Wealth funds draw profits and attention

In the years following the birth of the nation in 1971, the Government created a rainy-day fund, the Abu Dhabi Investment Authority (Adia).
The Abu Dhabi Investment Authorities headquarters dominates the Corniche, burning brightly at night. Solar-powered blinds close during the day to keep the 1,000 employees cool.
The Abu Dhabi Investment Authorities headquarters dominates the Corniche, burning brightly at night. Solar-powered blinds close during the day to keep the 1,000 employees cool.

Three-hundred and fifty-one million dollars a day: that is roughly how much money Abu Dhabi's oil and gas fields generate with crude at the price it is these days. It is the source of the emirate's increasing prosperity, funding the lion's share of a growing federal budget and a multibillion-dollar development plan. But it has also become part of a wider controversy as those funds have helped make Abu Dhabi one of the world's richest and most powerful investors.

In the years following the birth of the nation in 1971, the Government created a rainy-day fund, the Abu Dhabi Investment Authority (Adia), to invest the windfall revenues from the price shocks caused by the Arab oil embargo in 1973 and the Iranian revolution six years later. When oil prices dipped in the 1980s and 1990s, the Government was able to help pay its expenses with proceeds from the fund.

With oil's flight upwards in the past few years, however, the ebb and flow of oil earnings has become a one-way torrent. Adia has swollen to the point that it is now widely acknowledged as the world's biggest sovereign wealth fund, with estimates of its assets ranging above US$500 billion (Dh1.8trillion). Other wealth vehicles have sprung up to help invest the deluge, while still more Government-run institutions are pitching in to help invest Abu Dhabi's rising income.

"The surplus has just mushroomed," said Charles Seville, an analyst at Fitch Ratings in London. "That's why these sovereign wealth funds are on the agenda now. They just get bigger and are growing faster than the overall stock of financial assets in the world." There are at least eight Government-owned or Government-controlled institutions now investing sovereign funds on behalf of Abu Dhabi. Far from just trying to drive up short-term gains, most share the goal of securing the long-term prosperity of the emirate, whether by providing nest eggs for retirement, securing long-term supplies of food and energy, promoting the development of new industries that create skilled jobs and reduce Abu Dhabi's dependence on oil, or just amassing endowments.

"In many cases, we depend on long-term investments because we believe that our investments are part of our commitment to future generations, which may not have the same resources available now," Sheikh Khalifa bin Zayed, President of the UAE and Ruler of Abu Dhabi, said in a recent interview with the Lebanese newspaper, Al Nahar. "That is especially true if one takes into consideration that oil resources are depleting and global demand on energy is on the rise."

Most of the funds reveal only rudimentary information about themselves. This has intensified an international debate over the growing influence of sovereign wealth funds from the Gulf, East Asia and Russia, particularly in the wake of high-profile investments such as Adia's $7.5bn purchase of a 4.9 per cent stake in Citigroup last year. Some in the West resent the funds because they have been built with trade surpluses generated from heavily indebted nations such as the US and Britain, and seem to them harbingers of a new and unwelcome global order. Others see the funds as potential Trojan horses, economic war engines that could be used by their owners to achieve political ends.

Advocates of the funds, however, see their very existence as a testament to responsible fiscal policies in these emerging economies. To the global economy, their supporters argue, sovereign wealth funds are also important pillars of support, particularly amid the current global financial turmoil. Supporters point out that their investments have helped keep heavily indebted nations like the US and Britain afloat. The funds' typical strategy of investing in small, passive holdings for long periods makes them desirable shareholders, they say. They are calling for the sovereign funds to ward off critics by adopting a set of voluntary investment principles that includes a pledge not to use their investments for political purposes, an effort that Abu Dhabi and Adia support.

"The sovereign funds operate according to economic principles, not political considerations," Sheikh Khalifa said in the recent interview. "We have made that clear to our partners in international markets. We work in accordance to investment opportunities available to us in all markets." Abu Dhabi's funds reveal the difficulty of generalising. While nearly all have a track record of reticence, no two are exactly alike. Some are passive shareholders, others hands-on investors. What is certain is that as Abu Dhabi's resources grow and inflation here accelerates, the pressure on the funds to find investments big and bold enough to outperform will only rise.

More than four-fifths of Abu Dhabi's income, according to the International Monetary Fund (IMF), is derived from one source - the Abu Dhabi National Oil Company (Adnoc) and the 14 companies under its umbrella. Adnoc does not publish financial statements, but is estimated to pump about three million barrels of hydrocarbon liquids every day, an amount that at current prices adds up to about $128bn a year. Under the terms of concessions that date back 75 years, Adnoc pays the joint venture partners at its concessions - companies such as BP, Mitsui, Shell and France's Total - $1 a barrel, regardless of oil's price on the market. After paying its own costs, Adnoc then pays an undisclosed dividend to two of Abu Dhabi's largest funds, according to Fitch - 70 per cent to Adia and 30 per cent to its newest fund, the Abu Dhabi Investment Council. Analysts say Adnoc's costs are low, and that its royalties, taxes and dividends could represent up to 95 per cent of its gross revenues.

Adnoc's joint ventures also pay royalties and tax to the Government, with two of the companies - the Abu Dhabi Gas Liquefaction Company (Adgas, a joint venture between Adnoc, Mitsui, BP and Total) and Abu Dhabi Gas Industries (Gasco, a venture with Shell and Total) - paying what would appear to be the only income tax in a nation known for not having one. All told, the Government collected Dh157.1bn in oil-related revenues in 2006, more than quadruple the amount it earned from hydrocarbons in 2002.

Thanks to those surging oil revenues, the Government began posting increasing budget surpluses in 2004. By 2006, even after boosting spending by almost 50 per cent from 2002 and laying out Dh23bn in subsidies at home and transfers to the smallest emirates, Abu Dhabi rang up a Dh101bn ($27.4bn) surplus. With Abu Dhabi's booming economy already suffering from double-digit inflation, simply distributing the cash among the citizens is not an option - however appealing it may appear to the man on the street. Instead, the Government passes its surpluses to Adia and the investment council in roughly the same proportions as Adnoc does, according to Fitch. Abu Dhabi's other funds, with the exception of the pension fund, have to work with what funds they were given to start with, or can earn themselves.

The oldest of Abu Dhabi's Government funds also appears to be its smallest: launched by the late Sheikh Zayed bin Sultan in 1971, the fund for development says it today manages Dh4bn in assets. As its name suggests, the fund gives grants and loans to small projects in developing countries that promote poverty reduction, social equality or sustainable growth. It also makes direct equity investments and has so far invested in 52 countries in Africa, the Middle East, Central and South Asia. The ADFD was recently in talks with the World Bank on how to evaluate projects.

But the ADFD's investments go well beyond rural irrigation projects. It holds a majority stake in an Egyptian company that owns and operates three five-star Sofitel hotels. It is also investing in Sudan, where it is financing construction of a new dam and owns the country's presidential villas. Most recently, the ADFD announced that it was investing in farmland in northern Sudan to build up the UAE's strategic food reserves.

No visitor to Abu Dhabi can miss the Abu Dhabi Investment Authority - its new headquarters dominates the Corniche with an elegant architectural presence, a glass foil inspired by dunes and rippling sails. In the day, solar-controlled fabric blinds close like jasmine petals to reduce the cost of keeping its 1,100 employees cool; at night, the building's lights burn like house afire.

Down the Corniche, workers are still ripping the old office furniture out of the building that Adia occupied until last year. The discarded doors and desks are tossed in a heap on the steps outside. Adia has come a long way since 1976, when it was carved out of Abu Dhabi's old financial investments board, run under the Department of Finance by a British colonial officer. Adia made its first headlines with a bid for the Intercontinental hotel chain. But in the early 1980s, its investments in the US were largely conducted through the Arab Banking Corp, which it owned with Kuwait and Libya.

In 1984, Adia caused a mild stir when it bought nine per cent of Reuters, and again three years later when it bought a five per cent stake in the French oil company, Total. At one point, it owned a stake in the English football club, Manchester United. Over the years, Adia had been building up its expertise and sophistication. It started investing in managed futures in the mid-1980s and moved into private equity firms in 1989. Three years ago, it established an emerging markets department with a reported $30bn to invest, signalling an even more assertive strategy of chasing returns.

Ten years ago, Adia was believed to have between $100bn and $200bn in assets. Estimates of its size now start at about $500bn. In response to a reporter's question, which put the value of those investments in excess of $800bn, Sheikh Khalifa said ­recently: "I think the estimations you have mentioned are exaggerated and they do not reflect the truth and the size of Emirati investments abroad." Adia guards its silence. If nothing else, the authority has been renowned until recently for its low profile. Its website contained little more than a phone number and mailing address and its policy of taking only small and passive stakes in any companies enabled it to stay below the radar. Analysts who followed Adia resembled Kremlinologists, working from rumours and conjecture. They pored over a lone, 2006 interview with Adia's head of investment strategy, Jean-Paul Villain, a French banker. "What we know about some of their investments is the tip of the iceberg," said Emad Tinawi, the London-based vice president for the Monitor Group in the Middle East and North Africa. "Their investment strategy is one of the most protected secrets internally."

Things started to change last November, when Adia bought its stake in Citigroup. Sovereign wealth funds were put under the microscope and Adia - and Abu Dhabi - found itself being lumped together with other state investors such as China or Russia, whose strategies it could not vouch for. Earlier this year, under pressure from Washington and the EU, Abu Dhabi's director of international affairs, Yousef al Otaiba, wrote an open letter to the US treasury secretary and other Western financial officials, saying: "It is important to be absolutely clear that the Abu Dhabi Government has never and will never use its investment organisations or individual investments as a foreign policy tool." Adia has since taken a leading role in a working group at the IMF to create a set of voluntary principles for sovereign wealth funds.

Earlier this year, Adia granted the American magazine, BusinessWeek, interviews with several of its officials, including Adia's hands-on managing director, Sheikh Ahmed bin Zayed. The subsequent article revealed unprecedented details about Adia's asset allocations, including the revelation that roughly half of its funds are invested in stocks in the developed world, and that roughly 45 per cent of its funds are invested in North America.

What has also become generally known is that Adia outsources about 80 per cent of its funds to external managers. It will not divulge its returns, but various analysts and reports have concluded that it earns about nine to 10 per cent. Adia officials have revealed in interviews that they are uncomfortable investing much in the Middle East, because the region's markets are too small for such a large fund to invest in without creating a big wake - or a big vacuum if it wanted to sell. What has been less well publicised is that Adia last year hived off most of its domestic and regional portfolio to Abu Dhabi's newest fund, Abu Dhabi Investment Council, although the value of those assets is unknown. In April, Adia hired a public affairs manager and earlier this month it unveiled a new website that included both its board of directors, investment milestones and its organisational structure.

When Adia last year transferred its domestic assets over to the Abu Dhabi Investment Council, the Abu Dhabi Investment Company (Adic) was one asset that went with the package. Adic is now sometimes confused with its parent - the Council - as when news first broke that the Council was in talks to take a stake in Manhattan's Chrysler Building. Set up in 1977 as a Government-owned investment bank, Adic was for years known as the investment arm of Adia. The company is now trying to move from proprietary trading for the Government to investing and managing third-party assets.

It has some impressive selling points. Adic set up Abu Dhabi's first 24-hour foreign exchange trading desk in 1994 and still operates one of the busiest trading floors in the Gulf, moving up to $2bn worth of trades daily, according to the company. Last year, it set up its own hedge fund and earlier this year, it created a joint venture with UBS to create funds investing in infrastructure in the Middle East and North Africa. Still, Adic also has a role as a granary for Government assets and is believed to manage a portfolio worth more than $2bn. Its holdings include the local brokerage, National Financial, and a district cooling plant in Musaffah.

Adia and Adnoc set up the International Petroleum Investment Company, or Ipic, in 1984 to invest in oil and related investment outside the emirate. Ipic's 80 employees oversee a $13bn portfolio of petroleum assets that includes exploration and production rights in 11 countries and an estimated $1.35bn from the downstream sector, including six refineries - a portfolio that it says earns 12 to 14 per cent a year. It holds, for example, 70 per cent of South Korea's fourth-largest refiner. Mohammed bin Dha'en al Hamili, Ipic's chairman and the minister of energy, sits on Hyundai Oilbank's board of directors, along with two other Ipic officials. Yet Ipic says it typically does not participate in the day-to-day management of companies it invests in, "except in exceptional circumstances". Despite its mandate to invest abroad, Ipic's best known project is the Abu Dhabi Crude Oil Pipeline, or Adcop. The pipeline will pipe crude from Abu Dhabi's port at Habshan 370km to Fujairah, enabling Abu Dhabi's oil exports to bypass the Strait of Hormuz, a chokepoint of the global oil trade.

The Abu Dhabi Retirement Pensions and Benefits Fund is one of the recent additions to the emirate's constellation of Government-run funds. Set up in 2001 as a forced savings scheme along the lines of Singapore's central provident fund, this fund provides pensions for women over 55 and men over 60. While its size is unknown, it collects 26 per cent of whatever any Emirati working in Abu Dhabi earns, five per cent from the employee, 15 per cent from his or her employer and another six per cent from the Government. In 2005, according to the IMF, the Government contributed Dh6.2bn to the fund, which would suggest it is supplying the fund with far more than its share of what Abu Dhabi's resident Emiratis earn. The fund invests these savings in stocks and bonds around the world and while it will not disclose its returns, it says it has outperformed its own benchmark.

Although relatively small compared with its eldest sibling, Mubadala has managed to rise to prominence through a series of attention grabbing investment activities, including having a hand in launching this newspaper earlier this year.

Mubadala was created in late 2002 with a mandate to help diversify Abu Dhabi's economy by investing in new, hi-tech industries such as aerospace, infrastructure and health care, and areas that can promote the emirate's development, such as property, hospitality and services. While Adia's investment behaviour may resemble a large public pension fund, stressing diversification of risk with an appetite for meatier private equity deals and high-yielding securities, Mubadala has emerged as a private equity-cum-venture capitalist.

"Mubadala ? is willing to take controlling interests in companies in which they're investing," said Mr Tinawi at Monitor. "It has a much more dynamic outlook on their investments." Under the leadership of Khaldoon al Mubarak, who rose up from one of Mubadala's subsidiaries to become its chief executive in early 2005, Mubadala has grown fast, with nearly 500 employees. And while it, too, does not disclose the value of its assets, Mubadala is estimated by various estimates to manage approximately $10bn in assets. It has made a few high-profile investments, including its five per cent stake in the luxury sports car maker, Ferrari. Last year, it caught the attention of Americans with its $622 million purchase of an 8.1 per cent stake in the computer chip maker, AMD, and its $1.35bn purchase of a 7.5 per cent stake in the private equity giant, Carlyle Group.

But most of Mubadala's investments are right here at home, including the port operator, Abu Dhabi Terminals, the Abu Dhabi Future Energy Company - the company behind the clean-energy Masdar Initiative - and a planned resort with MGM Mirage. It owns 51 per cent of Dolphin Energy, which pipes natural gas to Abu Dhabi from Qatar, and 50 per cent of Emirates Aluminium, which is building the world's largest aluminium smelter in Al Taweelah, where Dolphin's Qatari gas lands.

The Abu Dhabi National Energy Company, better known by its nickname Taqa (Arabic for "energy"), was established just two years ago by the Abu Dhabi Water and Electricity Authority (Adwea). Adwea endowed Taqa with majority stakes in six power stations that combined to provide Abu Dhabi with 85 per cent of its electricity and water. The next month, Taqa raised another Dh600m by selling a 24.9 per cent stake to Emirati investors.

The next year, Taqa recruited a new chief executive, Peter Barker-Homek, to oversee a new mission: to invest in energy and infrastructure where, as its website says, "the Emirate of Abu Dhabi has meaningful political and economic strategic interests". A former US Marine pilot and BP mergers and acquisitions executive, Mr Barker-Homek wasted little time in launching Taqa on a $10.4bn investment tear, putting $200m into the Carlyle Infrastructure Fund, paying $550m for North Sea oilfields from Talisman Energy, and another $694m for BP's Dutch exploration and production subsidiary, BP Nederland, now called Taqa Energy.

Mr Barker-Homek was just warming up. Four months later, Taqa paid $900m for the African, Middle Eastern and South Asian assets of CMS Energy and ABB. Taqa waited three more months until August and then began a Canadian shopping spree, shelling out $2bn for Canada's Northrock Resources, owner of one of Canada's 10 largest natural gas reserves, and changed its name to Taqa North. As a side dish, it paid $540m for the oil driller, Pioneer Canada. But the piece de resistance came in September. Just days after Mubadala announced its $1.35bn investment in Carlyle, Taqa weighed in with the $5bn purchase of the Canadian oil and gas producer, PrimeWest Energy Trust.

Just don't call it Adic. The Abu Dhabi Investment Council prefers to be known as "the Council" rather than by the acronym of its subsidiary, the Abu Dhabi Investment Company. And if there were any doubts that the Council would have the heft to dictate its own nickname, it put them to rest this month when news broke that it had purchased a substantial stake in Manhattan's iconic Chrysler Building.

The Council's sudden interest in New York property raised almost as many eyebrows in Abu Dhabi as it did in New York. When the Council was created by a new law in 2006, many people concluded that it was intended to relieve Adia of its domestic and regional portfolio - a portfolio that, for reasons described above, Adia was not so excited about anyway. That is not how the Council sees it, however. It may be much smaller than Adia, but it clearly has big ambitions. "The Council is responsible for investing part of Abu Dhabi Government's surplus financial resources through a globally diversified investment strategy targeting positive capital returns through an expansive portfolio comprising highly diversified asset classes and active investment management strategies," the Council wrote in response to queries about its role. This mission statement does not clearly distinguish it from Adia.

But according to media reports at the time the law creating the Council was promulgated, it is not only mandated to carry out investments inside the emirate that were previously made by Adia, but to invest at home and abroad, and even to lay down investment policies. Whether the Council's foray into Manhattan will sit well with Americans or whether it will become the modern-day equivalent of Mitsubishi's purchase of the Rockefeller Center 19 years ago - a lightning rod for American economic xenophobia - remains to be seen.

"The thing that surprised me about it is that is that it's a very high-profile building," said Mr Seville at Fitch. "I don't know why they'd want to attract that kind of attention." @Email:warnold@thenational.ae

Published: July 13, 2008 04:00 AM

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