PE may be entering a period of lower returns: ADIA

Increased competition for deal flow and high valuations suggest that private equity returns may reduce for 2018 and beyond, Abu Dhabi Investment Authority’s 2017 annual report said.

But ADIA’s PE strategy of regional and sector focus will enable it to assess relative value of investments across geographies and capital structures, the report said.

In addition, ADIA’s core financial and industrial partners will help identify investments that offer the best risk-adjusted returns in the current environment, the report, released this week, said.

ADIA’s private equity geographical focus is the Americas, Europe, Middle East, Asia and Asia-Pacific; its sector focus is financial services, healthcare, industrials, technology and consumer.

The sovereign fund does not disclose its assets, but Sovereign Wealth Fund Institute estimates them at $828 billion.

PE-asset allocation is 2 percent to 8 percent, suggesting that actual allocation could range $16 billion to $64 billion at ADIA.

The sovereign fund commits to PE funds as an LP and makes direct and secondary investments. Over the years it has been shifting to more of a direct investor and away from being a passive LP.

ADIA also owns stakes in Apollo Global Management and Ares Management, according to media reports.

ADIA was part of the Blackstone Group-led $4.8 billion acquisition of Aon Hewitt’s technology-enabled benefits and HR platform. The business was named Alight Solutions after the acquisition.

With GIC, Singapore’s sovereign fund, ADIA participated in the recap of Pharmaceutical Product Development in 2017. Carlyle Group and Hellman & Friedman are majority stakeholders in the company.

ADIA also picked up a significant stake in KKR India Financial Services to focus on the Indian market.

As Buyouts has reported, ADIA’s PE team was restructured in 2017. The team was reorganized with regional focus and emphasis was on building expertise in five key industry sectors.

The PE team has built sector-specific knowledge and deepened its sourcing and underwriting skills, Colm Lanigan, private equity head of Americas, said in the annual report.

“The department’s activities during 2017 focused on private equity, private credit fund and principal investments and on concentrating its commitments with general partners that have consistently supported its strategy,” the report said.

The sovereign fund has been consolidating its internal teams across all asset classes and reducing external fund managers. External managers managed 55 percent of ADIA’s assets in 2017, down from 75 percent in 2012.

Investments across asset classes are heavily skewed toward North America; the region accounts for a minimum of 35 percent and a maximum of 50 percent total fund allocation.

Hamad Shahwan Surour Shahwan Aldhaheri is executive director for private equities. Sherwood Dodge is global head for private equities.

Action Item: Read the annual report here https://bit.ly/2jnL3In

The sun sets behind the Fairmont Hotel in Abu Dhabi, UAE, on Dec. 11, 2017. REUTERS/Matthew Childs