Lagos — A couple of weeks ago, there was an enquiry from ADIA about the status of the African Private Equity Fund of Funds - Henshaw Capital Partners, the first independent pan-African private equity fund of funds dedicated to Africa. The ADIA investment officer read about Henshaw in the Wall Street Journal and wanted to learn more about it.

ADIA - the Abu Dhabi Investment Authority - is the largest Sovereign Wealth Fund (SWF) in the world with over US$620 billion under management. Founded in 1976, the source of their funds is primarily from the oil wealth of the Emirate of Abu Dhabi. According to ADIA's 2009 Review, ADIA's sole mission is "to invest funds on behalf of the Government of the Emirate of Abu Dhabi to make available the necessary financial resources to secure and maintain the future welfare of the Emirate".

A robust and discerning investment powerhouse, highly sort after in fund investor portfolios, ADIA is a truly global operation, only 30% of ADIA's 1,200 staff are from the UAE, 36% from Asia and 12% from Europe. A composition that is not surprising considering its investment geographic spread, ADIA does not invest in the UAE or Gulf region. With a SWF to foreign reserves ration of nearly 14, and a gross national income (GNI) per capital 10 times Nigeria's GNI - Abu Dhabi's GNI is estimated at over $11,906 compared to Nigeria's GNI of $1,160 - ADIA and the Emirate of Abu Dhabi can afford not to invest in their region.

Nigeria's new sovereign wealth fund recently conceptualised by the new Nigerian Minister for Finance, Olusegun Aganga and the National Economic Council will not have the luxury of not investing in Nigeria - at least in the short to medium term.

For many years economists like Hernando de Soto, financial entrepreneurs and many others have been making the case for unlocking Africa's latent and local capital tied up in all sorts of initiatives and funds but not managed professionally to maximise its value and increase its pool. The excess crude account is one example, pension funds are another.

This is rather plain common sense - along the lines of consumption versus investment. If we keep drawing down (consuming) from a pool of excess crude or pension funds, in a matter of time the pool will be emptied. However, if we invest the pool of funds and get a return (profit), top it up from time to time and withdraw from it only when absolutely necessary - we can build a war chest to meet our specified needs as ADIA does.

ADIA manages its portfolio "in such a way as to ensure it holds a sufficient level of short-term liquidity to meet anticipated funding requests from the Government, thus minimising the need to liquidate other investments." These withdrawals in practice have occurred infrequently and usually during periods of extreme or prolonged weakness in commodity prices. The Government of Abu Dhabi provides ADIA with funds that are surplus to its budgetary requirements.

The ADIA model is one example; it was designed to suit the needs of the Emirate. Nigeria's new Sovereign Wealth Fund will need to meet Nigeria's requirements not least for infrastructure development and job creation.

Some principles will remain the same for all sovereign wealth funds and indeed pension, insurance and other pooled funds - diversification of investment types, geographies and managers is one such principle.

ADIA is well diversified - allocating 35% to 45% to Developed (e.g. US and Europe) Equities, 10% to 20% to Emerging Market Equities, 1% to 5% to Small Cap Equities, 10% to 20% to Government Bonds, 5% to 10% to Credit, 5% to 10% to Real Estate , 2% to 8% to Private Equity, 1% to 5% to Infrastructure and 0% to 10% to Cash.

Geographically ADIA allocates 35% to 50% to North America, 25% to 35% to Europe, 10% to 20% to Developed Asia and 15% to 25% to Emerging Markets.

Approximately 80% of ADIA's assets are managed by carefully-selected external fund managers. This is because ADIA recognises that external managers often bring unique skills, experience or track records that ADIA cannot replicate easily or in a cost efficient manner.

The new Nigerian Sovereign Wealth Fund like ADIA should be well diversified across investment types, geographies (within and outside Nigeria) as well as utilise existing and new carefully selected external managers alongside its internal team of investment professionals.

ADIA's 30 year annualised investment return rate of 8% as at 31st December 2009 is enviable and we should aim to replicate or indeed exceed it. Imagine if Nigeria had set up its SWF at the height of the oil wealth in the 70's and achieved similar returns.

In the current political climate of accelerating Nigeria's development, the country would do well to expand the investment asset types available to Nigerian pension funds and the new Nigerian sovereign wealth fund for two reasons - investment returns and development impact.

Take private equity for example, investment in private equity by these institutional investors meets both the return objective and the development objective. We have evidence from Europe and USA that over the long term private equity outperforms public equities, we also have evidence that private equity backed companies creates jobs 8 to 40 times faster than average . Over 25% of total funds raised by European private equity in 2008 came from pension funds.

Another asset class crying out for institutional investment is infrastructure. Investment in Nigeria's infrastructure cannot be put off any longer. Job creation and infrastructure development are critical for Nigeria's survival.

With total assets under management approaching US$4 trillion, sovereign wealth funds constitute a significant proportion of global institutional investor assets exceeding US$50 trillion.

Among African countries, Libya and Botswana have SWFs. The State of Alaska in the USA has a Sovereign Wealth Fund, so could the Niger Delta, in place of the NDDC spend and deplete model or indeed Lagos State - the economic powerhouse of the country.

The New Minister for finance with his international finance background has taken a bold first step to rescue Nigeria's excess oil income from certain depletion. The devil as always will be in the detail of how the fund is managed, by who and invested in what. There is a real opportunity here to unlock domestic capital to create jobs and build our infrastructure. If used well, this new approach will also encourage international institutional investors to invest in Nigeria various asset types alongside Nigerian institutional investors.

-James is Founder and Chief Executive of Henshaw Capital Partners, a private equity fund of funds and former Managing Director of the African Venture Capital Association.