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After a flurry of investments in distressed international banks, Middle East policymakers have watched with concern as the credit squeeze has continued to claim more victims.
Fearing they had plunged in too soon, Arab government investment arms have been taking a pause, hoping that the market will soon bottom out.
Government-backed investors and bankers in the region, however, say the pace of investment into distressed western financial and other securities will be stepped up again later this year, as oil-fuelled liquidity from the region prompts a move to snap up opportunities abroad.
Merger and acquisition activity also is set to accelerate, although the reluctance of international banks to lend could disadvantage some of the investment funds as much as their western counterparts.
"We're still very driven by this market and there will be some opportunities to look into," Shaikh Hamad Bin Jassem, Qatar's prime minister and head of its $60 billion (Dh220.68 billion) sovereign wealth fund, which bought a stake in Credit Suisse in February, said in an interview.
Omar Bin Sulaiman, governor of the Dubai International Financial Centre, also predicts that investment activities will pick up.
"The players of the region don't have a problem with liquidity, but they're looking for the right opportunities," he said. "One of the challenges facing all the investment arms from this region when we're looking at the west is to try to understand how bad the situation is or how deep the problem is, and how big the opportunity."
Yousuf Hussain Kamal, Qatar's finance minister, agrees but says more trouble lies ahead before the more interesting opportunities appear. "We don't know yet what's under the ashes - it will take two to three months to see the good from the bad," he says.
People familiar with the Qatar Investment Authority's strategy say it has considered every direct investment transaction that has involved sovereign wealth funds in the past six months, but decided to stay away from most.
Focus on Asia
In the meantime, it has intensified its interest in Asia, most recently setting up a joint committee with the Chinese government to look at investments.
Although the Gulf has avoided the worst of the credit turmoil and its investment companies can put up more equity in deals than their we tern rivals, some funds in the region are finding it more difficult to arrange credit for overseas transactions.
In at least one case, a sovereign wealth fund has been forced to walk away from a US property investment deal.
One senior banker, however, says Gulf investment arms have an important advantage. "Will they be affected by the shortage of liquidity [in western markets]? Yes possibly, but probably not as much as western [counterparts] because they can sign larger cheques," says Dubai-based George Makhoul, head of the Middle East at Morgan Stanley.
Gulf funds had at first estimated that the liquidity crisis was a cycle, so they jumped in, he says. But after the Bear Stearns debacle, they stopped and are now watching. At some point, he says, "someone will be presented with an opportunity they can't refuse and everyone else will follow".
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