedly political. Domestic voices have been suggesting that sovereign funds should invest more at home to stave off the global downturn and less in countries that haven't welcomed them. Indeed, the outcry over sovereign investment earlier this year prompted a group of countries with sovereign funds last month to issue a statement of principles designed to allay concerns they had political motives.

With the ink on those principles still drying, sovereign funds face a quandary when it comes to further investments: if they offer terms too generous, they could be accused of putting politics before profit; if they drive too hard a bargain, they could be accused of being predatory. Enter the private investor. The problem now, bankers and analysts say, is that private investors have also taken a beating as global markets tumble. Some, bankers say, have lost up to half their holdings.

That doesn't make them poor, just pickier. Sheikh Mansour's deal with Barclays has sparked outrage in the UK because of what seem like exceedingly generous terms. But with diplomacy no hurdle to their investments, bankers say, individual Gulf investors can be expected to behave no differently than Warren Buffett or Sheikh Mansour in making sure that their money earns rewards commensurate with the risks.