CODEL GUTIERREZ ENGAGES DUBAI ENTITIES ON SOVEREIGN WEALTH

C O N F I D E N T I A L SECTION 01 OF 03 DUBAI 000227

SIPDIS

DEPARTMENT: NEA/ARP BAGWELL AND MASILKO

E.O. 12958: DECL: 6/11/2018
TAGS: ECON EINV ETRD BTIO PGOV AE
SUBJECT: CODEL GUTIERREZ ENGAGES DUBAI ENTITIES ON SOVEREIGN WEALTH
ISSUES

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CLASSIFIED BY: Paul Sutphin, Consul General, Consulate Dubai,
UAE.
REASON: 1.4 (b),(d)




1. (U) Summary: UAE Government officials and senior business
executives told visiting members of Codel Gutierrez May 28-29
that investments from Dubai-owned companies did not represent a
threat to the national security of the United States. The
UAE-based officials voiced their concerns that increasing
restrictions on foreign financial investments, coupled with
political controversy surrounding a number of foreign
acquisitions, have resulted in the perception that overseas
investments - particularly Arab investments - are less welcome
in the US marketplace than elsewhere. End summary.


2. (U) Led by Rep. Luis Gutierrez (D-IL) and consisting of
members from the House Financial Services Committee including
Rep. Spencer Bachus (R-AL),Rep. Melvin Watt (D-NC),Rep.
Michael Capuano (D-MA),Rep. Gwen Moore (D-WI),as well as
members Rep. Tom Davis (R-VA),Rep. Jim Moran (D-VA),and Rep.
Luis Fortuno (R-PR),the Codel visited Dubai on May 28-29 on a
fact finding mission involving sovereign wealth funds (SWFs) and
their implications for US national security. The Codel
discussed the nature of private equity holdings in Dubai, as
well as perceived impediments to investing in the United States,
in meetings with HE Mohammed Al Gergawi, Minister of State for
Cabinet Affairs, HE Reem Al Hashimy, Minister of State without
portfolio, HE Dr. Anwar Gargash, Minister of State for Foreign
Affairs, and senior executives from Dubai Group, Istithmar,
Dubai International Capital, and DP World. The Codel was
accompanied by the Consul General and Pol/Econ Officer
(notetaker).

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Dubai: Awash in Private Equity

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3. (C) A primary concern of CODEL Gutierrez was the source and
control of private equity funding in Dubai. According to Dubai
Group (DG) CEO Thomas Volpe, the company started as a private
investment function for Sheikh Mohammad bin Rashid (MbR),Vice
President of the UAE and Ruler of Dubai. Historically, MbR's
personal wealth has represented between 90-95 percent of DG's
overall capital, but this figure has been decreasing. In 10
years, Volpe predicted, this allocation will be closer to 50
percent as the company transforms itself into an independent
asset manager. Asked about the role that DG plays in the
decision-making of its various assets, Volpe responded that DG
does not seek operations-oriented investments. Stressing the
importance of selecting investments with quality existing
management, "We bet on the jockey, not the horse," he stated.
He added that DG's investments are typically and intentionally
structured below a controlling share threshold. "Our sweet spot
is between 15-40 percent," he said, "so we rarely have the
ability to control or dominate the decision-making of a company."


4. (C/NF) Anand Krishnan, Chief Operating Officer of Dubai
International Capital (DIC) explained that DIC receives excess
capital from the Government of Dubai, but also relies on
external sources such as bank debt and third-party equity.
Sylvain Denis, Chief Executive Officer of DIC's Private Equity
Division, noted that DIC shares a similar "hands-off" philosophy
with regard to management or corporate operations. When asked
whether DIC was an SWF, Denis replied that the company is a
private equity firm. "We have a very transparent investment
strategy," he added. "Even though we are not required to
disclose certain corporate information, we voluntarily do so."
(Note: DIC, like the Dubai Group, is part of Dubai Holdings, the
Dubai parastatal that represents the personal assets of Mohammed
bin Rashid. DIC says it is a "private company" that belongs to
MbR, i.e. "the wealth of the sovereign, versus sovereign wealth"
- a distinction that is lost on most USG visitors, and with good
reason. End Note.)


5. (U) David Jackson, CEO of Istithmar (a subsidiary of Dubai
World) explained to the CODEL that 100 percent of his investment
capital is generated through the profits of various government
business initiatives such as Dubai World's various holdings,
including Nakheel property development. According to Jackson,
Istithmar primarily - but not exclusively - invests in emerging
markets. The principal concern, he added, is return on
investment.


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6. (U) Michael Moore, Senior Commercial Vice President at DP
World (DPW) explained that DPW is majority owned (80 percent) by
the Government of Dubai, with the remaining 20 percent owned by
60,000 shareholders. Moore also denied that DPW was an SWF,
explaining that the company, which is controlled by an
independent, multi-national board of directors, releases
quarterly statements surrounding the company's performance and
investment goals.

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Lingering Fallout from the DP World Controversy

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7. (C) All parties expressed regret over the aborted DP World
acquisition of P&O's terminal assets in the United States, as
well as the political controversy that surrounded the deal.
Minister for Cabinet Affairs Mohammed Gergawi stated that the
UAE had "come a long way" from the days in which he attended a
school with no electricity or running water. He predicted that
economic, political, educational, and social developments in the
UAE would eventually set the standard for other countries in the
region. He also stressed the positive US-UAE relations and
highlighted the major presence of the US Navy as one example of
this bilateral cooperation. (Note: The Jebel Ali port facility
receives the largest US Navy port calls outside of the US.) The
DP World controversy, he noted, was a step in the wrong
direction. Stressing Dubai's investments were all about
business, he urged that Congress reevaluate its approach to
foreign investment, particularly with regard to investment from
"your friends". "We are in a fight against radicalism. Help us
to help you," Gergawi implored.

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Encourage regional investment into the US

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8. (C) Minister of State without portfolio Reem Al Hashimy
echoed Gergawi's comments by stating that people in the region
unfortunately have an increasingly "sour taste of the West."
She added that the UAE, through its numerous charitable
initiatives, was striving to impart positive changes throughout
the region. (Note: The Mohammed bin Rashid Foundation and Dubai
Cares, headed by Al Hashimy, fund hundreds of millions of
dollars worth of education, healthcare, and entrepreneurship
projects throughout the Middle East and Muslim world). Noting
that half of the Arab population is under the age of 25, she
stated that the promotion of tolerance, peace, diversity, and
other liberal ideals would become progressively more important
(Al Hashimy herself is 31 years old). The regional shift away
from the West could have long-term political and economic
consequences for the United States. "Trends shift quickly," she
warned. Similar concerns were expressed during meetings with
UAE-based business leaders. Moore stated unequivocally, "The
capital will go where it's wanted...You want us on your side."
Jackson stressed the need to improve the process by which
foreigners - especially students - travel to the United States.
"We must win the PR battle," he said.


9. (C) In the same vein, all parties expressed a willingness to
comply with the existing regulatory and security requirements.
Jackson (a USC formerly with Lehman Brothers) noted that
Istithmar wanted to invest in the US market, but that rules
surrounding investments should apply to all people irrespective
of nationality. Established rules and prohibitions on
investment in certain cases of national security are legitimate
forms of regulation, he conceded, but "second class citizenship"
is bad for everyone. Asked about the Committee on Foreign
Investment in the United States (CFIUS) process, Denis replied
that DIC had voluntarily initiated the process during three
separate acquisitions of US-owned companies. In at least one of
the cases, the acquisition did not involve a national security
nexus, according to him, but "the political climate required
that we undergo CFIUS." The CFIUS procedure was not a problem,
he stated, explaining that the company has a good understanding
of the players and the process. He did note, however, that
uncertainty in the length of the process - between 30-100 days,
depending on the preliminary investigation - could conceivably
present a problem during future acquisitions, as potential
partners may be hesitant to enter into a deal with this
uncertain variable.

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MFA MinState Gargash Offers His Advice, Thoughtfully

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10.(C) Minster of State for Foreign Affairs (and Minister of
State for Federal National Council Affairs) Dr. Anwar Gargash
hosted the Codel at his Dubai home. Seizing the opportunity, he
offered five points of political advice for "the new
Administration" - clearly a presentation he had thought about
for a long time and delivered in his trademark scholarly manner
(Gargash holds a PhD from Cambridge.) He recommended the new
administration work to:

--Support your friends: Gargash said this might seem
self-evident, but as the DP World controversy in 2006 had made
clear in the UAE, the definition of "friend" could be subject to
political winds. He said that the USG should work to bolster
the positive changes in the region that the UAE and Dubai were
working to foster.

--Minimize the rhetoric, particularly that which can't be
supported in reality: He urged the new USG to be very careful
about its tone and language in how it addresses the region's
publics. In essence, he counseled "be positive and seek not to
appear belligerent, and don't write checks with statements that
can't be cashed with resources."

--Minimize the ideology: He talked at length about the generally
positive view of Americans, American education, and society held
on a "personal basis" by many in the Gulf, but that the
"ideology of recent years has eclipsed this" in creating
negative feelings about the US

--Avoid another war: He underscored that a US military conflict
with Iran would have devastating effects on the region and its
economy, and undermine long-term US interests throughout the
region. He lamented his previous support for the US incursion
into Iraq, noting, "with respect, I underestimated the
challenges and overestimated the ability of the US and coalition
to meet them."

--Keep the up front-burner engagement to resolve the
Arab-Israeli dispute: Gargash again criticized himself for
previously downplaying the centrality of the issue to regional
stability, and urged the members to support the new
administration following on the "stepped up US engagement of
recent months. You must lead."

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Comment

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11. (U) The issue of sovereign wealth funds and private equity
in general is an increasingly important component of US-UAE
relations. With record oil prices leading to increasing amounts
of financial liquidity - the GCC will provide an estimated 18
percent of global capital exports in 2008 - private equity will
continue to be an important investment vehicle for governments
in the region. Dubai will be less directly affected by the
increased oil liquidity, but inflows of private equity will
nonetheless remain an important component of Dubai's
international investment strategy.


12. (U) Codel Gutierrez did not clear this message.
SUTPHIN