Abu Dhabi Investment Authority to spruce up direct PE investments

Abu Dhabi Investment Authority HQ. Photo: Bloomberg

Abu Dhabi Investment Authority (ADIA), the $828 billion sovereign wealth fund of the government of the Emirate of Abu Dhabi, said its private equities department will scout for principal investments in its core sectors.

It will also continue to make new fund commitments to partners with whom it has developed “broad relationships” built on a mutual understanding of priorities, said ADIA in its 2018 annual review.

Direct investments made by ADIA comprised about 40 per cent of its overall new private equity commitments – a new high, and up from around 30 per cent in 2017. In addition, the total value of new principal investments made by ADIA’s PE team has doubled compared to 2017, and more than doubled since 2016.

ADIA said it has successfully completed 15 principal investments across its core sectors in 2018, in addition to several smaller direct venture capital investments, with an emphasis on opportunities where it could provide a differentiated capital solution to a seller or GP partner.

“With valuation and leverage metrics at or near record levels, private equity returns are likely to face headwinds going forward. Indeed, there were signs during 2018 of heightened caution in the market, as investors took note of sudden, sharp drops in public equities at various points during the year. While these proved short‑lived, they served as an indicator that the prolonged equity bull market may be entering its latter stages,” said the annual review.

The private equity department of ADIA said it will remain attentive to sectors such as financial services, healthcare and industrial. The $828 billion sovereign wealth fund has an 8 per cent and 10 per cent maximum allocation for private equity and real estate investments, respectively.

Established in 1976, ADIA started in private equity since 1989 and has built a significant internal team of specialists with experience across asset products, geographies and sectors.

Real estate – China, India and Latin America to be key focus

In its annaul review, ADIA noted that dry powder available for real estate investments has hit a record high, suggesting that investor appetite for the asset class remains robust.

In 2018, the fund’s new investments in real estate has achieved average equity-weighted internal rate of returns (IRR) of more than 10 per cent.

It said its real estate team will continue to seek out opportunities in the emerging markets of China, India and Latin America where growth will be driven by urbanisation, a growing middle class and increased consumption.

China, in particular, has seen Adia’s overal real estate exposure up by one-third over the past two years alone.

“As in 2018, ADIA’s real estate team will seek to balance its emphasis on portfolio and asset management with selective acquisitions in areas with long‑term growth potential. Meanwhile, we will look to deploy additional capital to existing, high potential assets, while continuing to assess new opportunities in line with our philosophy of ‘global relative value’,” said the annual review.

Moving forward

ADIA has also identified two major trends that may change the ways investments are made in the next decade: technology and climate change.

Private equity firms that are able to effectively implement data-centric strategies are likely to see their competitive advantage increase over time as they build a moat of proprietary talent, data and insights, said ADIA senior portfolio manager for the private equities department Hisham Hasan.

“Given the increasingly compressed timeframes for many sell‑side processes, the ability to deploy in‑house data analytics teams is becoming ever more valuable. By working alongside investment professionals, data analysts can rapidly validate the rationale for a transaction by analysing their target’s data from multiple perspectives,” said Hasan.

“However, over the medium‑to‑long term, the ability of PE firms to generate outsized returns is likely to come from their ability to use technology to enhance value at their portfolio companies,” he added.

In 2018, ADIA’s 20‑year and 30‑year annualised rates of return were 5.4 per cent and 6.5 per cent respectively.

“While these rolling averages were impacted somewhat by the exclusion of strong gains in the mid‑to‑late 1980s and 1990s, ADIA’s real returns remained largely consistent with previous years and historical levels,” said the fund’s managing director Hamed Zayed Al Nahyan.