Abu Dhabi fund draws scrutiny in U.S.

The headquarters of the InvestmAbu Dhabient Authority. The authority has a high profile in the emirate, but its secrecy is drawing scrutiny in Washington. (Charles Crowell/Bloomberg News)

Abu Dhabi has about 9 percent of the world’s oil and 0.02 percent of its population. One result is a surfeit of petrodollars, much of which is funneled into a secretive, government-controlled investment fund that is helping to shift the balance of power in the financial world.

After decades in the shadows, the fund, the Abu Dhabi Investment Authority, is turning heads on Wall Street and in Washington by making high-profile investments in the United States and elsewhere.

Known as ADIA (pronounced ah-DEE-ah), the fund recently formed a small team that is now buying big stakes in Western companies. This unit masterminded ADIA’s $7.5 billion investment in Citigroup, the largest U.S. bank, in November. It has also taken a large position in Toll Brothers, one of America’s biggest home builders.

“There is an idea that Abu Dhabi should not be the underdog of the map,” said Frauke Heard-Bey, a historian who has written a book about the political emergence of the United Arab Emirates. “They have the money to buy companies that are ailing, and why should they not? Why not make a mark?”

ADIA is the largest of the world’s sovereign wealth funds, giant pools of money controlled by cash-rich governments, particularly in Asia and Middle East. But Abu Dhabi, the wealthiest of the seven Arab emirates, says little about its fund. Few outsiders know for sure where ADIA invests, or even how much money it controls. And secrecy breeds hyperbole; some estimates of the fund’s size exceed $1 trillion.

Before long, ADIA will certainly reach that mark. But for now bankers, former employees and analysts familiar with the fund peg it at $650 billion to $700 billion – an amount that is still more than 15 times the size of the Fidelity Magellan Fund. In all, sovereign wealth funds in countries like the United Arab Emirates, Kuwait, Singapore, China and Russia together control more than $2 trillion, a figure that could approach $12 trillion by 2015, analysts say.

Such riches, coupled with the more-aggressive stance being taken by ADIA and other sovereign funds, has raised concern that these investors will wield their wealth for political as well as financial reasons.

ADIA’s secrecy is also drawing scrutiny. The fund has no internal communications department, although it says it is setting one up. When sovereign fund leaders from around the world descended on Davos, Switzerland, in February for the World Economic Forum, no one from ADIA saw fit to show up.

Executives at ADIA declined to comment for this article.

Senator Evan Bayh, a Democrat of Indiana and the chairman of the Senate subcommittee on security and international trade and finance, has raised concerns about sovereign fund transparency. Last week, he traveled to Abu Dhabi to meet with senior ADIA executives. Also last week, a delegation led by Clay Lowery, a top Treasury official, met with ADIA executives as part of a dialogue to formalize investment guidelines for sovereign funds.

In many ways the tension between ADIA’s elephantine size – the fund is twice as big as Norway’s, the second-largest sovereign fund – and its demure aspect is underscored by its investment in Citigroup.

Since ADIA’s genesis in 1976, the fund has followed a conservative investment approach. It has farmed out its assets to foreign money managers and taken stakes in companies based upon their weighting in benchmark stock indexes like the Standard & Poor’s 500. ADIA is also one of the largest institutional investors in hedge funds and private-equity funds. This approach has served ADIA well and reflects the strongly felt notion that the fund’s ultimate purpose is to serve as a financial reserve for Abu Dhabi in times when oil revenues are less robust.

Nevertheless, guided by the advice of a stream of foreign bankers who worked at ADIA in the 1970s and 1980s, the fund has allocated a large portion of its assets to equities. It now has about 65 percent of assets, or about $450 billion, invested in stocks, according to bankers. The fund averages a yearly return of 10 percent to 20 percent, say people who have been briefed on the fund’s investment strategy.

With oil at about $100 a barrel, bankers and analysts estimate Abu Dhabi produces a surplus of at least $50 billion a year. Given the emirate’s small population, 80 percent of which is foreign born, even the most expansive investment and welfare policies make it hard to put a dent in such a sum.

The United States is not a big buyer of Abu Dhabi’s oil, most of which goes to Asia, but the surplus is a vivid reminder of the U.S. economy’s own fiscal imbalance, to say nothing of its diminishing global stature, a theme that underpins much of the political worry surrounding sovereign fund investments.

“In the short run, that they are investing here is good,” Bayh said. “But in the long run it is unsustainable. Our power and authority is eroding because of the amounts we are sending abroad for energy and consumer goods.”

In the past, much of Abu Dhabi’s cash surplus has gone to ADIA, although the formation two years ago of a smaller sister fund, the Abu Dhabi Investment Council, has resulted in a lesser amount flowing to ADIA, analysts say.

But ADIA’s new strategic investment group represents the clearest sign that the fund is taking steps to leverage its size and influence.

The division was set up in the summer of 2006 and is overseen by Saeed Mubarek Rashid al-Hajiri, a young, Western-educated portfolio manager who also heads the fund’s considerable investments in emerging-market economies.

In addition to Citigroup and Toll Brothers, in which AIDA took a 4.5 percent position last summer, other companies in the group’s portfolio include EFG Hermes, one of the leading investment banks in the Arab world, and Banque de Tunisie et des Emirats, a Tunisian bank.

Instead of passively tracking indexes, this unit actively picks investments in hopes of generating market-beating returns. It is a method of stock picking practiced by most hedge funds and asset management companies, and the Citigroup investment, with its size and attendant risk, is a good example of this approach.

Compared with the overall fund, the assets within this group are small at about $30 billion, according to people who have been briefed on ADIA’s strategy. As with all its investments, ADIA adopts a long-term, passive approach and does not seek board seats. These people say that outsiders still manage 80 percent of ADIA’s assets, proof that the fund’s commitment to making direct investments is only in its early stages.

This hesitation partly reflects the lack of a strong individual within the organization who has the combination of investment experience, trust of the royal family and a bit of international swagger to assume a larger public presence.

Sheik Khalifa bin Zayed al-Nahyan, the president of the United Arab Emirates and the ruler of Abu Dhabi, while chairman of the fund, has a cautious and reserved disposition and does not take an active role in ADIA. When Citigroup’s chairman, Robert Rubin, traveled to Abu Dhabi last November, his courtesy call was made to Sheik Mohammed bin Zayed al-Nahyan, the crown prince of Abu Dhabi and the point person for the United States-Abu Dhabi relationship.

The fund’s managing director is Sheik Ahmed bin Zayed al-Nahyan, a half-brother of Sheik Khalifa who maintains a full-floor office in ADIA’s sleek 40-story headquarters. People familiar with ADIA management, however, say the sheik, who has worked at ADIA for 10 years, delegates significant authority to Jean-Paul Villain, a publicity-shy French money manager who directs investment strategy and asset allocation.

Villain, the most senior foreign-born executive at the fund, first joined ADIA in the early 1980s from the French bank Paribas. While other expatriates have come and gone, Villain has stayed, except for a brief period in the mid-1980s. More so than the other foreigners, Villain, whose wife is Syrian-born, has gained the royal family’s trust.

One view is that ADIA’s penchant for secrecy stems from its experience during the scandal at the Bank of Credit & Commerce International of the early 1990s, during which ADIA is said to have lost hundreds of millions of dollars. The Nahyan family became embroiled in regulatory investigations, although no charges were ever brought against them.

People who worked at ADIA from its earliest days in the late 1970s and 1980s say that the fund’s reticence dates to its formation.

Some see this as a reflection of Abu Dhabi’s small size, insular culture and geographical vulnerability, a sense that the less that is known about the specifics of ADIA’s hoard, the better.

“ADIA does not answer to a wide public at home,” said David Mack, a former United States ambassador to the United Arab Emirates.

“They are a small country in an area with some nasty countries like Iran that can make trouble for them. They don’t like to advertise.”

By Landon Thomas Jr.
Published: February 28, 2008

Source: International Herald Tribune

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