ADIA: Navigating the Great Energy Disruption
By: Inderjit Singh & Johnny Sun
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Abu Dhabi's Money Manager
Established in 1967, the Abu Dhabi Investment Authority (ADIA) is a sovereign wealth fund that manages and invests in government reserves on behalf of the Emirate of Abu Dhabi. As one of the world’s most significant sovereign wealth funds, ADIA oversees an estimated total asset of $790 billion US (2.9 trillion dirhams equivalent). Its long-term focused yet flexible portfolio is diversified across ten distinct asset classes, with the four leading categories being developed equities, emerging markets, government bonds, and private equities.
Due to its secretive characteristics, and unlike other sovereign wealth funds, ADIA rarely discloses its operations and quantitative performances of the fund to the public. Despite its private nature, in 2021, the fund reported a 20-year annualized return of 7.3 percent, compared to two other global sovereign wealth funds such as China (China Investment Corporation) and Norway (Norway Government Pension Fund Global), reporting 8.7 percent and 6.7 percent each respectively for their 10-year annualized return.
Throughout its 56-year operation history, ADIA’s predominant source of funding stems from the Abu Dhabi government surplus generated by the emirate’s economy, which heavily relies on the production and export of petroleum and natural gas, accounting for nearly 32 percent of the United Arab Emirates’ (UAE) total exports in 2020.
ADIA has an extreme degree of dependence on oil and petroleum, which are volatile and limited natural resources. This, along with clean and renewable energy trends gaining exponential traction over the past decade, is causing the fund’s long-term growth and sustainability to be threatened. To survive, ADIA needs to revamp its strategic focus and seek a new source of funding.
The Great Energy Disruption
From daily groceries and Amazon packages to airplanes and factory machines, all of these essential components of modern-day society are powered by one physical matter, energy. However, in a fast-paced world where everything has undergone innovation or transformative change, the production and consumption of energy are also quietly shifting away from the traditional energy infrastructure, such as petroleum and natural gas, towards a new era of clean and renewable energy. Renewable energy consumption worldwide has quadrupled over the last decade, from an estimated 9.7EJ (exajoules) in 2010 to an estimated 39.9EJ in 2020.
The Great Energy Disruption is driven by a plethora of factors, such as the adaptation of electric-powered cars, mass enforcement of pollution laws, global awareness raised via the United Nations Climate Change Conference (COP), numerous green power technologies, and the recent scientific breakthrough of nuclear fusion energy. As a result, humanity has entered the Great Energy Disruption.
Despite its immeasurable potential, as the Great Energy Disruption flourishes with all of its new advancements, it also abandons the old energy infrastructures and its legacy players, including Abu Dhabi, which, as mentioned above, is deeply dependent on the production and sale of its natural resources while our main subject, ADIA, has a high possibility of losing its source of funding in the future.
The Clock is Ticking
According to the Statistical Review of World Energy and the U.S. Energy Information Administration, the oil and petroleum reserves in the UAE have proven to be equivalent to 299 times its annual consumption as of 2016. This translates to an estimated 299 years for the country to consume and deplete all its natural oil and petroleum reserves.
Although three centuries may seem like an eternity, several factors have accelerated the countdown as the image of a dry oil well is approaching much faster than expected. The 299-year estimate does not consider the annual exports of oil and gas, recalling that it accounts for nearly 32 percent of the nation’s entire GDP. Moreover, the number doesn’t factor in the growth of the reserve’s consumption rate. As of 2021, the UAE’s oil consumption has reached 952.38 Barrels/Day, a jump of 45.56 percent from its 2010 consumption of 654.12 Barrels/Day. Furthermore, with developed countries planning to shift away from gas-powered vehicles by 2035, Abu Dhabi might end up in the quagmire of not finding buyers for its oil reserves. Even within the Emirates itself, there is a significant push on transitioning to sustainable renewable energy for its needs, with UAE aiming for 30 percent of its energy needs to be met by sustainable energy by 2030, which is a 29.5 percent increase from 0.5 percent in 2023.
With the Great Energy Disruption storming the traditional energy players, ADIA’s investment portfolio, funding source, and future growth are all at risk. Receiving excess oil money will no longer be feasible soon, and the government may need to withdraw money from the fund that they may never be able to replace. In essence, in the face of a massive storm brewing on the horizon, the rainy-day funds within ADIA’s portfolio could only be sustainable if it radically shifts away from its current approach to investing. ADIA must remodel its current strategy by divesting from old energy infrastructure into new, high-growth, and disruptive investments such as venture capital (VC) to decrease its funding dependence on the Emirate of Abu Dhabi and sustain the long-term growth of its investment portfolio.
Case Study: the Yozma Program
The Israeli government and its investing efforts towards VC is a significant and noteworthy example of how investing in the venture industry could serve as an advantageous strategic decision. Launched by the Israeli government in 1993, the Yozma (Initiative in Hebrew) Program is a multifaceted initiative aimed at jumpstarting the nation’s VC industry by stimulating technology, innovation, and entrepreneurship in the country’s economy. Key features of the program included government-backed VC funds supporting startups and small and medium-sized enterprises (SMEs), foreign capital injection and networks by encouraging foreign partnerships, and investment guarantees for private investors in the case of poor performance. Overall, the Yozma program has brought significant benefits nationwide, such as economic growth, technological innovation, attracting foreign investments, and tremendous brain gain in its entrepreneurship and VC ecosystems.
It is recommended that ADIA take a similar and expanded approach by targeting its strategic focus toward the high-potential VC industry and constructing its own VC ecosystems for numerous benefits such as diversification, high return potential, staying on top of technologies and innovations, and sustained growth. Besides VCs, the fund should extend its vision across other forms of disruptive investments for its long-term sustainability.
A Path Forward
ADIA could accelerate the pivot from its conservative approach to investing, which it has begun to shed over the past few years. The move towards quantitative vetting of investments, a more of a hedge fund style approach, has been a good start. However, a more dramatic shift might be required, with near-apocalyptic events forecasted for the oil industry.
Reprogramming ADIA’s Venture Arm
ADIA should increase its investments in early-stage startups. The most significant benefit of venturing into the world of startups is the potential for unlimited upside in the best-case scenario along with low initial investment requirements. The average return for venture capitalists is about 25.0 percent, higher than the 7.3 percent that ADIA makes on its current investments. In addition, the fund should focus on positioning itself as a perennial source of cash flow for the UAE government in the backdrop of the oil-less economy. They could achieve this by taking a majority stake in promising startups and partnering with them to supercharge their growth into the next Apple or Google. Revenue from these successful companies could fund the development of the Emirates for years to come.
Replicating the Yozma Program in Abu Dhabi
ADIA should work with the government to develop a program similar to the one developed by Israel. A potential way to achieve this is to invest 2.0 percent of the proposed $44.63 billion investment in the development of an incubator for startups in Abu Dhabi itself. Additionally, the fund should partner with the government to promote this incubator to other potential investors and create favourable business conditions through regulations to incentivize new startups.
The incubator program for startups aligns with the UAE government’s plan to reduce the reliance of GDP on oil. ADIA would need to guide the government in setting up the R&D infrastructure to ensure smooth implementation. The fund has considerable resources at its disposal, including a team of 50 academics, physicists, and data experts who could guide the necessary infrastructure required to make this program a reality.
The size of UAE’s GDP is expected to be $617.48 billion in 2027. If UAE and ADIA could replicate the growth of investments in the VC landscape similar to what Israel was able to achieve from 2013 to 2022, where investments into Israeli tech startups rose from $1.9 billion to $15.0 billion at a CAGR of 25.76 percent, VC could contribute up to 0.65 percent of UAE’s GDP by 2027.
ADIA has multitudes of resources that could help make the above vision successful. Firstly, they have an enormous amount of cash at their disposal, with significant windfalls in profits from the oil business in the backdrop of Russia’s invasion. Instead of dedicating these funds to traditional investment routes, the fund could use them to explore the VC landscape without divesting any funds from existing projects. To attract more startups and capital into the country UAE could utilize GITEX, one of the world's largest tech conventions held annually in Dubai. In 2022 alone, the event attracted over 170,000 attendants from 176 different countries. Finally, based on the guiding principles of ADIA listed on its website, no one other than the board has the right to manage where the fund’s money would be invested. This shields ADIA and its potentially sponsored startups from political repercussions that might result from any friction between UAE and other governments.
Risk Factors
One risk to this approach is the failure to develop a successful VC landscape in Abu Dhabi. The way to tackle such a case would be to research the underlying root causes for failures and address those by working alongside the government. ADIA should take a long-term approach and allocate adequate time for the VC industry to take off before deciding to pull the plug in extreme cases.
Another considerable risk is political interference in the use of ADIA’s funds. There have been reports of ADIA’s funds and investments being used as a political tool for finance policy objectives. Such reports may have flown under the radar, but if the fund were to operate companies through its venture investment arm in different parts of the world, it is quintessential for it to keep its neutral stance so as not to draw the ire of other nations.
Wrapping Up
Increasing the exposure to the VC industry would increase the overall risk profile of the Abu Dhabi Investment Authority. However, to address future challenges related to the oncoming Great Energy Disruption, fostering a local VC ecosystem could be a strategic step in securing the long-term development and economic livelihood of the people of Abu Dhabi. ADIA's current but limited holdings in sustainable investments around the world exemplify the fund's early adoption of this initiative; now, it is time for it to bring everything home.
