Probably the biggest real estate bubble in history after Japan's end of '80s bubble was Dubai's real estate market (who wants to buy a flat in the middle of the desert for the price of luxury houses in NYC, London or Paris??) well, it now appears that their sovereign funds were investing as wisely as Cerberus and are as leveraged as private equity funds (10 times leverage, meaning that a 10% loss wipes out the fund).
The bad news is that with 10 times leverage, the sovereign wealth fund gets wiped out, but also the creditors (i.e. major banks who were stupid enough to finance those LBOs).
Here are reports from Bloomberg which are very much worth reading.
Sept. 11 (Bloomberg) -- Istithmar World, the Dubai sovereign wealth fund, is halting investments as part of a restructuring effort after spending more than $25 billion this decade on stakes ranging from a yacht marina to luxury retailer Barneys New York, according to people familiar with the plan.Previous related posts are available here.
The process may result in a sale of the fund or its assets, they said. Istithmar, run by David Jackson, said this week that co-chief investment officers John Amato and Felix Herlihy would leave the firm. Jackson’s job is under review, the people said.
Sept. 14 (Bloomberg) -- Dubai investment firm Istithmar World may be the first sovereign wealth fund to liquidate after a $27 billion spending spree financed largely with borrowed money, people briefed on the matter said.
Unlike government-controlled funds in Kuwait and Abu Dhabi, flush with cash from oil production, or in China, backed by export earnings, Istithmar fueled purchases such as the takeover of Barneys New York by borrowing as much as 90 percent of the money, the people said. Istithmar’s parent, Dubai World, tapped Middle Eastern and European banks including Barclays Plc, Royal Bank of Scotland Group Plc and Deutsche Bank AG, leaving those three with combined debt holdings of at least $1.5 billion, the people said.
Istithmar contributed about $2.5 billion of its own cash to back $27 billion of purchases since 2003. [...]
Many of the deals have soured.[...]
“They realized they had defined the top of the market,” said Peter Slatin, editorial director at Real Capital Analytics Inc.[...]
One example of risky investing, according to Turner, came in 2007, when Dubai World bought about $5.5 billion of MGM Mirage stock at between $82 and $95 without any hedge. The stock now trades at about $12.
“The attitude there was: We’re a private equity firm and as such we don’t need to hedge our investments because we understand the inherent risks and believe in our decisions,” Turner said.
Refinancing Dubai’s debt became more difficult with the onset of the global credit crisis as lending froze. It has about $80 billion of outstanding corporate and government debt, according a report by Moody’s in February. That almost matches the emirate’s $82 billion gross domestic product in 2008, the report said.
“We’ll be more careful now,” Sheikh Mohammed told reporters in Dubai on Sept. 9.