Adia expects continued investment opportunities despite global challenges

Sovereign wealth fund is bullish on green transition, private credit and advanced technology

Abu Dhabi Investment Authority building in Abu Dhabi. The fund has undertaken "substantial efforts over recent years to increase its investing flexibility and operational agility paid dividends". The National
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Abu Dhabi Investment Authority (Adia), one of the world's biggest sovereign wealth funds, expects continued investment opportunities, despite rising inflation and higher borrowing costs globally.

The fund is also focusing on the effect that climate change will have on the investment landscape and the opportunities that it presents, Adia said in its 2022 annual report on Tuesday.

“On a fundamental level, it is clear that the era of low inflation and cheap money that propelled risk assets higher following the global financial crisis has drawn to a close,” Sheikh Hamed bin Zayed, Adia's managing director, said.

“Investors will now be required to navigate a less benign landscape marked by higher inflation and borrowing costs. This situation presents both challenges and opportunities.”

Adia, which does not disclose its assets, invests on behalf of the Abu Dhabi government.

It is the largest sovereign wealth fund in the Gulf and the fourth-largest in the world, with estimated assets of $993 billion (equivalent to 320 per cent of Abu Dhabi's gross domestic product), credit rating agency DBRS Morningstar said last month, citing data by Global SWF.

Adia makes direct and indirect investments across asset classes such as equities, fixed income, infrastructure, private equity and property.

As of December 31, 2022, Adia’s 20-year and 30-year annualised rates of return, on a point-to-point basis, were 7.1 per cent and 7 per cent respectively, compared with 7.3 per cent and 7.3 per cent in 2021, it said in the report.

“The dominant theme of 2022 was the return of inflation, after more than a decade of stagnant or declining prices,” Sheikh Hamed said.

“In addition to pent-up demand following the global pandemic, energy prices and supply chain dislocations further accelerated the trend.”

Inflation has continued to remain high in many countries across the globe, forcing central banks to tighten monetary policy.

The US Federal Reserve hit a pause on interest rate increases last month, after raising rates 11 times since March last year after prices hit a four-decade high in June 2022.

The Fed has hinted that there could be another rate increase by the end of the year as it seeks to tame inflation amid higher commodity prices and supply chain challenges.

While equities and bonds were hit hard by the policy moves last year, Adia’s “substantial efforts over recent years to increase its investing flexibility and operational agility paid dividends, enabling it to make swift portfolio adjustments as market conditions evolved during 2022,” Sheikh Hamed said.

“Adia was also successful in capturing pockets of absolute return across asset classes, underlining the value of its diversified portfolio in a year where equities and bonds experienced an atypical correlation.”

In 2022, Adia’s equities department complemented its existing risk exposures in preferred markets by allocating additional capital to high turnover strategies with low volatility.

China is likely to be a key focus in 2023 in equities as it emerges from pandemic lockdowns, while markets that were particularly affected last year, such as the UK may provide opportunities, it said.

Adia’s Private Equities Department commitment to new capital in 2022 was divided roughly equally between direct investments and funds, alongside an increased allocation to secondaries. In total, the Department completed 24 direct investments of more than $150 million across its core regions and sectors of specialisation, in line with 2021.

In Industrials, PED supported the merger of MHS Global and Fortna, which created a market leader in e-commerce and logistics automation. It also completed other deals in markets like China and India.

“Looking ahead, PED is positioning for the continued growth of private equity markets including private credit as an increasingly important alternative to traditional bank lending,” Adia said.

“In keeping with its mandate, PED will continue to support its existing platform investments by funding opportunistic tuck-in and transformative acquisitions. It will also pursue new attractive risk/ return opportunities across its focus sectors and geographies, leveraging its close partnerships and its ability to act as a provider of capital solutions at scale.”

In the real estate sector, Adia focused on assets with strong fundamentals and increased its exposure to data centres in China, India and the wider Asia-Pacific.

It also sought to capitalise on “mispricing in public securities globally,” where long-term operational fundamentals and secular trends remain intact.

The fund also continued to support investments in sectors with robust operating fundamentals, such as residential rentals, where rent growth remained strong.

Looking ahead, Sheikh Hamed cited reports that estimate that $3 trillion worth of investment is needed in infrastructure projects to support global economic growth and provide citizens with essential services.

“Importantly, this includes ventures aimed at accelerating the energy transition,” he said.

Global investments in energy transition technologies must quadruple to $35 trillion by 2030 to stay in line with commitments made under the Paris climate agreement, according to a report by the International Renewable Energy Agency (Irena).

Adia said it aims to boost collaboration between global institutional investors on energy transition.

“Adia’s prioritisation of this issue is closely aligned with that of the UAE as a whole, as demonstrated by the country's role as host of the 2023 UN Climate Change Conference, also known as Cop28,” Sheikh Hamed said.

Cop28 runs from November 30 to December 12 at Expo City Dubai where leaders will gather to tackle the escalating climate emergency with the UN stating the world remains off track to limit temperature rises to 1.5°C.

Adia is also bullish about opportunities in the technology sphere as countries focus on the digitisation of their operations from production to distribution and consumption.

“We have always believed that change and uncertainty are core features of the investing landscape and should be welcomed, rather than feared,” Sheikh Hamed said.

“We are enthusiastic about the opportunities that lie ahead, and in our ability to continue to deliver on our mission long into the future.”

Updated: October 10, 2023, 6:24 AM