Seeing Clearly

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Sovereign wealth funds (SWFs) in the UAE have been the topic of much discussion and some scrutiny in past weeks. During a recent trip to Abu Dhabi, David McCormick, the US undersecretary of commerce for industry and security, encouraged governments to utilise international best practices and increase transparency.

"A little more clarity on the funds will be useful for all parties - for those who are trying to invest sovereign wealth and those who are receiving it," McCormick told local press.

Some SWFs, notably Norway's Government Pension Fund, are very transparent and release extensive information about their investment activities and holdings; however, the majority of large SWFs rarely disclose this type of information to the public. Analysts believe these funds have an investment advantage by not having to disclose yearly financial results and holdings, yet this lack of disclosure forces analysts to speculate about SWFs' investment strategies, political objectives, and how much money they have under management.

Low levels of transparency tend to worry governments that would otherwise welcome foreign investment. As SWFs continue to grow and invest abroad, they will take a more authoritative position in the marketplace and the boardrooms of the companies they invest in. Without disclosing their strategic objectives and investment strategies, some critics believe that SWFs will be met with increasing opposition.

Commodities such as oil provide the capital for nearly half of the top 25 sovereign wealth funds. The hydrocarbon-rich Gulf Cooperation Council (GCC) is home to both the oldest, the Kuwait Investment Authority, and the largest, the Abu Dhabi Investment Authority (ADIA), of these funds.

Established in 1977 by the late Sheikh Zayed bin Sultan Al Nahyan, ADIA has grown to employ over 1,400 people and manages somewhere between $400bn to $850bn. ADIA is the largest shareholder in two of the UAE's largest banks, National Bank of Abu Dhabi and Abu Dhabi Commercial Bank. The fund has become world-renown not only for its size and investment acumen, but also because of its lack of transparency.

Boosted by the rise in energy prices, SWFs such as ADIA have grown exponentially over the past years. No longer satisfied with low-yield, low-risk investments, many SWFs are making strategic investments in foreign companies and modifying their investment strategy.

US hedge funds and private equity firms are also courting SWFs as a quick way to raise capital and build international business relations. ADIA recently bought a 9% share of Apollo Management, a US private equity group. This purchase came on the coattails of ADIA's $1.35bn investment in a 7.5% holding in Carlyle Group in September, another large US firm.

The Abu Dhabi Investment Company (ADIC) is a wholly owned subsidiary of ADIA. ADIC is involved in investment and merchant banking activities and is notable for releasing yearly financial statements, although its activities represent only a fraction of the estimated assets of its parent company.

SWFs are increasing in both size and importance and Western governments are trying to foster dialogue to better understand these funds. As SWFs continue to play a larger role in the global economy, Western players are hoping these funds will model their practices to include reporting similar to that undertaken by the ADIC.

McCormick said, "Abu Dhabi Investment Authority can play a very active role among SWFs to apply best practices."

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