The investment comes at a time of increasing pressure on international banks caused by the contraction of the global credit markets, which has forced many leading institutions such as Citigroup to cut billions of dollars of value from their balance sheets. At the same time, sovereign wealth funds in the Gulf have a surplus of available capital because of the increase in oil revenues from high energy prices.
Adia, which is thought to have up to $1 trillion under management, has traditionally been secretive about its investments. But the $7.5bn provided to Citigroup on 26 Nov-ember was uncharacteristically public. The loan, at an interest rate of 11 per cent, can be converted into shares equivalent to 4.9 per cent of Citigroup.
The investment could make Adia the largest single investor in the bank, overtaking Saudi Arabia’s Prince Alwaleed bin Talal al-Saud, who holds a 4 per cent stake.
Adia is expected to make further headline-grabbing investments as it seeks to dispose of huge oil-related surpluses, say analysts. The investments are expected to be large as the fund needs to spend surplus cash but does not have the capacity to manage numerous small investments.
“We will definitely see more big-ticket deals from Adia,” says Giyas Gokkent, head of research at National Bank of Abu Dhabi (NBAD).
The total value of investments made in 2007 is expected to be higher than in previous years, driven by increased oil receipts. NBAD estimates capital outflows from the UAE will total as much as $48bn this year, up from $40bn in 2006. “We can assume most of this is attributable to Adia,” says Gokkent.
The size of the investment and Adia’s choice to invest in Citigroup, the world’s largest bank by assets, has also been seen as a statement of support for the US. It has been made without the controversy that surrounded DP World’s purchase of US ports, via its takeover of P&O in 2006.
“This is first and foremost a hard-headed financial decision, but there is likely to be a strategic side to it as well,” says Tristan Cooper, an analyst at ratings agency Moody’s Investors Service.
“It is a tie-up between the UAE’s largest investment fund and the largest US bank, so it strengthens political bonds between the two countries.
“This is also a good opportunity to repair some of the damage sustained by the UAE during the DP World episode. The Citigroup purchase seems to have received a much more sympathetic reaction from power brokers in the US.”
Adia’s timing mimics that of Prince Alwaleed, who bought his stake in 1991 when the bank was suffering from losses in Latin America. Their two investments mean GCC investors now effectively own almost 10 per cent of the bank.
Citigroup is supportive of the deal. “This investment, from one of the world’s leading and most sophisticated equity investors, provides further capital to allow Citigroup to pursue attractive opportunities to grow its business,” says Win Bischoff, acting chief executive officer.
The fund is expected to remain a passive investor in Citigroup. It will not have voting rights, a seat on the board or control over management decisions at Citigroup.
“It is a fund for future generations. It does not want to run companies. It wants to invest in companies that will generate a good return. The strategy is to buy exposure to blue chip economies and blue chip companies,” says Gokkent.
Although Adia is the largest of the GCC sovereign wealth funds, investments from Dubai and Doha have most often captured international attention.
“There is inevitably a sense of rivalry between sovereign wealth funds in the region and the more aggressive stance of up-and-coming funds such as the Qatar Investment Authority or the Dubai-based funds, which seems to be prompting a bolder approach from more established funds such as Adia,” says Cooper.
Adia’s latest transaction will help to raise the profile of Abu Dhabi, which is keen to promote itself to a wider audience.
The emirate recently launched the Office of the Brand of Abu Dhabi, which will conduct a series of workshops in early December to explain to local organisations about the new brand for the emirate, which has been in development for the past two years.
Among the other known holdings of Adia is a stake in US private equity firm Apollo Management, which owns stakes in real estate firm Realogy and casino operator Harrah’s Entertainment.
Adia bought a 9 per cent stake in the company in November. However, it has traditionally either heavily invested in gov-ernment securities or bought stakes in companies via portfolio investments.
Adia was not available for comment.