The Newest Global Power Brokers

In the tech boom, it was the "Four Horsemen" -- Microsoft (MSFT), Intel (INTC), Dell (DELL) and Cisco (CSCO) -- that were set to dominate the world's economic future. A decade later, the influence of these tech titans has been dwarfed by what McKinsey Global Institute's new study has dubbed the four New Power Brokers -- the rise of large pools of new capital that are rapidly re-shaping the global financial landscape. By the end of 2006, these four New Power Brokers -- petrodollar investors, Asian central banks, hedge funds, and private equity -- collectively had amassed $8.4 trillion in assets. That's roughly $1 of every $20 in the global financial system -- and triple what they held in 2000. At current growth rates, the New Power Brokers could collectively control assets worth $20.7 trillion by 2012. Not since the Japanese bought Rockefeller Center in New York City during 1989 have large pools of newly emerging capital aroused such unease among the Western world's financial establishment.

The New Global Power Brokers: Who Are They?

Petrodollar investors from oil-exporting countries are the 800-pound gorilla of the group. This includes the Sovereign Wealth Funds -- state-owned investment funds that invest oil surpluses across a wide range of other asset classes. Thanks to the tripling of oil prices since 2002, this group controlled an estimated $3.4 trillion to $3.8 trillion in foreign financial assets at the end of 2006 -- or just under half the total for the four groups. At $70 a barrel, oil producers will generate nearly $2 billion of petrodollars to invest every day. That's more than Warren Buffet's net worth flowing into the global financial system just between now and Christmas.

Asia's central banks are next in line, with $3.1 trillion in foreign reserves. These traditionally conservative institutions invest in foreign assets to help stabilize their currencies against balance of payment fluctuations. Traditionally, their objective has been to seek stability, not to maximize returns. Around two-thirds of the money has been invested in the United States Treasury assets. These reserve assets are set to grow to $5.1 trillion by 2012. For all of the handwringing about diversifying out of U.S. dollar-denominated assets, it is unlikely that Asia's central banks will abandon the U.S. dollar as a reserve currency en masse.

Ironically, the two New Power Brokers that get the most press yield the least influence. Every time Mr. Market has a mood swing, the media points the finger at hedge funds. Yet hedge funds today boast assets of barely $1.7 trillion. Indeed, China's reserves alone probably surpass that of the entire global hedge fund industry -- though through leverage, hedge funds' gross investments may be as high as $6 trillion. That's why hedge funds account for 30% to 50% of the trading in U.S. and U.K. equity and bond markets.

Private equity has been garnering its share of negative press. But at the end of 2006, private equity only had $710 billion in investors' capital. Thus, private equity is still a relatively small player. The entire industry owns companies worth just 5% of the value of companies listed on stock markets in the United States and 3% of those in Europe.

So what do petrodollar investors, Asian central banks, hedge funds and private equity firms have in common? They have longer-term investment horizons than traditional investors. As a result, they are increasingly invested in alternative assets such as real estate and emerging markets. And it's getting harder to draw the lines of differentiation every day. Hedge funds’ strategies are overlapping with private-equity firms. Asian central banks -- so far noticeably behind the curve -- are starting to replicate the sovereign wealth funds of oil exporters.

The New Global Power Brokers: Query the Motives

The rising influence of this new capital is rapidly changing the world's investment landscape in visible ways. Russian and Venezuelan-owned gasoline stations dot the East Coast of the United States -– including one not far from the White House. China is using its newfound wealth to buy natural resources (and influence) in Africa that make the efforts of Peace Corps volunteers sweetly naive. Arab petrodollars soon may be in partial control of trading in Wall Street through an ownership chunk in NASDAQ. Indeed, in theory, the next owner of the New York Yankees could be the Abu Dhabi Investment authority. Imagine the owner’s box at Yankee Stadium shared by guests Donald Trump, New York Mayor Michael Bloomberg, and a cadre of Arab sheiks. Yet an analogous scene already is a theoretical reality with London Mayor "Red Ken" Livingstone and Russian oligarch Roman Abramovich at a Chelsea football (soccer) game in London.

If the New Global Power Brokers were purely about money and profit, we'd hardly be worried. But it's their motivations that are murky. The lack of transparency, regulation, and accountability surrounding their investment strategies and objectives make their actions opaque -- and even ominous. Indeed, for all the anti-globalization protests against McDonald's and Coca Cola, some perceive that the investments of the New Global Power Brokers are the 21st Century's incarnation of the Trojan Horse. Their investments are driven by politics more than by economics. Diana Farrell, one of the authors of the McKinsey report, noted, "The Anglo-Saxon model of capitalism will be challenged."

The New Global Power Brokers: Minnows Or Giants?

But let's resist the urge to fall into hyperbole. Their rapid emergence notwithstanding, the New Power Brokers today account for only 5% of the world's $167 trillion of financial assets. Pension funds, mutual funds and insurers still hold a bigger chunk of the world's financial assets ($59.4 trillion) than they do. But the New Power Brokers have their impact on every American's life, whether they know it or not. Asian central banks and petrodollars alone reduce U.S. interest rates by about three-quarters of a percentage point. And there is little doubt that the high end of the London and New York real estate market -- as well as art and wine market -- is being propped up by flashy Russians and Arabs. But the reality is that most New Power Brokers will be looking to emulate the investment strategies of the Yale endowment rather than Hugo Chavez's bizarre policy of subsidizing London commuters with Venezuela's petrodollars. But however you look at it, the New Global Power Brokers are here to stay.