Earlier this month I heard New York Times columnist Thomas Friedman on a radio talk show commenting about the lack of discussion among the current presidential candidates about global issues and topics that don't involve Iraq or Iran. Referring to a recent Republican debate, Friedman said he would have liked to pose this question to the candidates: How will you react when a major Chinese bank buys a piece of Bank of America because of losses they incurred related to the subprime mortgage crisis?
That is an excellent question, especially in light of a new study, "The World's New Financial Power Brokers," issued by the McKinsey Global Institute. According to the report, "Oil-rich countries and Asian central banks are now among the world's largest sources of capital. What's more, the influx of liquidity these players have brought is enabling hedge funds and private equity firms to soar in the pecking order of financial intermediation." The assets of these four groups of investors -- oil-rich countries, Asian central banks, hedge funds and private equity firms -- the study says, "have nearly tripled since 2000, reaching roughly $8.5 trillion at the end of 2006, ... equivalent to about 5 percent of total global financial assets ($167 trillion) at the end of 2006."
The rise of these four emerging power brokers is having a very real impact on the financial services industry in general, and financial services technology specifically. For example, in one of the most recent -- and dramatic -- deal announcements, Citigroup confirmed last month that it sold a $7.5 billion stake to the Abu Dhabi Investment Authority (ADIA). Reeling from multibillion-dollar losses related to the sub-prime market meltdown, Citi needed the investment, and ADIA was in a position to be opportunistic. And earlier this year, payments processing company First Data Corp. decided to sell itself to Kohlberg Kravis Roberts, and Warburg Pincus announced plans to invest in banking software provider Metavante.
This trend is neither a good thing nor a bad thing, neither a silver bullet nor a crisis. It's reality. It will challenge insurers' investment strategies, and affect how technology companies grow, market and provide service. It shows how small, flat and interconnected our world really is. The underwriting decision you make today could spur an investment decision in China or Abu Dhabi tomorrow. And you thought all you had to worry about was legacy systems transformation. Happy New Year!
Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio