Abu Dhabi Investment Authority’s push into direct private equity investments is steadily gaining momentum amid an increasingly challenging and competitive environment. And the Emirate’s flagship sovereign wealth fund (SWF), like many of its asset owner peers, sees Asia as a key focus region.

AsianInvestor took a closer look at how Adia has revamped its approach* to the asset class, to which it has a target allocation of between 2% and 8%. 

But the fund keeps the size of its overall portfolio closely guarded. Diego Lopez, New York-based managing director of advisory firm Global SWF, puts it at around $700 billion, as does the Sovereign Wealth Fund Institute. A London-based sovereign fund expert says it is closer to the $500 billion mark.

Whatever the number is, a private equity allocation of between $10 billion and $56 billion is substantial. And Adia is looking after more and more of that money directly through its in-house team, with the aim of exercising more control over its investments, reducing fee levels and ultimately, of course, boosting returns.

The fund is yet to publish its 2019 annual review, but the latest report showed that direct deals accounted for around 40% of its new commitments to private equity in 2018, up from some 30% the year before. The total value of new principal PE investments more than doubled between 2016 and 2018.

Moreover, Adia was the fifth most active SWF by number of deals done in 2018-2019, accounting for 6% (or 15) of all transactions done by such institutions analysed by a report published last week. 

The move to ramp up PE deal-making capabilities has gained pace since it rearranged the private equity department in 2016. This involved ditching its centralised global teams for developed and emerging markets and instead setting up the division along geographical lines across the three main regions: Europe, the Middle East and Africa; the Americas; and Asia-Pacific.

And, given that sourcing and executing direct deals is resource-intensive, Adia felt it needed a bigger headcount specifically targeting the larger markets in those three focus regions, and five key sectors.

INCREASING ASIA EXPERTISE

In Asia, of course, this by definition meant increasing the focus on the likes of China, India and Southeast Asia. But it also meant that some smaller markets outside Asia would receive less attention, by dint of them offering fewer large-scale opportunities.

“The shift to regional teams has allowed Adia to increase the depth of expertise it has in Asian markets,” one executive familiar with the fund told AsianInvestor.

Interestingly, the fund may hire local private equity experts in its target markets but bases the entire team at its headquarters. The fund takes the view that it makes sense to have them under one roof, so the team can easily share knowledge across markets or sectors. Of course, they do a lot of flying, said the executive on condition of anonymity.

Clearly then the portfolio management approach for Adia – and other very big institutional investors – is changing: they want to do more direct and co-investment deals, and to do them in size.

To do that successfully, you need both local and technical expertise, said the unnamed executive familiar with Adia. It is, however, more likely now to have cross-regional and multi-sector know-how than it is to have individuals focused on, say, a smaller market in Eastern Europe or Latin America.

Asia, meanwhile, is a beneficiary: the sheer size of its big economies means that it is receiving a growing share of the capital allocated by large global investors. Adia’s decision to close its office in London in late 2015 and open one in Hong Kong a year later – now its only international presence – is telling.

This reflects the direction of travel among Adia’s peer group.

BIG TICKET TREND

“Ticket size has been an issue for years for the biggest sovereign funds,” one London-based sovereign wealth fund expert told AsianInvestor. “They have relatively small teams compared to the big private equity firms, so they don’t want to spend a lot of time doing due diligence on smaller deals.”

That said, Adia is active in venture capital deals – which are typically well below $50 million in size – and has been doing more in recent years, like many of its peers.

But larger tickets are clearly the norm.

Recent successes include Adia forming part of a consortium that won the auction for German conglomerate Thyssenkrupp's elevator unit this year with a bid of €17.2 billion ($18.9 billion). The fund was also part of the group that bought Nestle’s $10 billion skincare business last year.

The big PE managers are benefiting despite the desire for direct deals, hence mega-funds of $10 billion-plus becoming increasingly common. This is because asset owners have reduced the number of general partners they use, but deepened their relationships with trusted large players. 

After all, only the larger government funds – such as China Investment Corporation, Singapore’s GIC and Qatar Investment Authority – can afford the expertise to run big direct investment programmes.

And even they can struggle to attract and hold on to talent. In-demand international dealmakers may often prefer London or New York to Kazakhstan or Saudi Arabia, noted the London-based expert.

But if an institution pays competitively and has the heft and firepower needed to participate in the flagship transactions, that will count for a great deal.

*Adia declined to provide an interview or provide specific details to AsianInvestor but was willing to check the material presented for factual accuracy.