Abu Dhabi sovereign wealth funds begin to open up

17 February 2010

As the emirates’s sovereign wealth funds engage more with global markets, they are slowly becoming less secretive about the details of their finances and investments

With its ownership of 9 per cent of the world’s oil reserves, Abu Dhabi commands huge wealth, conferring political power upon its ruler, Sheikh Khalifa bin Zayed al-Nahyan, through his presidency of the UAE federation. When Dubai’s economy started to teeter in December last year, due to the inability of some of its state-owned companies to repay their loans on time, it quickly became apparent that its economic survival depended on the beneficence of its larger, wealthier neighbour.

Abu Dhabi’s support for Dubai shifted the spotlight onto the extent of Abu Dhabi’s wealth and its strategy for preserving it. Given the emirate’s growing financial clout in the region and globally, its long-standing reticence to divulge the details of its finances and investments has raised questions about the operations of its numerous investment bodies.

Although public disclosure is unusual for the Abu Dhabi authorities, they are showing signs of opening up. In January Sheikh Ahmed bin Zayed al-Nahyan, managing director of the Abu Dhabi Investment Authority (Adia), the primary vehicle for the management of the emirate’s funds, gave a rare interview to the German financial newspaper Handelsblatt, in which he revealed some of the organisation’s aims and strategies.

Sheikh Ahmed stated categorically that Adia “does not disclose its assets under management”, but the fund is widely believed to be the largest in the world. The Sovereign Wealth Fund Institute, a US-based research group, estimates the value of its holdings at $627bn.

Many analysts believe this is considerably lower than its wealth prior to the global recession that began in 2008. Sheikh Ahmed demurred at such suggestions and said Adia raised its liquidity levels as the equity markets came off their peak, subsequently increasing its exposure once again when the economic conditions started to show signs of improvement.

These actions, he said, allowed Abu Dhabi to beat its own performance expectations.

But, regardless of the fund’s precise value, the fact that its wealth is underpinned by oil earnings means that Adia’s financial strength as a major global institutional investor, cannot be doubted.

In Sheikh Ahmed’s words, Adia’s sole mission, from which it has not deviated in its 33 years of operating, is to “secure and maintain the current and future welfare of the emirate of Abu Dhabi”. It is, in effect, its trust fund. As such, it has always adopted a conservative investment position, which is focused on long-term trends, rather than the ups and downs of individual cycles.

It typically takes stakes of less than 5 per cent in listed companies. In this way, it avoids disclosure clauses. As Sheikh Ahmed stated in his recent interview, “public attention is not a factor in our investment strategy”. As a matter of policy, Adia does not seek a board role at companies it invests in, nor does it exercise its voting rights.

Under this conservative, long-term focus, equities make up about 60 per cent of Adia’s portfolio. The bulk of its remaining investments are in fixed income assets, with limited exposure to real estate, private equity and alternative investments.

Different focus

Adia has been the mainstay of Abu Dhabi’s savings and investment portfolio since 1976 but, in recent years, the government’s investment strategy has matured, resulting in the creation of numerous other investment vehicles.

Not only do these other organisations have a different investment focus, they also have a greater appetite for risk. These newer funds are seeking to maximise returns, rather than just ensure a guaranteed investment.

In 2002, the government established the Mubadala Development Company. Mubadala’s investment strategy is designed to help the emirate diversify its economy away from oil and into industry and services. Its focus is primarily domestic, with an emphasis on supporting Abu Dhabi’s development.

Because it needs to attract foreign expertise to Abu Dhabi, its investment focus is heavily strategic. This results in greater financial risk in return for longer-term strategic gains. Hence its decision to invest in 2005 in Italian luxury car Ferrari, in order to help secure the emirate’s hosting of the Formula 1 Grand Prix in November last year.

Its earlier acquisition of a slice of Dutch car-maker Spyker also now gives it a stake in Sweden’s Saab in the wake of Spyker’s acquisition of Saab in February this year. Its partnership deal in 2008 with US conglomerate GE has provided for joint ventures in areas including commercial finance, clean energy research and development and aviation. In 2006, the Abu Dhabi Investment Council (Adic) was created. It is charged with “investment of funds allocated by the government of Abu Dhabi for investment projects in and outside the emirate”. Its remit combines those of Adia and Mubadala, and it also plays a role in shaping investment policy. Sheikh Khalifa chairs the body. In 2008, Adic purchased the Chrysler Building in New York – a high-profile move distinct from the kind of investment that Adia typically makes.

The diversification of Abu Dhabi’s investment strategy has not solely rested on the type of its investments but also on geography. In the political backlash following the 9/11 attacks on the US, Gulf investors’ appetite for Western markets, in particular the US, declined, and there was significant divestment of Arab funds out of the US. That said, the bulk of Adia’s investments – up to 80 per cent – remain in Western markets. Despite the global downturn, Sheikh Ahmed has said that there is “significant, long-term investment potential in the US and Europe”, emphasising that “US treasuries are still the most liquid benchmark bonds in the world and will remain an important diversification tool”.

But Abu Dhabi’s various funds also remain positive on the outlook for emerging markets, particularly those in Asia. These markets satisfy some of the newer funds’ greater appetite for risk.

With China now the region’s largest energy customer, the Abu Dhabi authorities understand that investing in Asia not only looks more profitable, but also makes business sense. Adia is following the likes of Istithmar, a Dubai government-managed investment firm, which opened an office in China in 2007, and the Qatar Investment Authority, which is in the process of doing so.

Adia, through one of its subsidiaries, Invest AD, a fund manager, is looking to form partnerships with Asian entities, not only to take advantage of investment opportunities in the Far East, but also to attract Asian investors and funds to Abu Dhabi.

Abu Dhabi’s robust economy – oil income is expected to rise to about $50bn this year compared with $38bn in 2008 – and its strong revenues will ensure continuous and significant flows of funds into the emirate’s investment vehicles. Abu Dhabi’s oil funds are channelled through the Abu Dhabi National Oil Company (Adnoc) and its various subsidiaries. They pay dividends to Adia and Adic, which receive 70 per cent and 30 per cent respectively of any budget surplus.

Despite Abu Dhabi’s sound economic fundamentals, credit ratings agencies are showing increased caution towards state-owned entities in the region in the wake of the Dubai debt crisis of the past three months, which centred on Dubai World. Abu Dhabi’s sovereign rating is itself not in doubt; all three main agencies – Moody’s Investors Service, Fitch Ratings and Standard & Poor’s (S&P), accord it an AA rating.

Historically, state-owned companies throughout the Gulf have operated under an implicit sovereign guarantee, which suggested that they would be bailed out by the government, should the need arise. Accordingly, the credit rating agencies factored this into their ratings assumptions. But this blanket guarantee has now been called into question.

Ratings reassessed

In December last year, Moody’s warned that it might reduce the ratings of a number of government-owned companies if it was not convinced of the state’s unstinting support and consequently placed the credit ratings of key state entities under review.

Neither Mubadala nor the International Petroleum Investment Company (Ipic), Abu Dhabi’s oil and gas investment company, escaped Moody’s reassessment. Other government-related issuers put on review included the Abu Dhabi National Energy Company (Taqa), Aldar Properties, Dolphin Energy, and the Tourism Development & Investment Company (TDIC). Moody’s clearly views the Dubai crisis as a shock to the system, which undermined the key pillars of its sovereign ratings assumptions.

“The main question that the Dubai World episode has raised is: how much weight should we give in our government-related issuer ratings to a verbal assurance of support from a government in the absence of any explicit guarantee?” says Tristan Cooper, head analyst for Middle East sovereigns at Moody’s.

Andrew Rae, a partner at UK law firm Trowers & Hamlin in Abu Dhabi, acknowledges Moody’s reservations and admits there is a lack of clarity about whether a sovereign guarantee is implicit or has to be explicitly stated.

However, he says that there are instances where the Abu Dhabi government does give explicit guarantees.

While there is no concern about the ability of Abu Dhabi to support any given project, there is evidently concern, much of which stems from its persistently opaque approach.

However, a lawsuit filed by Adia in December 2009 against US’ Citibank for fraud, following Adia’s $7.5bn investment in the ailing US bank in 2007, could to lead to some light being shed on its activities.

Adia accuses bank executives of “fraudulent misrepresentations” in the light of the subsequent problems at the bank and its bail-out by the US government.

The lawsuit will not induce a sea change in Abu Dhabi’s traditionally closed business culture. But the richer Abu Dhabi becomes, the more it is going to have to get used to being in the global spotlight.

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