Earlier this month I heard New York Times columnist Thomas Friedman on a radio talk show lamenting the lack of discussion among the current presidential candidates about global issues and topics that don't involve Iraq or Iran. Referring to a recent Republican debate, Friedman said
he would have liked to pose this question to the candidates: How will you react when a major Chinese bank buys a piece of Bank of America because of losses incurred due to the subprime mortgage crisis?
That is an excellent question, especially in light of a new study, "The World's New Financial Power Brokers," by the McKinsey Global Institute. According to the report, "Oil-rich countries and Asian central banks are now among the world's largest sources of capital. What's more, the influx of liquidity these players have brought is enabling hedge funds and private equity firms to soar in the pecking order of financial intermediation." The assets of these four investor groups -- oil-rich countries, Asian central banks, hedge funds and private equity firms -- "have nearly tripled since 2000, reaching roughly $8.5 trillion at the end of 2006, ... equivalent to about 5 percent of total global financial assets ($167 trillion)," the study says.
The rise of these four emerging power brokers is having a very real impact on the financial services industry, on both the business and technology-related sides. Perhaps the most dramatic recent example of this was last month's announcement that the Abu Dhabi Investment Authority (ADIA) would acquire a $7.5 billion stake in Citigroup. Reeling from multibillion-dollar losses related to the subprime market meltdown, Citi needed the investment, and ADIA was in a position to be opportunistic. On the private equity side, earlier this year, First Data Corp. decided to sell itself to Kohlberg Kravis Roberts, and Warburg Pincus announced plans to invest in Metavante.
This trend is neither a good thing nor a bad thing, neither a silver bullet nor a crisis. It's reality. It will challenge banks' investment and risk management strategies, and will affect how technology companies that target the banking industry will grow, market and provide service. It shows how small, flat and interconnected our world really is. The lending decision you make today could spur an investment decision in China or Abu Dhabi tomorrow. Happy New Year!