In Dubai, a $175 billion SWF Spreads Its Wings

June 11, 2015 by Loch Adamson

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Until recently, Dubai’s sovereign wealth fund invested only in domestic businesses. Now it's recasting itself as an aggressive and high-profile international investor.

In April 2014, Mohammed al-Shaibani, CEO of Investment Corp. of Dubai (ICD), the emirate’s sovereign wealth fund, rose to deliver a speech at Winchester House, Deutsche Bank’s London headquarters. ICD and Deutsche had invited more than 100 representatives of major global banks to the investor presentation, Dubai’s first since 2009 — the year the emirate asked for a debt standstill at Dubai World, the government’s flagship holding company, and received bailouts from neighboring Abu Dhabi.

Al-Shaibani used his speech to defend Dubai’s profligate policies of the mid-2000s and argued that the emirate’s spree of buyouts, investments and prestige real estate projects had largely achieved its aim of boosting gross domestic product (GDP). "If Dubai had to do the same again, most likely we would follow the same approach," said al-Shaibani, who added that Dubai was gearing up for another round of infrastructure spending ahead of its hosting of the World Expo in 2020.

Al-Shaibani’s comments reflect Dubai’s renewed confidence on the international stage — as well as ICD’s increasingly influential and outspoken status as the government’s principal investment arm. The fund has grown fast since it launched in 2006. Its latest financial results, published at the end of May, reveal that it oversaw some AED 643.7 billion ($175.3 billion) as of June 30, 2014 — up from AED 586.7 billion ($159.7 billion) a year earlier.

Palm Islands

It’s not just the fund’s surge in assets that has caught the eye of the financial world. Over the past few years ICD has grown from a development fund focused on restructuring the emirate’s state-owned assets to an aggressive international investor, adopting a similar strategy to that of Abu Dhabi’s International Petroleum Investment Co. (IPIC). ICD has ventured into frontier markets, signed co-investment agreements with peers such as the Korean Investment Corp. (KIC) and made headline-grabbing bids for prestige real estate assets such as London’s Hyde Park Barracks.

All this seems a far cry from the fund’s modest beginnings as a holding company for the emirate’s state-owned enterprises. ICD was launched in 2006 to oversee the government’s stakes in companies such as Emirates Group, the aviation conglomerate, Emirates National Oil Co. and Dubai Aluminium (DUBAL). Part of ICD’s mandate was to foster governance standards at these firms. In practice, it took a hands-off approach, looking on as the network of state-linked entities known collectively as Dubai Inc. spent big and borrowed bigger.

The mid-2000s were an era of extravagance in Dubai, as the emirate sought global power and prestige. ICD was involved in such record-breaking construction projects as Dubai Mall, the world’s biggest shopping center, and the Burj Dubai, its tallest building — both developed by Emaar Properties, one of the fund’s portfolio companies. Vast artificial archipelagos, including the famous Palm Islands, rose from the Arabian Gulf.

Overseas Strategy

Then, in 2008, the global financial hit. International investors withdrew capital and Dubai’s real estate cratered. With billions of dollars of debt due to mature in 2009, the government scrambled to streamline and restructure Dubai’s state-owned companies as it sought to limit the damage. ICD played a major role, buying several assets once controlled by Dubai World, the heavily leveraged conglomerate that had overseen many of the emirate’s most ambitious property developments, including the Palm Islands. ICD was even reportedly slated to incorporate Dubai World as a subsidiary, although ultimately the conglomerate remained independent, and was forced to accept a $10 billion bailout from the Abu Dhabi government to meet its debt obligations in December 2009.

ICD, on the other hand, emerged from the crisis in a powerful position. Although it had its wings clipped in 2011, when Dubai’s Emir Mohammed bin Rashid al-Maktoum removed Dubai Real Estate Corp., a $44 billion domestic real estate company, from ICD’s balance sheet and brought it under his direct control, the fund began to use the assets it bought during the restructuring as a foundation upon which to build an international portfolio.

The sheer range and scale of ICD’s global holdings has only started to become clear over the past twelve months or so. The fund has been counted as one of the more secretive of Middle Eastern government entities, but it began to disclose more information last year in a bid to win the confidence of international investors as part of a $2.5 billion fundraising program. By sifting through a 400-page bond prospectus issued in June 2014, along with some bare-bones financial statements it disclosed last month, the Sovereign Wealth Center has been able to build a picture of ICD’s portfolio that reveals an aggressive overseas investment strategy encompassing a range of assets and sectors.

Potential Risks

Since 2012 ICD has entered sub-Saharan Africa in a big way, buying an $300 million stake in Lagos-based Dangote Cement and signing a cooperation agreement with its parent company, Dangote Group, a conglomerate owned by Nigerian billionaire tycoon Aliko Dangote. The fund has pushed into Far Eastern markets, investing in Ssangyong Engineering and Construction, a Seoul-based real estate developer. The fund also owns SmartStream Technologies, a British data company that manages bond and stock transactions.

ICD continues to hold the bulk of its assets in domestic companies, however, particularly those in the financial services and tourism, which remain key drivers of the Dubai economy. The fund owns controlling stakes in Emirates NBD, the UAE’s largest bank, and Borse Dubai, the holding company for the Dubai financial exchange. It also owns a portfolio of hotels across the city, including the Palm Atlantis, a vast leisure complex situated on the outer rim of the Palm Jumeirah, which it purchased from Istithmar World, the private equity arm of Dubai World, for AED 2.7 billion in late 2013.

Real estate is likely to continue to feature heavily in ICD’s strategy over the next five years. Al-Shaibani’s forthright comments at the investor roadshow last year suggest that the fund will be be at the forefront of the emirate’s drive to build up its infrastructure ahead of 2020 World Expo. In 2013 ICD started an internal real estate department, which is already carrying out a AED 3 billion office and residential development along Dubai Creek, and launched a joint venture with Toronto-based Brookfield Asset Management Inc. that will oversee a Dubai-based real estate fund.

But experts have stressed that Dubai, and ICD, must be wary of the risks involved in pursuing another debt-driven growth strategy, given its near-collapse in 2009. After al-Shaibani delivered his speech last June, Juergen Fitschen, then co-chief executive of Deutsche Bank, took the floor to warn of the hazards: "Managing the expansion the right way and minimizing potential risks will be crucial for future investments," he said. ICD would be well advised to heed that message, even as it flexes its muscles as an increasingly powerful investor both at home and abroad.

Read our new profile of Investment Corp. of Dubai here.

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