Cities in the sand

Original Article

Sep 18th 2008
From The Economist print edition

A new sort of investment partnership

THE deal between GE and Mubadala concluded in July provides a useful test case of whether the rise of sovereign-wealth funds can be good for capitalism. Currently, both the company and the investor are claiming they have gained.

There is no doubting the ambition of the Gulf states as they set about building brand-new cities in the desert. Dubai has already become a cross between Las Vegas and pre-strife Beirut, with its luxury hotels, international financial centre, leisure and shopping facilities and man-made islands. But Abu Dhabi, its richer neighbour-cum-rival, has ambitious plans of its own, bringing in the sort of high culture Dubai lacks (including outlets of the Louvre and Guggenheim) and even looking beyond the oil age by committing $22 billion to building a futuristic carbon-free city called Masdar.

Masdar is one of the key ingredients of the deal, in which Mubadala agreed to become one of the firm’s top ten shareholders. GE will invest heavily in Masdar to make it a showcase for its Ecomagination clean-energy programme. The firm and the sovereign-wealth fund will also put $4 billion each into a joint venture to provide commercial finance in the region. Ultimately, the two are expected to invest a total of $40 billion in the partnership.

GE’s strategy is to establish bases in cities throughout the Gulf, investing in things that are useful both to the city and to the region. It also has close relations with Saudi Arabia, which it has made into its regional infrastructure-services hub. Saudi Arabia is building six new “economic cities”, in the hope of providing jobs that it desperately needs. It is trying to tempt energy-intensive international firms to move there with the promise of cheap fuel—which may not be such a boon for the environment.

The Mubadala deal represents the latest stage of a relationship that has continued to deepen since the fund’s managers visited Crotonville in 2005 for a week’s leadership training. GE says it is betting on a new generation of leaders in Abu Dhabi—and indeed across the Middle East—who are committed to building a more sustainable economic foundation that will survive the depletion of their oil and gas reserves. Mubadala, which also has a 7.5% stake in Carlyle, a big American private-equity firm, says that as a long-term investor it is keen to take big positions in such world-class companies. That must make Jeffrey Immelt, GE’s embattled boss, feel more secure in his job.