The Abu Dhabi Investment Authority (Adia) has taken the unprecedented step of outlining the general principles on which it will invest its wealth, in a letter sent to United States Treasury Secretary Henry Paulson and other Western officials.
The world’s largest sovereign wealth fund, with an estimated assets at up to $900 billion (Dh3.3 trillion), also pledged it will not use its money to further its political aims, a move addressing fears over global state funds’ power to control stakes in major Western corporations and banks, according to The Wall Street Journal.
In the letter, Yousef Al Otaiba, Abu Dhabi’s Director of International Affairs, wrote that the emirate “has never and will never use its investments as a foreign policy tool”. Instead, Abu Dhabi entities “have always sought solely to maximise risk-adjusted returns,” it said.
But Abu Dhabi also warns against blocking deals that could be important for the health of the global economic system. The emirate wants “to ensure that financial markets remain open, that investors that play by the rules are not discriminated against, and that the regulatory process remains transparent and predictable,” the letter says.
The document was also sent to the finance ministers of the other Group of Seven industrialised nations, the IMF, the World Bank, the Organisation for Economic Cooperation and Development, and the European Commission. Abu Dhabi’s latest move may disappoint some Western officials, who have called for much more specific promises.
While the letter lays out nine “principles” that it says guide Abu Dhabi investments, these stop short of the assurances that some US and European officials have called for.
Clay Lowery, the US Treasury official heading negotiations with sovereign funds, has called on them to disclose how they vote their shares in companies.
But Abu Dhabi does not commit to doing that in its letter. Instead, Abu Dhabi calls its investment entities “predominantly passive investors” that favour “small stakes in companies that involve no control rights, no board seats, and no involvement in the management or direction of firms”. But it does not rule out changing tack in the future.
Last month two of the European Union’s main finance commissioners called for sovereign wealth funds to improve their transparency.
EU Monetary Affairs Commissioner Joaquin Almunia said funds needed to be aware of their responsibilities, adding: “Let us be clear, sovereign wealth funds offer a source of investment that has been useful recently to provide quick and rapid financing to large banks that faced liquidity problems. The big difference we see in the case of sovereign wealth funds is they are owned by the state, not by private firms, and their investment criteria and management are characterised, in some cases, by a high level of opacity.”
Speaking at a joint press conference in Brussels, EU Internal Market Commissioner Charlie McCreevy added that sovereign wealth funds needed to improve their quality of financial information. “Let us be brutally frank about this, sovereign wealth funds have been positive and long-term investors. There is no, as far as I am aware, instance of sovereign wealth funds acting in any manner other than responsibly up until now,” said McCreevy. He added that the EU had no plans to limit investment by such funds, only that all business “should follow some common principles on transparency and governance”.
The Adia has been accused of being especially secretive in the past.
Set up more than 30 years ago, it is managed by a team of local and expatriate money managers but also relies heavily on outside fund managers and advisers. In its letter, Abu Dhabi said that 80 per cent of Adia’s funds are managed by outside firms.
Estimates of Adia’s portfolio range from $500bn to $900bn. Adia has shown more of an appetite for risk than many other Middle East sovereign investors, which have traditionally favoured ultra-safe investments such as US Treasury securities.
The International Monetary Fund and the European Commission back the adoption of a voluntary set of best practices for government funds. US Treasury officials, meanwhile, are pushing Abu Dhabi and Singapore – two of the most active government-owned deal makers – to embrace promises that they will not use their wealth for political advantage.
Activity from sovereign wealth funds in the China, Singapore and Russia has gained momentum in recent months as US banks and financial institutions have wilted amid the global market turmoil.
US bank Merrill Lynch has sold a $4.4bn stake to the investment arm of the Singapore Government.
The Government of Singapore Investment Corporation (GIC), estimated to be the third largest sovereign wealth fund in the world, does not disclose its assets except to say that they are well over $100bn and that it aims to beat G3 inflation.
Estimates of its size vary from $140bn to more than $300bn. Singapore’s cash-rich state-owned fund Temasek has also previously chased banking acquisitions and betted heavily on investments in private equity and buyout firms. In 2006, according to its annual report, it set up a special purpose vehicle named Astrea to hold investments in 45 private equity and buyout funds. Astrea then raised $810m in securitised debt. The names and balance sheets of those funds have not been disclosed.
Meanwhile, the Chinese sovereign wealth fund China Investment Corp (CIC) recently spent $5bn on a 9.9 per cent stake in US banking giant Morgan Stanley. CIC also invested $3bn in the US private equity firm Blackstone Group and put $100m into the initial public offering of the China Railway Group in Hong Kong.
The CIC was set up in September 2007 to increase the value of China’s huge foreign exchange reserve, which stood at $1.53trn at the end of last year.
Lord Christopher Patten, the last British governor of Hong Kong, recently backed the rise of sovereign wealth fund activity despite fears over their political agendas. Gulf sovereign wealth funds are sincere when they say they target strategic investments not controlling stakes in major Western corporations and banks, he said addressing the World Insurance Forum in Dubai this week.
Western countries have been hypocritical in their reaction to the SWFs’ attempts to invest in major financial and economic institutions, he added.
Lord Patten said: “Western countries were less enthusiastic about free trade and globalisation of markets when they dealt with the SWFs issue. GCC countries were highly transparent compared to others. For example, Russia is using the Gazprom company and energy issues to press on European countries and this increased fear in the West about the impact of state-owned investments. When a Western country privatises a state-owned company and after some years it is sold to another country the situation raises political arguments in the community about reasons behind privatising companies.”
Recently, sovereign wealth funds that have picked up stakes in the likes of Citigroup, Morgan Stanley, Merrill Lynch and Co. and UBS AG have been left wondering whether they have really acquired sizable chunks of great franchises, following the spectacular collapse of Bear Stearns.
$900bn: In assets is estimated to be held by Adia, the world’s largest sovereign fund
$300bn: In assets is estimated to be held by Singapore Investment
Corporation, a government entity, which refuses to disclose its assets
SWFs reflect whether their timing was right
Following the dramatic collapse of United States investment bank Bear Stearns, sovereign wealth funds in the Middle East and Asia have been left reflecting whether they bought stakes in US financial stocks at the right time.
The Abu Dhabi Investment Authority (Adia) has a 4.9 per cent stake in Citigroup for $7.5 billion (Dh27.5bn) and Mubadala Development, a smaller Abu Dhabi investment vehicle, recently bought stakes in the Carlyle Group worth 7.5 per cent of the firm.
The news that the Carlyle Capital Corp (CCC) said recently that its shareholders voted unanimously in favour of a compulsory winding up, will not be welcomed by ADIA, despite the fact that the firm is a separate legal and business entity from US private equity firm Carlyle Group.
The group said last week that the listed fund would not have a measurable impact on Carlyle’s other funds, investments and portfolio companies. The fund is 15 per cent-owned by Carlyle Group executives.
Meanwhile, the Government of Singapore Investment Corporation’s $4.4bn stake in Merrill Lynch and Chinese sovereign wealth fund China Investment Corp’s (CIC) recently $5bn spend for a 9.9 per cent stake in US banking giant Morgan Stanley is looking increasingly shakey as over the past three months the prices of all these companies have fallen steeply and may yet have much further to fall.
For big names such as Merrill Lynch, Citi, Blackstone and UBS the fall has been between 30 per cent and 45 per cent in this period alone.
CIC also invested $3bn in private equity firm Blackstone Group.
Several of the sovereign-fund investments in US financial companies are structured as interest-paying securities convertible into equity.
A drop in the share price in the short run does not immediately – or necessarily – erode the return on the sovereign fund’s investment.
Even so, not all of the investments appear to be in great shape.
Adia 'is not a political tool'