After decades in the shadows, the Abu Dhabi Investment Authority is turning heads on Wall Street and in Washington with a string of high-profile investments in Western firms that is shifting the balance of power in the financial world.
Known as ADIA, the world's largest sovereign wealth fund recently formed a small team that is now buying big stakes, especially in the United States. 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 the country'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, of which Abu Dhabi is the capital. "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.
With 10 percent of the world's oil and 0.02 percent of its populace, Abu Dhabi has a surfeit of petrodollars, much of which it funnels into this secretive, government-controlled fund. But Abu Dhabi, the wealthiest of the seven Arab emirates, says little about it: Few outsiders know for sure where ADIA invests or even how much money it controls.
Secrecy breeds hyperbole. In this era of $100-a-barrel oil, some estimates of the fund's size surpass $1 trillion.
Before long, ADIA will certainly reach that mark. But for now bankers, former employees and analysts familiar with the fund estimate its size at $650 billion to $700 billion - an amount that is more than 15 times the size of Fidelity's Magellan Fund.
In all, sovereign wealth funds in countries like the United Arab Emirates, Kuwait, Singapore, China and Russia together control over $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 several 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 its says it is in the process setting one up. When sovereign fund leaders from around the world descended on Davos, Switzerland last month, no one from ADIA saw fit to show up.
Executives at ADIA declined to comment for this article.
Last week Senator Evan Bayh, a Democrat of Indiana who has raised concerns about the transparency of sovereign wealth funds, traveled to Abu Dhabi to meet with senior ADIA officials.
Also last week, a delegation led by Clay Lowery, a top U.S. Treasury Department 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 ADIA's 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 indices like the Standard & Poor's 500-stock index.
ADIA is also one of the largest institutional investors in hedge funds and private-equity funds. This approach has served the fund well and reflects the strongly felt notion that its 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. Today, it has about 65 percent of assets, or about $450 billion, invested in stocks, according to bankers.
Currently, the fund averages a yearly return of between 10 and 20 percent, say people who have been briefed on the fund's investment strategy.
With oil over $100 a barrel, bankers and analysts estimate that 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. But the surplus is a vivid reminder of the U.S. economy's 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 of a sister fund, the Abu Dhabi Investment Council, which is said to have assets of about $50 billion, 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 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 Emirates, a Tunisian bank.
Instead of passively tracking indexes, the unit actively picks investments in hopes of generating market-beating returns, using a method of stock selection practiced by most hedge funds and asset management companies. The Citigroup investment, with its size and attendant risk, exemplifies this approach.
Compared to the overall size of the fund, the assets within this group are small, at about $30 billion, according to people who have been briefed on ADIA's strategy.
These people say that 80 percent of the ADIA's assets are still managed by outsiders, proof that the fund's commitment to making direct investments is only in its early stages.
The fund's slow investment pace partly reflects the organization's lack of a strong individual within the organization who has the combination of investment experience, trust of the royal family and the 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, is the fund's chairman, but he has a cautious and reserved disposition and does not take an active role in ADIA.
When the Citigroup chairman, Robert Rubin, traveled to Abu Dhabi last November, his courtesy call was made to Sheikh Mohamed bin Zayed Al Nahyan, the crown prince of Abu Dhabi and the point person for the U.S.-Abu Dhabi relationship.
The fund's managing director, Sheikh Ahmed bin Zayed Al Nahyan, a half-brother of Sheikh Khalifa, maintains a full-floor office in ADIA's sleek 40-story headquarters. People familiar with ADIA management 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 BNP Paribas bank of France. While other expatriates have come and gone, Villain, despite leaving ADIA for a brief period in the mid-1980s, has stayed. More so than the other foreigners, Villain, whose wife is Syrian-born, has gained the trust of the royal family. He oversees all major asset allocation decisions.
One view is that ADIA's penchant for secrecy stems from its experience during the BCCI scandal of the late 1980s, during which ADIA is said to have lost hundreds of millions of dollars. The Al-Nahyan family became embroiled in regulatory investigations, although no charges were ever brought against them.
But 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 holdings, the better.
"ADIA does not answer to a wide public at home," said David Mack, a former U.S. 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." (WAM)
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