Bloomberg rocks table at Istithmar's delicate game

Dubai World has become the litmus test for the future of Dubai Inc, in the wake of the financial crisis.

Dubai World (DW) has become the litmus test for the future of Dubai Inc. The state-owned conglomerate, with interests ranging from ports to property and investment, certainly symbolises the past business achievements of the emirate, but increasingly has come to encapsulate the acute problems facing Dubai in the wake of the financial crisis. With its US$60 billion (Dh220.38bn) of debts and liabilities, DW accounts for the bulk of Dubai's admitted $80bn debts (though many analysts believe the total is higher); the $3.5bn sukuk held by DW's subsidiary Nakheel, due for repayment in December, is regarded in international financial circles as the single most urgent issue Dubai has to resolve.

Now further questions have been cast over the conglomerate. A report by Bloomberg this week on Istithmar World, DW's international private equity arm, alleged that the fund is under severe financial pressure, going further than any previous assessment of DW's problems. It says Istithmar may become the first sovereign wealth fund to liquidate in the face of falling asset values, and that it, or its assets, will "probably" be sold in order to help DW repay its debts, estimated at $12bn or more.

DW advisers were privately furious at the Bloomberg report, partly because it was written from New York and partly because it relied for its sourcing on anonymous "people briefed on the matter" as well as a former Istithmar executive turned whistle-blower, Chris Turner. The report was inaccurate, misleading and speculative, they said. The problem was that Istithmar essentially resorted to the same methods to rebut the claim: it was impossible to get them to respond to Bloomberg on the record, which rather defeats their case. If DW rubbishes Bloomberg because it has relied on anonymous sources, and then itself retreats behind anonymity in response, it loses the high ground.

To the substantive issues of the Bloomberg report, that Istithmar might liquidate and that there was some kind of "fire sale" of assets under consideration, a DW spokesman came out with this: "Istithmar World underlines that it is a privately-held investment house and is one of DW's key subsidiaries, actively managing a portfolio of investments world wide, and will continue to be a key subsidiary into the future." That is a less-than-wholehearted commitment to Istithmar's future.

There is a delicate game being played here between DW and its banker creditors. If it admits openly it is considering a distressed disposal of assets, it will damage the value of those investments. If on the other hand it asserts publicly that it will sell nothing, its creditors, desperate for some sign that they will get their money back, will lose heart and might pull the plug. The position of Mr Turner as a reliable source is also questionable. He has left Istithmar and is now in Europe, unlikely to return to the UAE, where the courts are considering charges of embezzlement against him. Does this invalidate him as a "disaffected former employee", or give him extra credibility as a key witness whom DW is trying to gag by means of a legal action?

It is impossible to say, but it highlights the need for Istithmar to make its case more aggressively, more publicly, but also more transparently. For what it is worth, here is my take on the Istithmar situation. In the good years before the crash, spurred on by the extravagant global ambitions of Dubai Inc, it leveraged aggressively to buy international assets, investing a mere $2.5bn to purchase $27.5bn of assets. That level of leverage was not then unusual in the private equity industry.

Some of these investments were in "trophy" assets of highly volatile value, like a Las Vegas leisure development, a Caribbean supermarina and a Canadian travelling circus; others - the US retailer Barney's, Manhattan hotels, the QE2 cruiseship, stakes in US investment boutiques - were especially vulnerable to the effects of an economic downturn, such as the one seen in the past year. In these circumstances, then of course Istithmar is considering restructuring its portfolio, even selective disposal of assets. All private equity groups are being forced to do the same. But it would be crazy for Istithmar to contemplate a wholesale distressed disposal programme of these assets, especially when the global economic situation is improving. Whether it will improve quickly enough, especially for Istithmar's unbalanced portfolio of baubles, is a big variable.

The other key point is this: as chief executive of Istithmar, David Jackson was the man in charge of this essentially flawed investment strategy. You could argue that alone makes his position untenable in the long term. Whatever happens, his job has changed, from the supervision of global expansion, to retrenchment and restructuring. [e-mail]