Wealth funds in the UAE lead way with transparency
The negative public sentiment and concerns about the political motives of sovereign wealth funds (SWFs) is now finally subsiding, thanks to the credit crisis and global economic slowdown.
SWFs – particularly those in the Middle East – have proved that they merely act on pure economic motivation.
In the UAE, its more than $1 trillion (Dh3.67trn) funds have not only given a stabilising effect on the financial markets and had helped the Western state's ailing institutions, its SWFs are also helping reduce the inflation in the emirate by pumping excess liquidity out of the market.
But despite the world's need for liquidity, the call for more transparency remains inevitable.
In October, the Santiago Principles, a common set of voluntary principles and practices for SWFs in October, was created. And Adia has been on the forefront of the Principles, which was presented by the International Work of Sovereign Wealth Funds (IWG) to the International Monetary Fund's policy-guiding International Monetary and Financial committee.
Under the guideline, presented by the IWG to the International Monetary and Financial committee, SWFs will be required to disclose the funds' source and purpose to the public. Other things that need public disclosure include the SWF's legal basis and structure, as well as the legal relationship between the SWF and other state bodies.
In addition, SWF operations and activities in host countries should be conducted in compliance with all applicable regulatory and disclosure requirements of the countries in which they operate.
And if investment decisions are subject to considerations other than economic and financia ones, these should be clearly set out in the investment policy and be publicly disclosed.
"It's all about trust," Hamad Al Hurr Al Suwaidi, Director at Adia, who also co-chaired the forum. "It's about collectively doing everything in our power to ensure that trust lies in the heart of everything we do."
Adia is now gradually opening up. Adia has just recently updated its website, hired Burson-Marsteller, the US public relations company, and has hired an in-house communications expert from Morgan Stanley. It has also agreed with the US Treasury on a set of principles for investment.
However, it remains to be seen how far would it open up. The fund is still not pro-actively dealing with the media but has nevertheless allowed some of its senior officials to be interviewed.
Adia is involved purely in investment. It does not take controlling stakes in companies and has said that it usually takes stakes of less than 4.5 per cent. In terms of how its portfolio is broken down, no exact figures are available. Recent reports show that 50-60 per cent are in equities, with 14 per cent of this in emerging markets' equity. About 20-25 per cent are in fixed income; five-eight per cent in real estate, five-10 per cent in private equity and five-10 per cent in alternatives.
Adia's overseas real estate portfolio is notable. Previous reports say that 60 per cent of their real estate portfolio is managed externally, especially for complicated mortgage-related transactions in distant markets.
In a recent report by the Financial Times, that about 80 per cent of the portfolio is externally managed, including 60 per cent that is passively managed through indexed tracker funds.
And as markets have taken a battering across the globe, experts say Adia has not been spared.
According to a working paper by the Council on Foreign Relations, Adia was hard hit by the recent fall in global equities as many of the same factors that worked in its favor from 2004 to 2007 – a high allocation to equities, emerging market and private equity – worked against it in 2008.
Meanwhile, Abu Dhabi Investment Company (Adic), which used to be an executive arm of Adia and is now under the umbrella of Abu Dhabi Investment Council, is also on its way to becoming more transparent.
Adic is an improved version of Adia as it sends out press releases, so do another Abu Dhabi entity – the International Petroleum Investment Council (Ipic). Both, however, are not easily approachable. There is also little known on the dynamics within Abu Dhabi Investment Council, which now manages the regional portfolios of Adia.
Adic has hit the headlines when it was reported that it was in talks to buy the Chrysler Building for about $800 million.
The fund - which also offers treasury services, loan syndication, equity and debt underwriting as well as asset management and brokerage services – has recently formed a strategic partnership with Germany's second-largest private bank to provide asset management services. In addition, Adic and UBS Global Asset Management, which launched a $600m infrastructure fund last year, are planning a new $1bn fund to invest in the Mena region.
Ipic, which occasionally organises press conferences, has been investing in the downstream oil sector such as refineries and petrochemical plants, to secure a long-term market for crude oil exports from Abu Dhabi. It has also begun to enter the upstream sector that offers better returns.
The Government of Abu Dhabi has recently tasked Ipic to establish a three-way joint venture for a $70bn petrochemical portfolio. Khadem Al Qubaisi, Managing Director of Ipic, said a joint venture will be formed with Adic and Abu Dhabi National Oil Company (Adnoc) with an investment of $20bn in the first phase of five years. Mubadala, which according to United Nations Conference on Trade and Development has about $12bn assets under management, is the most transparent entity in Abu Dhabi so far.
Mubadala, which was founded by Sheikh Mohammed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces, has sought for a credit rating in a bid to increase transparency and lower borrowing costs. As of September, Mubadala has been assigned AA long-term credit ratings by the three global credit rating agencies: Moody's, Fitch Ratings, and Standard & Poor's.
While Abu Dhabi's SWFs have been discreet, Dubai's purchases are usually disclosed to the public. Deals made by Dubai International Capital, Istithmar, Dubai International Financial Centre Investments and Investment Corporation of Dubai has always made it to the headlines.
And even in these trying times, some of Dubai's funds have been answering press queries. DIFC Investments, for one, has said that it has repaid its $500m syndicated loan facility before its maturity in December 5.
Dubai International Capital on the other hand has been open about its strategy. The fund's Executive Chairman Sameer Al Ansari, said that since beginning 2008 DIC has been focused entirely in emerging markets.
"The only two deals we announced in 2008 have been in emerging markets," he said. "We do see opportunities here than elsewhere in risk return perspective for the time being."
He has been consistent in saying that the fund is now on an "extremely conservative" investment mode. He said the scenario in 2009 would be worse and the firm has thus decided to rather protect its more than $12bn assets under management than be aggressive in expanding its investment portfolio.
Major wealth funds
ABU DHABI INVESTMENT AUTHORITY
Adia was created in 1976 by the late Sheikh Zayed bin Sultan Al Nahyan. During its early days, Adia was a relatively unsophisticated body because local talent was limited. It is now the largest fund among oil exporters and has accumulated assets estimated at between $650bn-$1trillion.
ABU DHABI INVESTMENT COMPANY (ADIC)
Established a year after Adia was formed, Adic used to be the executive arm of Adia. Adic now comes under the umbrella of Abu Dhabi Investment Council.
Mubadala is said to have been formed from Offsets Company, which was founded by Sheikh Mohammed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces.
INTERNATIONAL PETROLEUM INVESTMENT CORP
Ipic was founded as a joint venture between Adia and Adnoc. It remains co-owned by the two entities, but now falls under the umbrella of the Supreme Petroleum Council. Ipic invests mainly in oil-related projects overseas and mostly in downstream.
INVESTMENT CORPORATION OF DUBAI (ICD)
ICD is the investment arm of the Government of Dubai. It has investments in companies in the industrial, retail and financial landscape of Dubai.
DUBAI INTERNATIONAL CAPITAL (DIC)
DIC has three main divisions: private equity, global equities and emerging markets. Total assets under management are more than $13bn.
Established in 2003, Istithmar World is an investment arm of Dubai World. The firm has built a broad portfolio of successful investments in markets.
DIFC Investments, the investment arm of Dubai International Financial Centre, has a 2.2 per cent stake worth $1.8bn in Deutsche Bank.
RAS AL KHAIMAH INVESTMENT AUTHORITY
This Ras Al Khaimah Government's initiatives aims at diversifying the economy, and promotes the development of the Industrial Zone, the Free Zone and the Industrial Park.
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