It was a whirlwind of negotiations for Citigroup and the Abu Dhabi Investment Authority (ADIA). For a week, dealmakers from both sides, some dressed in traditional white Arab robes and others in Western suits, worked furiously across the globe. Then, on the Monday after Thanksgiving they signed a deal, with the biggest bank in the U.S. agreeing to sell a 4.9% stake to the world's largest sovereign wealth fund in ADIA's new headquarters, the tallest skyscraper in Abu Dhabi. Citigroup (C) chairman Robert E. Rubin, on hand as Citigroup's top official, shook hands on the deal with Sheikh Ahmed Bin Zayed Al Nahyan, ADIA's managing director and the 12th son of Abu Dhabi's late patriarch Sheikh Zayed, before dashing off to meet the Crown Prince of Abu Dhabi Mohammed bin Zayed al Nahyan. Forty eight hours later, the investment arm of the richest Gulf emirate, wired $7.5 billion to a Citigroup account.
The move stunned many of Wall Street's savviest dealmakers, but it was just another day for the Masters of the Oil Universe, who control an estimated $875 billion portfolio. Twelve analysts had been scouring banks' financials for months to find potential investments. Largely, they wanted to correct a massive imbalance in the fund's portfolio, one driven by weakness in U.S. stocks and credit. At first, they had wanted five or six smaller, less market moving, stakes in financial institutions—around $1 billion a pop. But they quickly switched gears after calling Citigroup's top banker Michael Klein in late November. After that, they realized they could solve their asset allocation problems in one shot with Citi. "We were underweight in U.S. equities, large companies, and credit," says Jean-Paul Villian, head of strategy at ADIA, whose management team recently spoke with BusinessWeek in a series of interviews, its first public ones. "Citigroup was reducing the risk of the portfolio."
The dollar looks sick, and U.S. stocks are getting pummeled. But those jitters are merely wetting the appetite of ADIA and other sovereign wealth funds for U.S. investments. These mega investors can afford to take a long term view. "The short term for us is three to five years forward," says Sheikh Ahmed in his dark mahogany paneled office, after a servant poured small cups of Bedouin style cardamom-flavored coffee. "We find (the American market) very attractive." At a time when Abu Dhabi's oil fields are producing extraordinary riches from $120 oil, ADIA, the emirate's other crown jewel, is raising its game. Charged with preserving the wealth of the richest Arab emirate for future generations, ADIA invested for years mostly in low-profile, conservative havens like U.S. Treasury securities and government bonds. But now, it's plowing about 34% of its money into exotica such as private equity funds, hedge funds, emerging markets, and infrastructure. And, in a move with implications for money managers across the globe, it is dramatically upping its investment in index funds.
Best in Class
In many ways, the rise of ADIA mirrors the recent rise of Abu Dhabi, its home base. Founded in 1976 when only about 20% of the population could read, ADIA has become more sophisticated. So has Abu Dhabi. Since the death of Sheikh Zayed in 2004, Abu Dhabi's leadership has become hugely ambitious, spurred by the gleaming spires and cosmopolitan ambience of their rival and neighbor Dubai. Zayed's sons, Khalifa, the emir and ADIA's chairman, along with Mohammed, the Crown Prince, are racing to transform long-sleepy Abu Dhabi into a refined cultural center. They're spending billions on a range of hugely ambitious undertakings, including Middle Eastern offshoots of the Louvre and Guggenheim museums, a New York University campus, and an outpost of the Cleveland Clinic.
Abu Dhabi wants to be among the world's most attractive destinations, and ADIA's Sheikh Ahmed is pushing the giant fund to be best in class as well. So ADIA is tapping the best financial brainpower. And with huge fees and potential capital stakes at stake, top Wall Street players are more than willing to oblige. In recent months, veteran investor Wilbur Ross, BlackRock (BLK) CEO Larry Fink, and Goldman Sachs (GS) CEO Lloyd C. Blankfein all have visited executives at the fund. "People view having an investment from ADIA as one of the top names in the Middle East and one of the region's most sophisticated investors," says Monte Brem, CEO of StepStone Group, a consulting firm in La Jolla, Calif. that advises Middle Eastern funds, including the Kuwait Investment Authority.
ADIA traces its investment roots to the 1960s, when it was a mere government investment board run by a British colonial officer and a local advisor to the Abu Dhabi royal family. And though the fund has long been regarded among the most savvy in the region, it's trying now to compete on a global stage and that means luring the crème of the world's investment management talent to what has until very recently seemed a remote and sterile place. The fund's spanking new 36-story skyscraper screams its desire to become one of the most admired investment firms in the world. The blinds automatically adjust to the sun. Lights shut off when sensors sense little activity. And approximately 200 servers process thousands of trades, collecting data on money flows that is used to form future investment strategies.
In the hallways of its office, men and women in Western suits mix with others in flowing Middle Eastern robes. About 70% of ADIA's 1,100 professionals are foreigners, many educated in the U.S. or Europe. Many local staff members also have Western educations, thanks to generous scholarships provided by the fund. By comparison, the Kuwait Investment Authority relies largely on domestic civil service workers.
Subject to Scrutiny
And while newer and flashier funds in Dubai and Qatar focus narrowly on high-stakes plays in stocks and buyouts, ADIA has a keen eye toward asset allocation, not unlike big endowments at Yale and Harvard University. Since its official inception in 1976, ADIA has returned about 10% a year, compared with 3.94% racked up by the world's second-largest such fund, the $380 billion sovereign wealth fund in Norway, since its founding in 1998. "They are among the best investors worldwide," says BlackRock's Fink. "I compare them to the top foundations, top sovereign wealth funds, top banks."
ADIA's huge size and unwillingness to disclose much about its investments means that whatever moves do come to light receive inordinate scrutiny. Sometimes ADIA chafes under its increased attention. Ever since Citigroup's stock went into freefall, ADIA has gotten flack for its Citigroup investment, even though the fund has locked in a return of least 11% by owning a convertible stock.
There are even mutterings around ADIA that such high-profile investments may be a mistake and would be better left for other smaller investment vehicles that the government has recently created, like the Abu Dhabi Investment Council and Mubadala Development Company, which bought a big stake in the Carlyle Group and Advanced Micro Devices (AMD) last year. "Every time the price goes down, someone says 'you could have invested in this or that company and done much better,'" says executive director Saeed Mubarak Al-Hajeri. "We do have those types of unsolicited advisors."
But for the most part, ADIA's close study of the markets and rigorous internal debate seems to have served the big fund well. Shortly before Al Nahyan, now 39, took charge in 1997, the fund dramatically overhauled its investment guidelines so that it would allocate its investments in line with global economic growth. That resulted in a savvy call in 1993, when its investment team determined that Japan's 40% share of the global stock markets didn't match the growth prospects of Japan's economy. The fund sold down its stake, escaping a subsequent decline in the Japanese stock market.
A Turn to Indexing
Even today, the fund's investments officers fear getting caught off guard by a huge shift in the capital markets if they fail to identify an investment bubble. "When people ask what keeps you awake at night, it is trying to avoid investing massively in another Japan in 1990," says ADIA's Villain, a Frenchman. "Are we at the beginning of something similar to what happened to Japanese equities in the 1990s? That is the way we look at the world."
More recently, Al Nahyan, who hates to be called "Your Highness" as is customary, and who worked for ADIA as a European equities analyst side-by-side with colleagues on an open floor for six years before he took charge, has encouraged his people to weed out money managers who can't cut it. In 2006, he ordered his investment committee to figure out why passive investments in indexes were outperforming some of ADIA's highly-paid fund managers. ADIA hired a consultant who found, after several months, that many endowments used index funds for as much as 80% of their investments. Through 2007, the team conducted an extensive study of its own money managers and others in the industry, and eventually concluded that few firms that invest in developed markets like the U.S. and Europe consistently outperform their benchmarks over the long haul.
With the findings in hand, ADIA has increased the amount of the portfolio that is indexed from 45% to 60% in the last six months. It has also halved the number of hedge funds in its portfolio. "ADIA is keen on identifying real management skills and real talent and is not prepared to pay the usual fees charged by hedge funds for strategies that can be replicated in an index," says Al-Hajeri.
ADIA's scrutiny of potential money managers has also intensified over the years. Not long after Tarek "Terry" Abdel-Meguid, a partner at Perella Weinberg Partners, flew to Abu Dhabi to pitch ADIA on a potential investment idea last year, people from ADIA spent a day in one of the firm's offices scrutinizing the idea, as well as the team of people who would be investing and the way they would be reporting their returns. "Everything gets checked and double checked. They are very thorough." says Meguid. "The process is no different than that of any other large, sophisticated investor." Echoes Goldman' Blankfein, who visited in April: "They're as rigorous in their analysis of potential deals as I would expect our people to be."
Even after ADIA invests, monitoring continues. ADIA wants to be sure money managers are investing within agreed upon guidelines. Several years ago, ADIA warned one London-listed company meant to be investing in Europe that it had three days to get out of its core listing, which ADIA had discovered was South African. Yet, senior ADIA executives say that some financial executives still don't take them seriously enough.
"Sometimes we meet senior people who come in and think that at the end of a one hour meeting they will walk away with $1 billion," says ADIA executive director Majed Salem Al Romaithi. "They underestimate our sophistication." ADIA also has taken up its game in private equity. The fund is outmaneuvering top Wall Street investors, being invited to co-invest in high profile buyout deals as well as in buyout firms themselves. ADIA co-invested in TPG's $44.4 billion purchase of TXU Corp. in February 2007 and Kohlberg Kravis Roberts' $19.4 billion buyout of Alliance Boots in March 2007. Then last summer, it bought a 10% stake in buyout firm Apollo Management with at least $40 billion in capital committed, and a nearly 20% stake in the Los Angeles-based buyout firm Ares Management, which has $25 billion.
About a half dozen institutional investors, including large pension funds, were angling to invest in Ares after managing partner Tony Ressler briefed limited partners, including ADIA, on his expansion plans for about a year. Ressler wanted to raise capital to build out his firm's ability to invest in distressed debt and to provide rescue financing. Ressler's group selected ADIA, in part because he was convinced it was interested in Ares' long term health. While some investors inquired about getting fee discounts or special access to co-investments, "ADIA didn't ask for any special arrangements," Ressler says. ADIA executive director Hareb Al-Darmaki says the fund is talking to other firms about potentially buying stakes.
In some areas, ADIA is attempting to race ahead of the pack by stealing top talent away. Eighteen months ago, executive director Al-Hajeri personally wooed Chris Koski away from the Canadian Pension Plan Investment Board, an early player in the burgeoning area of infrastructure investing. Al-Hajeri convinced Koski to head up ADIA's own group to buy up roads, ports, and bridges by promising him the freedom to run his own show. He also showed Koski's wife around Abu Dhabi to convince her it was a good place to live. Poring through more than 1,200 applications, Koski quickly created a multinational 12-person investment team to look for plays across the globe. The group made its first purchase in North America, partnering with a couple of other firms. ADIA declined to name the investment.
ADIA is also racing to become best-in-class through training. It's spending $10 million on accounting classes and other employee training initiatives. In February, Harvard Business School professor Josh Lerner conducted a seminar on private equity. Former General Electric (GE) CEO Jack Welch (who co-authors a column for BusinessWeek) engaged in a question and answer session with 100 ADIA employees about political, economic, and management leadership issues recently. "We consider ADIA to be like the best [financial] institutions in the world," says Al Nahyan, with the asset allocations of Yale's endowment before him on a long brick-colored marble table. "Being far away around the world doesn't mean we are far away in quality."
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