Optimizing Allocation Strategic Frameworks for Institutional Investors

Good afternoon everyone. Um, in the next 20 minutes we have the great privilege of hearing from three of the world's leading long-term investors. Dan, Ed, Troy, thank you so much for joining us. Um, let's jump straight in. Um, Dan, from ADA's perspective, what are the major long-term macro themes that have influenced your asset allocation mindset in recent years?

Thank you, Dara. Let me start by saying financial markets and the investing environment has significantly changed over the past couple of years. Traditional assasses boundaries is blurring and opportunities are shortlived. So for us to really be able to capture these fastmoving teams, we had to really build the skills internally and really become much more systematic and datadriven to be able to move much more agile and capture these these these events. So some of the major themes uh that is actually we're looking at and that's really driven our long-term macro themes are of course AI and the AI ecosystem around it whether it's software power energy but also uh we're we're looking at uh really expanding that asset allocation decision when it comes to these teams through our private allocation.

So over the past I would say couple of years one of the biggest drivers or biggest decisions we made is to actually increase our private ass allocation from around 10 to 15% five years ago to something close to 25 to 30% as you speak today.

Great. Thank you. And Troy, does the see similar set of long-term macro forces shaping opportunity or a different mix? Yeah, one thing to keep in mind, it's notoriously hard to forecast the ups and downs of the economy. I remember dearly in 22 and 23, there were many people calling for the the end of growth as we know it.

The focus for us is therefore on long-term economic growth. I don't want to bet against human innovation. There's any place on the planet that's a better demonstration than the UAE, I haven't found it. we continue to allocate and then it's just a question of how you choose as Dan was saying to capture that growth whether it's an artificial intelligence power infrastructure etc but in the long term risk tends to be rewarded

great and AD CPP investments often describes it portfolio as a super tanker engineered for resilience rather than rapid maneuvering how does that philosophy shape the macro variables you prioritize most as CIO Great. Uh first of all, let me uh just say thank you for the invite and it's great to be in the region and it's phenomenal just to see how the region has progressed over the last 50 years and the tremendous impetus of the leadership to develop the region both economically and geographically. So congratulations. Uh yes, the the super tanker analogy is a good one and it's partly because of the size of our organization, but it also reflects the fact that we invest in a lot of private assets that we expect to hold for a long time. We don't have a whole bunch of liquidity with respect to.

So when we think about portfolio design, we're really trying to be cognizant of how do we build a portfolio that is robust to a whole bunch of different economic events and outturns and is it able to weather those outturns and come out the other side. One, as I said, we don't have a whole bunch of liquidity in the portfolio, but two, uh, as Troy just alluded to, we're relatively humble about our ability to predict where markets are going. So we think much better design criteria is building something that is robust and resilient against a whole bunch of different outcomes.

Yeah. And staying on a macro theme in today's environment of fragmentation and persistent inflation, how has the total portfolio approach reshaped the way CPP investments interprets macro signals compared with a traditional asset class CIO model? Yes, we were one of the the early adopters I think of the total portfolio approach and by that we meant that uh we wouldn't have preset allocations to individual asset classes. We're going to be a lot more flexible in terms of how we thought the our portfolio and our portfolio construction. One of the ways that we do that uh from a design perspective is trying to identify the underlying drivers of asset returns across a whole variety of different asset classes.

In that respect we think of things like growth and inflation, discount rates, risk premiums and we try to figure out how different assets load on those factors. Then importantly uh what is the appropriate allocation across those different exposures. We then take a look at all the different asset classes try and figure out how they load on or how they deliver those factors and then select a combination that we think increases the risk return of the portfolio. And that is it hard is really trying to level all assets whether they're infrastructure assets or equity or real estates public or private saying if we can price those consistently

according to those exposures that they exhibit then we can form the portfolio that has the highest expected return at the end and that is essence is kind of total portfolio approach in terms of a relative value framework. Yes, that's really helpful especially at a moment when TPA is such an active point of discussion in institutional circles. Yes, I I I think the the TPA is a bit of a buzzword right now, I think, in the industry, but uh if you abstract it all back uh and think much more from the perspective of an individual asset owner and how do you want to think about your entire collection of assets as opposed to allocating to individual asset classes in a set perspective? That's really the flexibility that I think TPA delivers.

Thank you. Uh let's move to private markets. Don from AIA's perspective how are you thinking about private equity equity pacing today in this exit environment

so let me start by saying I think ADI has a natural competitive advantage I think all of us do given our long-term focus so one of the things that we look at and our teams actually have a global mandate

and they have actually flexibility to invest and deploy capital when they see opportunities on a global relative basis So we've been uh in the recent years we've been trying to really look at subasset class within private equity and try to grow that mandate as possible. So one of the things we've done is we've invested in private credit. We were early on to deploy capital into secondaries continuation vehicles and as the environment actually did improve in terms of trying to actually exit we did actually take that opportunity and exited some of our deals. So I can give some examples. We've exited from our investment in Galerma which was a spin-off from Nestle for example.

We've uh you know exited from our uh PIC investment pick investments of investment corporation in the UK sold it to uh Aora. So these are some of the examples where we definitely try to utilize the environment when it's actually does it's healthy and the markets are actually conducive to actually exit this this but we continue to deploy we definitely continue to see opportunities globally and we should not really stop from deploying one of the things where in the past I think we see the trough in distributions and private equity behind us so it was 22 23 was the trough when it came to distributions around 10% of open nav we believe it's actually coming back to its normal normality around 20% open nab so we think you know the markets are actually coming it's coming back to normality and we should be getting more distributions to redeploy in the market

right and Troy where is the stepping in or stepping back in private equity today

yeah it's a it's a very interesting topic in that respect so the the extent to which for example within bios we've always like midmark markets and lower mid markets, a focus on value creation and operational improvement, that's never been more important. The extent to which leverage is your friend, that's great. But good oldfashioned private equity from 30 years ago, just like my suit, get out there and do the hard work of improving businesses.

Yeah,

the exit environment and the challenges around selling businesses also create massive opportunities in secondaries. Secondaries are a favored allocation for us. But even within secondaries, the world has changed quite a lot. Single asset continuation vehicles are now more than half of GPEs. I think if you stand still for another three years, they might be 75% of GPEs.

Great. I was going to ask about secondaries because we [clears throat] had a chat in the summer and the pace picked up since then and the role of secondaries in your portfolio and your thoughts on GPL and LPL secondaries. Yeah. Well, there's a there's a role for all of those in the portfolio. The important part here is that every challenge that various parts of markets face, whether they're public or private, creates opportunities elsewhere.

So, a classic one for us is in this environment where exits have been more difficult. There are chances for people like us to step in and build pipelines to help liquidity flow from those who have it to those who don't. So, that's private equity secondaries and co-investments. But it's also helping to finance the underlying portfolio companies. Classic direct lending, flexible capital, opportunistic and hybrid.

And then at the LP level, GP and LP solutions have exploded. All these opportunities out there to provide that counterbalance. In the long term, private equity should win, but in the short to medium term, it creates wonderful opportunities in private credit as well.

Exactly. That's a good uh um seg to private credit. done idea has been inca has been increasing its exposure to private credit what's driving your interest in the asset class first of all I think private credit if you think about it is a very broad term so we don't have a single allocation to private credit the way we approach private credit is again through the lens of individual asset classes so if you think of private equity you can invest in private credit if you look at real estate infrastructure and also fixed income you can actually invest so the way we approached was bottom up rather and top down.

We definitely measure our exposure at the top level. Now the way we approach it is we actually allow the investment teams to look for opportunities on a relative value basis given their targets but they have to look at it from a riskadjusted basis. So each individual sleeve actually approached a bit differently. So I can give an example of how the private equity team looks at it. So private equity but they invest in a private they invest in platforms.

What they do is they actually go they have excellent relationships with with some of the managers. They create or they seed private plat priv private credit platforms where the team actually owns an econom uh stakes in the GP. So they have this economics

which is provides a kicker over and above the return. So that brings them closer to an equity equity private equity like returns even though it's a private credit. When you look for example at real estate we did the same thing. So we really created these platforms whether it's overland with centridge whether it's AGL where we funded actually we funded a CL manager in New York again we did the same thing so we really try to look for opportunities where it really does give us uh high high teen returns and does give us exposure to private but I think the way we approach it is very opportunistically it's a relative value I think when the asset class is very attractive and you know does does marry itself to high returns the teams actually invest in it.

Ultimately, I think the whole idea is to allow that flexibility within the teams rather than have a strict allocation to it. That's how we approach it.

Yeah.

Great. And Troy, private credit is clearly strategic for EIA as well. What's underpinning that conviction?

Well, it's the changing opportunity set out there. So, if you came to Abu Dhabi six or seven years ago and wanted to talk about that wonderful six or seven% return you can get, I don't care. But now you can make 12, 15, 18% depending on how much risk you want to take in private credit. These are genuinely competitive returns for long-term investors. So as the opportunity set changes out there, whether you're using a TPA approach or an SAA or something else to set your allocations, the important part is that marginal allocation of capital to new opportunities to solve problems, to seek higher returns, to capture new sources of returns.

The GP economic side of things for example is down highlights has been an exciting area for a lot of LPs to capture some of that fee revenue back.

Co-investments are the way to blend down returns. So the the chance here whether it's private credit or infrastructure or real estate anyone wants to talk about real estate is to continue to rotate capital through opportunities.

That's great. And then staying in private markets uh looking at infrastructure which has long been a major area for ADIA. Uh how has the environment for infrastructure investing changed and where are you seeing the most compelling opportunities done?

So ADA started investing in infrastructure since 2007. That was the initial asset allocation decision to actually invest

and I think today the asset class did mature since then. So rather I think institutional investors are now moving away from actually deciding whether to allocate to infrastructure. It's now moving towards more a portfolio management approach of the infrastructure uh portfolios. So again I think what we've done in now we have a really mature portfolio where we try to continue to upgrade that portfolio and really follows some of thematics that are happening around us. So we we again once the opportunities are there we tend to exit some of the old portfolios or the mature portfolios and move something which again try to upgrade the portfolio something which is more relevant.

So we've actually again exited for example from Gatling we've exited you know I think from uh uh Phoenix power Imperu and now we're reinvesting that into into again the current thematic again around AI whether it's data centers with vantage point uh with arite you know again power distribution in the US uh which is again a very hot theme again around the AI ecosystem uh ultimately but we continue to see opportunities in renewables Transportation is an emerging market with which you think are it's a bit difficult but still we think there are certain opportunities in in these in these sub subex exposures within infrastructure.

Thank you. And Troy which areas are most compelling uh for EIA in

infra infrastructure space power looks very special. So everyone's obviously aware about data centers and the endless demand they apparently have for power but particularly in the United States in this world of deglobalization and onoring of manufacturing capability. Most of those industries are very powerthirsty and so the extent to which many places in the world have aging infrastructure for power generation but also power distribution and storage there are very exciting opportunities there for long-term investors to allocate capital at high rates of return. So I'm I'm very enthusiastic about the power aspect obviously reinforced by the digital technology aspects but as an outright thematic in its own own being.

Great. And Ed um CPP Investment's legislated mandate maximizing long-term returns without undue risk of loss is unusually explicit. How does that clarity anchor capital allocation decisions in practice?

Yes. Importantly, there's uh there's a distinction between, I'd say, sovereign wealth funds and ourselves. So, we're actually a pension fund and we're a we're a creature of statute. Uh and as you just referred to, our mandate is explicitly set out in the statute. And the way we've interpreted that phrase uh maximize returns without undue risk of loss is that it first imposes a duty upon us to try and understand how much risk the fund can bear and still deliver upon its mandate.

So the first thing that we do is try and set a target overall risk exposure for the fund and then subsequent to that it's maximizing returns at that level of risk and as I alluded to previously there's there's no preset asset allocations within that frame. Uh management is delegated the responsibility of trying to figure out how to allocate capital across all the available opportunities that we have. But the end goal is to maximize returns or to maximize the sharp ratio the risk return of the profile of the fund at that stated level of risk. So it gives management a lot of flexibility and really forces us to always consider what the options are out there

in terms of what's available to us and what we can do to to help the fund succeed.

That's a really helpful explanation and the difference between uh the mandates from the sovereign wealth fund to a pension plan. Um and I think you know turning into one theme that runs through everything we've just discussed technology and AI. Uh Dan, how are AI and advanced analytics influencing your allocation processes or risk monitoring at Dadia? And is AI improving real time viability across the total portfolio?

Uh I think that's a very relevant topic. So AIA I think we definitely try to utilize AI and data analytics quite heavily over the past couple of years. We've actually invested heavily into technology and data curation and trying to structure our data in a much more effective way. We've uh on boarded more than 150 individuals that actually manage our quantum research group within ADA which are responsible to really derive signals and now casting models to help us at least capture some thematic trends in markets. Again, as a long-term investor, we don't tend to really move quickly, but having the ability to really understand what's happening in the markets and really being able to dynamically shift allocations when feasible is very important.

So, definitely using data analytics and advanced data analytics is quite important for us.

Leveraging AI uh capabilities is quite important to us to really make sense of the data we actually we invested heavily also in alternative data, not the usual data. Obviously uh we invest in we try to really design a new uh investment strategies that are actually enabled or at least influenced by these data sets which is quite important for us as we try to build more and more strategies that are managed internally. When it comes to risk again I think it's the same thing using AI and using data analytics to really understand the risk on a on a on every strategy is important. You don't have one holistic system that can really understand the risks that and portfolios especially when you have different strategies. You have short short horizon strategies that require completely different risk systems and you have again your asset allocation is a much more longer term horizon which requires complete different risk model.

So the ability to overlay that with again an in-houseuilt risk models is quite important.

So again leveraging AI capabilities and you know investing in the right talent is very important.

Yes.

So I think it's quite relevant. Yeah, thank you. And Ed, where is AI having the greatest impact on you uh CPP's total portfolio approach and your CIO level decision making?

Yes. Uh I think there's a couple different aspects of AI within our organization that probably mirrored with the market at large. And one is the the first gains were really efficiency gains in terms of how we analyze data and how we process data. We can do that faster. We can do that more quickly.

we can make decisions more quickly. I think the the true value ad from AI though in our context will come in when AI really helps us make decisions. And in that respect, I think we have an extraordinary advantage in the fact that we have a access to a broad range of asset classes and a 20 year history of investing in them. If we can draw upon all that data, the decisions that we make when we analyze an infrastructure investment or when we analyze a real estate investment or we analyze a private equity investment and try and figure out the commonalities that exist between where we've been successful investing and where we haven't,

I think that could be a real advantage. We've recently embarked upon something called decision analysis internally where we've gone back in time and tried to say what was our thesis when we entered into something. what were the decisions we made and importantly what did we get right and what did we get wrong and how do they align with our comparative advantages and I think with the help of AI we hope that we can do more kind of pattern analysis and try and pick up those common threads that led to us being successful and double down on those and conversely where we haven't been successful what can we do better or how can we improve

or if we can't let's just stay away from it and and stick to those things that have proven to generate value for us over Thank you. And Troy, how is AI influencing EIA's how EIA evaluates managers or identifies opportunities?

Yeah, I I'd actually like to tie up what Dan and Ed have been talking about here in the context of governance. So, we started talking a little bit about total portfolio approaches or strategic asset allocations. The important thing here for your AI uh technology spend is to improve the quality of your decision making within your governance structure. Choosing what decisions you want to make and how you're going to make them to make the best possible decisions in the time frames that suit your organization. And so the great hope for me in this is that we can use the silicon technology to improve the carbon-based technology.

Okay,

that's the important thing for me.

Great. Well, thank you so much. We're coming up on time. Thank you for your really valuable insights and um Dan, Troy, Ed, it's great to hear your sort of thoughts and perspectives on the various topics and thanks everyone for joining us. Thank you.

Thank you.

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