In the passenger seat

A recent visit to Abu Dhabi found that the emirate’s flagship investment entity, the Abu Dhabi Investment Authority, was actively taking more control of its real estate investment strategy, evolving from making fund commitments to taking more direct positions.

Abu Dhabi: Private equity GPs should still
visit for commitments

The department, led by global head of real estate Bill Schwab, is busy hiring experts on all sectors and geographies in which it sees potential value, so that it can take on active investment execution and management responsibilities. During a 90 minute-plus session at ADIA’s headquarters,  Schwab and other senior real estate executives stressed that the department is after  “true economic partnerships” where ADIA can bring as much to the table as its investment partners. In other words, passive co-investments and blind pool fund interests won’t cut it anymore.

But don’t expect ADIA to take a similar approach through its private equity and infrastructure investment divisions. Why? Headline and political risk. ADIA stresses its motivations are purely commercial and will not risk taking what could be perceived as politically sensitive positions in companies or large infrastructure projects.  It is keen to avoid the sort of high-profile problems experienced, for instance, by Dubai Ports, a conglomerate backed by fellow emirate Dubai, which kicked up controversy in 2007 when it bought the UK’s P&O Holdings, thus gaining control of six major American ports. To assuage security concerns threatening the deal, and resulting Congressional furore, DP World agreed to transfer ownership of the US ports to AIG Investments.

ADIA’s private equity programme, operational since the late 1980s, has an allocation to private equity of between 2 percent and 8 percent, according to official ADIA data. While the sovereign wealth fund does not disclose specific asset totals, sources close to the organisation say it comprises between $300 billion and $600 billion in equity. No matter which set of numbers you choose to do the maths, it adds up to a lot of private equity investment.

Other than a few co-investment deals – including the blockbuster $44 billion LBO of TXU and the $19.4 billion Alliance Boots take-private – practically all of its private equity investments have been made through commingled funds. It would be fair to believe ADIA might increase co-investment activity alongside the funds in which it entrusts its equity, but not to any degree where it would need to take serious operational or managerial positions.

ADIA’s infrastructure group, headed by Chris Koski, is even less likely to take controlling positions. The department, created in 2007, has so far invested only on a direct basis and not through funds, although it doesn’t rule fund commitments out for the future. It will, however, be even more sensitive in the size of the positions it takes.

ADIA aims to have between 1 percent and 2 percent of capital invested in the infrastructure sector (a maximum of $12 billion, given the largest total capital under management estimation). The infrastructure team deliberately avoids operational involvement in its investments by participating in investor syndicates, sometimes taking the smallest stake within a consortium. It recently paid £125 million (€143 million; $196 million) to purchase a 15 percent stake in London’s Gatwick airport from Global Infrastructure Partners, which also sold a stake to South Korea’s national pension.

As one market source said: “They want to be seen as savvy, financial investors, pure and simple. They have the capital and the expertise to close on transactions that make economic sense to them.”

So, while ADIA’s real estate team is intent on taking the direct investment wheel, expect its other alternative asset divisions to remain firmly in fund managers’ passenger seats.