Abu Dhabi Financial Group often looks at alternative measures in its investment strategy, particularly during slower times in the economy and on the financial markets. How does this strategy suit the company?
This has been the philosophy behind our investment strategy since inception; it is a fundamental part of who we are. Today, the alternative investment landscape is growing worldwide, and it is also the case in the Middle East. Therefore, it is natural that one finds new companies and initiatives in the alternative investment space. We like to invest in downtrend cycles, because value becomes more apparent when things are on the down side and investor sentiment isn't present, or is weak. In terms of sectors, real estate and financial services are the largest in the UAE outside of oil and gas. We, as a group, have a lot of experience and expertise in these sectors; therefore, we will always be looking at them and we will always be active there. Having said that, we also want to expand into different sectors, such as maritime and oil and gas services, among others. It depends where opportunities present themselves. Technology is another sector that is gaining traction in the UAE in terms of biotech, ICT, and mobile applications, for example.
What financial instruments and methods suit these kinds of alternative investment strategies?
It is diverse. Alternative investments are typically very bespoke and customized; therefore, they are done in ways that are different and new compared to the standard practices regarding investments. When it comes to debt, for example, we talk about junior debt, mezzanine debt, hybrid debt, and convertible debt—everything that's non-conventional. In terms of equity, it's about preferred equity, normal equity, private equity, and private investment in public equities (PIPE).
How does your company go about managing and assessing risk in its investment strategy?
We invest in down cycles when investor sentiment is weak and people are wary of investing. People think we are taking excessive risk in these periods; however, it is in fact the opposite. We are taking minimal risk. First of all, you are getting a lot of value up front and, secondly, you are already in a downward cycle; therefore, the value has already dropped to a certain level. Our investments are typically opportunistic and represent excellent value. In the projects that we rescue, we take a lot of collateral; therefore, it is very much asset backed. These projects need us not because they are not successful projects, but because banks have caps and don't want to deploy financing over a certain period of time, for example. It is not necessarily because the project isn't viable, which allows us to source capital and funding that is new in the region. Historically, it was equity and debt. Today, it is equity and off-plan investing, last-mile funding, mezzanine, and conventional debt. The funding structure evolves over time.
What changes in strategy do you plan once the economy picks up again?
The market has already picked up to some degree. The US has picked up and is doing phenomenally well. The capital markets have more than doubled in the last five years. Interest rates have started to be raised and unemployment is low. That means things have already picked up. It is the same with the UK, which is also bustling, as is Germany. Other European economies are still suffering, true, but they are out of the vicious circle. Turkey, South America, Malaysia, and China are now facing difficulties with their currencies and slowdowns, so not all of them will pick up. Some will be disasters, while some are too big to fail. The world today is fragmented. The US and Europe will have their own way forward, and emerging markets and GCC countries will find their own way forward, too. I don't foresee any major crisis in the near future at the level of the 2008 crisis. Middle Eastern countries, Europe, and Asian countries are not significantly leveraged and haven't been relying on banks the way they used to. There isn't any bubble that can be expected to burst. A lot of people today are concerned about oil, which was recently below $30 per barrel. I really believe that for an important commodity such as oil, the prices cannot remain so low. Therefore, now is the best time to buy oil and lock down contracts. Right now, all expenses considered, even water is more expensive than oil. Consider also all the side businesses, products, and industries oil is crucial for, from petrochemicals to plastics.
Abu Dhabi Financial Group wants to be another market maker for the ADX and DFM. How will that enhance the company?
If you want to be a market maker in the local capital markets like the ADX and DFM, you have to have a license from the Securities and Commodities Authority (SCA). We are in discussion with the SCA to launch our market-making division, which will market-make on the ADX and DFM. Today, only NBAD is a market maker. Capital markets will have a major role in the economy with time, and the SCA has done a good job in coming up with new legislation and regulations, new instruments and tools to help get new companies in through IPOs, and so forth. Time is important and things will eventually mature and evolve in the market over time. It is already heading in the right direction. Whether things stay low for a while or go back up, there will continue to be forward progress. We are doing this because we see an opportunity to make money. The industry is still nascent, not matured, and growing. There is a lot of room to grow and make money here, especially if you know and understand the market well. Market making is a profitable business and, simultaneously, it is a cornerstone for a healthy and thriving financial market. It will be challenging in the beginning, but the regulator is working closely with us on this matter.
The firm has the vision to become one of the world's leading financial groups. What are your benchmarks to achieve this and how do you see the way forward?
One thing we set out to do from the start was ensure that we didn't achieve anything by compromising on our performance. Our performance so far has been stellar, and we want to keep that going. That is our most precious asset at the moment. Growth in numbers isn't really a key metric. For us, consistent, stellar performance is what we're looking for. If we could carry our 27% internal rate of return (IRR) over the last five years into the next five years so that we could say we have had 27% IRR over a decade since our company's inception, that would be superb. It is not easy maintaining such a high IRR across boom and bust cycles, but that's our goal. If it means forsaking further growth, then so be it. To ensure this, we adhere to best practices and drive strong, ethical financing. We hired one of the big four accountancy firms to do a corporate governance review for us. We examine the findings and review them every year and base improvements on this. Other than that, the group subsidiaries are regulated by different regulatory bodies, be it the UAE Central Bank, Emirates Security and Commodities Association, the IFC, or the LSE. Our subsidiaries are closely regulated, and we as a group have best-in-class corporate governance practice and a code of ethics that we regularly circulate among our employees.