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Sovereign stains

29 June 2016 By Una Galani

Abu Dhabi is papering over its sovereign fund woes by merging two of the emirate’s most prominent investment vehicles. Combining International Petroleum Investment Company (IPIC) with local peer Mubadala should lead to better governance. Creating a new $135 billion fund will also help the Gulf state to scrub out the stain of past missteps – notably a scandal involving IPIC and 1Malaysia Development Berhad.

The two Abu Dhabi funds are similar in size and both arms of the state but are distinct entities. Under Chairman Sheikh Mansour bin Zayed Al Nahyan – owner of Manchester City football club – IPIC has strayed from its original mandate to invest in oil and gas. It has recently made bets from private banks to space travel, mostly through a subsidiary called Aabar. It also appears to have racked up big losses by investing in commodities trader Glencore, Malaysian bank RHB Capital, and Italian bank UniCredit.

IPIC’s main source of shame, however, is its entanglement in a global money laundering investigation centred on 1MDB. The Malaysian fund made payments worth $3.5 billion to an entity called Aabar Investments PJS Limited. IPIC says it is not the owner of that company. Last year the Abu Dhabi fund replaced two senior executives who 1MDB claims it dealt with when the payments were made.

The dispute has cast a shadow over 1MDB bonds, also worth $3.5 billion, which were jointly guaranteed by IPIC. The Malaysian group has stopped paying interest on the securities, leaving IPIC to pick up the tab. A London court will decide who is ultimately on the hook.

Mubadala’s mandate seems clear by comparison. It has assembled holdings ranging from clean energy to technology and aerospace in an effort to diversify the oil-based economy. It has even recovered the value of a $2 billion preferred equity investment into the holding company of bankrupt Brazilian tycoon Eike Batista by claiming assets including a Colombian gold mine and a key port. Most significantly, the well-governed fund is highly respected both within the emirate and overseas.

A merger will not save Abu Dhabi from its troubles with 1MDB. But it could be a neat way to erase a fund that has embarrassed the emirate, while placing IPIC’s valuable energy assets in better hands.

 

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