Can’t have it both ways

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The Carlyle Group is selling a 7.5% equity stake in itself to Abu Dhabi for $1.35 billion, at the same time as questions are being raised in Congress, by Senator Chuck Schumer among others, about the sale of 20% of NASDAQ to Dubai. Meanwhile, Dubai and Qatar are engaged in a flurry of multi-billion dollar bids which ultimately may involve the NASDAQ, London, and other exchanges. FT:

Carlyle agreed on Thursday to sell a 7.5 per cent stake in itself to an arm of Abu Dhabi’s government – the latest US private equity group to bring in a sovereign wealth fund as a big investor.

Blackstone sold a near 10 per cent stake in its management company to the Chinese government in May. A different arm of the Abu Dhabi government bought a stake in Apollo Management in July. Selling stakes to international sovereign wealth funds has become a popular way for US buy-out groups to cash in on their booming businesses while expanding their influence in new markets. The Carlyle deal demonstrates that the credit squeeze has not halted such transactions.

Mubadala, the arm of Abu Dhabi which has invested in sectors as diverse as Libyan oil exploration and Ferrari, the Italian motor company, is paying $1.35bn for the Carlyle stake. The deal was struck at a 10 per cent discount to a valuation of $20bn for all of Carlyle. The Washington-based buy-out group agreed to guarantee a floor to Mubadala’s investment, pledging to compensate the arm of the oil-rich emirate if Carlyle goes public and the share price drops.

Carlyle co-founder David Rubenstein said, in an interview with the Financial Times, that the deal gave his firm “more capital to invest in our funds and more flexibility in terms of deciding whether to go public”. Mr Rubenstein said the relationship with Mubadala could foster co-investments, although he did not identify any particular sectors. Several Gulf investors have invested heavily in Carlyle funds but the firm has not done many deals in the Middle East.

If the US is going to import massive amounts of oil, and massive amounts of Chinese goods, recycling of those dollars into US investments in absolutely critical to maintaining orderly capital flows and a semblance of value to the dollar. Due to the high price of oil, Saudi Arabia alone has $800 billion in its future generation fund, and the region has $3.5 trillion under management, according to the Telegraph. China sits on $1.3 trillion in foreign exchange reserves at the moment, and these have grown by as much as $25 billion a month in some months recently.

It violates the laws of economics, logic, and even simple arithmetic to think that the US can run huge current account deficits indefinitely without allowing the surplus accumulating nations to recycle those dollars back into the US in the form of spending or investment. We understand the emotions that tend to get energized in such times — they arose with some ferocity in the 1980′s as well, when the Japanese went on a spending spree in the US.

Those who in the past forecast doom to the American economy from such activities have been very wrong in those predictions, which is perhaps instructive to our current situation. Be that as it may, what appears quite clear is that a protectionist attitude towards US investments by surplus accumulating countries would be a ruinous course for a country that runs a current account deficit of $875 billion or a trillion dollars a year. You can’t have it both ways.

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