Abu Dhabi Investment Authority secrets revealed …
Thanks to Henny Sender of the Wall Street Journal. One reason why the Abu Dhabi Investment Authority (ADIA) has gotten so big so fast is that it had (and still has) a lot of money invested in emerging market equities.
“Analysts believe it [ADIA] may well be the largest investor in emerging economy stocks”
And those securities – unlike China’s huge holdings of US Treasuries and Agencies – have gone up in value. A lot. Turning an oil surplus into Brazilian and Turkish equities has been a better business model over the past say five years than turning a “manufacturing workshop to the world” surplus into US bonds.
And then ADIA levered its oil surplus up. Not directly. But by investing in various private equity funds. Think of it this way: ADIA gives a private fund some money to manage – and that fund borrowed some of the dollars that the Indians and the North African's have placed in the international banking system, as well as taking advantage of the liquidity generated by huge Saudi Monetary Agency and PBoC purchases of debt securities to gear themselves up. Sometimes ADIA invested along side various private equity firms in specific deals as well.
“It [ADIA] has a long history of investing in private equity firms and investing along side them in some of their largest purchases.”
More after the break.
I would bet that the Saudi royal family – and other key families in the Gulf – have played a similar game. Carlyle certainly manages the money of someone in the Gulf. Sender:
“Carlyle Group co-founder David Rubenstein was among the earliest and most frequent visitors to the Gulf to raise money.”
London's "The Business" makes a similar point:
"Many of the London-based hedge funds and private equity raiders are at least in part (often indirectly) being financed with petro-dollars"
Now it seems like ADIA may want a cut of private equity’s management fees. Fair enough. It has paid its fair share of those fees.
If China can have its private equity fund, why shouldn’t ADIA have one too. For that matter, ADIA and QIA may have quietly done in with China on Blackstone too. Sender:
“Abu Dhabi and the investment arm of the government of Qatar are believed to have approached Blackstone for significant stakes before its public debut, according to people familiar with the matter .. “
One question:
ADIA’s business model (along with the business model of Singapore’s GIC) seems to have been enormously successful. It is now attracting a host of imitators. But to what extent was its success due to the fact that it was playing a different game than the other big official institutions?
The other big institutions focused on liquidity — and building up a buffer against swings in capital flows and oil prices. The consequently bought safe industrial country bonds. ADIA, on the other hand, has long held more than enough assets to buffer against swings in oil prices. It focused more on returns and, not unlike some private investors in advanced economies, bought emerging market equities and arbitraged the difference between the price of debt and equity in the advanced markets.
Both bets paid off. All the domestic liquidity created by the intervention of other central banks had to go somewhere — and a lot went into equity prices. And private equity firms mastered the art of turning official demand for debt — or actually, demand for higher-yielding debt from private investors who sold their Agencies and Treasuries to central banks and thus were liquid — into demand for equities.
However, if all of the big official players stop buying bonds and start buying emerging market equities, though, emerging market equities may not prove to be quite as a good an investment going forward. Sure, that means new demand for emerging market equities. But ADIA (and others) have already bid the price of emerging market equity up — a lot of emerging markets aren't cheap anymore.
Then again, I doubt dollar-denominated treasuries yielding 5% nominal offer China a very attractive RMB return. Portfolio diversification alone suggests China should buy fewer US bonds and more of something else.
That is one clear lesson from ADIA’s portfolio. It clearly has had a diverse portfolio for some time, not a portfolio concentrated in "safe" government and agency bonds from advanced economies. Too bad we don't have a better sense of exactly what share was allocated to various kinds of investments, and what share was invested in more traditional safe assets …
Brad — Given the Dubai/China comparison — obviously the Chinese strategy is far from optimal. While the argument you made in your congressional testimony and elsewhere that suggests the Chinese will probably not maintain their current strategy of non-diversified holdings of Treasuries makes economic sense, are there POLITICAL reasons that have motivated the Chinese decision to not dive directly into more portfolio diversity? Is there a dividend either directly or indirectly the Chinese were expecting with regard to either the economic or political relationship they have with the United States? More recently the “dependence” of current account deficit spending that the US has seems to have caused negative feedback since there has been Congressional fears etc that have emerged over simple dependence issues or even perceived leverage the Chinese financial position creates, not to mention political peculiarities like the Chinese financing a war they were diplomatically opposed to. I know this brings up a lot of issues, but wanted to try and swing the discussion a little bit more onto the side of political economy given my political science bias.
apologies for the difficulty commenting — i used an apostrophe in the post title, and it caused the confirmation keyword system problems. should be better now.
Quoting Brad “If all of the big official players stop buying bonds and start buying emerging market equities, though, emerging market equities may not prove to be quite as a good an investment going forward. Sure, that means new demand for emerging market equities. But ADIA (and others) have already bid the price of emerging market equity up — a lot of emerging markets aren’t cheap anymore.”
If Nouriel is right, and I would bet “all-in” on that,
then those heavily invested in emerging markets must find a geater fool, and fast. How do you think AIDA will become liquid, if not to eventually sell?? In fact, demand for BlackStone-like investments by such entities is a sell signal in itself.
From a market perspective, the ADIA will be need a new
moniker, and ADIEU sounds about right to me.
I would say Japan has much more need for foreign equity investment than China. China’s capital can be much better used investing at home or securing strategic resources. Much of its portfolio outflow will probably be used to buy back shares it has sold overseas earlier.
investing at home means running a smaller current account surplus (which likely means letting the rmb appreciation and stimulating the economy with a fiscal deficit); it may slow the pace of reserve accumulation but doesn’t address the question of what to do with china’s existing reserves. remember, foreign assets can be traded for other foreign assets, but cannot be traded directly for domestic assets –tho you can run down your foreign assets to cover a current account deficit or a capital outflow.
buying strategic resources is fine in theory, but most strategic resources aren’t for sale. i don’t think the saudis are about to sell Aramco. Abu dhabi isn’t putting adnoc on the block either … and so on.
interesting point re ADIA. it can sell to the CIC. But then where does it go? it already tried to buy the Louvre, and was only able to get a small bit …
What’s interesting and slightly scary is that Singapore and Abu Dhabi are both pretty small countries/economies, yet their SWF’s have nearly $1 trillion in combined assets. While CIC will obviously have nowhere near the AUM per person ratio of these (now or, in all likelihood, ever), it does beg the question of how effective CIC can be in the alpha generation game moving forward. From a simple size perspective, they will face quite substantial investment contraints in a couple of years, assuming a reasonable growth rate; an investment in a small, illiquid risky asset that might be highly attractive to an individual will be untenable for CIC because it won’t make enough money.
“investing at home means running a smaller current account surplus (which likely means letting the rmb appreciation and stimulating the economy with a fiscal deficit); it may slow the pace of reserve accumulation but doesn’t address the question of what to do with china’s existing reserves.”
I agree. I just don’t think there is not enough space to diversify. Not in equities. A city state may be able to live on foreign investments, as long as it is tolerated. A big country can’t. US does it through debt/equity swap. Very large net foreign ownership by a big country without dominant military power is not politically sustainable. It may not be sustainable even with dominant power.
“buying strategic resources is fine in theory, but most strategic resources aren’t for sale.”
Right again. But it doesn’t have to be sale of majority control. It will have to be strategic deals. The reciprocal concession is some agreements on market access. China does have pricing power over commodities, if it chooses to.
Another perspective from an investor’s viewpoint on SWF:
many countries have dividend withholding tax, as high as 40% in some European countries. This is not a problem for individual investors investing through taxable accounts, because the tax will be credited back by their governments (at least in the U.S.). But this makes no sense if you ARE the taxing authority as a sovereign. So it cuts the economic value of your holding by a lot. Your recourse is capital gain but there are countries that have withholding taxes on those too. In a word often what makes sense for private investments does not for SWFs.
http://atimes01.atimes.com/atimes/Global_Economy/IK03Dj03.html
http://www.globalfirepower.com/list_gold_reserves.asp
http://mwhodges.home.att.net/
http://www.freewebs.com/rumorsconspiracybooks/Folder1/The%20Federal%20Reserve%20is%20PRIVATELY%20OWNED%20by%20Thomas%20D%20Schauf.pdf