Part 14 Abu Dhabi Investment Authority--Reimaging the State in the Global Sphere: An Inventory of Sovereign Wealth Funds as Regulator and Participant in Global Markets

(Pix (C) Larry Catá Backer 2014)

This Blog Essay site devotes every February to a series of integrated but short essays on a single theme. For 2014 this site introduces a new theme:  Reimaging the State in the Global Sphere: An Inventory of Sovereign Wealth Fund as Regulator and Participant in Global Markets.

There have been a number of studies that have sought to provide an overarching structure for understanding SWFs. The easiest way to to this is to find the largest and most influential funds and then extrapolate universal behaviors or characteristics from them.  This is a useful enterprise, it may erase substantial nuance that itself might provide the basis for a deeper understanding of SWFs within globalization and in the context of a state system in which not all states are created equal.  In this sense, while the large SWFs are better known, they do not define the entire field of emerging SWF activity. This study provides a brief critical inventory of the emerging communities of sovereign wealth funds. Each post will consider a different and less well known SWF.  Taken together, these brief studies might suggest the character and nature of the emerging universe of SWFs, and their possible rationalization.

This Post considers the Abu Dhabi Investment Authority.

Like a number of other SWF, the Abu Dhabi Investment Authority (ADIA) is one of several SWF organizations that manages several distinct funds, each differentiated from the others by objective and investment strategy, within the United Arab Emirates. This functional division also reflects the political organization of Abu Dhabi. Similar to the United States the United Arab Emirates has multiple sovereign wealth funds, each run by their respective emirate. Started in 1976 the Abu Dhabi Investment Authority (ADIA) is the first and largest of the UAE funds with an estimated value of $627 billion (Sovereign Wealth Fund Institute). Following the ADIA, the Investment Corporation of Dubai is the second largest with $70 billion in assets (SWF Institute Dubai), followed by the Mubadala Investment Company (Abu Dhabi) with $56 billion in assets (Mubadala). "In 2002, Mubadala - the Arabic word for ‘exchange’ - was established by the Government of Abu Dhabi as a principal agent in the diversification of Abu Dhabi’s economy."  (Mubadala Overview).  In addition to these funds there are multiple other funds totaling less than $10 billion. In 2007 the UAE established the Emirates Investment Authority which is the first and only national level sovereign wealth fund (EIA). This post considers only the ADIA and to a lesser extent Mubadala.

Governance: The ADIA’s Board, Managing Director, and Chairman are all appointed positions as directed by the decree of the Ruler of the Emirate. The duties of the Board are “The Board holds primary responsibility for the implementation of ADIA's strategy in accordance with Law (5) of 1981 of the Emirate of Abu Dhabi. It also oversees ADIA's financial performance and the activities of management. The Board does not involve itself in ADIA's investment and operational decisions, for which the Managing Director is responsible under the law" (Governance). The Investment Committee is the organization tasked with investment function of the fund and is chaired by the Managing Director. Supporting the governance framework are five committees: The Strategy Committee, The Audit Committee, The Risk Management Committee, The Investment Guidelines Committee, and the Management Committee. As noted on its corporate website “ADIA carries out its investment programme independently and without reference to the Government of the Emirate of Abu Dhabi or other entities that also invest on the Government’s behalf. ADIA’s Managing Director is vested under the law with responsibility for implementing ADIA’s policy and the management of its affairs, including decisions related to investments, and acts as its legal representative in dealings with third parties. ADIA is not involved with, nor has any visibility on, matters relating to the spending requirements of the Government of the Emirate of Abu Dhabi, nor are ADIA’s assets classified as international reserves" (ADIA Governance).

His Highness Sheikh Mohamed Bin Zayed Al Nahyan, Abu Dhabi’s Crown Prince and Deputy Supreme Commander of the Armed Forces, is Chairman of the Board of Directors. (Mubadala Overview). Mubadala is operated through a board of directors which is responsible to its sole shareholder. Its operations are the responsibility of an Investment Committee, which is "responsible to the Board for developing and monitoring Mubadala’s investment strategy, for the overall performance of Mubadala and for managing Mubadala’s business, as defined by the Investment Committee Charter." (Ibid). Mubadala is operated as eight Business Units, each of which invest and operate in specific areas that are integral to the diversification of Abu Dhabi. Each Business Unit is composed of "sector experts who, in partnership with Mubadala’s Corporate Units, manage investments and assets throughout the lifecycle." (Mubadala, Organization Structure)

Financial Strategies: ADIA manages the emirate’s excess oil reserves, and invests some of its revenues for development. It is thus principally a futures fund.

Our approach begins by identifying an acceptable level of risk, and then building outwards by adding a highly diversified range of asset classes that allow us to maximise returns within these parameters. The Strategy Unit is at the heart of this process. Its market strategists and asset specialists, supported by quantitative analysts, identify new and emerging trends in the global economy and then compare the potential risks and returns of different asset classes within those scenarios. The result is a recommended portfolio mix that contains more than two dozen asset classes and sub-categories, each with a fixed weighting, which together form ADIA’s shared, long-term view of the world, otherwise known as our policy portfolio or “neutral benchmark.” (ADIA, Investment Strategy)

Its financial strategy is grounded on what ADIA sees as the protection of its private market acrtivities abroad by host states through compliance with the Santiago Principles. "A key element of this process was the expectation that if SWFs complied with the Santiago Principles, recipient countries would recognise and respect their compliance, and would not subject SWFs to any requirement, obligation, restriction, or regulatory action exceeding that of other investors." (ADIA The Santiago Principles).

It's sister operation Mubadala has an internal development objective, which has expanded to substantial interests in key industries worldwide.  "Mubadala is an investment and development company supporting the diversification of the UAE by investing in key social infrastructure and creating globally integrated industry sectors in Abu Dhabi." (Mubadala)  The object is to diversify the economy of Abu Dhabi by investing in new local industries and strategic industries abroad. (Ibid).  Its interactive portfolio for 2012 may be accessed HERE. The object is to build on "Abu Dhabi’s competitive advantages to build businesses, alongside established international partners, in multiple sectors." (Mubadala, 2012 Annual Report, Global Platforms). These partnerships are built on large strategic investments in critical multinational enterprises form which Mubadala extracts joint initiatives, training and operational expertise. It is to that extent that sovereign investing through Mubadala produces public effect through private investment.  Effectively Mubaldala purchases larhe stakes in companies abroad which is then used to build relationships of financial benefit to Abu Dhabi. For example,

Now in its fifth year, the Mubadala GE relationship has been a partnership in every respect and draws on the companies’ joint commitment to, and core expertise in, high-growth businesses such as commercial finance and clean energy. The relationship encompasses a broad range of initiatives, including in financial services, clean energy research and development, aviation and corporate learning. Mubadala is also one of GE’s largest shareholders. (Mubadala Partnership in Focus).

Recently, it has been reported that SWFs like ADIA has begun to compete against global insurance companies for target investments that had traditionally been part of insurance company core investment targets. This has contributed to real estate bubbles in certain markets (SWF Institute Report).

Active Shareholding: The ADIA has embraced a quite conservative investment strategy. Unlike Norwegian and Australian Funds, and some U.S: State pension funds, the ADIA doe snot engage in active shareholding. "With a long tradition of prudent investing, ADIA’s decisions are based solely on its economic objectives of delivering sustained long-term financial returns. ADIA does not seek to manage or take an operational role in the companies in which it invests." (ADIA About).  ADIA prides itself on developing cooperative relations with management. "Throughout this time ADIA has built a strong reputation across global markets as a trusted and responsible investor." (ADIA Our History). 

Macro-Economic Interventionism.  An interesting feature of ADIA and its sister funds is the growing self consciousness of their ability to shape private markets.  That shaping provides some power to affect the wealth and welfare of local economic sub units based on investment flows from and through these funds.

Speaking to Asharq Al-Awsat, Dr. Abdul-Rahman Al-Sultan, a Saudi economist, said that those SWFs that acted as the backbone of financial markets during the global crisis were, since the start of the new year, being forced to change their investment strategies in line with changes in international economies.

These SWFs now needed to reevaluate their risks, especially with rising fears over emerging market currencies and plans to withdraw financial incentives in the United States. “Most of the time, however, funds of this sort rely on long-term investment, which means there will be no fundamental change,” he said.

However, there are some signs of a strategy shift among some of the region’s largest SWFs. The NMG Consulting report found that Middle-Eastern SWFs had in the past 12 months beefed up their allocations for investments in the alternative asset class—private equity, hedge funds, real estate, infrastructure—by 69 percent. (Abu Dhabi’s sovereign wealth fund is world’s second largest, Asharq al-Awsat, 30 Jan. 2014 ).

But ADIA is also used, in a way that resembles that of the Chinese Sovereign Wealth Fund, to create operating entities that then take large stakes in related groups of companies of strategic interests to Abu Dhabi.  Consider in this respect Abu dhabi’s International Petroleum Investment Co, or IPIC,

The government of Abu Dhabi created IPIC to leverage the energy expertise embedded in the Abu Dhabi Investment Authority, or ADIA, the largest sovereign wealth fund in the Middle East and Adnoc, with its network of joint ventures with the world’s leading energy supermajors.
. . . . .
The government of Abu Dhabi created IPIC to leverage the energy expertise embedded in the Abu Dhabi Investment Authority, or ADIA, the largest sovereign wealth fund in the Middle East and Adnoc, with its network of joint ventures with the world’s leading energy supermajors. IPIC made global headlines when it acquired a 24.9 per cent strategic stake in Austria’s OMV, the largest oil and gas firm in Central Europe and the most valuable company on the Vienna Stock Exchange. (The hidden giant: Abu Dhabi's oil IPIC is emerging stronger than ever, Albawaba,  Feb,. 25, 2014)

 But the conflation of public and private roles has made categorization of activities more difficult.  Thuis for example,a consortium of SWFs (including ADIA) and private enterprises, have sued the government of Norway over its regulatory actions in a gas tariff dispute fees that adversely affect the joint investment of this SWF-private enterprise group. (Abu Dhabi fund part of lawsuit against Norway government, Arabian Business.com, Jan. 30, 2014).

Lastly, like the Korean SWF, a portion of the objective of the Abu Dhabi Funds is to bring business, especially business in targeted industries (finance, banking, etc.).   "Bankers expect the Abu Dhabi government to encourage foreign companies seeking to provide services to Abu Dhabi sovereign funds, such as Abu Dhabi Investment Authority and Mubadala, to locate staff in the capital." (Simeon Kerr,  Abu Dhabi works to lure top investors to fledgling financial hub, Financial Times, Feb. 17, 2014).