Former ‘fringe players’ centre stage

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By Joanna Chung
October 3 2007

International financial markets face a permanent shift in power from traditional money managers to opaque groups such as petrodollar investors, Asian central banks, hedge funds and private equity groups, according to a new study out on Thursday.

The unprecedented financial clout of these four “power brokers” is reflected in the size of the assets they already hold and the rapid growth they are expected to see in the next five years, says the study, published by McKinsey Global Institute.

They had collectively amassed $8,400bn in assets by the end of 2006, three times what they held in 2000 when they were “little more than fringe players” in the capital markets. That is some 5 percent of the world’s $167,00bn of financial assets, the report says.

If current growth trends continue, they could collectively control assets worth $20,700bn – or nearly three quarters of the size of global pension funds – by 2012.

However, the four investor groups often lack transparency and are out of the reach of regulatory oversight.

“It is true that there is not the kind of light shed on some of these activities in the way we are used to,” said Diana Farrell, director of MGI and one of the authors of the report.

“The Anglo-Saxon model of capitalism will be challenged. We need to evolve in terms of regulatory oversight.”

The findings come as a debate grows among politicians and policymakers in the US and Europe who are increasingly fearful that some of these investors, including powerful sovereign wealth funds, are being driven by political motives, rather than purely financial ones.

So far, the evidence shows that petrodollar sovereign wealth funds and Asian central banks have focused on returns and “acted cautiously and discreetly” to avoid moving prices, according to the report.

However, some funds in oil-exporting regions have signalled their intent to shift away from being largely passive investors to taking larger equity stakes in foreign companies.

The collective impact of this breed of investors also poses new risks to the global financial system. For instance, the liquidity provided by Asian central banks and petrodollar investors may be fuelling asset price bubbles in some markets, such as real estate, and are enabling excessive lending.

Copyright The Financial Times Limited 2007