It was a whirlwind of negotiations for Citigroup and the Abu Dhabi Investment Authority (ADIA). For a week, dealmakers from both sides, some dressed in traditional white Arab robes and others in Western suits, worked furiously across the globe. Then, on the Monday after Thanksgiving, they signed a deal, with the biggest bank in the U.S. agreeing to sell a 4.9% stake to the world's largest sovereign wealth fund, in ADIA's new headquarters, the tallest skyscraper in Abu Dhabi. Citigroup Chairman Robert Rubin, on hand as Citigroup's top official, shook hands on the deal with Sheikh Ahmed bin Zayed Al Nahyan, ADIA's managing director and the 12th son of Abu Dhabi's late patriarch, Sheikh Zayed, before dashing off to meet the Crown Prince of Abu Dhabi, Mohammed bin Zayed Al Nahyan. Forty-eight hours later, the investment arm of the richest Gulf emirate wired $7.5 billion to a Citigroup (C) account.
The move stunned many of Wall Street's savviest dealmakers, but it was just another day for the Masters of the Oil Universe, who control an estimated $875 billion portfolio. Twelve analysts had been scouring banks' financials for months to find potential investments. Largely, they wanted to correct a massive imbalance in the fund's portfolio, one driven by weakness in U.S. stocks and credit. At first, they had wanted five or six smaller, less market-moving, stakes in financial institutions—around $1 billion a pop. But they quickly switched gears after calling Citigroup's top banker, Michael Klein, in late November. After that, they realized they could solve their asset allocation problems in one shot with Citi. "We were underweight in U.S. equities, large companies, and credit," says Jean-Paul Villain, head of strategy at ADIA, whose management team recently spoke with BusinessWeek in a series of interviews, its first public ones. "Citigroup was reducing the risk of the portfolio."
Luring Financial HeavyweightsThe dollar looks sick, and U.S. stocks are getting pummeled. But those jitters are merely wetting ADIA's and other sovereign wealth funds' appetite for U.S. investments. These mega-investors can afford to take a long-term view. "The short term for us is three to five years forward," says Sheikh Ahmed in his dark mahogany-paneled office after a servant has poured small cups of Bedouin-style, cardamom-flavored coffee. "We find [the U.S. market] very attractive." At a time when Abu Dhabi's oil fields are producing extraordinary riches from $120 oil, ADIA, the emirate's other crown jewel, is raising its game. Charged with preserving the wealth of the richest Arab emirate for future generations, ADIA invested for years mostly in low-profile, conservative havens like U.S. Treasury securities and government bonds. But now, it's plowing about 34% of its money into exotica such as private equity funds, hedge funds, emerging markets, and infrastructure. And, in a move with implications for money managers across the globe, it is dramatically upping its investment in index funds.
In many ways, the rise of ADIA mirrors the recent rise of Abu Dhabi, its home base. Founded in 1976, when only about 20% of the population could read, ADIA has become more sophisticated. So has Abu Dhabi. Since the death of Sheikh Zayed in 2004, Abu Dhabi's leadership has become hugely ambitious, spurred by the gleaming spires and cosmopolitan ambience of the emirate's rival and neighbor, Dubai. Zayed's sons Khalifa, the emir and ADIA's chairman, and Mohammed, the crown prince, are racing to transform long-sleepy Abu Dhabi into a refined cultural center.
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