By Henny Sender in New York and Andrew England in Abu Dhabi
Published: December 16 2009 19:25 | Last updated: December 17 2009 01:44
Abu Dhabi
The sky’s the limit: two years ago the deal struck by Adia left its Gulf peers looking on from the sidelines with envy
When US banks searched the world for rescue capital during the early stages of the financial crisis, the Abu Dhabi Investment Authority was the first sovereign wealth fund to provide assistance.
In November 2007 – after only three days of due diligence, according to people familiar with the matter – Adia agreed to invest $7.5bn in Citigroup. In return, Adia received “equity units” that currently pay an annual 11 per cent dividend and convert into shares, starting in March 2010, at a price of not less than $31.83.
The deal by Adia – then the world’s wealthiest sovereign wealth fund, with an estimated $800bn in funds, according to a New York Federal Reserve Bank official – left its Gulf peers looking on from the sidelines with envy.
“Citi is America,” the head of one sovereign fund in the region said at the time. “We must learn to move as quickly as Adia.”
With a three-decade track record, Adia had a reputation for conservatism and staying in for the long term – rarely seeking board positions or voting rights, while harbouring desires to stay out of the public glare. The capital of the United Arab Emirates was also seen as a strong US ally.
According to one person familiar with Adia’s thinking, the fund “was under the impression that the US government was supportive of the deal”. In this sense, Adia was applying local notions to international affairs, the person added.
Just as many observers assume that Abu Dhabi implicitly backs Dubai – a fellow UAE member – Abu Dhabi assumed the US government would make any investor in Citi whole.
Moreover, among those in Abu Dhabi the day the deal was signed, according to three people with know-ledge of the matter, was Robert Rubin, chairman of the Citi executive committee and former US Treasury secretary. A Citi spokesman said it was his understanding that Mr Rubin was in Abu Dhabi at the time. Efforts to reach Mr Rubin, who was travelling outside the US, were unsuccessful.
“You go from the government into the private sector in the Middle East and the line is blurred,” said one former senior official of the New York Federal Reserve Bank. “The belief [in the Gulf] is that in the US these linkages are [also] preserved.”
In this context, Adia’s decision to file an arbitration claim against the US bank – alleging that it was the victim of “fraudulent misrepresentations” over the investment – was unexpected.
Some lawyers familiar with the rescue financings of US banks speculated that the timing of Adia’s action was related to Citi’s decision this week to raise capital in order to pay back $20bn in government bail-out funds – which would dilute the holdings of existing shareholders.
Other analysts questioned whether internal politics were behind the unprecedented action. They cite the fact that the Adia claim comes just a few weeks after theKuwait Investment Authority sold its $3bn investment in Citi, at a profit of $1.1bn.
Both the KIA and the Government Investment Corporation of Singapore put money into Citi in January 2008, and earned profits. However, they were also able to learn from the Adia deal. As a result, they pressed for the right to change their investment terms if Citi raised more capital on better terms.
People close to Adia say the fund has been unsuccessfully trying to change the terms of its deal with Citi for months, to make it more like the deals struck by the KIA and the GIC. At the time sovereign wealth funds invested in Citi, they had little sense of how bad the crisis would get. Citi shareholders have been diluted six times and its stock price has fallen as low as 97 cents. Citi shares closed on Wednesday at $3.45.
Adia alleges that the numbers Citi gave it were not correct. Citi said the claims are without merit.
The action also comes amid signs other investors in the region are becoming bolder. In June, Abu Dhabi’s International Petroleum Investment Company (Ipic) surprised markets when it sold the bulk of its $3.5bn investment in Barclays – eight months after the original acquisition. Ipic – chaired by Sheikh Mansour bin Zayed al-Nahyan, a member of the emirate’s royal family – booked an estimated £1.46bn ($2.4bn) profit.
Largest sovereign wealth investments in banks
Date Target Acquirer Deal value ($bn)
Feb 27 09 Citigroup (17.8%, US)
(KIA has since sold a stake worth $4.1bn)
Consortium led by Government of Singapore Investment Corp 12.5
Dec 10 07 UBS (9%, Switzerland) Government of Singapore Investment Corp, Saudi Arabian Monetary Agency 11.5
Nov 27 07 Merrill Lynch (9.4%, US)
(Temasek has since sold a 0.1% stake valued at $50m)
Temasek, Davis Selected Advisors 6.2
Dec 19 07 Morgan Stanley (9.9%, US) China Investment Corp 5.6
Jun 25 08 Barclays (10%, UK)
(QIA has since sold 3.7% valued at $2.3bn)
Qatar Investment Authority, Challenger Universal 4.5
Mar 27 06 Standard Chartered (11.6%, UK) Temasek 4.0
Jul 28 08 Merrill Lynch (4.5, US) Temasek 3.4
Source: Dealogic