We live in a time of sovereign wealth fund (SWF) mergers. Russia recently folded the remains of its Reserve Fund into its National Wealth Fund while Saudi Arabia is contemplating changes to the institutional architecture managing its country’s wealth. Both were a rational response to low oil prices, whereas the consolidation of Mubadala – last year it incorporated IPIC and this year it will integrate Abu Dhabi Investment Council (ADIC) – is a proactive step to maximize the benefits of skillful sovereign wealth management. This will now reduce the number of sovereign wealth fund vehicles managing Abu Dhabi’s one-trillion-plus assets to three, ADIA, the new Mubadala and the Emirates Investment Authority.
Many will wonder why didn’t Abu Dhabi consolidate sooner? In this regard, it is important to understand that any sovereign wealth fund has a particular mandate. As a relatively young state, the Emirates gradually created new sovereign wealth fund vehicles to pursue complimentary missions within one policy framework. Just five years after independence, the original sovereign wealth fund, ADIA, was created with the view of forming a stabilization fund investing in foreign assets to buffer oil cycles. Less than a decade later, Abu Dhabi established IPIC to invest in the global energy industry, particularly to ensure it had commercial downstream interests across the globe. By 2002, it had created a further sovereign wealth fund, Mubadala, to promote domestic developmental investments in line with the government’s broader economic diversification agenda. In stark contrast to the other two funds, this was done through direct strategic stakes in domestic projects. The 2007 formation of ADIC as a spinoff of ADIA reflected the tremendous growth in sovereign wealth and the evolution of ADIA into a hybrid fund for stabiliszation as well as long-term savings. The funds diverted into ADIC were supposed to be a pure form of long-term savings, i.e. liberated from any liquidity constraints as they were not designated to ever provide fiscal support.
In addition to the complementarity of the funds’ mandates, one side benefit has been the comparative performance of each fund’s operating model. In plain English, competition has shown what works best. Today, ADIA is a pioneer among institutional investors in global markets, with a long tradition in public markets as well as targeted stakes in unlisted companies. Mubadala has set world-class standards for a state development fund, showcasing how to effectively deploy capital in full alignment with economic policy goals. Given that the other two funds (ADIC and IPIC) have a similar disposition to illiquid investments, the consolidation of asset class expertise with strategic investment capabilities is compelling.
Admittedly, one can question if these funds can preserve all of their specializations within the larger structure. However, the benefits of consolidation should overwhelm any such concerns. First, there is a streamlining of governance. ADIA will continue to be mandated to invest abroad to maintain reserves as well as generate long-term returns. Mubadala will now be the sole development fund serving strategic policy objectives. More importantly, having quadrupled its assets through the two mergers, it will be able to extract large savings from economies of scale and synergies in the pooling of the three organizations. Above all, having such a substantial investment tool will provide a powerful boost to Abu Dhabi’s industrial policy making and the Emirate’s role as a financial hub.