Letter from Abu Dhabi: Different strategies, different shades

Readers of sister magazine Private Equity Real Estate (PERE) will note this month that the Abu Dhabi Investment Authority’s (ADIA) real estate department is taking more control of its investment strategy, effectively evolving from making fund commitments to blind pool vehicles, to taking more direct positions.

The department, led by global head of real estate Bill Schwab, is hiring on all cylinders to ensure it has an expert in every sector and geography it sees value, so it can take on active investment execution and management responsibilities. The ideal investment scenario most-coined during PERE’s one hour and forty-five minutes with Schwab and other senior real estate executives was a that of a “true economic partnership” where ADIA can bring as much to the table as the partners it invests with. In other words, passive positions won’t cut it anymore.

Don’t expect ADIA to take a similar approach through its private equity and infrastructure strategies. Why? Put simply, the organisation has repeatedly stressed its motivations are purely commercial and it will not risk taking what could be perceived as politically sensitive positions in companies or large infrastructure projects. Real estate simply doesn’t carry the same risk.

ADIA’s private equity department, operational since the late 1980s, has a neutral benchmark 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 told us it has between $300 billion and $600 billion in equity, meaning it has up to $24 billion invested in the sector.

Other than a few co-investments, such as 2007’s positions in TPG’s $44.4 billion buyout of Texas utility giant TXU Corp and KKR’s $19.4 billion purchase of UK retailer Alliance Boots, practically all private equity investments have been made through commingled funds. It would perhaps be reasonable to believe ADIA might increase co-investing alongside the funds in which it entrusts its equity, but not to the degree that it would need to take serious operational or managerial positions.

ADIA’s infrastructure group, headed by Canadian Chris Koski, is even less likely to take controlling positions. The department, created in 2007, has so far only invested on a direct basis and not through funds (though it has not ruled out the latter), but will be even more sensitive in the size of the positions it takes.

Again, looking at the official data obtained by PERE, ADIA aims to have between 1 percent and 2 percent of capital invested in infrastructure (a maximum of $12 billion, given the largest total capital under management estimation). The infrastructure team is populated with investment professionals and deliberately avoids operational involvement in its investments. To ensure it doesn’t have to, expect it to make only consortium investments where it assumes minority and passive positions. One source close to the organisation went one step further when he said it’s not unusual for ADIA to hold the smallest position within a consortium.

This chimes with an anecdote heard by PERE that one of ADIA’s investments involved actually turning down a board seat in order to keep the investment at arm’s length. Instead, ADIA’s team of ex-Macquarie and Canada Pension Plan infrastructure professionals are positioning themselves as investment partners of choice for assets with what they regard as the right profile.

One 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.” The most recent example of that was ADIA’s acquisition of a 15 percent stake in London’s Gatwick airport, alongside majority owner Global Infrastructure Partners.

So, while the story from ADIA’s real estate department is all about control, rest assured that one shoe does not fit all of its departments.