Where is the oil money?

Cautious investment strategies have caused Middle East investors to sidestep UK M&A in favour of ‘prudent’ property deals. Andrew MacLeod reports

With the price of crude forecast to top $150 a barrel this summer, wealth beyond the dreams of Midas has been dumped into the laps of Middle Eastern oil producers.

Sovereign wealth funds, and not a few enormously wealthy individuals who already had more money than they could count, have overnight become even more fabulously rich. And now they’re eyeing the world with a view to investing the mountains of money that fate has thrown their way.

But there is a puzzling question: why is so little of the cash finding its way into the UK mergers and acquisitions market?

There has been some activity, of course. An unconfirmed report in The Sunday Telegraph claims that Barclays Bank is in talks with various Middle East funds to obtain more than £3 billion in fresh capital, and it has emerged that Gazeley, the logistics park developer owned by Asda Wal-Mart, could also be on the brink of being sold to Dubai World for a sum in the region of £300 million.

But these are drop in the ocean transactions compared to the countless billions of dollars pouring into the vaults of the oil producers.

Carefully does it

Part of the reason, says Tim Harrison, HSBC’s head of corporate in the Middle East, is the traditionally cautious approach these funds have taken towards investment.

“Many of the governments in the Gulf have established funds for future generations,” Harrison says. “They exist to replace the oil income once the oil runs out, and for that reason they have historically been invested very conservatively. However, in the recent past high oil prices have led to a greater surplus.”

This cash glut has led to a more relaxed approach to investment – although prudence is still the watchword.

“Some of the funds have been used in a much more opportunistic way, such as the support given to distressed financial institutions in the USA,” he adds. Some fingers have been burned in the process, as the wealth funds have learned the hard way that share prices can go down as well as up.

Gulf-friendly regions

Harrison makes the point that the UK has a long-standing partnership with the region, and in many ways is the most ‘Gulf friendly’ of the western nations.

So far, what UK activity there is appears to be concentrated largely on the property market, or to reflect the sporting interests of Arab investors.

Turnberry golf course is a case in point. As of a few weeks ago, it is now a little piece of Dubai in Scotland. It seems only a matter of time before Liverpool FC goes the same way. The UAE bidder has backed off for the time being, while the club’s current US owners sort out their reported differences.

Still with property, Harrison refers to the multi-billion dollar acquisition by a Qatar investment vehicle in the so-called ‘Shard of Glass’, which will soon become a new London landmark with the help of £2 billion in oil money.

Qatari investors also part funded the £900 million purchase of the 13-acre Chelsea Barracks site, which is earmarked for a mixed use development that will include some 1,500 new homes, shops and offices.

UK investment

The UK faces stiff competition for its investment money from the emerging markets of Asia and the Far East, in which direction Arab investors have been looking for some time, says Harrison.

In addition to the property deals already listed, it has notched up some successes, reports the government agency UK Trade & Investment.

Although there are no up-to-date facts available, figures from the Office for National Statistics reveal that up until 2006 a number of Gulf Arabian companies invested in Britain, including Boubyan Bank and Securities House, while the National Industries Group of Kuwait expanded its manufacturing operations for the oil industry.

In the same period Bahrain’s Gulf Finance House opened a sales and marketing office in London, while the Al Rashid Group expanded its oil and gas facility in Durham.

Robin Lamb, head of business development with the Arab British Chamber of Commerce, sees things in much the same way as Tim Harrison: “The Gulf States are accruing huge current account surpluses on the back of high oil prices, and the strength of the oil market looks likely to be sustained for the foreseeable future.

“These surpluses are being invested in sophisticated global markets, as well as their domestic infrastructures. They are investing very strategically at home, but they also have global investment strategies.”

The increasingly powerful sovereign wealth funds and very wealthy individuals are scouring the far corners of the world for appropriate investments, and Lamb believes the UK is attractive to them because of its open economy, which welcomes Arab investors.

“There is also a growing financial sector in the Gulf itself, and those institutions are investing globally – including in the UK,” Lamb adds.

“Ten or twenty years ago the Arabs tended to put their surpluses into portfolio investments, but without stopping that they have now diversified into more direct economic investment.”