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Abu Dhabi sovereign wealth fund to deploy more into private credit

ADIA had invested around $7.3bn private credit as of 2020
  • Interest rate rises haven’t dimmed allure of private credit for Gulf funds 
  • Appeals to sophisticated investors hunting for higher yield
  • Return from low-interest rate era to normal environment benefits savers

Abu Dhabi Investment Authority (ADIA) is upping its exposure to private credit to boost its returns, the world’s fifth largest sovereign wealth fund revealed in its 2021 annual review published on Thursday. 

Private credit has flourished since the 2008 global financial crisis as banks became more risk averse in their lending and interest rates plunged, spurring non-bank institutions to meet unfulfilled demand from corporate borrowers. 

Private credit funds had assets under management of $1.6 trillion as of March 2022, up 53 percent over the preceding five years, according to a May report by Intertrust Group. The report highlights the growing popularity of private credit niches such as litigation finance, aviation lending and supply-chain finance. 

“Given the last few years where yields have been ultra-low in traditional fixed income, investors have travelled up the risk curve in a bid to enhance returns,” said Akber Khan, senior director of asset management at Al Rayan Investment in Doha.

“Institutional investors who were in public equities made allocations to private equity, while investors in public debt looked at private credit markets.”

ADIA’s 2021 report states its fixed income division will “seek to deploy further capital into less liquid areas of fixed income including private credit, in order to enhance returns in the low yield environment”. 

A spokesperson for ADIA declined to comment in response to questions from AGBI but confirmed that its annual review is written as if it was released on January 1, 2022.

Yields on US 10-year treasuries, against which other bonds are often benchmarked, slumped to a four-decade low in mid-2020 of around 0.5 percent and were at 1.51 percent at the start of 2022, but have subsequently nearly tripled to 4.04 percent as of October 27, following a series of interest rate rises. 

Such increases do not seem to have dimmed the allure of private credit for Gulf sovereign funds. 

In August, ADIA committed to invest A$700 million ($452.1 million) through Australian alternative real estate investment manager Qualitas. The firm will invest ADIA’s money in commercial real estate private credit, while the sovereign fund may buy a stake of up to 10 percent in Qualitas itself. 

ADIA had invested around $7.3 billion private credit as of 2020, according to Global SWF. These include a $500 million commitment to a “special situations fund” run by Mumbai’s Kotak Investment Advisors that will invest in credit.

Person, Human, Tarmac
ADIA has invested in real estate such as 330 Madison Avenue in New York. Picture: Supplied

ADIA’s assets under management were $829 billion as of 2020, Global SWF estimates. 

ADIA is the only sovereign player in the Gulf to tap into the private credit market. Another Abu Dhabi sovereign fund, Mubadala, on Monday entered into a partnership with investment firm KKR to co-invest at least $1 billion in private credit “opportunities” in Asia Pacific.

That follows a similar tie-up with Barings in September 2020 that would provide $3.5 billion in financing to European corporations. 

“Expanding into the Asia Pacific region is a core pillar of our strategy as this market presents unique credit investment opportunities, driven by its rapid growth and high demand for non-bank capital,” Omar Eraiqaat, Mubadala’s co-head of credit investments said in a statement accompanying the KKR announcement. 

Kuwait’s NBK Capital Partners in February 2021 closed a $300 million sharia-compliant credit fund in which Saudi Arabia’s state-owned Public Investment Fund (PIF) is the anchor investor. 

“Private credit meets the demands of sophisticated investors – usually pension or sovereign wealth funds – perennially hunting for higher yield,” the Intertrust report states.

“This is not a broad investor base, but it is a deep one, flush with money.”

A January note from JP Morgan highlights how investors not only seek the greater yields that private credit can deliver, but also as a hedge against inflation and to protect capital. 

“As a result, investors are increasing their allocations to private credit. It still offers relatively high spreads over public markets … and it will likely continue to exhibit low volatility due to its less liquid nature,” the note adds. 

Yet the end of the low-interest rate era could be ominous for private credit investors, Rayan’s Khan warns. 

“We are now returning to a more normal environment that doesn’t discriminate against savers,” said Khan.

“As a result, investors don’t have to take as much risk to generate sufficient returns. There are concerns about the performance of those riskier assets because the companies to whom private funds have been lending to are having to cope with significantly higher costs of doing business and funding.

“The question to which many investors don’t have the answers to just yet – given the opacity of these private markets – is how these companies will fare following sharp increases in interest rates worldwide.”

ADIA 2021 annual review

ADIA foreign investment

North America45-60%
Emerging markets10-20%
‘Developed’ Asia5-10%

Asset classes held by ADIA

Cashup to 10%
Companies based in developed markets32-42%
Emerging market equities7-15%
Government bonds7-15%
Private equity7-12%
Real estate10%
Small-cap equities1-5%

ADIA’s returns (on a point-to-point basis)

20-year returns7.3%6%
30-year returns7.3%7.2%

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