Abu Dhabi's Buying Binge

Flush with oil money, its sovereign wealth fund draws scrutiny and controversy.

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ABU DHABI—In recent years, the capital of the United Arab Emirates has been on a tremendous buying binge. Fueled by record high oil prices, the government's mammoth sovereign wealth fund, the Abu Dhabi Investment Authority, has been grabbing stakes in blue-chip American and other western firms, like a $7.5 billion stake in Citigroup. Mubadala Development Co., a separate investing arm, has bought portions of high-end auto maker Ferrari and the Carlyle Group, a Washington-based private equity firm.

Over the past 30 years, Abu Dhabi has assembled a dynamic investment sector to supplement its massive oil reserves. Amid the latest oil boom, these funds have become so central to Abu Dhabi's economy that one local businessman privately says, with a straight face, that oil is now "just the icing on the cake."

The shopping spree is a regionwide phenomenon. Persian Gulf states gobbled up $89 billion worth of foreign firms last year, more than triple the previous year, according to London-based research firm Dealogic.

But the Abu Dhabi Investment Authority, in particular, has also become a focus for controversy. Estimated to have as much as $900 billion in assets, the fund is one of the few places flush with cash amid a global credit crunch. It is the largest sovereign wealth fund in the world, with holdings that are about four times larger than the biggest U.S. pension fund.

Details about the true extent of its assets are scarce and its nearly impenetrable cloak of secrecy has fueled suspicions about the government's intentions. News of sovereign wealth funds looking to purchase stakes in U.S. firms has prompted fears in some quarters that foreign investors might be seeking to quietly take over companies or to purchase influence.

In 2007, sovereign wealth funds from Abu Dhabi to China invested $48 billion in foreign firms, according to Dealogic.

Several in the U.S. Congress have demanded closer scrutiny of these firms, their practices, and their tax status. Yet many of these investments, such as Abu Dhabi's stake in Citigroup, came at crucial times, when little other financing was available, to help stabilize firms in tough financial straits.

UAE officials have long insisted that the Abu Dhabi fund is run strictly as a business and bristle at critics who worry they might misuse their massive financial clout, but the government refuses to speak publicly about the fund's operations.

Earlier this year, UAE finance officials responded to calls for more transparency by releasing a set of the principles that govern its investments. Officials pledged not to use the money for political aims but also warned other countries not to discriminate against the fund.

The UAE is particularly sensitive to the potential for political backlash in the business world. A 2006 deal for DP World, one of the world's largest and most successful port operators, to take over running several U.S. ports triggered a firestorm that forced the Dubai-based firm to sell its newly acquired U.S. operations.

While the Abu Dhabi Investment Authority is a passive investment house, Mubadala is a more active development and management firm. "We are in the business of building businesses," says Waleed al Mokarrab al-Muhairi, the chief operating officer of Mubadala. Beyond Ferrari and the Carlyle Group, many of its investments have a major infrastructure component aimed at helping build Abu Dhabi into a world-class city.

Perhaps Mubadala's most high-profile project is the $15 billion Masdar Initiative, which aims to make Abu Dhabi a hub for alternative energy research and technology. The centerpiece is a demonstration city designed to be zero-waste, zero-emission, and car free.

But Mubadala also spearheaded a venture to recover and refine natural gas in Qatar and send it to the UAE through a subsea pipeline, and it is working on a separate joint venture to build the world's biggest aluminum smelter in the UAE. "We don't do projects unless I am able to deliver a rate of return that we need to deliver to our single shareholder," says al-Muhairi. "We're not a charitable foundation."