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SEPTEMBER 2009

m c k i n s e y g l o b a l i n s t i t u t e

The new financial power brokers:


Crisis update

Although their paths are diverging, all will remain powerful forces in
the global economy.

Susan Lund and Charles Roxburgh


2

Last year’s events have altered the fortunes of the four large groups of investors—oil
exporters, Asian sovereign investors, hedge funds, and private-equity firms—described
as “the new power brokers” in a 2007 report from the McKinsey Global Institute.1 That
MGI study analyzed their rapid rise in wealth and clout at a time of soaring crude prices,
expanding trade, and cheap credit. Although the boom years ended in late 2008 as the
financial crisis escalated and the global economy slumped, new MGI research shows that
the power brokers fared relatively well.2 But their future paths have diverged: petrodollar
and Asian sovereign investors are more influential than ever, while the rapid growth of
hedge funds and private-equity firms has halted abruptly.

To understand the future evolution of the power brokers, we modeled changes in their
financial assets over the next five years under different macroeconomic scenarios, each
with a specific trajectory for global GDP, oil prices, trade, recovery in financial markets,
and other key variables. We find that the assets of oil exporters and Asian governments
will grow rapidly in nearly any scenario. The source of their wealth—trade surpluses—will
continue in every case we considered, though the magnitude of those surpluses would vary.
Indeed, we now project that in the base-case scenario the financial assets of oil exporters
and Asian governments will reach levels higher than those we projected in our original
2007 report. In contrast, our future projections for assets under management by hedge
funds and private-equity buyout funds are lower. We still expect the best of each to survive
and even thrive, but it will take time for the portfolios of these institutional investors to
recover sufficiently for them to raise substantial new funds.

Here we will outline our projections for the four groups of investors under three of the
four scenarios we considered. The first scenario, the “quick fix,” envisions a relatively fast
economic recovery in which global GDP starts growing again in late 2009, oil prices climb
steadily to nearly $100 a barrel by 2013, Asian trade surpluses grow (though more slowly
than in the past), and credit markets return to health. In our base-case scenario, “battered
but resilient,” the global economy starts to expand only in mid-2010, crude oil surpasses
$70 a barrel by 2013, and trade and credit markets recover more slowly than they do in
scenario one. The worst-case scenario, the “long freeze,” involves a very severe economic
downturn: GDP doesn’t start growing again until 2011, oil lingers at $50 a barrel for years,
world trade remains well below its peak, the wealth of global investors is slow to recover,
and credit markets remain constrained.3

1 
The full report, The new power brokers: How oil, Asia, hedge funds, and private equity are shaping global capital markets, is
available free of charge on mckinsey.com/mgi.
2 
The full report, The new power brokers: How oil, Asia, hedge funds, and private equity are faring in the financial crisis, is
available free of charge on mckinsey.com/mgi.
3 
The “battered but resilient” scenario is our base case because it was viewed as the most likely one by a plurality (42 percent) of
the respondents to a McKinsey Quarterly executive survey in August 2009. See “Economic Conditions Snapshot, August 2009:
McKinsey Global Survey Results,” mckinseyquarterly.com, August 2009.
3

Q4 2009
Power Brokers
Exhibit 1 of 5
Glance: The new power brokers fared better than many other investors during the crisis.
Exhibit title: Holding steady

Exhibit 1
Holding steady Assets under management, 2008, $ trillion Change, 2007–08, %
2007 2008 (estimated)

Pension funds 30.4


25.0 –18

Mutual funds 26.2 –28


18.8

Insurance assets 18.9 –14


16.2
Petrodollar 5.1
foreign assets 5.0 –2

Asian sovereign 4.4


4.8 9
investors1

Hedge funds 1.9


1.4 –26

Private-equity, 0.9
0.9 0
buyout funds2

1Includes
Asian central banks ($4.3 trillion) and foreign holdings of Asian sovereign-wealth funds ($490 billion).
2Reflects
estimated marked-to-market values of portfolio companies. Measuring only cumulative fund-raising, assets would
have grown to $1.2 trillion.
Source: Hedge Fund Research; International Financial Services, London; Investment Company Institute; Preqin; McKinsey
Global Institute analysis

Petrodollar investors—including central banks, sovereign-wealth funds, high-net-worth


individuals, and other investors from the major oil-exporting countries—would remain
the largest of the four classes of power brokers over the next five years under all of our
scenarios. In the base case, we project that the foreign financial assets of these investors
will rise to nearly $9 trillion by 2013. In the quick fix, with a faster economic recovery
driving the price of oil to nearly $100 a barrel, their assets grow to more than $13 trillion,
nearly half as large as the assets of the world’s pension funds in that year.

The sovereign investors of Asia—its central banks and sovereign-wealth funds—see


their foreign wealth grow to $7.5 trillion by 2013 in our base case. China, with its foreign
financial assets growing to $4 trillion, accounts for more than half of this total, though
its current-account surplus declines relative to GDP. In the quick fix, with world GDP and
trade recovering more quickly, the foreign assets of Asian sovereign investors grow to $8.5
trillion.
4

Q4 2009
Power Brokers
Exhibit 2 of 5
Glance: The foreign assets of petrodollar investors will remain larger than of those held by the other
three classes of power brokers over the next five years.
Title: Bright prospects
Exhibit 2
Bright prospects Foreign assets of petrodollar investors by scenarios, $ billion
Compound
annual growth 
Scenarios rate, 2008–13, %

Quick fix +21

13.2

10.6 Battered but resilient +12


8.9 (base case)
8.6 Long freeze +8
7.6
5.6 6.8 6.5
5.2 5.5
7.4
5.7 6.5
5.1 5.0 4.9 5.1
4.0
3.0

2005 2006 2007 2008 2009 2010 2011 2012 2013


Actual Forecast

Source: International Monetary Fund (IMF); Oxford Economics; McKinsey Global Institute analysis

In 2009, the hedge funds’ assets under management decline further in all scenarios,
reflecting continuing net withdrawals by investors during the year’s first half. In our base
case, assets recover slowly thereafter, to $1.5 trillion by 2013. That’s slightly better than
the total at the end of 2008 but still well below the peak in 2007. A major constraint on
the growth of hedge funds is the size of their investors’ portfolios: the collective wealth
of pension funds, insurance companies, endowments, sovereign-wealth funds, high-net-
worth individuals, and other such investors fell from $91 trillion in 2007 to an estimated
$75 trillion by the end of 2008. In our conservative base-case scenario, battered but
resilient, in which the economic recovery doesn’t begin until mid-2010, it takes four to
five years for these investors’ assets to regain their 2007 levels. Unless the appetite for
investments in hedge funds increases a good deal, this delay will substantially curtail their
fund-raising.
5

Q4 2009
Power Brokers
Exhibit 3 of 5
Glance: The foreign assets of Asian sovereign investors could grow to $7.5 trillion
in the base-case scenario.
Title: Significant growth
Exhibit 3
The significant Foreign assets of Asian sovereign investors1
Compound
growth annual growth 
Scenarios rate, 2008–13, %

Quick fix +12


8.5
7.7 7.5 Battered but resilient +9
6.9 6.9 (base case)
5.5 6.2 6.4
5.4 5.8 Long freeze +8

6.6 7.0
5.6 6.1
4.8 5.3
4.4
3.0 3.5

2005 2006 2007 2008 2009 2010 2011 2012 2013


Actual Forecast

1 Asia
includes Bangladesh, Cambodia, China, Hong Kong, India, Japan, Malaysia, Pakistan, Philippines, Singapore, South
Korea, Sri Lanka, Thailand, and Vietnam.
Source: International Monetary Fund (IMF); Oxford Economics; McKinsey Global Institute analysis

As for private-equity buyout funds, their assets under management fall in our base case, to
$1 trillion by 2013. For starters, the collective wealth of their investors (like those of hedge
Q4 2009
funds) has declined sharply. Second, this scenario assumes that megadeals—leveraged
Power Brokers
buyouts worth more than $3 billion apiece, which dominated private equity during the
Exhibit 4 of 5
boom—won’t revive anytime soon, because investors have less appetite for them, and
Glance: The hedge funds’ assets under management will decline further in 2009 in all scenarios.
Title: Falling from the peak

Exhibit 4
Falling from the peak Assets in hedge funds,1 $ trillion
Compound
annual growth 
Scenarios rate, 2009–13, %

Quick fix +19


2.4
2.1
1.9 Battered but resilient +11
1.7 (base case)
1.2 1.4 1.5
1.9 1.0 1.1 1.2
1.5 1.4 Long freeze –3
1.1 0.9 0.7 0.7 0.8 0.8

2005 2006 2007 2008 2009 2010 2011 2012 2013


Actual Forecast

1Assumes constant allocation to hedge funds at average levels of 2002–08, except for predicted drop in 2009.
Source: Hedge Fund Research; International Financial Services, London; Oxford Economics; McKinsey Global Institute
analysis
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banks working through credit losses face funding constraints. Meanwhile, private-equity
managers are looking beyond buyouts, to other types of investments, such as distressed
Q4 2009
debt, infrastructure, real estate, and venture capital. We therefore project that total
Power Brokers assets under management will grow modestly in our base case, to $3.4
private-equity
trillion5in
Exhibit of2013.
5
Glance: Assets under management in private-equity buyout funds will fall in the base case, but total
private-equity assets will grow modestly.
Title: Private-equity split
Exhibit 5
Private-equity split Assets under management, by scenario, $ trillion
Leveraged buyouts1 Total private equity Scenarios
CAGR,2 2008–13 = –4% CAGR,2 2008–13 = +4%
Quick fix
4.1
3.7 Battered but
resilient
Scenarios 3.4 3.2 3.4 (base case)
1.1
2.9 3.1
2.9
Quick fix Long freeze
1.2
1.0 1.1 1.0 Battered but
0.9 0.9 resilient
(base case) 2.9
1.2 1.2 2.6 2.6 2.6 2.7 2.8
Long freeze
0.9 1.0 2.0
0.7 0.8 0.8 0.8 1.4
0.5 1.0

2005 06 07 08 09 10 11 12 13 2005 06 07 08 09 10 11 12 13
Actual Forecast Actual Forecast

1Measured as cumulative funds raised in the current year.


2Compound annual growth rate.
Source: Capital IQ; Oxford Economics; Preqin; McKinsey Global Institute analysis

Related articles No one knows how the current financial and economic turmoil will play out, but our
analysis shows that in virtually any scenario, the power brokers will remain a significant
“The world’s new financial force in global capital markets. Oil exporters and Asian sovereign investors will continue
power brokers” to be major players, controlling vast pools of wealth. Hedge funds and private-equity
buyout funds are down but not out.
“The new role of oil wealth
in the world economy”

The authors wish to thank Matt Lippert, a consultant in McKinsey’s Silicon Valley office, who helped manage the research
“The future of private equity” project underlying this article, as well as Charles Atkins, Chris Rezek, Olivia White, and Yue Zhao.

“Mapping the global capital Susan Lund is director of research at the McKinsey Global Institute, and Charles Roxburgh is a director in McKinsey’s
markets” London office. Copyright © 2009 McKinsey & Company. All rights reserved.

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