Mubadala taps foreign expertise for new return sources

Setting its commercial finance joint venture with General Electric (GE) in stone last Sunday, the US$14.7 billion Mubadala Development of Abu Dhabi furthered its drive into investments designed to boost its home economy through knowledge transfer, from resources exploration and production and education, to the ultimate commodity hedge: a sustainable city founded in the desert. Simon Mumme profiles one of the most active sovereign wealth fund (SWF) investors of 2008.

One of the clear trends in international SWF investment throughout 2008 was the snubbing of Western financial firms in favour of investments aiming to benefit local economies through knowledge transfer, a report on SWF activity in 2008 by Monitor/FEEM finds.

Mubadala, charged with the dual aims of generating attractive returns while helping to diversify the Abu Dhabi economy away from oil and gas, was a proponent of this shift, through its investments with GE and others, such as France’s US$28 billion Fond Strategique d’Investissement and Western resources firms.

After four years accumulating flows from the Emirati government, making some initial investments including a 7.5 per cent equity stake in private equity firm Carlyle Group – the SWF honed its strategic focus. In 2008, “Mubadala reinvented itself as a domestic development company,” the Monitor/FEEM report states.

It invested swiftly to flesh out its aims. The GE deal, in which both companies will pump US$4 billion into commercial finance projects in the next three years, was the seventh-largest SWF deal in 2008, and one of 12 joint ventures undertaken by Mubadala in the year, making it one of the two most active SWFs in 2008, investing US$1.4 billion in seven transactions (the other was Singapore’s GIC, which, unlike Mubadala, pursued investments in the OECD).

More than half of its disclosed transactions were made in the United Arab Emirates (UAE), accounting for more than 70 per cent of its reported spend for the year.

The GE joint venture is expected to grow to US$40 billion and will be headquartered in Abu Dhabi and led by Ron Herman, the head of GE Equity.

Jeff Immelt, GE’s chief, said the deal could morph into a new “global financial services business,” combining Mubadala’s knowledge of the Middle East and Africa economies and GE’s deal origination capabilities. Mubadala aims to tap into GE’s expertise, while GE seeks deeper involvement in another fast-growing Gulf economy.

The deal represents the latest phase of a relationship strengthened that was when Mubadala executives attended GE’s Crotonville campus for a week’s leadership training in 2005.

The company’s Middle East-sourced revenues have grown by more than 60 per cent in the past two years, and it already holds close ties with Saudi Arabia, which has become a regional infrastructure-services hub for the business.

Last year, Mubadala announced its intention to become a top 10 shareholder in GE; in March, it owned 0.6 per cent of the company, making it the 17th largest equity holder.

The deal gives Mubadala access to GE Capital’s global platform of investment deals, and will also develop a Middle East and Africa investment program, favouring renewable energy research and development, aviation and business education.

The deal also sees the founding of the Abu Dhabi Leadership Development Centre, a business school catering to executives from the region. It will draw on the Crotonville leadership curriculum, and develop programs specifically for the region. Courses for GE and Mubadala employees and regional partners will run from next month, while a permanent campus and residence will be built in the next three years.

As the deal was being cemented, the first major solar panel in Masdar City, the emirate’s sustainable city-in-the-making, was connected to Abu Dhabi’s power grid. Masdar (which means ‘the source’ in Arabic) aims to be a carbon-free, zero-waste, sustainable city in the desert, housing 50,000 people by 2016. This first solar panel, costing US$50.3 million, provides a peak output of 10 megawatts, enough to power 3,500 homes.

This is far behind the world’s leading provider of solar energy, Germany, which has built up a 5,400 megawatt capacity to date. Yet Masdar’s solar ‘array’ has displaced about 15,000 tonnes of carbon from Abu Dhabi’s energy cycle.

Masdar aims to build arrays that will power the city’s six square kilometre area by 2015. By 2020, the UAE aims to generate 7 per cent of its energy through renewable processes. This interest in clean energy is not wholly driven by environmental considerations, but also by commercial interests: when Abu Dhabi runs out of oil, or the world taps a new energy source, it aims to remain at the fore of energy markets.

At the current rate of consumption, Abu Dhabi’s oil supply – about 8 per cent of the world’s proven reserves – will last for 92 years. Mubadala’s mission is to build alterative economic drivers for when the world stops sucking oil from the UAE desert.

Masdar, an ideal crucible of sustainability, has been founded in an unlikely environment. It is built next to Abu Dhabi’s international airport, and a Formula One racing track and Ferarri-themed amusement park are being built close by. Mubadala owns a 5 per cent slice of Ferarri and sponsors its racing team.

The SWF is also building what is reportedly the world’s biggest aluminium smelter. Its oil and gas operations bought outright Pearl Energy, a south-east Asian oil and gas exploration and development company, in 2008, and secured an exploration and production sharing agreements with Oman and Kazakhstan. With Occidental Petroleum Corporation, it signed an interim agreement with the Bahrain government to quicken production of its main hydrocarbon reservoir.

Meanwhile, Mubadala’s energy and industry business founded two joint venture companies with US and Scottish firms to provide engineering and production services in the region. But it also developed technologies for Masdar.

The streets of Masdar will contrast greatly with those of downtown Abu Dhabi, where residents drive fuel-guzzling cars and, amid the desert heat, work in air conditioned buildings. One of the city’s shopping malls is mulling over plans to build an indoor ski slope – rivalling the existing one in Dubai.

In Masdar, there will be no cars. Instead, six-seater “personal rapid transit” cars, fuelled by solar and batteries, run in along subterranean transport routes between about 1,500 stations. On the surface, the streets will be narrow, shaded walks designed to funnel wind coming from the desert.

In Masdar, Mubadala’s attempts to tap foreign expertise through its investments as it aims to diversify its local economy are evident. It is working with the Massachusetts Institute of Technology to create the Masdar Institute of Science and Technology (MIST), which it claims is the world’s first graduate university for sustainable energy.

GE already has a foothold in the city too. The company and Mubadala have developed the ecomagination centre, designed to bolster clean energy research and development and accelerate development of new technologies in the Middle East.

Abroad, Mubadala has invested in the renewable energy industry to bring advancements back home. It wrote a US$92.8 million interest-bearing loan to Finnish wind turbine manufacturer WinWinD Oy, and entered into a joint-venture with Spanish engineering firm Sener Grupo de Ingeneria S.A. to design, build and operate concentrating solar power plants in the sunbelt regions of the world.

It has put US$600 million into thin-film photovoltaic cell technology – US$203 million of which was invested in a solar photovoltaic production plant in Erfurt, Germany. According to Mubadala, the investment “marks the first phase of Masdar’s investment in thin-film photovoltaic manufacturing, and will act as a blueprint for technology and knowledge transfer” to a 140 megawatt plant in Abu Dhabi.