Georges Sudarskis

A recent conference featured a presentation by Georges Sudarskis, Senior Investment Controller at the Abu Dhabi Investment Authority, better known as ADIA. ADIA is the world's largest institutional investor and recently made headlines with its $7.5 billion stake in beleaguered Citigroup as well as buying into private equity firms Carlyle (through a related entity, Mubadala) and Apollo Management. In a presentation that represented the first of its kind, Sudarskis agreed to “share the dynamics and inner workings of a professional investment team within a sovereign fund.”?

In sum, he said that, “a sovereign fund's attitude towards private equity investments is no different than that of any other institutional investor.”? And, that the ingredients of success include “diversification, patience, hard work, and a long term perspective.”?

ADIA was formed in 1976 by Sheikh Zayed bin Sultan Al Nahyan to invest and diversify the Abu Dhabi government's cash surpluses. Since then, ADIA's assets have grown substantially. Today, according to London-based IFSL, ADIA manages over $875 billion in assets—over twice that of the next largest state fund, the Government Pension Fund of Norway.

Today's private equity landscape

Said Sudarskis, “listed stocks as well as private equity have had a long ride up. Housing prices have had a long ride up. And, it would be fair to say that both these rides were largely fueled by massive leveraging of the financial economy.”?

The abundance of cheap debt from 2002-2006 aside, Sudarskis said that private equity owes its success to a number of factors—all of which are available to sovereign funds.

The real driver of ADIA's success is well known in the financial world—compounding. The longer the period and the higher the return, the greater the end result. For example, at 10% per annum return, an initial investment will be worth 7x its original value in 20 years; at a 15% return, the original stake will multiple 16x in value. But over a 30 year time horizon, those returns leap to 17x and 66x the value of the original stake.

Other important factors to success

But, Sudarskis stressed that ADIA's returns were equally due to hard work and analysis: understanding companies better, “focusing on management teams and business strategies rather than excel spreadsheets,”? he said. He cited other factors as well: planning and thinking ahead; governance; diversification; patience, the willingness to take a contrarian view, and the search for value. Finally, he said that allocation among asset classes and identifying and investing in top quartile funds were vital to realizing high returns.

“Private equity is about patient capital. If an investor is eager for quick returns, it isn't for him. We're never diversified enough. For example, we have 3,500 portfolio companies across all sectors, growth stages, and regions of the world. On average, our managers buy and sell 2 companies each day.”?

ADIA has done exceedingly well. By its own calculations, it earned $3.30 for every $1 invested during the 10 year period between 1997-2007. That compares to the Morgan Stanley Capital Index of $1.97 and the S&P 500 Index of $1.77.

Control positions exaggerated

Sudarskis also suggested that the role of state funds in control buyouts had been greatly exaggerated. “The SWF attitude towards private equity investments is just like any other institutional investor on the planet, whether its pension fund or endowments. I think what we do should be followed by anybody.”?

And he adds, “if you fast forward to today, we didn't see the credit crunch coming, though all the signs were here: cheap financing, credit terms, big deals, valuations up all-time highs. Wasn't this obvious that in 2006-07 something like this would occur?”? He believes, “the credit crunch will take some time to pass. Fundraising will be more difficult, deals will be harder to come by.”?

Deals will require more work from the fund managers—“it will have to be more inventive, more alternative financing. On the other hand, the quality of deals will improve. The best deals will be done in 2008-2009 and it promises to be an excellent vintage. For some firms, it will be extraordinary times.”?