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 ...