In a major development for sovereign wealth funds (SWFs) – and capital markets more broadly – the Abu Dhabi Investment Authority (ADIA) issued a letter this week to finance ministers and international bodies (such as the World Bank / IMF) regarding its investment principles. The letter represents a major milestone for the historically guarded ADIA, and reflects the institution’s desire to accommodate demands for transparency – but on its own terms.
For those familiar with ADIA, the letter itself holds no surprises. Signed by Yousef Al Otaiba, ADIA’s director of international affairs, it articulated nine principles such as the practice of generally being a “passive investor” and not seeking “involvement in the management or direction of firms.” These principles, which are borne out by ADIA’s three decade track record, are not legal commitments or guarantees.
(For more on ADIA and Gulf institutional investors, see Chapter 8 – Capable Capital: The GCC as a Source of Capital – of Dubai & Co. For more on the letter, see this article from the Wall Street Journal)
ADIA’s letter is an important chapter in a story that is far from over. In considering what will likely come next, a few market realities should be kept in mind.
The first of these is that ADIA’s letter may have some PR benefits, but will not — in all likelihood — assuage the most vocal critics of sovereign funds. These critics, in the media and in government, will almost certainly call for legally binding agreements rather than statements of intent.
The second is that ADIA and other sovereign funds (especially in the GCC) will almost certainly grow in importance as a rare source of liquidity in a time of global financial crises. The combination of high oil prices with lower-priced companies available for sale would only suggest even that greater overseas investment is on the horizon.
The third is that Gulf capital has choices. Markets that take a more nuanced stance – protecting their legitimate interests without repelling GCC investors with blanket prohibitions – will win out in the competition to attract investment.
The most practical approach moving forward seems to be greater transparency at the deal-level – not at the fund-level. As sovereigns like ADIA make equity investments in companies, appropriate covenants ensuring a focus on shareholder value can be articulated and publicized. This moderate approach both addresses political / security concerns while protecting the confidentiality of sovereign investors.
Another interesting method is to fund joint ventures like the Kuwait / Dow Chemical JV about which I wrote in December. While this strategy has many benefits, it does not always provide the level of liquidity multinationals may be seeking at the parent-company level.
In issuing its letter, ADIA has chosen a diplomatic and understated approach, rather than flexing its substantial muscles. Savvy observers will nonetheless appreciate that making sovereign funds feel unnecessarily unwelcome is hardly a recipe for attracting much-needed capital and enhancing shareholder value.
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