Sovereign wealth funds tap U.S. firms for growth

By Michael Flaherty

DUBAI (Reuters) - With Middle Eastern sovereign funds seeking to spread hundreds of billions of dollars abroad through a wide range of investments, governments in the Gulf Arab region are seeking help with complex deals from U.S. private equity firms and hedge funds.

The flow of Middle Eastern money into U.S. and European companies and securities is expected to grow significantly in the next few years.

Thanks to rising oil prices and booming economies in the Gulf Arab region, sovereign wealth funds there are loaded with cash that they wish to spend abroad. The funds want more diverse holdings and higher investment returns -- a desire that has them turning more and more to U.S. firms for advice.

"You will see more partnerships between groups like ours and private equity firms and hedge funds, not so much co-investments but partnerships," said Kenneth Shen, head of strategy for the Qatar Investment Authority (QIA).

"You may see sovereign wealth groups partner with these firms to invest in a broader part of the capital structure," he said, speaking at the Super Return Middle East private equity conference here this week. While some groups may even become lenders to investment funds, Shen was quick to say that QIA is "not generally in the business of lending."

Still, QIA and other wealth funds such as the Abu Dhabi Investment Authority are buying active equity stakes in public companies, private companies, initial public offerings and other securities. ADIA, for example, just purchased a $7.5 billion stake in U.S. bank Citigroup.

For years, Middle Eastern institutions have been passive investors in U.S. private equity firms and hedge funds. They give Western funds cash to invest and thank them when it comes back a few years later with a nice return.

That is changing.