Tuesday, September 27, 2011

GCC Sovereign Wealth Funds monitor European opportunities

The eurozone is in crisis, and many expect that Middle East money will be used to help bail out struggling European banks and even governments. But with no guarantees the eurozone will even survive its current troubles, might Gulf Sovereign Wealth Funds be reluctant to help out this time around?

Two of Greece's biggest banks are in advanced talks over a merger, which would see Alpha Bank, the country's second-largest bank, take over Eurobank, which failed recent stress tests designed to calculate how the institutions would cope in any future financial meltdown.

The merger will be supported by a €500m ($707m) cash injection from Qatar-backed Paramount Services Holding, which already owns 4% of Alpha and will effectively own 17% of the merged lender. The money will be injected through mandatory convertible bonds, and if approved the merger will create southeast Europe's biggest bank, and the 22nd largest bank in Europe.

Analysts conceded that the move was a surprise when it was announced last month. However, it sits neatly alongside the widely-held view that Qatar is looking to become Europe's preferred supplier of gas in the future. By helping to prop up the European banking sector, the tiny Gulf nation is showing solidarity with a region which is going through its toughest days since the 17-nation bloc was established in 1999.

Qatar capitalises on European strategic investments

Paramount Services Holding is just one of the many vehicles which represent the interests of the Qatari royal family. And it's not the Gulf state's first brush with Europe, either: in August last year Qatar snapped up a 2% stake in the power company Energias de Portugal, worth around €160m. Last September Qatar signed an agreement concerning potential investments totalling up to $5bn in the Greek economy across sectors ranging from banking to energy and real estate, and in March this year the Qatar Holding group acquired a 6% stake in the Spanish power company Iberdrola, worth around $2.8bn.

The Qataris are unlikely to be the only cash-rich Middle East investors who have spotted opportunities amid the trials of the European banking system. After all, as well as providing long-term strategic opportunities, the troubles of others often represent golden tickets to wealthy sovereign investors in a position to make sizable investments on favourable terms.

"[Gulf SWFs] will be heavily involved," predicts Gary Dugan, Chief Investment Officer, Private Banking, at Emirates NBD.

"If you think about transparent buckets of money around the world, it's very largely centred on the Middle East," he continues. "If you think of the concentration of free cash anywhere in the world, the Middle East is the capital of that. You might talk about the Singaporean government or a few other SWFs, but you're not going to go to the UK to raise money, and you're not going to go to the US because there's probably not one state pension fund there that's liquid."

Dugan - who recently published a note entitled 'Eurozone: You Are the Weakest Link' - anticipates that troubled European economies will already have extended feelers to cash-rich Gulf states. Indeed those feelers have probably been in place since the global financial crisis hit back in 2008, and debt-laden Western economies were first confronted with a meltdown that has since claimed the scalps of numerous political leaders and their governments.

"With good outcomes and bad outcomes, this region has provided over the last 12 months a number of support programmes for some of these countries," he says. "The Portuguese came around six to nine months ago looking to raise money and basically setting out their stall. The Irish government is also known to have gone cap-in-hand around the world looking for some support, and these countries aren't going out as the eurozone - they're going out as individual countries."

Lack of distressed asset classes

Not all are convinced that Gulf governments should be interceding in European economies.

"It would be an extremely bad idea for the Middle East to bail out Greece [with sovereign money], and I don't see why they would," cautions Raj Madha, MENA Banking Analyst at Rasmala Investments.

"It's up to Germany and Europe to decide whether, from an economic point of view, Greece should be supported," he continues. "For a third party to come along and make some charitable venture, giving away its wealth for no good reason, makes little sense."

Even those who believe Gulf governments will look to invest across the Mediterranean, are unsure as to whether SWFs will be sufficiently attracted to the kind of deals European countries and institutions have been offering since the worst of the 2008 crisis passed. At the height of the initial economic crisis, Gulf governments were able to demand premium properties at distressed prices; since then as the global economy has found its footing, European sellers have been driving a harder bargain - and returns have dipped too.

"Many of the SWFs here try to play that global citizen role, saying: 'We'll support you in the tough times'," says Dugan. "But if they have supported you in the last six months, as many of them have, they'll be facing losses and I just wonder what their attitude will be now.

"During the previous crisis there were special deals done, in circumstances where you could get some very special deals at a discount to the prevailing prices at the time," he continues. "There were a lot of good deals struck, and the Qataris in particular came out smelling of roses because they made some very good returns.

"But I think a lot of the deals done in the last 12 months would have been at closer to market price, and I think [Gulf dealmakers] will now only be interested in purchases at distressed prices," he adds. "At the moment, people are worried they're catching a falling knife, rather than buying into a sustainable situation. Greece is not sustainable at this level, and neither is Italy, and a lot of people are now thinking: 'Let's just stand back, and see where it falls to'."

Source: www.ameinfo.com

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