Dubai flexes its buying muscle
DIC looks to spread its investment wings
EVEN IN DUBAI, a city teeming with high-rise buildings, the gleaming Emirates Office Towers stands out from the crowd. At more than 350 metres high, the office block is one of the tallest buildings in the world.
It is somehow appropriate that the fourth level of this impressive structure serves as the headquarters for Istithmar, a company that is beginning to stand tall in the investment world. Istithmar, which means investment in Arabic, is the asset management arm of government-owned conglomerate Dubai World, whose portfolio stretches across development, marine services, commodities, ports and free-trade zone divisions. One of Dubai World’s biggest companies is Dubai Ports, which hit the headlines in 2005 following its controversial acquisition of UK-based ports operator P&O for $3.9 billion.
Istithmar invests the surplus cash generated by Dubai World’s fleet of companies primarily in real estate and private equity, although it buys stakes in public firms too. Although the fund has never declared how much it has under management, it has invested $3.5 billion of proprietary capital since it was created in 2003, which it has levered up to $14 billion. Its portfolio includes an impressive list of investments: Time Warner, Standard Chartered Bank, SpiceJet, as well as large swathes of prime real estate in midtown Manhattan, central London and the Middle East.
The flurry of activity is poised to be even greater this year. The fund expects to invest $1.7 billion in 2007, according to CEO David Jackson, employing a similar leverage ratio. Istithmar has already embarked on a shopping spree in the first quarter. Over a four-week period spanning February and March, for example, the fund bought two business parks on the outskirts of London for about $200 million, completed the purchase of a majority stake in the Mandarin Oriental hotel in New York for $340 million, made a $100 million preferred stock investment in Irish company HM Rivergroup and announced plans to back Kenya’s first Islamic bank, which should open this month.
"If you look at the last 18 months to two years, Istithmar has gone from being an unknown in the marketplace to entering the premier league in private equity and real estate," says Peter Jodlowski, the fund’s chief financial officer.
Flexible model
Though Istithmar is government-owned, it has the same aim as any other private equity investor: to achieve above-average risk-adjusted returns. Where it does differ from other traditional players is in its flexibility. Because Istithmar has one shareholder with deep pockets – the government of Dubai – it has few of the constraints of some of its private sector competitors. Unlike many typical private equity houses, for example, the fund can take a long-term view on an investment, which can be anything up to 10 years, so long as the asset continues to perform. There are no artificial deadlines imposed on the firm as to when returns should be made. Nor is the fund limited to investing in private equity structures. Istithmar can invest across multiple types of assets to maximize value.
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SpiceJet was a tasty opportunity to gain exposure to a simple macroeconomic proposition: that air travel will increase in developing economies as sector reforms begin to bite and incomes increase |
The company has structured a wide variety of transactions ranging from common equity to highly structured mezzanine finance instruments, such as its investment in India’s SpiceJet via a foreign currency convertible bond. It has also conducted private investments in public entities, such as Hyflux and Kerzner International. It has established greenfield utilities such as Palm District Cooling with captive offtake contracts with Nakheel, which is a Dubai World company. Istithmar has also completed LBOs, such as its acquisition of Inchcape Shipping Services, a leading marine services company.
"We are an investor. We should be looking at how we can make money," says Jackson. "It doesn’t matter if that is through private-equity securities, publicly listed securities or debt instruments."
The company’s flexibility is reflected by the fact that it has one global multi-asset fund. This model is similar to that deployed by other government investment authorities. Abu Dhabi Investment Authority (Adia), for example, manages its vast amount of funds through one multi-asset vehicle. However, whereas Adia then breaks its global fund into sub-funds, such as European equities or inflation-indexed bonds, which can be outsourced to third parties to manage, Istithmar administers all of its assets through the one structure.
About 45% of the fund is invested in real estate, 40% in private equity and the rest in public equity, debt and venture capital. But there is no predetermined asset allocation strategy. It’s a simple and opportunistic approach.
"We don’t say 10% of the portfolio has to be measured against this [benchmark] or 10% against that one," says Jackson. "Nor do we break the fund into geography or industry. We’re not a pension fund. We’re not supposed to manage a balanced portfolio."
Performance is measured on a deal-by-deal basis. "The way we look at it is: in this industry, in this class of security, we should be earning x. If it’s returning 200bp above that, then we are doing well," says Jackson, who joined Istithmar in January 2004 after stints at Lehman Brothers, Saks Fifth Avenue and Marco Polo Partners.
Holistic approach
Still, Jackson admits that Istithmar’s holistic approach can be challenging. "It’s easier said than done. Very few places actually work that way," he says.
What are the advantages of the model? The biggest, according to Jackson, is that it helps to break down the walls between different investment mentalities. He cites the example of Standard Chartered, in which Istithmar invested $1 billion to take a 2.7% stake last October.
Some time last year, the company began to consider a private equity-type investment in an emerging markets bank. Istithmar’s analysts believed that the banking industry in the developing world was poised to have a bigger role in these countries’ GDP performance and wanted to capture the potential upside. During the research process, however, the team realized that the best way to do this was through an investment in UK bank Standard Chartered. The bank has a strong franchise across many emerging markets and the institution’s impressive growth and recent acquisitions put it in a unique position to provide shareholder value, according to Jackson. Standard Chartered, however, is a publicly listed company.