A warning to all general partners about to book plane tickets to Abu Dhabi: if your purpose is to lure one of
the world’s largest sovereign wealth funds into investing in your latest blind pool real estate fund, save your airfare. Regular-way fund commitments are not what the Abu Dhabi Investment Authority is about these days.
In an unprecedented exercise, ADIA invited PERE to its headquarters on the emirate’s distinctively landscaped waterfront to share with our readers a more accurate picture of what is becoming a highly resourced and direct investor.
There is change afoot within the curved-glass walls of this Kohn Pederson Fox-designed wonder office, and nowhere more so than within ADIA’s Real Estate Department (RED). Seeking to optimise its performance and position itself for evolving market opportunities, ADIA is taking a more “hands-on” approach to managing its real estate investments. Today, RED is just as likely to be your “equal” investment partner as your limited partner.
Within minutes of our meeting, Bill Schwab, ADIA’s global head of real estate, is relaying a comprehensive list of strategies the investment authority will target. Based on a research-driven, global view of the market, ADIA is prepared to invest its substantial petrodollars (crude oil was back up to $75 a barrel at press time) invest across the property sectors, in different stages of the development process and will consider both public and private debt and equity investments. “The mandate we have here is very broad,” explains the white-haired six-footer, who emigrated from London to the emirate in January 2009.“We are able to step in and out of the capital structure and can be as flexible as we need to be if it fits our strategy and makes sense for a particular deal,” Schwab says confidently.
Bill Schwab
Although the 57-year old former Goldman Sachs, Deutsche Bank and JPMorgan senior executive has been at the helm of ADIA’s global real estate portfolio for little over a year, his tenure has seen the rapid ramp-up of a strategy formulated in 2006. The plan was drawn up by senior members of RED who concluded that ADIA needed to refine its property investment approach in order to better capture an increasingly complex set of opportunities. 
We felt it was a good time to let people get to know us better and understand what we are trying to achieve
Changes are also underway in other parts of the 1,200-staff investment authority, whose famously low profile had led some to label it as “opaque” or “secretive”.
In 2008, ADIA led a group of sovereign wealth funds from 26 countries in crafting a set of principles that clearly set out how sovereign wealth funds operate, including their sole pursuit of risk-adjusted returns, as opposed to political objectives. Additionally, in a significant break from the past, ADIA hired a five-person communications team to make itself more accessible to the outside world.
However, according to sources familiar with the organisation, the new RED is a radical transformation away from the old RED (not that too many outsiders knew the inner workings of ADIA in the first place). Now, partly to broadcast its upgraded capabilities, and partly to correct misconceptions, ADIA is more willing than ever before to tell its own story.
But it has not gone from opacity to transparency in one fell swoop. The unrelenting question of how much money it has under management, for example, remains officially unanswered. However, we can report that the oft-cited figure of $875 billion is way off mark. While unconfirmed by ADIA, PERE has learned that the sovereign fund’s capital under management lies in a range between $300 billion and $600 billion.
“It is substantial,” says Schwab of RED’s asset base. “But we prefer people to focus on what we can do, not on how big we are.”
Instead, starting with its property group, ADIA wants to dispel some of the misunderstandings about the organisation that exist in the marketplace and, in so doing, attract an appropriate set of operating partners to help it pursue its strategy. ADIA’s RED also plans to grow its staff to roughly 90 people this year, and so staying silent is not helpful in this regard.
A room with a view
A 21st floor conference room is the setting of ADIA’s first interview on its real estate strategy. The room would fit well in a giant cruise-liner at sea – very panoramic, very bright, very blue. Already used to such serenity, however, Schwab and team sit with their backs to the window along a sparsely laden, curved desk.
Schwab is flanked by Tom Arnold, 51, RED’s head of Americas, and Mike Goodson, 49, RED’s global head of hospitality. Both were recently hired Arnold from private equity firm Cerberus Capital Management last October and Goodson from hotel real estate company Host Hotels & Resorts a month after Schwab joined. With Schwab’s background in real estate debt thrown into the mix, it is immediately apparent there is a senior expert in place to understand practically every investment opportunity. A representation of ADIA’s all-encompassing skill set is on full display.
“In 2006, the senior people here decided they wanted to evolve ADIA to anticipate and position for changes that were occurring in the market,” Schwab says. “That thinking led to the expansion of RED. We felt it was a good time to let people get to know us better and understand what we are trying to achieve.”
Many know ADIA as one of the world’s most coveted cornerstone LPs, and while that would not be incorrect, today ADIA has much broader ambitions than being only that. Unlike in the wider organisation, where 80 percent of its assets are managed externally, RED has long invested directly and often in joint venture partnerships. That said, since its formation in 1976 as a replacement for Abu Dhabi’s Financial Investments Board, real estate has historically played a minor role (although sizable in absolute terms) in the UAE capital’s overseas portfolio compared with its significantly larger positions in equities and bonds.
Schwab says that ADIA’s current exposure to real estate is “consistent with historical figures” of a 5 percent to 10 percent allocation range.
This would peg the value of ADIA’s property portfolio at somewhere between $15 billion and $60 billion. Whatever it is, ADIA is among the world’s largest backers of real estate, along with the California Public Employees’ Retirement System and fellow sovereign wealth fund, Singapore’s GIC. And ADIA is clearly intent on putting more capital to work in real estate.
Allocation decisions are made by ADIA’s Investment Committee, which comprises senior executives from across the organisation, and ultimately the managing director, Sheikh Ahmed bin Zayed Al Nehayan, brother of UAE president and ruler of Abu Dhabi, Sheikh Khalifa bin Zayed Al Nehayan. Their decisions are based in part on recommendations from the Strategy Unit led by Jean-Paul Villain, as well as with feedback from the individual departments. Although the Strategy Unit makes its allocation recommendations independent of RED, Schwab says he and his senior colleagues do maintain a regular dialogue with them.
Goodson says: “We spend time with them discussing where we see opportunities and real estate might go a little heavier or lighter depending on relative value across the asset classes. RED’s focus is on identifying and executing transactions and creating value with the assets that have been allocated to us.
RED’s focus is on identifying and executing transactions and creating value with the assets that have been allocated to us
All are keen to point out that RED has sole responsibility for originating investment ideas and all decisionsare made on a purely commercial basis. The person who sets RED’s overall direction and oversees the team’s activities is Majed Al Romaithi, executive director for real estate. It was Al Romaithi who led RED’s more self-reliant investment strategy and began the recruitment process that resulted in Schwab’s appointment following the departure of chief investment officer for real estate Mark Burton. Burton is now at The Abu Dhabi Investment Council (ADIC), a separate government investment fund created in 2006 which invests both domestically and internationally.
While Al Romaithi represents the real estate division in the Investment Committee, Schwab is responsible for managing RED’s investments and is given the “latitude” to execute the strategy. Schwab explains: “What brought me here was the chance to have a positive impact on one of the world’s leading real estate investors. We have hired some of the best talent in the world and these people would not have come if they did not feel they could have a similar impact.” And the chance to have an impact “is exactly how it turned out” adds Schwab.
Cyclically astute
RED is billing itself as the partner of choice in global real estate investment, able to add its own array of expertise and services to deals. “There has been a perception that RED is a passive investor, but that really is not the case,” argues Goodson.
To illustrate this point, Goodson describes a deal in North America which had stalled until RED stepped in with fresh capital and ideas. “Part of the reason that deal had stalled was because it was dependent on bank financing. We were able to move in, increase our equity commitment, thereby taking away the financing dependency to get the deal moving again.”
Schwab chimes in: “It’s one thing to have substantial resources. It’s another to be able to respond quickly and in a sophisticated way on complex proposals, which we can. If you come to us with a good economic deal and a reasonable structure, we can get it done. We can do it quickly and with conviction and I think that makes for a great partner.”
Bill Schwab
A senior partner at a major real estate fund manager familiar with ADIA says he regards the investment authority’s increasingly active strategy as logical and cyclically astute. Likening the sovereign wealth fund’s sudden growth as reflective of a “giant start-up”, he says: “They are trying to take advantage of their size and they have the ability to do it. They want to build a franchise at a time when the world is weak.” If you come to us with a good economic deal and a reasonable structure, we can get it done
Schwab insists ADIA’s current strategy is the latest evolution of a business that has had a significant presence in real estate for more than 30 years. Arnold adds: “We view the team build-out as an enhancement. We’ve got 20- and 30-year veterans with excellent contacts built up over many years and who bring valuable cultural and historical perspectives. There are certain specialisations that we are adding but we think that is part of our story.”
Although RED is focused on attracting new partners able to offer complimentary skill-sets, Goodson says RED will maintain a strong focus on managing relationships with existing partners, even if, on the LP side, some of the structures of the investment vehicles they manage have become outmoded. “The managers of some of the funds we invest in are coming to us and are asking to be reconstituted in some manner, offering things like shorter investment periods, narrower strategies,” he says.
Schwab adds: “If there is a degree of flexibility, a series of reconfiguration points, expanded major approvals, that’s when we approach a true economic partnership. In general, the inflexible approach offered up by fund managers in the past has proved very unsatisfactory for many market participants.”
Private equity-style real estate funds also typically come with finite holding periods, a constraint that RED wants to avoid. Arnold amplifies this point by describing an office tower ADIA has owned for 25 years. “We’ve pulled the capital out of it several times over,” he says. The current performance of this long-term hold is “a bit off”, he adds. “Rents are off 35 percent from 18 months ago and its occupancy is soft. Is that a good thing or a bad thing? We submit it’s neither.” Arnold says challenging conditions like this cause ADIA to ask the question: “How can we reposition the asset for the next 25 years?”
Goodson adds blind pool funds are now “the exception rather than the rule” and this message has already filtered into the market. RED is invested in more than 100 real estate funds managed by a variety of managers from first-time fund managers such as India-focused Red Fort Capital, to medium-sized platforms like AREA Property Partners and established heavyweights like The Blackstone Group and Lone Star. According to PERE sources, ADIA has recently declined several opportunities to invest in new funds by well-known industry players, although in keeping with policy, ADIA would not discuss individual investment partners.
That is not to say ADIA has turned its back on its existing LP commitments. Schwab says RED is a very active advisory board member in many of its funds. “For us, there is a fair bit to do even when we are an opportunity fund investor where we have a passive position. We are still regularly talking with managers about what they are doing with particular assets.”
And ADIA is in regular dialogue with other LPs too. The day before PERE sat down with ADIA, Arnold received a visit from a large US pension fund simply to undertake a note-swapping exercise. “We had no agenda other than to share best practices,” he says. High on the agenda of their conversation, though, was how LPs can advance their sophistication, as well as “the extent to which we are relying on managers”.
That visit, Arnold adds, was one of up to 15 RED receives from managers and other market participants each week, many seeking to offer investment propositions. Some of these visits, Arnold admits, are from fund managers expecting RED to make a limited partnership commitment. These parties, Arnold says “are likely to be disappointed”.
“[GPs] need to know that the high degree of discretion people had in the past will be very different today,” says Schwab. “Some people come to us with numbers that are just too high and don’t make a lot of sense. We want to deploy capital but we want a premium for something other than just risk.”
Goodson adds: “The reason we would want a partner is because the deal works better with them than without.” Mike Goodson
Proposals that are well thought out, with sound financial structures and good management teams are more likely to get a hearing
ADIA today is happy to invest and manage an asset directly but it is equally comfortable investing in a club-style structure with two or three partners or as the sole financial partner to a specialist. Arnold describes another investment, worth hundreds of millions of dollars, with a North American investment management firm that specialises in repositioning multifamily occupied properties. “They have a track record for deal identification and execution as well as bettering rental units,” says Arnold. “They demonstrated this expertise in 12 cities. We have a global view which led us to like eight of these cities, so we told them we would like them to work exclusively for us in these eight cities, not the twelve. The strategy for these investments will be hand in hand, almost like a marriage.”
Given the lack of liquidity in many global real estate markets, it is little wonder that petrol-dollar fuelled sovereign wealth funds like ADIA are inundated with investment proposals. Schwab jokes: “All roads may lead to Rome, but sometimes it feels like all flights lead to Abu Dhabi.”
Goodson says the investment team is forever scrutinising potential deals. Clearly few make it to RED’s investment committee and the sheer volume of incoming proposals means some might garner a quick “no” if they don’t meet basic criteria. “There will be a good reason we decline,” says Goodson. “Proposals that are well thought out, with sound financial structures and good management teams are more likely to get a hearing,” he says.
While ADIA’s financial resources requires little explanation (it invests the proceeds of Abu Dhabi’s petroleum resources), the organisation is not looking exclusively for big-ticket ideas. Sure, it won’t be writing too many $10 million cheques. Arnold says it is regularly discussing $300 million, $400 million, $500 million and even $1 billion opportunities although he says: “We are not looking to make large investments for the sake of making large investments. We are looking to generate superior risk-adjusted returns and sometimes that can be a function of scale.”
Naturally when such a large investor, such as RED, chooses to do more for itself, thare are some sceptics. Some question the fund’s ability to capitalise on the opportunities it is currently targeting, even if it does assemble an A-list investment team.
One senior fund manager draws a pejorative distinction between “decision-making within sovereign wealth funds” and “decision making by 24/7 Blackberry types like us … Do they do calls on a Saturday morning every weekend like we have to?” he asks.
Ironically oblivious of this quote, Arnold holds his own Blackberry aloft and says: “We don’t let these things out of our sight. This interview will be one of the longest periods that I’ve been without being hooked in.” To add further irony, this interview took place on a Friday – the first day of the weekend in the Middle East. Clearly building one of the largest real estate investment platforms in the world is a seven-day a week task.
Building for the future
ADIA’s Real Estate Department is looking to grow its team by almost 50 percent by the end of 2010 – and it is pulling out all the stops to attract the right people to the emirate
If you want to work for the world’s largest sovereign wealth fund, the first thing to know is you will have to relocate to Abu Dhabi.
However, providing an attractive working and social environments therefore plays a pivotal role in the recruiting process of ADIA, which is seeking to add some 40 people to RED this year. In addition to plugging the obvious advantages of sunny weather, beaches and an income tax rate of zero, the sovereign wealth fund is also keen to demonstrate it has grown a compelling working environment, too.
With its executive airport lounge-style waiting room, the entrance to ADIA’s headquarters on 211 Corniche Street sets a cutting-edge tone for what it might be like to work for the investment authority. Completed in 2006, the 36-storey Kohn Pederson Fox Associates-designed office, shaped in the image of two conjoined boats, is curved to afford every office a sea view. Its automated blinds move in synchronisation with the sun to ward off desert glare and – somewhat emblematic of ADIA’s green aspirations – there are plants everywhere.
In addition to showcasing an alluring modern office, ADIA has also tasked a team of support staff to ensure employees and their families are well provided for. The team often helps source resident visas for new employees, find accommodation, arranging schooling for children and organise UAE driving licences.
Bill Schwab
Then there’s the matter of compensation, which ADIA approaches differently to many other financial institutions. In line with its long-term investment strategy, ADIA is keen to recruit people only interested in being with the firm for the long haul. As such its compensation structure is focused on the concept of “total reward”, which incorporates a base salary, a performance-related bonus and a “wide range” of benefits and allowances which combine to ensure a “highly competitive bottom line”, according to RED’s global head Bill Schwab. People are expected to grow here
In general, staff are largely incented by career development opportunities and the potential to advance, with successively higher positions carrying successively higher compensation packages. In the case of RED, there is potential for advancement through its multi-layered reporting structure. The department has Schwab and the various sector heads sitting atop of a layer of senior portfolio managers. They, in turn, are responsible for portfolio managers and below these are a layer of investment managers. Under the investment managers are senior analysts and, below them, analysts. “We have a very formal programme where people are trained up over five or six phases within a sector.” The idea is that staff grow their skill-sets before being considered for promotion, which naturally brings greater compensation. “People are expected to grow here,” Schwab adds.
But joining ADIA is far from easy. Recruits either apply for jobs or are head-hunted by external recruitment agencies. All go through a rigorous and often lengthy qualification process (read about ADIA’s recruitment process below). One staff member PERE spoke with said he had eight separate interview sessions before he secured his post.
But Schwab is keen to stress ADIA is no slow-moving behemoth either: “We are selective and prudent but not bureaucratic. When someone is right for a job we make them an offer. It’s as simple as that.”
Significantly, ADIA has proved a popular place for expatriates to work. Of the 1,200 staff currently employed, 70 percent were recruited internationally and as a consequence, there are 40 different nationalities milling about its 939,670-square-foot office.
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