“New Power Brokers” Gaining Clout in Financial Markets
The role of petrodollar investors, Asian central banks, hedge funds, and private equity firms is increasingly important in the world’s financial markets, according to new study by the McKinsey Global Institute. And their influence will continue to grow in the future, offering both benefits and risks to market stability.
Although none are new, their rapid growth since 2000 has given them unprecedented clout, MGI says in The New Power Brokers. Excluding cross-investments between them, oil investors, Asian central banks, hedge funds, and private-equity firms together held $8.4 trillion in assets at the end of 2006. Their assets have tripled since 2000, making them 40% of the size of global pension funds. Together, they represent some 5% of the world’s $167 trillion of financial assets—a significant share given that five years ago these players were on the fringes of the global financial system.
Under current growth trends, MGI finds that their assets will grow to $20 trillion by 2012, reaching more than two-thirds the size of global pension funds.
Under a more conservative scenario in which oil prices fell, China’s current-account surplus declined, and growth in hedge funds and private equity slowed, the assets of these four players will still nearly double over the next five years to as much as $15.2 trillion by 2012.
Together these four new players are reshaping global capital markets. They each represent large new pools of liquidity with longer-term investment horizons than traditional investors that allow them to pursue higher returns—and risks, MGI says. They have markedly diversified the investor base and expanded private markets for capital. They are spurring financial innovation, enabling the more efficient spreading of risk, and spreading liquidity.
With these positive developments come new risks according to MGI:
- Liquidity from Asian central banks and petrodollar investors may be fueling asset price bubbles in some markets. The state connections of both raises the possibility that political considerations may cloud their investment decisions.
- Hedge funds may be creating systemic risk through their highly leveraged positions and through banks’ large exposure to them.
- Private-equity firms may be increasing financial market credit risk due to high leverage and their ability to extract looser lending covenants from banks.
The evidence to date gives some reason for optimism that the risks these players pose are manageable, MGI says.
Nevertheless, the concerns being raised by the rise of the new power brokers are real and justify careful monitoring.
MGI suggests that “the four players would be wise to note public concerns and voluntarily take steps to minimize them.”
The McKinsey Global Institute report, The New Power Brokers, is available at no charge (registration required).
You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.