GCC and Global Private Equity Issues

KKR gets license to operate in Saudi Arabia

2011-11-14T02:39:00.001-08:00

KKR gets license to operate in Saudi Arabia

Mon, Jun 27 2011

DUBAI, June 27 (Reuters) - Private equity giant KKR & Co LP has received a license from Saudi market regulator Capital Markets Authority (CMA) to conduct business in the oil-rich country, a bourse filing showed.

"The CMA Board of Commissioners issued a resolution today...authorizing KKR Saudi Limited Company to conduct arranging," a statement from the regulator on Sunday said.

The statement did not provide any more details.

A spokesman for the company in London declined to comment.

KKR, co-founded by "buyout king" Henry Kravis, began its operations in the region with an office in Dubai in 2009. Several private equity firms have set up shop in the Gulf Arab region in the last few years, attracted by rapid economic growth and high oil prices.

A spokesman for the company in London declined to comment.

U.S. private equity firm Carlyle Group expects to complete a deal in Saudi Arabia by the end of the year, a senior executive said early this year.

Education in Mena does not meet workplace requirements

2011-11-14T02:37:00.000-08:00

Education in Mena does not meet workplace requirements

Shuchita Kapur

Published Monday, November 14, 2011

Education imparted in the Mena region often does not meet the workplace requirements, according to a Mena education report released by Markaz.

The findings suggest that education education system in the region, to a large extent, fails to impart the right skills required for a modern workplace. As a result, employers (particularly in GCC) prefer to hire foreigner’s vis-à-vis nationals. Foreign employees are considered to be proficient in terms of productivity as well as accept lower salaries.

Quoting a World Bank report, Education for Employment: Realizing Arab Youth Potential, researchers at Markaz highlight the disconnect between education and workplace requirements. This is largely because factors such as ill-equipped classrooms, untrained teachers and outdated curriculums. Furthermore, the report highlights three main areas for private sector participation – vocational education and training, university education and work readiness programmes that can help improve the system.

The report points out that the region has over 100,000 K-12 schools of which the maximum number are located in Egypt (37%), Saudi Arabia (22%), Algeria (19%), Morocco (8%), and Jordan (5%).

“However, despite having a number of schools, the lack of availability of good schooling ails the education system in the region. PISA results from the OECD (which surveys 15-year-olds on knowledge and skills essential for full participation in society) ranked the UAE at 42nd position, followed by Jordan (55), Tunisia (56) and Qatar (61). Establishment of new world-class schools and/or renovation of existing ones with the help of private equity could be pursued to improve the infrastructure and curriculum,” says the report.

Availability of quality teachers is another key concern. The figure in the report show that the region has 17 students for every one teacher (a pupil-teacher ratio of 17:1) compared to the world average of 24:1. Yet, the knowledge level and skill set among students in the region is far lower compared to the counterparts in the developed countries. One key reason for this is the poor quality of teachers in the region. Moreover, the demand for teachers is expected to go up. A UNESCO report titled Teachers and Educational Quality: Monitoring Global Needs estimates that the Arab world, mainly Saudi Arabia, Egypt, Morocco and the UAE, would need an additional 450,000 teachers by 2015.

“Good teachers are essential in an education system as they are the ones who impart knowledge and values to the future generation. However, countries in the MENA face an acute shortage of teachers. Therefore, those hired to serve as teachers are often not adequately qualified for the position. The result is lower knowledge level and skill sets among students in the MENA region,” the report points out.

“Mena students score lower on Trends in International Mathematics and Science Study (TIMSS4) compared to the average score in developing/developed regions,” it adds further.

The report also focuses on poor quality course curriculum. “The quality of primary education in the MENA region is still below the standards in developed nations such as the UK. A consultancy firm McKinsey and Co recently reported that the majority of schools in the UAE rank between ‘poor’ to ‘fair’ by international standards. Data from World Economic Forum (WEF) suggests that countries like Libya, Egypt, Morocco, and Algeria particularly need to improve their quality of education at the primary level. These countries could learn from Qatar, which now ranks among the top five nations globally in terms of quality of primary education.”

Despite the pitfalls, education is high on growth agenda of governments in the region. “Providing access and imparting quality education is among the top priorities of governments in the region. Significant budgetary allocations for education and related activities undertaken by various governments for several years emphasize the importance given to the sector. Data from the World Bank indicates that public spending on education (as a % of government expenditure) in the MENA stands at 18.6% compared to the world’s average of 14.2%.

Egypt's Citadel secures $150 mln finance facility

2011-11-13T04:00:00.001-08:00

Egypt's Citadel secures $150 mln finance facility

Sun Nov 13, 2011 8:58am GMT

CAIRO Nov 13 (Reuters) - Egyptian private equity firm Citadel Capital secured a $150 million, 10-year financing facility from a U.S. government development finance institution, the company said on Sunday.

The funds from the Overseas Private Investment Corporation (OPIC) take Citadel's long-term capital to $325 million, including a recent rights issue, Citadel said in a statement.

The firm, which focuses on the Middle East and north Africa, reported a net loss for the first half of 2011 and is scaling back investments outside its existing projects until Egypt's political and economic outlook becomes clearer.

The country is gearing up for elections after the overthrow of President Hosni Mubarak in February in a popular uprising that caused a flight of foreign investors and tourists.

The financing "addresses the shortage of credit in Egypt, where investment in important infrastructure sectors has been stymied by political uncertainty", Citadel cited OPIC Chief Executive Elizabeth Littlefield as saying. (Reporting by Tom Pfeiffer; Editing by Robert Birsel)

2011-10-19T03:52:00.000-07:00

New index will help GCC firms attract investment and expertise

Gulf 100 will rank fastest growing entrepreneur-led companies

Dubai: The stakes have just gotten higher for Gulf entrepreneurs. A new ranking regime is being created — the Gulf 100 — which will showcase companies where the entrepreneurial light is shining brightest.

A similar ranking has already been created in Saudi Arabia and the new one will cover businesses in the other Gulf states.

"The GCC 100 is not [about] membership — it's a ranking of the fastest growing entrepreneur-led companies in the region," said Atif Abdul Malek, chief executive officer of Arcapita, the Bahrain-based financial institution closely involved in the process.

"The idea behind it is that [the provision of] a credible and well-backed platform to showcase the importance of entrepreneurial companies is a vital step towards attracting more capital and expertise into the region," he said.

"Companies which feature in the rankings — from Saudi Arabia, South Africa and Lebanon — have all reported a rise in interest and other positive dividends as a direct result," Abdul Malek added.

"Arcapita's aim is to support an initiative that we believe will help the GCC to develop a more entrepreneurial culture, which is necessary to prepare for the more developed economies in the future."

So, what do businesses need to have to make it to the final rankings — beyond that of being an entrepreneur-owned enterprise?

According to the promoters, the platform is open to any company that is privately owned with ten or more full-time employees as of end-2010. It should have an operating history of three years or more, and sales should be in the region of $100,000 (Dh367,300) in 2008 and $500,000 as of last year. Franchisee operations as well as government-funded private companies are excluded from the rankings.

"In this region, for early-stage growth companies, capital is often more easily accessible from informal networks of families and contacts than it is elsewhere in the world," Abdul Malek said.

"Probably the biggest challenge is the training of human capital to compete with the highly competitive markets elsewhere around the world, as well as the relative lack of experience available outside the core industries supported by the oil and gas infrastructure."

Much has been said in the recent past of private equity starting to chase possibilities in the private enterprise space. But, going by actual evidence, as of now it's proven to be more of a sentiment than actual practice.

Abdul Malek explains why.

"Private equity as an asset class targets growth capital investments in established companies," he said.

"Typically, entrepreneurs aiming to fund early-stage ventures look to bank finance, venture capital investment or angel investors to secure capital."

Supporting development

Would his bank itself get into the scene at some stage?

"The bank invests in developed companies all over the world; our interest in the GCC 100 is in supporting the development of a more dynamic entrepreneurial environment throughout the region, thereby helping to create the conditions that will one day produce the kinds of companies that Arcapita would like to invest in."

While not in the investment banking space, Arcapita invests on a deal-by-deal basis in private equity, real estate and infrastructure transactions around the world, Abdul Malek said.

These are then syndicated among its pool of investors, many of which are based in the GCC.

"We are beginning to add funds alongside our deal-by-deal model to allow us to attract more of the large institutional pools of capital in the region," he added.

Is a stock market listing the eventual destination that the GCC's privately owned powerhouses should aspire to?

Some of the individual Gulf states are already preparing the groundwork for such a transition. Abdul Malek would not be drawn into the debate. His response: "It entirely depends on the circumstances of the individual case."

Part of wider network

The Gulf 100 is part of the AllWorld Network, set up in 2007 by Deirdre Coyle, Anne Habiby and Harvard Business School's Michael Porter. The stated aim was to find the growth entrepreneurs in the emerging economies, and thus create an information system and network.

The AllWorld network has already compiled country rankings for Saudi Arabia, South Africa, India, Lebanon, Jordan and Turkey. The GCC 100 intends to encourage entrepreneurs from the other five Gulf states.

Signs US$ 25.5 Million Agreement to Finance Completion of Shorouk's New Paper Mill

2011-04-03T10:04:00.000-07:00

03 April 2011
The IFC joins Sphinx Private Equity Management and Grandview, Citadel Capital's small and mid-cap investment portfolio company, to finalize the debt and equity financing for the completion of environmentally-friendly paper mill that will create 850 jobs and ease Egypt's reliance on imports

Grandview Investment Holdings, a company managed by Sphinx Private Equity Management, announced today that the International Finance Corporation (IFC) is supporting job creation and reducing greenhouse gas emissions in Egypt by investing to complete the construction of a new paper mill, a project initiated by El Motaheda S.A.E., a subsidiary of Modern Shorouk for Printing and Packaging.

The IFC will contribute an equity investment of up to $10 million and a loan of up to $15.5 million to complete the building of the facility, which began two years ago. The mill, to be located 60 kilometers outside Cairo in the Sadat City industrial zone, will use recycled fiber from local waste paper to produce duplex board, which is used to make boxes for retail products.

"Sphinx has worked diligently with the IFC over a period of one year to finance the debt and equity for this project, which will satisfy regional demand for a critical product in the paper packaging industry," says Sphinx Private Equity Management Chairman Marianne Ghali. "We are extremely pleased that the IFC continues to support SMEs in Egypt. We view this as a very positive step as the SME sector will be of critical importance to the country at this unique moment in its economic development."

El Motaheda will create an estimated 300 direct manufacturing jobs and a further 550 indirect jobs through the collection and transport of wastepaper. In addition, availability of high-quality locally produced duplex will help replace imports, benefiting domestic and regional consumer goods companies and, ultimately, individual consumers.

"Our goal is to transform Egypt into a regional hub for the packaging industry, becoming the primary provider of high-quality packaging materials for multinationals and exporters alike," said Ibrahim El Moallem, Chairman of Modern Shorouk for Printing and Packaging.

"Central to our business proposition is leveraging Egypt's skilled labour force and key geographical locations," noted El Moallem. "We have grown remarkably in the past five years in part through the development and continuous training of our staff. On completion of the duplex project, we will be a fully-integrated packaging solutions provider for the region."

Grandview, which invests in small- and mid-cap opportunities in Egypt, joined forces in 2006 with Modern Shorouk for Printing and Packaging, one of the leading players in the field of paper, to create the National Printing Company, El Motaheda's parent company.

National Printing Company stands today as one of the largest converting and consumer-products printing houses in Egypt. Through key subsidiaries Modern Shorouk for Printing and El Baddar for Packages, the National Printing Company produces books, folded board boxes, corrugated boxes and sheets, laminated packaging, and paper cups and bags.

The expansion into the manufacturing of duplex paper comes as part Shorouk Group's vertical integration strategy.

Egypt produces an estimated 60,000 tons of solid waste each day, of which around 12,000 tons is paper, yet the country imports wastepaper and pulp for its paper-product industries. El-Motaheda mill and its domestic supply chain promise to significantly reduce the volume of discarded wastepaper and help eliminate carbon emissions from its decay.

"Grandview has pursued a strategy of investing in growth sectors where Egypt enjoys considerable competitive advantages. The fund's participation in this important project aims to provide value-added services to support regional expansion, financial structuring and improved corporate governance," added Ghali.

GCC outbound investments fall Mena’s investment inflows down 12 per cent

2011-01-25T01:37:00.000-08:00

Saudi Arabia is the only country to grow its outbound investments by a notable 350 per cent from $1.45 billion in 2008 to $6.5 billion in 2009.

GCC’s outbound investments dropped 40 per cent while other Middle East and North African countries suffered from steep decline in inbound investments.

According to World Bank estimates, the Mena region saw a 12 per cent decline in foreign direct investment (FDI) inflows last year. And the GCC, which has had a history of substantial FDI outflows in the past, saw more than 40 per cent dive in 2009.

While there are signs of economic recovery, going back to boom levels in 2007-2008 is small, the World Bank said.

Mena’s FDI established an average growth of 32 percent between 2000 and 2005 and reached $35.3 billion, or 3.7 percent of GDP in 2008, with Egypt, Lebanon, Iran and Jordan as key recipients.

However, the Dubai financial crisis disrupted these flows. Outbound FDI from the GCC halved from 2007 levels by 2009. As a result, developing Mena countries such as Egypt, Lebanon, Iran, Jordan, Algeria, Tunisia and Morocco saw 12 per cent decrease in FDI inflows to $28.3 billion in 2010 from $32 billion in 2009.

Meanwhile, FDI outflows from the GCC in 2009 registered $20.3 billion, a 40.6 per cent decrease from $34.3 billion a year earlier. Outflows peaked in 2007 with $26 billion. There are no available estimates for 2010.

FDI is a foreign investment that establishes a lasting interest in or effective management control over an enterprise. It can include buying shares of an enterprise in another country, reinvesting earnings of a foreign- owned enterprise in the country where it is located, and parent firms extending loans to their foreign affiliates.

International Monetary Fund (IMF) guidelines consider an investment to be a foreign direct investment if it accounts for at least 10 percent of the foreign firm's voting stock of shares.

However, many countries set a higher threshold because 10 percent is often not enough to establish effective management control of a company or demonstrate an investor's lasting interest.

World Bank data shows the UAE recorded the steepest decline in FDI outflow (83 per cent) from $15.8 in 2008 to $2.7 billion in 2009. Qatar suffered a 37 per cent drop from $6 billion to $3.8 billion. Kuwait saw a modest slow down from $8.8 billion to $8.7 billion while Oman and Bahrain saw significant slump in FDI outflow.

Saudi Arabia is the only country to grow its outbound investments by a notable 350 per cent from $1.45 billion in 2008 to $6.5 billion in 2009.

“Developments among GCC economies suggest that the likelihood of a quick return to the halcyon days of 2007-08 is small, though signs of economic recovery and financial improvement are emerging,” the report said.

The World Bank said flows may nonetheless begin to take place across developing countries of the region, as trade and production agreements among Middle East and North Africa countries, and between Middle East and North Africa and the European Union begin to gather momentum.

“Even at reduced levels, FDI continues to dominate overall financial flows to the region,” it said.

Looking forward, the World Bank anticipates a resumption of growth in FDI over the period through 2012, with a continued—albeit more moderate— pickup in portfolio equity and private debt.

In terms of private capital flows, the developing Middle East and North Africa region saw a modest growth of 1.2 per cent, or $320 million to $25.8 billion during 2010. This in contrast with the sharp pick-up in flows into East and South Asia.

On an upside note, World Bank expects the region’s net private inflows - which comprise equity and debt - to grow 26 per cent next year to $32.4 billion.

Moderate gains in portfolio equity and medium-term debt flows were almost wholly offset by the decline in FDI noted for 2010. Equity flows increased for a second year in succession favoring the bourses of Egypt and the UAE.

“For the UAE market, improvements were centered in fall 2010 as the Dubai World restructuring was settled and banking results improved,” the report said.

Medium and long-term private debt flows increased by $6.7 billion, with issuance of $2.3 billion in international bonds and the undertaking of syndicated bank borrowing of some $2.7 billion.

Net flows from official creditors increased by $620 million to $2.9 billion in the year. But the decline in FDI by 15 percent to $20.8 billion dominates the flow of capital to the region.

The World Bank expects FDI growth to resume over the period through 2012, with moderate but continued pickup in portfolio equity and private debt.

by Sam Smith

Standard Chartered Private Equity has closed a $75m Mezzanine Investment

2011-01-24T08:50:00.000-08:00

Standard Chartered Private Equity has closed a $75m mezzanine investment in Hassan Mohammed Jawad & Sons (Jawad Business Group or 'JBG'), a family-owned private company based in Bahrain.

This is Standard Chartered Private Equity's (SCPEL) first proprietary investment in the Middle East.

SCPEL managing director and regional head of MENA private equity Taimoor Labib said they believe this to be the largest MENA corporate mezzanine investment to date and is a strong indication of their belief in the JBG senior management team.

"As the proprietary investor for Standard Chartered Bank, we are one of the few organizations in the MENA private equity space capable of executing large ticket transactions across asset classes," Labib said.

JBG is a diversified mid-market retailer in the GCC with approximately 660 stores in Bahrain, UAE, Qatar, Kuwait, Saudi Arabia, Oman, and India with distribution centers in Bahrain and Dubai.

JBG's main franchises include Accessorize, Monsoon, The White Company, Mango, Bhs, Pumpkin Patch, Hush Puppies, Chili's, Lakeland, Dairy Queen, Costa Coffee, Burger King and Papa John's Pizza in several GCC countries.

Private equity sector faces shakeout

2010-10-03T15:46:00.000-07:00

Industry players need to reset their expectations in new business environment

By Babu Das Augustine, Deputy Business Editor
Published: 00:00 September 13, 2010

In the first half of this year, the value of private equity investment in the Middle East plunged to a low not seen since before the financial slowdown. But the region has a young and promising population that with increasing wealth and increased political stability could constitute a major driver for economic growth and increased demand for products and services.
Image Credit: MEGAN HIRONS MAHON/Gulf News

Dubai: The Middle East private equity (PE) industry that went through a phase of breakneck growth between 2004-08 and a drastic slowdown during the last two years is facing shakeout and needs to reset its expectations in the new economic environment, said analysts and industry players.

From 2004 to 2008 alone, global PE growth in the Middle East reached 70 per cent. Yet despite its rapid ascent, it is an industry that is still trying to find its footing.

Many PE firms operating in the region were founded at the height of the industry's boom in 2007 and early 2008 as investors pumped money into the PE bandwagon.

But few knew where to invest. Some invested in real estate and listed equities, and some didn't invest at all. The investors will start to lose patience over the next few years as funds reach the end of their terms and exits remain elusive.

"In fact, only three per cent of the aggregate capital across all funds raised from 2000 to 2010 is under liquidation, representing only 15 funds, or about 11 per cent of the total number of funds", said Peter Vayanos, partner, Booz & Company.

Private equity investments globally as well as regionally were affected by the continued recession in 2009. PE industry in the Middle East and North Africa witnessed a decline in 2009, with fund managers raising only $1.06 billion compared to a near-record $5.4 billion in 2008. Investments also declined from $2.72 billion in 2008 to $561 million in 2009, according to the latest statistics from the Gulf Venture Capital Association (GVCA).

According to Zephyr M&A Report for the first half of this year, the value of private equity investment in the Middle East plunged to a low not seen since before the financial crisis.

Just $135 (Dh495.45) million of private equity transactions was recorded in the first half of this year — a decline of 78 per cent from $617 million in the second half of 2009 and 62 per cent from $355 million in the first half of 2009. There were just ten private equity deals targeting the Middle East and only three of these have known values. The UAE was targeted by private equity three times, while Saudi Arabia and Bahrain had two leveraged deals apiece.

Industry observers expect a turnaround in the near future. The region has a young and promising population that with increasing wealth and increased political stability could constitute a major driver for economic growth and increased demand for products and services.

Increasing appetite

"A survey of 46 PE professionals conducted by Booz & Company and Insead in April 2010 confirmed that 73 per cent of industry leaders will be looking to tap this demand over the next five years through direct investments in companies from the region," said Vayanos.

Recent figures on fund raising points to a steady revival in the industry. Private equity firms in the Mena region raised $1.25 billion in the first quarter of 2010, an 18 per cent per cent increase over 2009, as regional economies recovered and investor appetite returned.

"Overall there is a revival in the fund raising activity in the region, the size of regional private deals has clearly come down," said Vikas Papriwal, KPMG's UAE Country Head of Private Equity and Sovereign Wealth Funds, said at a recent presentation on trends in regional PE industry at the Dubai International Financial Centre (DIFC).

Leading regional players say there is an increasing appetite for both private equity venture capital (VCs) investing in the region. "There is a growing interest from regional investors in funding start-ups through VCs and angel funding," said Frederic Sicre, Executive Director of Abraaj Capital. Venture capital received significant attention in 2009 with 7 transactions estimated at $25 million was closed, a substantial increase over previous years.

"The outlook for private equity in 2010 and beyond remains positive. The story in the region continues to remain one of growth and economic stability, and private equity funds will have ample opportunities to invest profitably in the coming few years," said Emad Ghandour, executive director of Gulf Capital who also chairs GVCA's Information Committee.

Experts say investors looking to participate in the Middle East's next stage of growth will still need to be cautious. The region's heady growth over the last decade worked to cover up some critical weaknesses in the PE industry. As these weaknesses come into full view, investors will need to trust that they will be addressed.

For starters, significant gaps remain in the region's legal and regulatory frameworks. Bankruptcy laws, for instance, are still not in place in many countries in the region, leading to confusion when portfolio companies fail. Methods for dealing with closure are not explicitly detailed, and in most cases it is left to the parties to reach agreement with each other.

The enforcement of contracts is not always swiftly implemented; the procedural phases of filing, trial, judgment, and enforcement typically take an average of 635 days.

"Saudi Arabia ranks 140th out of 183 countries for enforcing contracts, according to the World Bank's International Finance Corporation. Syria is even more challenged, ranking 176th," said Ahmad Yousuf, principal, Booz & Company

Corporate governance is another area that requires development. The influence of family-owned businesses may hinder corporate disclosure and limits transparency.

"Corporate governance plays a crucial role in the PE industry not only because good governance has a positive effect on company valuation, but also because in most cases, PE funds have limited ability to sell their ownership stakes, and are therefore committed to staying with the company for the medium term. This increases their dependence on good governance, transparency and disclosure in invested companies," said Dr Nasser Saidi, Chief Economist of DIFC.

Hawkamah, the Institute for Corporate Governance has set up a Task Force on Corporate Governance in Private Equity with regional PE firms and international to assist regional PE firms and PE-backed companies with their corporate governance frameworks. The Task Force will issue its first set of guidelines on October this year.

As limited partners prepare to make the leap of faith into a market poised for growth, the PE firms that judiciously apply their knowledge and talent stand to capture the benefits. However, general partners will need to adapt their practices to local and changing circumstances.

Family businesses

Family-owned businesses, which play an extremely important role in the Middle East's economies, offer sizable opportunity for PE firms. The restless entrepreneurs who have run many of these family-owned businesses for the past few decades are giving way to a rising second or third generation of family members who see the need to develop more focused strategies and more professional management approaches.

In the years ahead, these businesses are expected to divest some of their scattered holdings, scale up the businesses they retain, and seek to improve their overall performance. To do so, they need to acquire good management capabilities with a breadth of strategic, financial, and operational knowledge, a scarce resource in the region.

"The size of the opportunity is evident from the role that these companies play in GCC economies: They account for roughly 40 per cent of the region's non-oil GDP and 50 per cent of private sector employment," said Ahmad Yousuf, principal, Booz & Company.

Palestinian Venture Fund creates opportunity and optimism

2010-10-03T06:42:00.000-07:00

An interesting take from from Jean Case on 18 Mar 2010

Following the Annapolis Israeli-Palestinian talks in 2007, Secretary of State Condoleezza Rice appointed a group of private-sector leaders to help ignite economic development in the West Bank. The idea was that the co-chairs would mobilize private sector resources and investment that could benefit the West Bank and bring new hope and prosperity to the Palestinians – all in an effort to facilitate progress toward a two-state solution to peace. The initiative was called the US-Palestinian Partnership (UPP).

Against the backdrop of recent weeks where diplomatic snafus and territorial disputes have fueled tempers and shone a spotlight on the inherent barriers towards progress, I am at an event today in New York City that signals what is working in the region, instead of what has not, and I am feeling very encouraged. Led by the private sector, UPP is announcing a new Middle East Venture Capital Fund that is in many ways the culmination of the work we began in 2007 and gives me great hope for what the future holds.

In less than three years, the U.S.-Palestinian Partnership has facilitated millions of dollars in new youth programs and initiatives from Intel, Cisco, Microsoft, USAID and others; convened hundreds of investors and corporate executives in Bethlehem and Washington through the investment conferences; and co-hosted G-Pals Days with Google for small business owners and software developers to gather in Ramallah to learn new skills and compete for development prizes. And, today I am smiling ear-to-ear because we are in New York to announce and celebrate multi-million dollar lead commitments from the Skoll Foundation and Soros Foundations Network to a new $50 million fund that will bring hope and opportunity to thousands of men and women in the West Bank. These investments follow the European Investment Bank’s (EIB) significant commitment to the fund. Read EIB's press release about the fund here.

The Middle East Venture Capital Fund will invest in entrepreneurial companies in the Internet, mobile and software sector that are growing out of the substantial community of software and telecom engineers and other entrepreneurs in Ramallah and throughout the West Bank. It will give US and global investors an opportunity to do well while doing good – making meaningful contributions towards creating a viable Palestinian state and getting a valuable financial and social return on investment in the process. And thanks to our partners at the Skoll Foundation, Soros Foundation Network and the European Investment Bank, we are within sight of meeting our investment goals in the fund.

Perhaps I’m so optimistic today because of some history. Many years ago, when I was at AOL, we acquired a young company in Israel called ICQ, which revolutionized instant messaging across the Internet. The investment was not only significant because of the value it added to AOL’s success at the time, and the value it created for the leaders of ICQ, but more importantly because that single transaction with an Israel-based company helped serve as a beacon of the burgeoning innovation and talent in Israel in the early days of that country’s efforts to grow an ICT sector. Since that early investment, a technology boom has taken place in Israel, and today the ICT sector has become a cornerstone of the Israeli economy. I can’t help but see the potential of history repeating itself as this new fund goes forward. In addition to a highly-educated workforce, low infrastructure costs and a burgeoning technology sector, the same entrepreneurial spirit and innovative thinking is alive and booming in the West Bank.

While the private sector can’t do much to address diplomacy or security, it can play an equally important role through the contribution of resources and investment to the region. It has been a complete delight to see the undaunted courage of private sector leaders who’ve stepped up and in the midst of troubles and strife, have made commitments to go forward with this important work in the West Bank. There is a passionate belief that there’s really money to be made here, but these leaders are equally excited about the potential for the prosperity and stability these investments might help enable. These good things only happen when people come together with commitment and passion – I am enormously grateful to those who have stepped up early and to those who are at the table with us now looking at future investments

Goldman sees $80 trillion emerging nation stock market by 2030

2010-09-09T13:30:00.000-07:00

The market value of emerging market stocks may surge more than five fold to $80 trillion in two decades, overtaking developed nations, as China becomes the world’s largest stock market, Goldman Sachs Group Inc said.

Faster economic expansion and growing capital markets may lift emerging nations’ share of world equity capitalization to 55 percent by 2030 from 31 percent on Wednesday, Goldman strategists led by Timothy Moe wrote in a research report.

Institutional investors in developed nations will probably buy a net $4 trillion of emerging market equities, lifting holdings to 18 percent of their total portfolios from 6 percent now, Moe wrote.

In the report on Monday, Moe wrote: “The primary drivers are rapid economic growth and the maturing of equity markets that are at earlier stages of development."

“Developed market institutional asset management pools will need to increase their holdings of emerging market equities.”

The MSCI Emerging Markets Index has more than doubled since the beginning of 2000 even as the MSCI World Index of advanced nation shares dropped about 21 percent.

Emerging economies will expand 6.4 percent as a group next year, compared with 2.4 percent in developed nations, according to forecasts by International Monetary Fund.

Prospects for faster growth spurred investors to add money to emerging market equity funds for a 14th straight week even as they pulled $6.87 billion from global stock funds, research firm EPFR Global said on Wednesday.

The 21 country MSCI emerging gauge has gained 1.2 percent this year, while the MSCI World index declined 4.2 percent amid concern that stagnant jobs growth and spending cuts by indebted governments will hamper economic recoveries in the US and Europe.

The emerging gauge is valued at 14.2 times reported profits, compared with the MSCI World, which trades for 15.1 times earnings, according to data compiled by Bloomberg.

The MSCI China Index of Hong Kong traded shares has slipped 3.4 percent this year and the Shanghai Composite Index, comprised of stocks traded mostly by mainland Chinese investors, has dropped 18 percent.

The market value of Chinese shares may climb to $41 trillion by 2030 from $5 trillion on Wednesday, topping the $34 trillion projection for the US, Moe wrote.

Moe wrote: “Emerging equity market capitalization could increase substantially."

Moe also added: “Investors, financial intermediaries and developed-market corporates will have significant opportunities as well as challenges from these shifts in the equity landscape.”

GCC Market Analytics GCC Equity Market Analysis, Trading Strategies & Performance Metrics

2010-09-08T08:29:00.000-07:00

Below are the year-to-date percentage returns for all GCC market sectors. The top performers this year are the insurance sector in Qatar and (surprisingly?) the banking sector in Kuwait.

Seven of the bottom ten performing sectors are from the UAE market. The Dubai utilities and Abu Dhabi real estate sectors have been by far the worst sectors so far this year.

Is there a tendency for the best or worst performing sectors to continue to perform well or poorly in the future? I'll be taking a look at sector rotation strategies in an upcoming post.

Sovereign Wealth Funds and the Global Economic Crisis

2009-07-14T06:55:00.000-07:00

Sovereign Wealth Funds and the Global Economic Crisis

The global economic crisis has left many sophisticated institutional investors reeling. Most are yet to fully recover even though markets have clawed back some of their early losses. Worst hit are the hedge funds with exposure to financials and commodities. For instance, New York based Ospraie Fund that was worth some $2.8 billion at the start of August 2008 wound up later in the year as its holdings took a massive hit due to falling commodity prices. London based RAB Capital, which invests in small cap mining stocks, had to seek protection from redemptions due to falling commodity prices and consequent poor performance. Assets under management by RAB have reportedly fallen by 74% in 2008.

It is not only regular hedge funds that have crash landed but also mighty Sovereign Wealth Funds (SWFs). The Monitor Group, a US based consulting firm, estimates SWFs to have lost $57.2 billion on the publicly disclosed investments of $125.7 billion they have made since 2006. According to a working paper on Gulf Cooperation Council (GCC) SWFs published by The Council on Foreign Relations (Brad Setser and Rachel Ziemba), SWFs in the GCC have lost as much as $350 billion in 2008. SWFs elsewhere haven’t faired any better.

SWFs are returning to the market again and are making big investments. Some of these investments are in strategically important assets to their sponsors; i.e. their respective governments. SWFs have made a wide range of investments covering a multitude of sectors such as banks, real estate, energy and technology.

With their massive wealth and sprawling investments, SWFs have marked the rise of state capitalism. Owned directly by a sovereign government and managed independently of other state financial institutions, SWFs were created to manage the country’s foreign exchange reserves. Some high profile SWF investments include $3 billion in Blackstone Private Equity Firm by the Chinese Investment Corporation (CIC), $75 billion in Citigroup by Abu Dhabi Investment Authority (ADIA) and $800 million investment by Mudabala Investment Company from Abu Dhabi (Mudabala).

The advent of SWFs was viewed by many with considerable hostility and even prompted Mr. Larry Summers, the former US Treasury Secretary, to express concerns over potential threats by SWFs. Mr Summers’ concerns stem from the differences between investments by governments through SWFs and those by other conventional institutions as the former may have different motives. Mr Henry Paulson, another former US Treasury, urged the International Monetary Fund (IMF) to develop “best practices” to govern SWFs investments to, “demonstrate to critics that SWFs can be constructive, responsible participants in the international financial system.”

Those were the heady days of 2007-2008, when markets were defying gravity and oil was reaching new highs. And most of the SWFs are actually from oil rich nations. With government coffers brimming with foreign reserves on the back of the oil windfall, SWFs such as ADIA, Kuwait Investment Authority (KIA) and Qatar Investment Authority (QIA) were making inroads into markets in the West with investments in large corporations, banks and private equity firms.

Given the influence SWFs can exert and the magnitude of funds under their management (estimated to be $3.22 trillion), an analysis of SWFs and their investment strategies would prove to be appropriate. So what are the implications of these losses to the investment world? What have been the responses by SWFs? How will they change the investment strategy of these funds? What would be their role in a post financial crisis environment?

We interviewed investment officials and policy makers from several prominent SWFs to determine the answers to the questions above. In a series of articles we will be publishing views, findings and conclusions, of course within the boundaries of confidentiality.

One notable observation was that SWFs have started reducing their investment time horizons in response to market uncertainties and declines in reserve transfers. This appears to be the case particularly for SWFs established by oil producing countries. Views on expected returns have changed, leading to the postponement of some investments. It is fair to say that SWFs will not be making aggressive investments such as those in 2007 – 2008, unless of course the assets are at fire sale prices.

SWFs are also moving towards the establishment of stabilisation funds, to insulate their respective economies from falling commodity prices and export earnings. They are also expected to provide stability in fiscal revenues and protect against Dutch disease. Russia’s Stabilisation fund is a classic example which prevented the emergence of Dutch disease in the country.

SWFs as stabilisation funds are also expected to make investments in ailing domestic companies, as indicated by Kazakhstan’s sovereign wealth fund Samruk-Kazyna. The fund is seeking to buy gold, copper and iron assets which would benefit companies such as London listed KazakhGold Group (LSE: KZG), Kazakhmys (LSE: KAZ), Eurasian Natural Resources Corporation (LSE: ENRC) and Toronto listed Alhambra Corporation (TSX: ALH). Similar investments in local companies are expected by Singapore’s Temasek, CIC and Brazil’s SWF.

According to the International Monetary Fund (IMF) some SWFs are seeking indirect hedges in response to falling commodity prices. This would change the asset allocation strategy in the SWF portfolios resulting in overweighting assets that are negatively correlated with the price of the commodity that funds them. For example, though not exactly a SWF, Gazprom’s investment in Airbus Industries provides a natural hedge against falling energy prices. This may lead to SWFs seeking investments in new sectors and new regions as well as different asset classes that they have not invested in before.

This bodes well for sectors such as natural resources, particularly mining, as they currently have a relatively low exposure amongst current SWFs. At present, SWFs have the highest exposure to banks and financials, even after the market meltdown, followed by real estate and energy. As SWFs seek to diversify into other sectors, the mining sector emerges as an attractive candidate.

While SWFs have already made investments in the mining sector, it is worthwhile highlighting the latest SWF investment in a mining company. The China Investment Corporation (CIC) invested C$1.75 billion (US$1.5 billion) in Teck Cominco's (TSX: TCK.A and TCK.B, NYSE: TCK) outstanding Class B subordinate voting shares. This acquisition represents approximately 17.2 per cent equity and 6.7 per cent voting interests in the company. Other SWFs may also make similar investments in mining companies with Chinese SWFs however securing the lion share.

SWF investments in the energy sector is expect to be relatively low however, as most of the large SWF sponsoring governments already have an exposure to the sector either through investments already made or naturally through their own economies. SWF investments in oil are therefore expected to come from SWFs from countries that do not have oil resources (such as Korea Investment Corp, Temasek and Government of Singapore Investment Corporation) or from industrial nations such as China and Japan that are heavy energy consumers.

While the objectives of SWFs sponsoring governments cannot be fully ascertained, some display very clear-cut investment aims. For instance, Singapore’s Temasek Holdings acts like a reserve investment corporation seeking to generate returns to its sponsors through investments in diverse industries including energy and resources. Stabilisation funds such as the Kazakhstan National Fund seek to insulate the economy against the price swings of oil, gas and metals, on which the country heavily depends. The Government Pension Fund of Norway seeks to facilitate government savings necessary to meet future public pension expenditures and to support a long-term management of petroleum revenues.

However, concerns by the likes of Mr. Summers and Mr. Paulson are not ill-founded and it is imperative to determine if SWFs can be used as a government policy tool. Sponsoring countries could use the SWF muscle in a protectionist backlash. SWFs such as CIC can not only ensure base metal and energy supplies, they may also use their clout to gain access to greenfield energy and mining projects in places such as Africa.

Governments have so far not used their SWF clout as a policy tool. SWFs such as Temasek, ADIA, KIA and QIA have indeed remained passive partners. In the case of ADIA, Yousef al Otaiba, Abu Dhabi’s director of international affairs, even assured that they have no plans to use investments by ADIA as a foreign policy tool. CIC in its investment in Teck has also assured that they seek to be mere passive investors. One would fervently hope that SWFs would indeed follow similar policies and usher in a more effective system of corporate ownership.

Sources & Acknowledgements:
Sovereign Wealth Fund Institute, International Monetary Fund, International Financial Services London, Council on Foreign Relations, The Economist, Individual Sovereign Wealth Funds, The Monitor Group

Saudi grants approval for UBS securities business

2009-07-14T06:52:00.000-07:00

* UBS Saudi Arabia to offer full range of services

* Part of expansion in Middle East

ZURICH, July 14 (Reuters) - Saudi authorities have granted approval for UBS (UBS.N: Quote, Profile, Research, Stock Buzz) (UBSN.VX: Quote, Profile, Research, Stock Buzz) to start securities business activities, which the Swiss bank said on Tuesday would help it expand in the fast-growing Middle Eastern region.

In establishing the business, UBS said it had partnerned with Mohammed Al Dhoheyan, former chief executive of the Saudi Development and Management House for Investments, and MerchantBridge, an equity house investing in the Middle East.

UBS, the world's second largest wealth manager by private client assets, is struggling to rebuild its once powerful brand after massive investments into risky U.S. assets forced it to make more writedowns than any other European bank.

Last year, UBS won won a licence to open an investment banking branch in Saudi Arabia, the world's top oil exporter and the region's largest economy, joining a growing list of western banks boosting their presence in the booming Gulf Arab region.

UAE and Saudi to lead GCC M&A activity in Second Half of 2009

2009-06-13T13:48:00.000-07:00

Even though merger and acquisition agreements have fallen considerably across the GCC, in sync with the global slowdown, the UAE and Saudi Arabia may see most of the agreements happening in the second half of this year as far as the region is concerned.

According to Azhar Zafar, Head of Mergers and Acquisitions at Ernst & Young Middle East, the UAE and Saudi Arabia will see the most number of deals in the Middle East.

Nawal Roy, Managing Partner, Shobhit Capital Group based in the US, sees the UAE as one market where maximum number of deals are expected to happen in the latter part of the year.

"We expect to see M&A activity still subdued in the second half of the year. Early signs suggest there maybe some activity in Saudi, Egypt and the UAE," says Vikas Papriwal, a partner in KPMG's private equity and sovereign wealth funds practice. However, market stabilisation is vital if deals are to happen.

"In the beginning of the year, there was little buyer interest in transactions at any price. With stabilisation in the last couple months, groups are again considering growth investments, but buyers can afford to be selective. We should see some pickup in activity at the year-end as more bids and asks continue to converge," Steve McIntire, Managing Director, Capital Street Partners told Emirates Business.

Agrees Zafar: "M&A deals activity in the coming quarters is dependent on investor confidence – the key driver, which means for companies achieving good operating results as well as on the availability of liquidity," he said.

Experts believe this is a great opportunity to buy but if credit remains limited, most of the deals may be distressed and out of necessity. "It will be more driven either to strengthen or just out of sheer necessity for survival," said Roy.

"If liquidity remains tight, we can expect to see more mergers particularly in the real estate and financial services sectors," said Zafar.

However, deals could be more than just distress, said McIntire. "This is a great time for opportunistic buyers with valuations in many sectors failing to reflect growth inherent in the UAE market. As the market recognises that new consumers will eventually live in all these properties close to completion, there will be bids that appeal to more than forced sellers, at least in non-construction, consumer-driven sectors," he said.

"Sectors that are likely to be more favoured include healthcare, power and utilities and financial services," said Papriwal.

Experts differ on the subject of the sectors that may see the most M&A deals in the coming months.

According to E&Y, most activity is expected in the financial services, telecommunications and the real estate. Roy believes banking sector is very ripe for M&A activity.

McIntire, on the other hand, sees retail and consumer products as the best sectors ripe for deals.

"Retail and consumer products are the broadest markets with the most opportunities. Despite the recent down trend, the UAE consumer market will grow over a five-year horizon. In both consumer product and retail, there is a healthy mix of sellers and buyers along with some interest from financial buyers who recognise the longer-term growth dynamic," he added.

SEI Launches the First Shariah-Compliant Manager of Managers Equity Funds

2009-06-07T07:17:00.000-07:00

SEI Launches the First Shariah-Compliant Manager of Managers Equity Funds

SEI Attracts $160m in Assets in First Month

SEI (Nasdaq: SEIC), a leading global provider of asset management, investment processing and investment operations solutions, today announced the launch of the first dedicated Islamic Manager of Managers equity funds. The SEI Islamic Investments Fund Plc (SIIF) is a new umbrella UCITS III fund designed to offer Shariah-
compliant investments.
This represents the first phase of SEI's expansion plans for the Middle
East and Islamic Finance market, where it has already attracted significant
interest in SIIF among High Net Worth investors in partnership with a major
global private bank, gathering $160m in assets in the first month since
launch.
Commenting, Brandon Sharrett, Managing Director of SEI's Global Private
Banking business in the EMEA region said:
"Investors globally are familiar with the Manager of Managers concept
and have been benefiting from this approach for quite some time. This is
the first time Islamic investors will be able to take advantage of our
sophisticated, internationally-recognised Manager of Managers programme.
Our launch of these funds represents SEI's first step towards targeting the
rapidly growing Islamic Finance market."
The SIIF umbrella fund will have four initial underlying Manager of
Managers sub-funds. These are the SEI Islamic US Equity Fund, the SEI
Islamic European Equity Fund, the SEI Islamic Emerging Markets Equity Fund
and the SEI Islamic Pacific Basin Equity Fund. These can be used to build
global asset allocation models and benefit from a rigorous manager
selection process designed to limit volatility, manage risk and deliver
consistent returns.
The adviser for Shariah compliance is HSBC Amanah, the Islamic Finance
Division of HSBC Securities (USA), part of the HSBC Group. Shariah
compliance is specifically included in the investment objective of each
SIIF sub-fund, with customised Shariah guidelines for each underlying fund
manager.
About SEI
SEI (Nasdaq: SEIC) is a leading global provider of outsourced asset
management, investment processing and investment operations solutions. The
company's innovative solutions help corporations, financial institutions,
financial advisors, and affluent families create and manage wealth. As of
the period ending March 31, 2007, through its subsidiaries and partnerships
in which the company has a significant interest, SEI administers $382.4
billion in mutual fund and pooled assets and manages $190.0 billion in
assets. SEI serves clients, conducts or is registered to conduct business
and/or operations, from more than 15 offices in over a dozen countries. For
more information, visit http://www.seic.com

TAQA Arabia, the energy subsidiary of Egypt's private equity firm Citadel Capital, said Sunday it won an EUR118 million contract in Libya

2009-06-07T06:37:00.000-07:00

TAQA Arabia, the energy subsidiary of Egypt's private equity firm Citadel Capital, said Sunday it won an EUR118 million contract in Libya, its first in the North African country.

Under the contract, TAQA Arabia will connect over 370,000 households in the Libyan cities of Tripoli, Benghazi and Misurata with natural gas through a gas distribution network, the company said in an emailed statement.

The project will be executed through a joint venture between TAQA Arabia and the Libyan Social Economic Development Fund under the auspices of the General People's Committee for Electricity, Water and Gas Distribution, according to the statement.

The joint venture, operating as The Arab Gas Co. (Libya) and to have a paid-in capital of 5 million Libyan dinars ($4 million), will be 49%-owned by TAQA Arabia, while the Libyan Social Economic Development Fund will hold 51%.

"We believe that this contract will be the launching pad for more Libyan projects for TAQA Arabia as well as our other platform companies," said Citadel Capital Managing Director Marwan Elaraby.

TAQA Arabia said it will also draft a strategic plan for the expansion of Libya's gas grid, a project worth an estimated EUR2.5 million.

The company, which was established in March 2006 by Citadel Capital, was previously awarded contracts in the United Arab Emirates, Qatar, Jordan and Syria.

-By Tahani Karrar,

Foreign capital floods back to the Gulf

2009-06-06T10:25:00.000-07:00

Foreign capital is flooding back to Gulf equity and debt markets as international investors who fled the region last year reload on local stocks and bonds.

International investors bought shares worth about Dh6.3 billion (US$1.71bn) on the Dubai Financial Market last month, up more than 20 per cent on April, helping the market advance last Wednesday to its highest close since November. Debt markets are also receiving a boost as foreign investors withdraw from other asset classes such as US treasuries and seek higher returns from Gulf corporate and sovereign bond sales, analysts say.
But the rapid gains of the past week could lead to a significant correction across regional stock markets later this month as investors take profits, according to analysts based in Dubai.

“From our side, we’ve seen a marked increase in foreign participation in the local equity and debt markets,” said Ali Khan, the managing director of Arqaam Capital. “There’s been a shift to more positive sentiment for our markets from international investors.”
International investors retreated from Gulf markets in the second half of last year while a global lending squeeze hit regional bond and syndicated loan sales. Emerging markets have risen for the past three weeks on speculation that the worst of the recession is over, encouraging investment flows to return to economies driven by oil and other commodities.

The return of international capital has also triggered activity in the region’s private equity market, where activity has slowed over the past six months. Gulf Capital, a buyout group based in the UAE, last week launched a Dh1.75bn fund that was heavily subscribed by foreign investors.

“It was an eye-opener for us,” said Karim el Solh, the chief executive of Gulf Capital. “If you look at most of the funds launched here, they were raised locally. We were very surprised to see that international money is chasing opportunities in the Gulf. If you put it in perspective, the Gulf is expected to grow by 4.5 per cent over the next two years. It’s not the 6 to 7 per cent we saw over the past five years, but still respectable by any measure.”
But regional companies may need to become more transparent and communicate with potential investors more effectively if markets are to attract further inflows and build on recent gains.

“That’s the area of concern at the moment, there needs to be more progress in terms of reform and development for companies in the GCC in order for us to see more capital inflows,” said Mohieddine Kronfol, the managing director of Algebra Capital.
The GCC’s $100bn debt market almost ground to a halt in the previous two quarters as bond spreads widened and liquidity was unavailable. Analysts say the recent success of sovereign debt issuances helped revive interest in local bond sales. Mubadala Development, Abu Dhabi’s strategic investment arm, launched a $1.75bn bond programme in April and Qatar raised $3bn through a bond issue on April 3.

Qatar Telecom said last week it received $13bn worth of bids for the sale of $1.5bn in debt. Aldar Properties, the largest developer in Abu Dhabi, was also oversubscribed for a $1.25bn bond sale last month. The growing appetite for sovereign and quasi-sovereign debt sales is reflected in narrowing spreads on government credit default swaps, analysts say.
“This is an indication that flows are coming back, perhaps not to the same extent as [last summer], but spreads were very wide and they are narrowing now,” said Florence Pisani, an economist with Dexia Asset Management.

Equity markets are also seeing a revival, especially in Saudi Arabia and Dubai, which became the world’s third-worst performing exchange last year, losing 70 per cent of its value by the end of the year from retreating international investors.
Dubai shares on Wednesday advanced to their highest level since December after Bank of America (BofA) said the stocks offered the best value in the region. The value of shares traded last month reached Dh14.9bn, an increase of 6.9 per cent compared with Dh13.9bn in April, according to data supplied by the DFM.

Net foreign investment in DFM-traded shares more than doubled last month to Dh540.7 million as stocks gained 17 per cent. NASDAQ Dubai also saw trading volumes surge, rising 67 per cent to 331.3 million shares from 198 million shares in April.
Dubai shares are the best in the region to own for a short-term “trade” because the market’s valuation is 56 per cent lower than that of the MSCI Emerging Markets Index, based on the price-to-book ratio, according to a BofA report.

Last week, stocks advanced across the region, gaining 13 per cent in Dubai, 5.4 per cent in Abu Dhabi and 4.5 per cent in Saudi Arabia. Analysts warn that a correction could follow the huge gains of the past month.
“Equity markets have rebounded due to positive fund flows and increasing risk appetite. But our view is that there will be profit-taking in the short-term, resulting in markets in the region erasing a portion of the gains generated so far this year,” said Fahd Iqbal, a research analyst at EFG Hermes.

Sara Hamdan and Asa Fitch

ADIC eyes investments in South Korea, Asia

2009-06-06T08:58:00.000-07:00

ADIC eyes investments in South Korea, Asia

State-owned Abu Dhabi Investment Company (ADIC) said yesterday it is diversifying investments into South Korea and Asia as it seeks also to attract inward investment.

ADIC, Korea Development Bank (KDB) and the Korea Trade Promotion Agency (KOTRA) signed an agreement to help increase investment flows between South Korea and the Middle East and the North Africa region, ADIC said in a statement.

The agreement lays the groundwork for cooperation in many areas, including cross-border mergers and acquisitions, private equity, infrastructure and portfolio equity investment.

Markaz expects 50% surge in Saudi demand after mortgage law

2009-06-02T14:43:00.001-07:00

Markaz expects 50% surge in Saudi demand after mortgage law

Makkah and Jeddah will see higher growth compared to other cities. (AFP)

By Parag Deulgaonkar on Wednesday, June 03, 2009
The total demand for residential units in Saudi Arabia will be in the range of 500,000 to 800,000 during the period 2009-13, with the economy expected to get back on the growth track next year as oil prices rise, according to a new report.

"The demand will experience a 50 per cent upward shift from its current levels if the mortgage law comes into force, thereby turning ar-ound from the historic trend of waning investment in residential real estate and lack of home ownership affordability for the younger generation," Ku-wait Financial Centre (Markaz) said in its June report on real estate.

The currently planned organised supply will provide about 73,000 units during 2009-13 and the rest will be tapped by current and future projects by smaller size developers and major projects planned in future.

The younger generation, in the age group of 20 to 35, is currently deprived of real estate ownership and they live with the elder generation, which also leads to the choice of villas as preferred housing units. They have to face a rental cost at 45 per cent of their current income levels or a monthly mortgage at 41 per cent, should they decide to move out. The higher equity levels of 50 per cent on an average, which is the result of lower mortgage penetration, also magnifies the lack of affordability.

"The mortgage law, if and when passed, will include them in the target market and expand the potential for residential real estate in Saudi Arabia thereby turning around the waning investment trend seen in the past decade," the report said.

Supply scenario, currently dominated by projects worth less than $50 million (Dh183m) apiece, is slowly drifting towards more organised supply due to the planned mega cities. However, completions will happen in a phased manner with major completions planned during the middle of the next decade, thus providing attractive opportunities for developers of smaller size projects and also for big projects.

The current major cities of Riyadh, Jeddah, Makkah, Al Khobar and Dammam will remain the centre of activity for the next five years till the boom gets shared by the planned mega cities.

Rentals and prices contracted on an average by 10 per cent, much less than other cities in the region, driven mainly by a fall in risk appetite.

"We expect rentals and prices to bounce back again following economic recovery and re-emergence of risk seeking. We expect Makkah and Jeddah to experience a much higher growth compared to other cities mainly due to the current pent-up demand," Markaz said.

Residential real estate is one major type of capital asset and a sustainable trend in its share in the overall capital formation is essential for the prevalence of equilibrium conditions in the economy.

Residential real estate investment has been growing at a much slower compound annual growth rate (CAGR) of four per cent in the past decade in nominal terms compared to the 10 per cent growth in overall investment. In the past five years, marked by high nominal capital and gross domestic product growth, overall capital formation grew at a CAGR of 16 per cent in nominal terms while residential real estate grew by a much smaller six per cent.

The better growth in non-residential real estate capital, which was at a decadal CAGR of 15 per cent and by 25 per cent in the past five years, should not be construed for commercial and retail real estate assets as this includes the infrastructure capital spending as well.

Investment in residential real estate marked by years of relative and absolute under investment.

Besides, residential real estate's share in the total capital investment also came down from its high of more than 20 per cent during early 2000s to 13 per cent in 2008 due to shortages in ownership financing. This is corroborated by a 100 basis points contraction in mortgage lending as a percentage of total credit during the past three years.

According to the report, the primary cause of the dramatic fall in the residential real estate capital build-up is the lack of mortgage lending. The effect of the current economic slowdown hit bank lending hard, which has resulted in lending contraction.

"Given the historic dismal lending to real estate and construction sector, we can expect no significant changes in the trends in bank lending to real estate. Mortgage lending as a percentage of total residential real estate capital formed stood at a meagre average of three per cent in the past five years. Though it has grown up to 5.5 per cent in 2008, it still indicates dismal penetration," said the Markaz report.

Saudi Arabia is among the least levered countries in the GCC, measured in terms of bank credit to private sector as a per cent of nominal GDP, and hence is not a highly levered economy. This scenario warrants the necessity for the passage of the mortgage law, which would remove these impediments while a further delay could put the sector in a gridlock till the time it is passed, the Markaz report said.

Kingdom urged to focus on housing supply gap

Saudi Arabia needs to give priority in its massive investment programme to tackling the housing supply constraints within efforts to bring inflation rates to normal levels, the kingdom's largest bank said yesterday.

The National Commercial Bank (NCB) estimated the investment programme being carried out in the world's oil superpower at SR2.4 trillion (Dh2.35trn), covering planned projects and those under way.

It said such projects, mostly infrastructure, are intended to expand the supply capacity in the kingdom and ease inflationary pressure in the long term.

Citing official data, NCB said inflation in Saudi Arabia, which controls a quarter of the world's recoverable oil deposits, declined to about 5.2 per cent in April from six cent in March, its lowest rate since the historic high of 11.1 per cent in July.

But the report noted that the main cause of the decline was a sharp fall in food and beverage prices, which tumbled by 10 per cent during that period. In contrast, the rental component of the cost of living index in the kingdom slipped by only about 1.2 per cent, the report said.

The report attributed the plunge in food inflation to the drop in imported inflation from major trading partners, as a result of the rapid decline in global commodity prices. In rental, the decline was minimal due to the domestic supply crunch.

"In the kingdom, the demand for residential housing is estimated at nearly 155,000 units per annum that will require a significant investment outlay of about SR68 billion during 2009-2014," NCB said in its weekly bulletin, sent to Emirates Business. "Bottom-line, priorities should be in place to direct both public and private resources towards relaxing such capacity constraints and to counterbalance the spillover effects of external shocks by capitalising on the windfall of oil resources, which will mitigate inflationary pressures in the long-run."

Saudi Arabia, which pumps nearly 10 per cent of the world's oil supply, has already announced it would invest more than $400bn (Dh1.47trn) in infrastructure development in the next five years.

The government also announced a record budget of SR475bn for 2009 in a bid to stimulate the economy that has been largely stifled by the global financial distress.

Inflation in Saudi Arabia climbed to its highest annual rate of about 10 per cent in 2008 because of a surge in food prices and rents, a weakening in the US dollar to which the Saudi rial is pegged, and strong domestic demand after oil prices soared to their highest average of nearly $95 per barrel.

The rate last year was more than double the 4.1 per cent inflation average recorded in 2007 and five times the rate of 2.1 per cent in 2006. Independent estimates expect the rate to tumble below six per cent this year.

Like in other Gulf oil producing countries, the global financial crisis has ended nearly six years of an economic boom in Saudi Arabia after sharply depressing crude prices and forcing the kingdom to trim oil output in line with an Organisation of Petroleum Exporting Countries' accord. This has led to a liquidity shortage, weakened domestic demand and slashed the kingdom's income, prompting it to use part of its massive overseas assets. (Nadim Kawach)

SHUAA sees overwhelming investor interest during GCC Investor Conference in London

2009-05-31T06:33:00.000-07:00

SHUAA sees overwhelming investor interest during GCC Investor Conference in London

31 May 2009
Dubai - 31 May 2009: SHUAA Capital (ticker symbol: SHUA.DU), the GCC's leading financial services institution, saw significant interest and renewed optimism towards the Gulf region during its two day GCC Investor Conference in London.
Mr Majid Al Ghurair, Chairman, SHUAA Capital commented:

"The conference was a great success and we saw real optimism amongst international investors towards the GCC. This demonstrates the widespread belief amongst investors that regional markets are likely to recover more quickly from the global crisis than many in the developed world. The strength of the GCC economies lies in the vast hydrocarbon reserves and the initiatives governments have taken to modernise, liberalise and regulate their markets and in the programmes to educate their growing populations. As the hosts of this conference, we are proud to be continuing our longstanding tradition of attracting foreign capital to the GCC."

Conference participants included the senior management of 17 leading GCC companies and over 150 international investors who together discussed each company's investment case and equity story during a series of one on one meetings.

H.H. Sheikh Khaled bin Zayed Al Nahyan, Chairman, Bin Zayed Group commented:

"As Dubai 1.0 witnessed a strong focus on developing its hardware, I believe that we now have in place the financial and economic infrastructure to enable Dubai to develop its software, or knowledge infrastructure, that will help it rebound more quickly than other economies. Dubai 2.0 will symbolise an economic model that can compete globally with its state-of-the-art soft and hard infrastructure, cutting edge technology and an entrepreneurial environment that supports creativity and unrestrained flow of capital. Dubai's solid achievements over the last few years enable it to now consolidate its position as it moves ahead with its recovery."

Sanjay Uppal, Chief Financial Officer, Emirates NBD commented:

"The uncertainties posed by the current global economic downturn have necessitated continued, if not increased, engagement with the market and Emirates NBD have maintained an active dialogue with the regional and international investor community throughout the crisis. The SHUAA Capital GCC Investor Conference in London provided an excellent opportunity to continue this dialogue at a time when sentiment is showing signs of improvement and the outlook is starting to become clearer."

Zeina Al Tabari, Chief Corporate Affairs Officer, Drake & Scull International PJSC said:

"We are very pleased to have been given the opportunity by SHUAA Capital to explain our investment case to such a wide range of leading international investors. Importantly, our discussions also focused on the strong fundamentals supporting GCC economies and equity markets which make the region a very attractive destination for foreign investment.'

The conference also saw keynote speeches and panel sessions with regional business leaders and experts including H.H. Sheikh Khaled bin Zayed Al Nahyan, Chairman, Bin Zayed Group, UAE; H.H. Sheikha Hanadi Al Thani, Chairperson, Amwal Investment Co., Qatar; Mr. Abdulrahman Alsufiyani, VP SAGIA Funds Initiative, Regional Development, Saudi Arabia; Mr. Husam Hourani, Managing Partner, Tamimi & Company; Mr. Tom Healy, Chief Executive Officer, Abu Dhabi Stock Exchange; Mr. Abdullah Bin Saleh Al Suweilmi, Chief Executive Officer, Saudi Stock Exchange (Tadawul); and; Mr. Kito de Boer, Director, Middle East North Africa, McKinsey & Company.

-Ends-

About SHUAA Capital psc:
Since 1979, SHUAA Capital has played a prominent role in shaping the financial services landscape of the GCC and will continue to be at the vanguard of regional integration into global financial markets. www.shuaacapital.com

SHUAA Capital psc maintains a leadership position in Investment Banking, Asset Management, Brokerage, Private Equity, Finance, and Research. Headquartered in Dubai, in the United Arab Emirates, SHUAA Capital has a regional presence with offices in Abu Dhabi, Riyadh, Doha, Cairo, Beirut and Istanbul.

Embedded in the dynamic economic environment of the Gulf Cooperation Council (GCC), SHUAA Capital provides a broad range of financial services to corporations, governments, institutional clients, and high net worth individuals.

Euromoney Conference discusses future of financial sector in Saudi Arabia

2009-05-27T08:49:00.000-07:00

Euromoney Conference discusses future of financial sector in Saudi Arabia

The Euromoney Conference has completed two days of discussions at the Faisaliah Hotel, Riyadh on the current global financial situation and the effects it is having on different industries in the Saudi Arabian market.

Saudi Arabia: Thursday, May 21 - 2009

The conference was addressed by H.E. Dr. Ibrahim Al-Assaf, Minister of Finance, Kingdom of Saudi Arabia, who said:
'Saudi Arabia has continued to follow an expansionary fiscal policy. The 2009 budget includes a 36% increase in investment spending.'

He added, 'The current expansion of investment expenditure, which covers infrastructure, public services, education and health sectors, will provide great trade and investment opportunities for the private sector both at home and abroad. We expect contracting firms and suppliers to take full advantage of these opportunities.'

The second keynote speech was delivered by H.E. Abdullah Alireza, Minister of Commerce and Industry, Kingdom of Saudi Arabia. In it he spoke about the future vision of the Saudi economy until 2025, focusing on diversification of the sources led by the private sector to provide well-paying job opportunities, high quality education and excellent health care.

'Saudi Arabia has carried out many steps to achieve this goal including increasing sustainable economic and industrial growth, developing the business environment and infrastructure, continuing high rates of spending and supporting the national private sector,' he added.

'This vision sends a clear message to the world that Saudi Arabia will not accept being or being looked at as a fuel station but rather as a laboratory of distinction and as an incubator of innovation and invention. There is no room for reversing this policy,' he stated.

H.E. Dr Mohammed Al-Jasser, Governor, Saudi Arabian Monetary Agency (SAMA), explained the fiscal policy in the Kingdom, 'The Saudi Arabian economy is still exposed to the vagaries of the oil market so that our growth is much more volatile than in the advanced economies which are highly diversified. The result is that we have always used fiscal policy as a powerful counter-cyclical tool to stabilize the growth path.'

Mubarak Al-Khafrah, Chairman, National Industrialisation Company (Tasnee), gave an insight into the view of the global economic crisis from a private sector perspective, 'The Saudi economy has faired better than most economies in the world coping with the financial crisis. We still need a lot of work through co-operation between the public and private sectors to withstand the impact of this crisis while at the same time pushing for our economic growth which is critical for our prosperity.'

Day two was opened with an address from H.E. Dr. Jobarah Al-Suraisry, Minister of Transport, Kingdom of Saudi Arabia who commented, 'Saudi Arabia has not postponed or cancelled any public sector projects. At the beginning of the crisis it was announced that none of the Government’s projects would be affected and the largest ever budget in the Kingdom’s history was immediately put in place. The North-South Rail Project connecting Jordan and Riyadh is on track and will be completed next year. The express train connecting Jeddah to Mecca and Medina has already started and is due for completion in 2012.'

The conference included a series of discussion panels on topics on the global economy, Saudi Arabian macroeconomy and Government finance, the private sector response, equity markets, infrastructure investment, real estate and power and water. Panelists included representatives from both the public and private sector.

Delegates were also able to attend a series of focused workshops during the course of the conference discussing GCC capital markets, strategic alternatives for capital raising, domestic consolidation in the Kingdom, the future of economic diversification and financing regional economic growth through Sukuk.

The Euromoney conference was attended by 1,200 delegates over the course of the two day event.

'The conference has been a great success with many different view points on the current global financial situation and how new models should be created to free the restrictions in the financial markets and improve the availability of finance in the future. We would like to thank all the speakers, delegates and our sponsors for helping to create a very informative and interesting conference,'

concluded Richad Banks, Director, Middle East, Euromoney Conferences.

Kuwait's Noor to launch $175m real-estate fund

2009-05-27T08:47:00.000-07:00

Kuwait's Noor to launch $175m real-estate fund

Kuwait's Noor Financial Investment is set to launch a $175 million real estate fund in the second quarter of 2009 looking to tap on to growing opportunities in the sector, sources close to the company said on Sunday. Noor has already applied for the proper licensing from the Kuwaiti authorities and the fund is expected to be launched in the near future, the source told Kuwait's Al-Qabas daily. The fund will invest in the commercial real estate properties across the region despite the downturn in the real estate sector in the GCC.

The source pointed out that Noor has identified many opportunities in the real sector and wanted to invest now and capitalize later.

The GCC's real estate sector has been hit hard by the global economic downturn, with hundreds of projects being delayed or closed down in 2008. But experts say these properties offer good value as they are now undevalued.

The source said the creation of the fund is timely due to a number of good valuations available in the market, and the region's economies positive growth outlook.

Noor Financial Investment is the financial arm of National Industries Group (Holding) with interests in several sectors including telecommunications, infrastructure and oil, gas and private equity investments. - RPN

Middle East Private Equity Raises Record $6.4 Billion in 2008 Press Release

2009-03-17T06:08:00.000-07:00

Middle East Private Equity Raises Record $6.4 Billion in 2008
Press Release

Of the $19.6 billion raised since 2000, $11 billion remains available for acquisitions

Middle East private equity fund managers raised a record $6.4 billion in 2008, up more than 10% over 2007 and more than double the amount raised in 2005, according to Gulf Venture Capital Association's (GVCA) 2008 report on Private Equity & Venture Capital in the Middle East, which was released today at the Dubai International Financial Centre.

Large size funds are primarily responsible for this growth, with the average fund size in 2008 being $258 million, compared with $213 million in 2007 and just $177 million in 2006. This trend is driven by the need for more flexibility in structuring deals and the past success of large buyout transactions, according to the 2008 GVCA report, developed in cooperation with KPMG, and Zawya, and supported by Hawkamah - The Institute for Corporate Governance.

Three regional funds have crossed the $1 billion mark, and as the report notes, the current economic downturn may make it more difficult for all but the most established fund managers to secure the successful closure of these larger funds.

Yet, there is also tremendous liquidity among regional funds, which are cash rich with $11 billion in capital under management yet to be deployed. The report notes that this "dry powder", as it is called, gives private equity a strategic opportunity vis-à-vis target companies, given the limited scope of other funding sources available in the current environment. This liquidity results from both an increase in fundraising and a decrease in deals, with the number of private equity investments dropping by 22% between 2007 and 2008, as well as the total investment size, which fell by 31%.

The report found that over the past four years, Egypt, Saudi Arabia and the United Arab Emirates were the largest recipients of private equity funds, at 33%, 15% and 14% respectively. The majority of funds are Middle East and North Africa (MENA) focused, with Turkey sometimes included as part of that region. Regional players are experiencing an increasing request for funds with a mandate that includes MENA, to expand and include South Asia, Southeast Asia and/or Africa.

The sectors of focus for portfolio acquisitions during 2008 were healthcare, transport, power & utilities and construction. Healthcare likely would remain a top recipient of private equity funds in the next few years.

In terms of fund strategies, more and more funds are seeking controlling stakes. While in 2005, only 3% of transactions were control buyouts, by 2008, some 26% of transactions volume and half of transactions values were control buyouts.

The report was optimistic about the future of private equity in the region, noting that as an asset class, it does not have a short-term investment horizon and so is well placed to weather the current crisis.

Imad Ghandour, Chairman of the GVCA Information & Statistics committee, said, "The economic fundamentals of the region remain strong and are supported by aggressive fiscal policies. Governments' reserves will continue to trickle down to the rest of the economy - sustaining corporate profits and public investments. A sober market will offer better valuations, and hence better returns for private equity. Although the increased attention from international players that the region witnessed in 2007 may be disrupted, we expect the disruption to be temporary. As a matter of fact, we expect the robust economic performance of the region to attract additional allocation from international institutional investors over the medium term."

Although fundraising in the region has been strong, when compared with the total value of announced fund sizes, it is clear there have been delays in reaching target sizes. In fact, after excluding one major fundraising, only 16% of the total amount announced in 2008 was actually raised in the same year, compared with 65% in 2005. Roughly half of the funds announced in 2006 have so far been raised, and approximately $11.7 billion of announced funds in 2006-8 have yet to make a close. The report suggests that this is because fund sizes are much larger, as well as recent constraints on liquidity.

While 2008 saw an increase in the total value of sale activity, which reached $3 billion, most of this was due to one major exit of $2.5 billion; excluding this one-off transaction, sale activity decreased by approximately 60%, as did the number of exits, which dropped from 17 in 2007 to 11 in 2008. The report suggests that there will be fewer exits in the current economic climate, as funds won't be able to achieve the returns traditionally targeted and exit options shrink, particularly with the sharp decline in regional IPOs. Trade sales were named as the most likely exit over the next couple years.

Ihsan Jawad, CEO of Zawya and board member of GVCA, said "Private Equity in the region is developing in many ways that are unique in comparison to the developed world. Transparency remains a major barrier that hinders this mode of investment from becoming a strong component in the GCC financial system. More research efforts and collaboration is needed by all practitioners to elevate the current opacity of the private equity market."

Of the 18 private equity fund managers interviewed for the report, most said they were established in the last five years. They expressed an expectation of consolidation in the industry, a decrease in investment, and lower portfolio company growth. This means portfolio companies will be held longer and fund managers will be increasingly active in managing their companies in order to add the maximum value.

These efforts should include corporate governance, according to Dr Nasser Saidi, Director of Hawkamah. "MENA private equity can, and should, play a critical role in diffusing good corporate governance practices across portfolio companies, in terms of board structures, executive compensation better aligned with long term shareholder interest and underlying risk, improved risk management, transparency and disclosure requirements and minority interest protection. This benefits all parties, as empirical evidence shows that investors are willing to pay a premium for companies with good corporate governance. The current global financial crisis has reinforced the view that improved corporate governance practices lead to sustainable growth and value of companies, with a focus on the medium and long-term and away from short-termism. This is why Hawkamah has launched a Private Equity Task Force to develop corporate governance guidelines for private equity firms and portfolio companies in the MENA region."

Elaborating on the role of fund managers toward their portfolio companies given the current environment, Vikas Papriwal, Partner in KPMG's Private Equity and Sovereign Wealth Funds practice, said, "With attractive exit options scarce at present, the focus for many private equity firms is now the workout of their existing portfolio - with operational improvements, debt restructuring and working capital management at the core. Discretionary spending is being restricted, including expansionary capital expenditures, and business plan timelines are being reassessed, as entities look to weather the storm. However, no one doubts that opportunities will exist once we are over the worst."

The GVCA report compiles comprehensive information and statistics about private equity funds and investments across the Middle East, and contains nine articles on current topics in the industry. The 125-page report also provides a detailed survey of 18 private equity fund managers regarding their views looking back at 2008 and ahead to 2009. There also is a special section dedicated to sovereign wealth fund strategies and investments.

About GVCA
Gulf Venture Capital Association ("GVCA") is the non-profit trade and industry association for Venture Capital (VC) and Private Equity (PE) in the Gulf Cooperation Council. GVCA organizes conferences, industry forums, training and workshops. In addition, GVCA periodically publishes information and statistics about the regional activity of VC and PE. GVCA is based in Bahrain.

Trump and Nakheel - Dubai Developments

2009-02-05T09:42:00.000-08:00

Nakheel, developer of more than US$30 billion in real estate in Dubai, and The Trump Organization have unveiled a new design for the Trump International Hotel & Tower, the centerpiece of The Palm Jumeirah.

Donald J. Trump, Jr., son of Donald J. Trump, and Executive Vice President of Development and Acquisitions, The Trump Organization, is in Dubai this week to reveal details about the new design and discuss The Trump Organization’s increased involvement in the UAE. Speaking at the Arabian Hotel and Investment Conference (29th April to 1st May), he will discuss mixed use developments & condo hotels and feature in a round table discussion on private equity in the Middle East. On the 2nd May, he will be present on the Nakheel stand at the Arabian Travel Market.
Trump Dubai

Trump Dubai

Trump International Hotel & Tower, The Palm Jumeirah is the initial development in Nakheel and The Trump Organization’s joint-venture in the Middle East, which includes exclusive rights for 19 countries in the Middle East region and 17 major brands. It is also the first UAE property in the portfolio of Nakheel Hotels & Resorts, Nakheel’s hotel and resort investment company, which was launched in February this year.

On announcing the partnership in October 2005, Donald J. Trump, Chairman and President of The Trump Organization, who is known throughout the world for his luxurious real estate developments, stated that the organization’s architects and designers would engage closely with Nakheel Hotels & Resorts on the design. The results of the partnership have now been released.

The US$600 million Trump International Hotel & Tower, The Palm Jumeirah is a stunning 48 storey mixed-use hotel and residential building, anchoring the trunk of the 5 by 5km man made palm tree shaped island which lies off the coast of Dubai. The first of three such islands to be built in Dubai, The Palm Jumeirah will be one of the world’s premier resorts, offering a wealth of beachfront hotels, residences, retail and leisure.

The new ultra-modern design, features a split linked tower – an innovative open core design that minimizes shadows – constructed with stainless steel, glass and stone.

Regarding the new design, Donald J. Trump, Jr. said: “In redesigning the property, we focused on creating a magnet for tourists and residents and a landmark icon on the Dubai skyline. Trump International Hotel & Tower, The Palm Jumeirah will soar into the sky, its twin sets of glazed diamond shaped structures at the top of each tower creating a sense of infinity as the glazed elements blur building and sky”.

Sultan Ahmed bin Sulayem, Executive Chairman, Nakheel stated: “The new design ensures that the property will be a striking landmark – a bold monument at the heart of the island. The property’s taller, more slender design allows for a linear view through the building to the top of the island and provides spectacular panoramas of the island, Dubai and the Arabian Gulf, with all rooms benefiting from a sea view.”

“In building the vision of Dubai, Nakheel is committed to creating genuinely unique projects which are at the forefront of innovation”, Sultan Ahmed bin Sulayem continued. “The new design of the Trump International Hotel and Tower lives up to this commitment and will provide a fitting landmark centerpiece for The Palm Jumeirah, our flagship development.

“As the world’s fastest growing city, it is important that Dubai forms progressive partnerships with prominent international organizations. Our alliance with The Trump Organization is a fantastic example of how such partnerships can operate successfully. The Trump International Hotel and Tower is the first example of this success”

KSA Economy Offers Highly Attractive Landscape for Private Equity Investors

2008-11-25T11:34:00.000-08:00

KSA Economy Offers Highly Attractive Landscape for Private Equity Investors

4 November 2008

JEDDAH - Saudi economy offers a highly attractive economic landscape for private equity investors.

The nominal GDP of the economy has grown at a compound annual growth rate (CAGR) of 15 per cent during the period from 2002 to 2007 while the real GDP increased at a GAGR of 5 per cent for the same period, according to a Global report.

The private equity deal volume as a percentage of GDP is still among the lowest and is estimated to around 0.1 per cent, compared to around 1.5 per cent in the UAE, the Kuwait-based Global Investment House (GIH) states.

Sectors of high potential include sectors subject to privatisation and regulatory reforms such as air travel, telecom, financial services and services such as education, retail, healthcare, food and beverage, consumer goods, and transportation, it said in information made available to Khaleej Times here on Sunday.

“All the above offer a unique opportunity to tap this high potential market. However, a number of obstacles stand in the way of effective access to this attractive market,” it added.

According to a World Bank report, Saudi Arabia is the seventh fastest reformer globally, and second fastest within the Middle East and North Africa (MENA) region.

Also, the kingdom’s surge in ranking to 16th in the world and as the best in the MENA region in regards to ease of doing business is a reflection of the reformatory action taken by the government to de-risk its economy from oil.

With around 50 per cent of the population less than the 20 years age bracket and another 33 per cent in between the 20 to 40 age group, demographics remain attractive and this, coupled with high oil prices have ensured governments thrust on infrastructure and social spending remained high, it added.

“A physical presence with right contacts in the kingdom along with a deep understanding of the social and regulatory setting becomes the key to success for private equity players to benefit from the private equity boom that the kingdom is on the verge of witnessing,” states the report.

It added that with relatively cheap valuations of Saudi listed companies due to the current meltdown, coupled with an increasingly progressive regulatory environment, Global believes long-term institutional money will be attracted to the region.

It noted that the geographic focus of regional funds is changing and becoming more diverse as mandates and operations broaden to include other regions with many regional players opening offices in regions like Saudi Arabia, Turkey, Egypt and North Africa region.

The report states Egypt emerged as the preferred destination for investment in the Middle East and North Africa region, with $2.4 billion being invested in the last decade.

(Habib Shaikh)

Ithmar Capital focusing on healthcare-related acquisitions worth $1.2 billion

2008-11-06T04:42:00.000-08:00

Dubai-based private equity firm Ithmar Capital will spend around $1.2 billion on international healthcare acquisitions within the next twelve months, according to its founder.

The acquisitions will take place under the banner of Ithmar’s new healthcare platform, Enaya, and are likely to include firms in the US and Europe.

“Enaya’s pipeline assumes deploying around $1.2 billion for healthcare acquisitions, and this is assumed over a 12 month period,” Faisal Belhoul, founder and managing partner of Ithmar Capital, said in an interview with Arabian Business.
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“These acquisitions will be GCC-related opportunities, but outside the GCC.”

“We are looking to acquire one large international healthcare group, and our shortlist of five options includes companies in both the US and Europe,” he added.

“We are very advanced in launching Enaya, and before year end we will be able to make significant announcements on acquisitions.”

Currently managing proprietary investments in excess of $500 million, Ithmar is also planning to launch its third fund (Ithmar Fund III), targeting $1 billion.

Belhoul is also executive chairman of Belhoul Investment Office, a holding company with a portfolio of investments in hospitals, schools, pharmaceutical and medical equipment, travel and tourism agencies, construction and engineering, catering as well as garment manufacturing.

Unicorn Investment Bank earnings, profits jump in nine months to September

2008-11-06T04:08:00.000-08:00

Unicorn Investment Bank (Unicorn) reports earnings rose by 121 per cent, from US$84.6 million in the first nine months of 2007 to US$186.7 million in the first nine months of 2008. Net profit increased from US$31.8 million in the first nine months of 2007 to US$53.4 million during the same period in 2008. Return on average equity increased to 21.2 per cent and earnings per share grew to 28.7 US cents per share.

Unicorn’s strong performance comes on the back of a series of high profile transactions closed during the course of the year. In the third quarter, the bank announced the sale of its shares in United Arabe Emirates-based Orimix Concrete Products LLC (Orimix), an investment held by the bank itself and the Unicorn Global Private Equity Fund I. The fund acquired a controlling stake in Orimix in November 2006, and the disposal of its shares in July 2008 resulted in a return on capital of 160 per cent and an Internal Rate of Return (IRR) of 98 per cent.

Unicorn also recently announced that it had reached agreement to acquire Bahrain Financing Company (BFC), the oldest and one of the leading foreign exchange and remittance houses in the GCC. Founded in 1917, BFC was Bahrain’s first foreign exchange company and the first financial services institution to be established in the GCC region. It is the market leader in foreign exchange and money transfer services in Bahrain. The company has an extensive correspondent network comprising leading institutions in over 60 countries worldwide. Unicorn’s acquisition of BFC includes Bahrain Exchange Company in Kuwait and EzRemit in the United Kingdom.

Commenting on the bank’s results, Majid Al-Sayed Bader Al-Refai, Unicorn’s Managing Director and Chief Executive Officer, said, “We are particularly pleased to have achieved such outstanding results in the first nine months of 2008 given the challenging global economic environment. Unicorn is committed to prudent risk management, sound corporate governance and strict Shari’ah compliance, and it is this commitment, and our adherence to these operating principles, that will allow us to achieve further success in the future inshaAllah.”

Dubai mortgage lenders Amlak Finance and Tamweel in merger talks

2008-10-05T11:18:00.000-07:00

Dubai lenders Amlak and Tamweel look to combine

DUBAI, United Arab Emirates: Dubai mortgage lenders Amlak Finance and Tamweel say they are considering a merger, but investors appear to have doubts about such a deal.

Shares of both companies sank Sunday despite the companies' assurances that a deal would bring benefits.

Amlak and Tamweel announced that they have begun exploring a tie-up Saturday. They say the combined company would have a balance sheet worth 27 billion dirhams (US$7.35 billion).

The merger talks come as global credit markets tighten amid the financial fallout on Wall Street.

AP

Foreign Direct Investment in Qatar jumps by 700%

2008-09-28T16:18:00.000-07:00

DI in Qatar rises seven-fold; outward flows jump 41 times

DOHA: Qatar saw a more than seven-fold rise in foreign direct investment (FDI) inflows, while the outward FDI jumped 41-fold in 2007, according to the World Investment Report (WDR) 2008 by United Nations Conference on Trade and Development.
In the WDR ranking of 141 world economies, Qatar is placed at 110 for inward FDI performance and 25 for outward FDI in 2007.
Bahrain is ranked 12 in inward FDI performance and ninth in outward FDI; Kuwait (134 and eighth); Oman (48 and 47); Saudi Arabia (51 and 41) and the UAE (34 and 23).
Qatar’s FDI inflows rose to $1.14bn in 2007 from $159mn a year ago, the report said.
In the case of other GCC countries – which come under West Asia in the WDR – Bahrain saw a 39.73% dip in FDI inflows to $1.76bn, while Kuwait saw a marginal rise of 0.82% to $123mn and the UAE’s by 3.43% to $13.25bn.
Oman’s inward FDI rose by 46.91% to $2.38bn and Saudi Arabia’s by 32.97% to $24.32bn.
Qatar’s outward FDI saw a 41-fold jump to $5.26bn; Saudi Arabia’s by 10-fold to $13.14bn; Oman’s by 73.78% to $570mn; Kuwait’s by 72.96% to $14.20bn and Bahrain’s by 70.31% to $1.67bn, while in the case of the UAE, it was 39.12% dip to $6.63bn in 2007.
FDI in the GCC rose by 20% to $43bn in 2007, the WDR said, adding these countries – especially Saudi Arabia, the UAE and Qatar – have seen relatively high inflows in recent years due to a growing number of energy and construction projects as well as notable improvements in the business environment.
“The most significant rise in FDI in the sub region was in Qatar where there was a seven-fold increase from the previous year,” the report said.
Although developed countries continued to be the major sources of FDI flows into the West Asian region, FDI by transnational corporations from developing countries has risen “substantially.”
In 2007, like the previous year, West Asia attracted Greenfield FDI primarily from the US, the UK, France and Germany. Inflows from South, East, South-East Asian countries, particularly China and India, was also significant, followed by intra-regional flows, particularly from the UAE and Saudi Arabia, the report said.
High oil prices have continued to boost economic growth rates in the oil-exporting countries of the West Asian region, WDR said. Rising revenues have encouraged the GCC governments to spend heavily on infrastructure, particularly for revamping water and energy industries and services, often in collaboration with private investors, including foreign ones, it said.
In addition, WDR said, export-oriented economic activity in some West Asian economies, especially in Turkey, benefited from higher demand in European economies. All these factors have contributed to sustaining high FDI inflows to the region.
On the outbound FDI, WDR said “the GCC countries, led by Qatar, accounted for 94% of the region’s outward FDI, with about $41bn in outflows.”
The GCC countries have built up a substantial windfall from oil exports since 2002 when global oil prices started to rise. High prices enabled them to accumulate huge stocks of net foreign assets estimated at around $1.8tn and to implement their diversification strategy, it said.
Sovereign wealth funds based in the sub-region are playing a key role in boosting outward FDI flows, WDR said. Several Islamic private equity firms and other alternative asset management companies from the GCC countries were also investing abroad, particularly in the developed countries, it said.
Although the US has attracted the largest share of investments from the GCC countries, a growing number of GCC investors are now moving to Asia, particularly China and India, to diversify their investment portfolio, WDR said.
“A growing amount of GCC capital is being invested in various sectors such as banking, telecom, real estate and manufacturing in West Asia and North Africa, including export-oriented manufacturing activities to supply to the European and West Asian markets, as a result of accelerating liberalisation, privatisation and the increasing use of Islamic financial instruments,” WDR said.
By Santhosh V Perumal

Dubai firm buys Egypt bank stake

2008-08-03T16:05:00.001-07:00

Dubai firm buys Egypt bank stake

CAIRO: Commercial International Bank yesterday said a firm owned by Dubai's ruler had bought a 5.24 per cent stake in the bank, the emirate's second major investment in a year in Egypt's financial sector.

Dubai Capital Group, part of government-owned Dubai Holding, had accumulated the stake of Egypt's largest publicly traded lender from the Egyptian and London stock exchanges over the past few months, a CIB spokesman said.

Dubai Holding is owned by Dubai's ruler Shaikh Mohammed bin Rashid Al Maktoum.

"This investment (provides) us opportunities in an environment which has been challenged by the changes in the global financial services sector," Dubai Capital Group chief executive Mustafa Farid Geninah said.

Another Dubai government-owned firm bought a 25pc stake in EFG-Hermes in November.

GCC sates may invest $9tr abroad

2008-07-13T07:44:00.000-07:00

Several trends have emerged indicating where a mammoth $5 trillion to $9 trillion in oil revenues in GCC states like Qatar will be invested over the next decade.

In 2002, nearly 85 percent of the Gulf's wealth was invested abroad in financial instruments mostly linked to the US dollar. However, by 2007, this had fallen to 75 percent due to the rising investment within the Gulf region itself.

There will be increased investments onshore in the MENA region and in Asia, a shift in allocation to alternative investments and more direct investment strategies, an increased sophistication and institutionalisation of the Gulf region including the growing importance of corporate governance - a soaring demand for Islamic products and greater importance of Sovereign Wealth Funds (SWFs), according to Investcorp, a Bahrain-based investment products provider with over $15bn of assets under management.

Gary Long, Investcorp President and Chief Operating Officer (COO), speaking at the Harvard Club in New York, said the oil boom will translate into an investable asset pool in excess of $10tn by 2020.

Long, who addressed the Club along with Ramzi AbdelJaber, head of Investcorp's Business Development Unit, emphasised the new and increasing tendency of GCC investors to make local investments.

Increasing investment in the MENA region and Asia had in turn led to an increased demand for alternative investments such as private equity and hedge funds.

This shift in strategy has been driven by the need to invest more aggressively in hard and social infrastructure to cater to fast-growing populations following decades of under-investment and the emergence of more attractive onshore investment opportunities buoyed by the strong regional economic growth.

Fueling these trends are predicted record figures for the region's oil revenues which will far outstrip the region's current GDP of $800bn.

(MENAFN - The Peninsula)

More foreign players flocking to region as private equity industry witnesses growth

2008-07-03T07:44:00.000-07:00

More foreign players flocking to region as private equity industry witnesses growth

The private equity (PE) industry in the Middle East and North Africa (Mena) region has been under the spotlight over the last few years with more and more foreign players flocking to the region, said Professor Dr Rasim Kaan Aytogu, Executive Director of Tanmiyat Group.

He said the PE industry in the GCC in particular and the Mena region in general ended 2005 with a record number of funds launched and announcements made.

More than 12 funds with a total of around $3 billion (Dh11bn) of commitments started their operations in that year. International PE funds, including The Carlyle Group, 3i, and CVC, for the first time started to look for deal flow from the Middle East after having considered the region solely as a source of limited partners in the past.

Since then, the industry never looked backed. By the end of 2007, funds under management in Mena increased to 76 funds under managing $13bn. This sudden take-off can be attributed to many factors within the context of the global prominence of PE as an investment class. Economic growth, high oil prices, increasing economic liberalisation, reduced restrictions on foreign investment, privatisation of state-owned assets, and greater liquidity of regional stock markets have all been put forward as stimuli for the impressive growth of PE in the GCC.

Starting from 2002, oil prices began their continuous climb from $20/barrel, rising around 30-40 per cent annually. Liquidity from petrodollars was compounded by the repatriation of capital from the West following the 9/11 events. The excess capital was first directed towards the capital markets, which appreciated 100 per cent annually between 2003 and 2005. Liquidity then filtered into real estate, which in the past few years witnessed a flood of announced mega real-estate projects (for example, the Palm, DubaiLand and Kind Abdullah Economic City). In 2005 some of the excess liquidity moved into private equity, jump starting the industry.

Fuelled by the increasing oil prices and production, GCC economics have witnessed stellar growth in the past three years. Future economic growth is expected to be maintained in the short and medium terms and to surpass global economic growth of five per cent. Aggressive financial policies and economic restructuring by the GCC governments will ensure that growth in the non-oil sector will be over five per cent and relatively isolated from the volatility of oil prices.

Despite the windfall from higher oil revenues, the GCC governments have started selling state-owned assets at an increasing rate. This is in light of the increasing economic benefits from private sector management which have led the governments to restructure their economies during a period in which a favorable environment exists.

Airlines, power stations, desalination plants, industrial assets, postal services, banks, stock exchanges, telecom operators, and ports are some of the assets that have been or will be sold to the private sector either partially or fully. The value of the assets in all GCC privatisation programmes is estimated at as high as $1 trillion.

Within this positive environment, the PE industry has risen quickly in the GCC. Not only it is viewed as an out-performing investment class, but also more importantly, governments and economist are preaching its positive role in developing the private sector and creating strong, globally competitive local corporations. Whenever an investment in PE fund is announced, the local media has consistently praised the announcement.

Industry experts keep on reiterating whether the industry has grown too fast on the back of the excess liquidity. Although the value of investments has increased considerably in 2007, the number of transactions has staggered to an extent. Moreover, the largest three transactions have been all in Egypt, whilst the GCC has only witnessed transactions mostly smaller that $100 million, as the flow of privatisation transactions in the GCC has not yet materialised.

Aytogu believes that the quality of deal flow continues to improve, influenced by favourable macroeconomic factors. Corporate Arabia profitability is increasing steadily, and this will create bigger companies that will sooner or later need serious capital injection to maintain their growth trajectory. Banks reluctance to extend additional lending against a backdrop of a global credit crunch will also increase the chances of opening capital to private equity funds.

Egypt has emerged as the leading destination for private equity money in 2006-07. The size of the Egyptian economy, its need for capital, and the government's liberal policies have all contributed to Egypt's attractiveness. The UAE, traditionally the leading destination, remained at No2. Saudi Arabia is rapidly increasing its share, albeit from a lower base. Jordan has also maintained its attractiveness at the fourth position, despite the small size of its economy.

It is interesting to note how sensitive private equity money is to macroeconomic policies. Countries like Kuwait – third largest economy in the GCC – attracted less investment than Jordan – fifth the size of Kuwait's economy. Saudi Arabia's share of private equity investments increased only after government policies became more investment-friendly. The PE industry quickly completed the investment cycle, and the number of exits soared in value in 2007 to more that $1.5bn. The internal rate of returns (IRRs) achieved by these exits have ranged between 31 per cent and 348 per cent, very healthy returns for a nascent industry.

Exits were split between IPOs, trade sale, and financial sales. Despite the robust activity in the IPO market, IPOs as an exit route are decreasing in importance as trade and financial buyers are becoming more active. Naturally, private equity players find trade and financial sales less complicated, and hence, are exploring such exit routes more aggressively than before.

With new plans sprouting up to develop Saudi Arabia's infrastructure, particularly in the transport and communication sectors, as well as down-market industries in the supply chain of goods and services, Saudi Arabia is a slow giant ripe for the introduction of management efficiency.

A slow relaxation of regulations on private equity firms is just one of the series of measures – along building the social infrastructure of education and healthcare – where the kingdom is thoughtfully giving a thumbs-up to private equity groups looking to enter the market. This is done through obvious contacts with regulatory and other government authorities, but also with the country's major family firms.

The noticeable difference between the Saudi market and those of its neighbouring economies are the following:

• Both the UAE and Bahrain have been leaders in creating regulatory and economic environments that have been inviting and welcoming to foreign investment, particularly the development of the banking and financial sector.

• Because Saudi Arabia is the biggest market in the Gulf Co-operation Council (GCC) and its economic powerhouse, the economy is slower, more deliberate and has a regulatory scheme that is changing on a more deliberate basis.

• But the kingdom has already made significant changes, for instance the Saudi government shifted from its traditional policy to spend 60-70 per cent of GDP on defence and infrastructure to the new plan whereby more than 50 per cent of the GDP is being spent on housing, education and healthcare. To prepare the country for an era of declining demand for oil and the possible price drops associated with it.

In addition, the Saudi regulators are in need of having to set criteria, they have to be careful, then they have to make a move attributing the caution to the relative size of the country and the potential for grave errors from a regulatory or economic missteps.

Culturally, however, entry into the Saudi market is a new frontier for private equity firms. They must understand how to navigate policies by deciphering them.

There is a need for liquidity and a formal capital structure in an increasingly competitive free-market economic environment, which will result in significant merger, acquisition and divestiture activity. Many companies have capitalised on these opportunities.

The numbers

$13bn: worth of funds, which increased to 76, were under management in Mena by 2007-end

$1trn: is the estimated value of total assets involved in all GCC privatisation programmes

Challenges and trends

Robustness of economic growth: As the subprime crisis snowballs in 2008 into a global economic slowdown, the impact of such a negative turn-around in the world's economy on growth in the GCC cannot be clearly assessed. However, it is expected that the GCC will be one of the least affected regions.

Entry of international players: The previously timid interest of international players in the region was suddenly emboldened when The Carlyle Group announced its plans to raise a MENA fund for up to $750 million by 2008. The Carlyle Group is following the footsteps of many international players like 3i, TPG, Duetsche Bank, Credit Suisse, CVC, Ripplewood, HSBC, and EMP. The entry of The Carlyle Group will definitely entice many other global heavy-weights to establish funds for the region.

Larger funds: The PE industry surpassed the $100m per fund milestone in 2003, the $500m in 2005, and the $1 billion in 2006.

Track record: As regional fund managers start exhibiting their investments, their track record is being established – in most cases showing 30 per cent plus net returns. The window of opportunity for new fund managers is starting to close, and 2007 has seen some fund managers is starting to close, and 2007 has seen some fund raising efforts being aborted.

Deal flow: Business and social habits, limited opportunities in the private sector, and delayed privatisation programmes have made good deals hard to come by. Proprietary access and extensive deep business networks are essential for succeeding in the region. Regional dynamics have not allowed intermediaries to play a significant role in maturing deal flow, and hence made deal sourcing process a competitive edge for some and frustrating issue for others.

Private equity wave forecast for Mideast

2008-06-11T16:44:00.000-07:00

Private equity wave forecast for Mideast

LONDON: The Middle East is set to enjoy a surge in private equity investment as Western markets continue to be squeezed by the global credit crunch, according to a report published on Wednesday. UK financial consultant Deloitte predicts strong growth on the back of the large availability of capital and says an increasing number of funds are expected to target the region, with particular focus on the Gulf Cooperation Council (GCC) states and Egypt.

Deloitte's upbeat news comes just days after Egypt's Weather Investments, which has a controlling stake in Orascom Telecom, announced the sale of 10 percent of its shares for around $1.5 billion to a group of US private equity firms led by Apax Partners, Madison Dearborn Partners and TA Associates.

The report is the latest bullish assessment of the Middle East's financial sector. Earlier this month Standard & Poors (S&P) gave what in the current global financial crisis amounts to a vote of confidence in Middle East equity markets. In its report the rating agency noted that the region's markets "have been resilient" amid the current market turmoil.

Meanwhile, Deloitte points to what it describes as a "perfect storm situation" of high levels of liquidity due to high oil prices and the increasing sophistication of the market in the region - including improved regulation and the desire of people to invest more in their home markets.

Deloitte predicts the hotspots for the coming year will predictably be the states of the GCC, along with Egypt, the only Middle East country combining scale with a history of industrialization. But Deloitte also flags up Algeria, Libya and Sudan as emerging markets, which Deloitte says are very much like GCC nations 30 or 40 years ago with "natural resources and scope for investment."

The good news is largely a reflection of the abundance of capital swirling around the region, courtesy of the seemingly unending upward climb of oil prices. But S&P noted that the scarcity of investment opportunities is also a significant factor in the performance of the region's markets. And there of course is the rub. For while private equity is desperately seeking homes for its investment bucks, there is a currently lot of cash chasing a very small number of investment opportunities in the Middle East.

Chris Ward, Deloitte's global head of corporate finance agreed supply and demand is a problem.

"Confidence levels are high for long-term growth prospects in the MENA [Middle East and North Africa] region and there is a growing awareness of private equity. But more needs to be done to raise the profile of the industry which currently has more capital to deploy than investment opportunities," he said.

There is also the issue of still restrictive foreign ownership legislation in the region, which, while changing, remains an obstacle to much investment. The key for Western private equity funds, as ever, and as Deloitte notes, will be for them to partner with local groups.

The report notes that many regional family businesses are now more familiar with private equity and are more open to talking to private equity investors. It adds that the rise in initial public offerings in the region also offers opportunities for private equity investment because many companies are likely to take on a partner when they go public that can guide them through the process.

Deloitte believes this will pave the way for Western private equity groups to make inroads into the market here. Timothy Mahapatra, managing partner for transaction services with Deloitte said: "Whilst domestic players are expected to be most active within the MENA region in the next 12 months, we are seeing a rising number of international private equity firms looking towards the region as a new and exciting area, rich in growth opportunities in what is still a relatively untapped market, to deploy capital. The attractiveness of the region from an investor perspective cannot be underestimated, with an economic climate ripe for conducting business in."

That sounds fine, but as Deloitte's report makes clear, private equity funds are primarily interested in energy, real estate and financial services sectors, all of which still continue to have restrictions on overseas investment in most Middle East states.

And while a recent report by consultant group KPMG estimated that more than 200 privatizations valued at over $1 trillion are in the pipeline in the next 10 years, the reality, as the Deloitte report notes, is that the region is unlikely to see kind the multi-billion dollar private equity deals common in American and Europe but will instead have to be content with deals of between $100 million and $1 billion.

By Michael Glackin

$4tr in Middle East Capital Eyes Equity Investments

2008-05-27T07:36:00.000-07:00

DUBAI — Led by Abu Dhabi Investment Authority — the world's largest Sovereign Wealth Fund (SWF) with estimated assets of $875 billion — up to $4 trillion capital available for investment from the Middle East is increasingly targeting equity investments around the globe.

According to a global management consulting firm, the region's high private and public sector investment power, bolstered by rising oil revenues and increasing foreign exchanges reserves, is underpinned by SWFs which currently have a combined $3.3 trillion assets under management, up 18 per cent between 2006 and 2007.

With the Middle East based SWFs currently accounting for 50 per cent, global assets under the management of these funds are expected to reach $5 trillion in 2010 and $10 to $ 15 trillion in 2015.

"This dramatic growth is supported by rising oil revenues and by increasing foreign exchanges reserves of some Asian countries. The objectives of these funds are to protect the budget and the economy from excess volatility in exports and / or to diversify from non renewable commodity exports," said A.T. Kearney in its latest report.

"With the rapid growth of assets, SWFs are under growing pressure to invest. They have accomplished a strategic shift in the way the money is being invested," Kearney said. Traditionally, countries turned their surpluses into risk-averse financial assets. China, for example, supported the US consumption economy by buying government bonds. SWF are now favouring equity-type investments to benefit from higher revenues and to gain exposure to strategic companies with more capabilities and know-how in industries that are crucial to their own economies.

"With the world's biggest Sovereign Wealth Fund — the Abu Dhabi Investment Authority (ADIA) — as one example, the UAE is moving towards these private equity-style deals," the report said.

Kuwait Financial Centre (KFC) in a recent research titled "The Golden Portfolio," said in the GCC 36 SWFs hold 131 Gulf-listed companies accounting for 27 per cent of region's market capitalisation valued at $300 billion.

KFC's Head of Research M. R. Raghu, and Sarah Al Khaled, an analyst, pointed out that apart from the big and most quoted names like ADIA or Kuwait Investment Authority (KIA), SWFs also include a variety of government agencies that manage money either directly or indirectly. The categories may include pension funds, ministries, fully owned companies.

The report said SWFs could also be an opportunity for developed countries, when most of their economies are slowing down. "In the short-term, the SWF can help to absorb the liquidity crisis; in the long run, they will be valuable partners for Western companies to back their growth and to finance innovation," said Cyril Garbois, Principal and expert for SWF, A.T. Kearney Dubai. Early this year, SWF from Asia and Middle East injected billions of dollars of new capital into troubled financial institutions and contributed this way to the stability of the whole system.

"Because of this new way to invest, concern about the political purpose and influence of these funds, and developing countries' investors in general, has risen among Western countries. The criticisms raised when Dubai Ports World planned to purchase operating rights to several US ports through the acquisition of P&O, or when the Chinese energy firm CNOOC tried to buy Unocal, are vivid examples. International bodies such as the International Monetary Fund and OECD are working on rules to prevent discrimination against SWF but also to answer to the need of more transparency in their investment processes," the report pointed out.

The rising power of the regional SWF and their private equity oriented investments are also an opportunity for the Middle East economy itself. The study revealed that private equity and SWF investments accelerate the growth of job creations. "More than one million jobs have been created through private equity investments in Europe in the last four years" said Dr. Dirk Buchta, Managing Director, A.T. Kearney Middle East.

"With $4 trillion available in the Middle East for investment and very healthy SWFs, the outlook for economic development in the region is very positive," said Dr. Alexander von Pock, Manager of Financial Services, A.T. Kearney Middle East.

The report shows that companies financed by private equity and SWF grow faster than those traditionally financed. Private equity firms often invest in mid-size companies, mostly former family owned businesses — of which the Middle East has many

By Issac John

There have been no examples of any SWF abuse

2008-05-18T10:04:00.000-07:00

While the rest of the world is still split on whether they love or hate sovereign wealth funds, or SWFs, Lehman Brothers last month became the first investment bank to announce a fully fledged division to handle and grow its business from such funds.

Even the International Monetary Fund (IMF) has waxed hot and cold on the role that sovereign funds play or have the capability of playing in the world's financial markets. On the one hand, it has called sovereign wealth funds a stabilising force; on the other, it has demanded more transparency about their business because they have the potential to carry out transactions based on non-commercial motives. The IMF has estimated that deployable assets by these funds will grow to as much as $10 trillion (Dh36.73trn) in the next five years.

This is the universe in which Makram Azar, Lehman's freshly minted Global Head of Sovereign Wealth Funds, will operate. Azar dismisses the hype surrounding sovereign funds saying the headline-grabbing deals of the past six months in Western financial institutions such as Citibank and Merrill Lynch make up a minuscule percentage of SWF activity. The bulk of investments are not in the mergers and acquisitions arena, and therefore not on a newspaper's radar.

How would you classify a sovereign wealth fund? How does it differ from a state-owned investment company?

It does not, necessarily. Different countries have different ways of deploying their wealth. We want to capture the whole universe. So, I'm not focused so much on the name, I'm focused on the client base. Wherever the money comes from the sovereign, I'm there. Lehman was the first mover in this – and I cover Norway to Alaska, not just the Gulf. Some of these institutions do much more than just mergers and acquisitions – but it is the big deals such as Citigroup or Morgan Stanley that grab the headlines. Most of the investments are below the surface, people don't actually see them.

What's your view on the guidelines that the IMF wants sovereign funds to create and follow? How do you respond to fears that investments by these funds may have political undertones?

Up to now, most of these fears have not been well founded. There have not been any examples of an abuse or a deal made by a sovereign fund for the wrong reasons. If you own five per cent of a big bank, what does it really mean? Where is the concealed agenda? I don't see it. I think this has been used a lot for domestic political reasons. The DP World investment in United States' ports [as part of the Dubai-based company's acquisition of Peninsular & Oriental Steamship Company] is a perfect example of this. There was no security threat. DP World is not a sovereign wealth fund but it is a state-controlled company. That said, there are some sensitive sectors and industries that the US in particular may want to protect – more from the Chinese, I think, than from the Gulf. So let's see where it leads in terms of the guidelines.

What do you see happening in future that can ease such fears?

Well, for one thing, the US presidential campaign will soon be over. That's one aspect. And over time, when they see that there has been no abuse or misuse of the funds for any political agenda, the fears will ease off. You build trust in a relationship over time.

What kinds of guidelines do you see coming in?

I think a lot of the guidelines will have to do with transparency and some sort of limits on the amount of control that can be exerted on companies in the West.

Will that make your job easier or harder?

Frankly, I'm neutral on this. It might define more clearly what the sovereign wealth funds can or cannot do, rather than stumbling on an obstacle after the fact, similar to what happened with DP World.

Where do you see the biggest deals happening for you in this arena?

Again, you have the deals that grab the headlines – these are only a small fraction of the pie, which today may be $3.5 trillion. Of this the investments made in the Western institutions were $60-$80 billion – which is nothing. Abu Dhabi Investment Authority, for example, has hundreds of billions of dollars but their headlining deal was Citibank for $7.5bn. The rest of their investments are below the radar, so to speak, for the newspapers. They invest their money every day in the markets – and that's what we're going after, not just the M&A deals. For instance, if they have $100bn to invest they may put 50 per cent in fixed income, 40 per cent in equity, and 10 per cent in more aggressive asset classes spanning hedge funds and private equity etc. We offer all of that. We are not here to just work on the M&A deals.

What is the average internal rate of return that you would have to look at when you get a fund-management mandate from a sovereign wealth fund?

The IRR is not ours, it is theirs. In the monetary markets, it is small return and low risk; 10 to 15 per cent would be in more aggressive investments where the IRR is greater and more than 20 per cent in private equity deals.

Where does it average out?

Well, when you put your money in the bank you get two or 2.5 per cent. You go buy a piece of real estate, you can expect a higher return. That's how they do it. In the more aggressive markets, they can expect an IRR of 10 to 15 per cent. In the less aggressive, it can be single-digit or low double-digits.

Does the competition to get SWF fund-management mandates push investment banks like Lehman to structure specific products with higher average returns?

We work with our existing products. We can create products, but at the end of the day our products channel investments into the areas in which the SWF wants to invest. For example, they may say they want to be present in the Asian markets. We tell them what to invest in and do it for them. An IRR is not something we can guarantee. We show them the returns we have generated over the past five years – we show them our track record.

What slice of the global sovereign fund market are you targeting?

The biggest possible! Lehman is the only investment bank that has created a global division that spans all the products across asset classes. I'm surprised that we are the first to do this as a global co-ordinated effort.

How much of Lehman's business do you see coming from this segment?

An increasing amount. What we are targeting is not a percentage of Lehman's business but a percentage of the SWFs' market – as large a market share as possible.

Sovereign funds are a growing financial force – is it a force for good? Or is it a force that the world should be wary of?

I don't see anything to be wary of.

Do you see them as saviours?

In the past six months they may have looked like saviours. But that's not their objective – which is to make money and get good returns on their investment. They will continue to invest wherever they see the potential to make money. They did not invest in Western financials to be saviours. They invested because they thought the sector had hit bottom and was going to bounce back.

They were wrong.

Yes. Everyone lost money on that call but so did all other investors in the equity markets during that period, including Western ones. But in five to 10 years you will see them making money on that investment.

Does that make sovereign funds more stable investors?

Yes, they do take a long-term view.

Sovereign funds today generate a lot of heated argument. One either loves them or hates them. What's the reality check here?

The world is focusing on $60-$80bn of sovereign investments that have taken place in the past six or seven months in M&A deals. If you look at the total pool of sovereign investible funds – $2-$3trn – that is a minuscule percentage. Something like 90 to 95 per cent of their investing is being done in mundane, everyday things. You can't mystify them based on the small percentage that is in the headlines. Look at Norway. It has half a trillion dollars, but nobody is saying anything bad about them. So, yes, it's a group of different countries, different people, different agendas. We cannot put them all under one blanket. Sovereign wealth funds have more money than hedge funds and private equity combined. They are different from each other. Is China, for example, the same as Saudi Arabia? I don't think so. At the same time, however, if you look at the banking crisis, all of them rushed to invest in Western financials. So there are commonalities as well – in investment philosophies, for instance.

What quantum of sovereign funds does Lehman have the mandate to manage today and how do you see that growing?

Sovereign wealth funds themselves are expected to quadruple in size over the next five years. This will come from oil revenues, commodity prices, trade surpluses – multiple things – anything that comes into the sovereign coffers. We will grow at a similar rate, or higher, as we gain market share.

Do you think the whole move towards transparency and international best practices will hurt the image of sovereign funds in the huge percentage of business they do in the non-M&A segments?

Definitely not. The liquidity and depth they bring to financial markets worldwide is seen as a boon to those markets. Because the sovereign funds have an increasing amount of money, they have to put it to work. That's very healthy for the markets; it's a lifeline for the markets.

What are the critical success factors of your division?

One is relationship-building, building trust. Others do this as part of their day job, so to speak, not in a fully dedicated manner. I wake up every day thinking about how I can take our relationships further. Secondly, it is the quality of investment products and ideas in our portfolio. You can't have one without the other.

Why are you basing this effort in Dubai? Why are you moving in from London? Is that because the IMF says half of all sovereign funds will be in the GCC in five years?

I have a map of the world in my office. If you look at it – from Norway right up there to South Korea and Alaska, Dubai is perfectly located. And of course I can focus on the Gulf more easily as well. This week I'm flying to China. Dubai is like the centre of the universe – at least the universe that I will be looking at. New sovereign funds are expected to come up – India, for example, is one. Saudi Arabia, Japan… It's fascinating!

Makram Azar, Global Head of Sovereign Wealth Funds, Lehman Brothers

Makram Azar joined Lehman Brothers in 1990. Before his new posting as global head of SWFs, he led the media, consumer and retail investment banking businesses in Europe and the Middle East. Under his leadership, Lehman Brothers was named Media M&A Bank of the Year 2007 by MediaFinance magazine for having advised on most of the significant 2007 transactions in the media sector. These included the takeover of ProSiebenSat1 by KKR and Permira, merger of Canal+ and TPS, and the sale of Endemol.

A Lebanese by birth, Azar has developed strong relationships in the region, including advising Saudi Prince Alwaleed bin Talal on an investment in Berlusconi's media company, a deal that could be seen as a precursor to regional sovereign fund investments in the West, which started more recently.

His new cross-divisional role based in Dubai, says Azar, is all about "building relationships and then doing deals together".

By Yazad Darasha on Sunday, May 18, 2008

Case for setting up sovereign wealth fund gets stronger

2008-05-04T11:39:00.000-07:00

Case for setting up sovereign wealth fund gets stronger

Thursday, 01 May , 2008, 15:34

With India�s foreign exchange reserves at over $300 billion and growing, there has been renewed interest in establishing a sovereign wealth fund (SWF), using a part of those reserves.

An SWF is a separate pool of assets, primarily (but not exclusively) invested outside the country, and controlled by governments to achieve economic, financial, and strategic objectives.

While there are well-established conservative international norms for investing forex reserves, this is not the case with the SWFs, which can engage in more aggressive risk-management practices.

India is a significant recipient of investments by SWFs from abroad.

While the SWFs have existed for several decades, their vastly expanded scale and scope of activities is a relatively new phenomenon.

Currently, among the institutional investors, pension funds have the largest assets, totalling around $25 trillion, while the corpus of SWFs is around $5 trillion. Industry experts estimate that the SWFs will grow to $20 trillion by 2015, while the endowment funds and foundations increase to $10 trillion.

The current stock market capitalisation of the world is around $50 trillion.

As with other institutional investors, SWFs also engage in partnership with private equity companies and hedge funds. SWFs can potentially facilitate a more efficient allocation of revenue from commodity surpluses across countries; help recycle current account surpluses; and enhance market liquidity. They also have potentially longer time horizons; and scale to employ more sophisticated risk management strategies.

Unlike in case of pension funds, there are no robust databases, either domestically or internationally, to monitor the financial flows of the SWFs. There are concerns about transparency and accountability of the SWFs, both for the home and the recipient countries. There are also concerns about conflicts of interest, potential insider trading, and reduced regulatory effectiveness.

The IMF has begun work on developing a code of conduct for the SWFs, which will include disclosure, reporting, transparency, and governance. Efforts are underway to also develop such code for hedge funds.

In India, the regulatory regime governing capital inflows does not recognise SWFs, hedge funds and private equity as a distinct category. Their investments are subject to normal prudential provisions.

There is, however, a concern that such an approach may be too benign given the complexity of the nature of transactions and the size of the SWFs. At the least, more robust database on incoming flows needs to be developed by the Reserve Bank of India (RBI).

The case for establishing a SWF in India is mixed. Most analysts feel that while India�s international investment position is not very comfortable, its gross reserves are adequate, even after considering high precautionary needs due to its current account and budget deficits. Thus, unlike most other countries, India�s case for SWF does not rely on export surpluses, conversion of non-renewable assets into a more diversified portfolio of financial and physical assets, or contingent pension reserve.

Instead, in India, a major reason for setting up an SWF is the possible use of forex reserves to finance critical infrastructure needs; and to mitigate quasi-fiscal costs of sterilising reserves. These costs arise as returns on conventionally invested reserves are 3-4%, while domestic bonds need to be financed at 7-8%.

A more aggressive risk posture for 3-5% of forex reserves ($9-15 billion) could help mitigate the extent of quasi-fiscal costs, albeit at a higher risk.

Even if India does establish such an SWF, its size will be among the smallest globally.

The largest SWF in the World is Abu Dhabi Investment Authority, with assets exceeding $1 trillion.

Russia has recently announced its intention to use its excess revenue from oil through SWFs to increase its strategic leverage.

Establishment of an SWF will enable India to be on a learning curve in regards the complexities of establishing and operating such a fund. This, in turn, could assist in devising measures to better monitor the operations of foreign SWFs in India. It will also give India a standing in participating in international discussions concerning the governance code for SWFs. Also, as India�s pension assets (currently about 15% of GDP) continue to grow, some international risk diversification would become essential. The SWF experience could then prove useful.

The challenges in setting up a SWF in India include high initial setup costs, including specialised staffing, sustaining a transparent and accountable governance structure and managing the political economy. India�s democratic checks and balances will impose constraints on SWFs, which are usually not found in the state-capitalist economies most of the SWFs are located in.

The SWF may also distract the government�s urgent need to address more critical public policy issues concerning trade imbalances, fiscal consolidation, infrastructure and human resource development needs.

By some measures, India already has a SWF called the India Infrastructure Finance Company (IIFC). The government-owned firm has set up a subsidiary in London, and has borrowed $250 million from RBI in foreign currency by issuing it 10-year government-guaranteed bonds at Libor.

IIFC is mandated to lend to Indian companies to import capital goods for infrastructure projects in India, or to co-finance external commercial borrowings (ECBs) of Indian firms in select areas. But, while this does address the concern that using reserves domestically could create adverse liquidity and inflationary impact, this may adversely impact the domestic capital goods sector, and government guarantees may create severe moral hazard problem.

In a speech in Washington DC this month, RBI governor Dr Y Venugopal Reddy outlined the broad contours of a more traditional SWF, which would invest a part of India�s excess reserves in the global markets. Reddy suggested creation of a separate entity or company, which will purchase foreign currencies from the RBI, and in turn invest in higher risk-higher return assets internationally. He also suggested that the SWF be managed by an independent sovereign entity, and not by RBI.

More India business stories

It appears there is consensus emerging in official circles for setting up a traditional SWF. On balance, there is a case for such a move, but caution is needed in implementing it to ensure that appropriate safeguards are provided. Mukul Asher / DNA MONEY

Ithmar Capital enters into strategic investment partnership with Panceltica

2008-04-29T08:22:00.000-07:00

Ithmar Capital enters into strategic investment partnership with Panceltica

Posted: 29-04-2008 , 10:40 GMT

Ithmar CapitalIthmar Capital, a leading private equity firm in the GCC, has partnered with Qatar-based Panceltica, principal provider of fast track housing across the Middle East, to support Panceltica’s aggressive growth and expansion strategy throughout the region.

Panceltica recently became the largest company to float on London’s Alternative Investment Market (AIM) this year. Ithmar Fund II was brought in as a strategic shareholder at pre-IPO phase with a 14pc stake as well as a board seat.

“We are uniquely placed to provide Panceltica with innovative investment and business development strategies to tap into the phenomenal growth potential of the region,” said Faisal Belhoul, Founder & Managing Partner of Ithmar Capital.

“Our highly-focused private equity specialist team is not only experienced in myriad local expansion opportunities, but is also able to leverage our global network and international expertise to deliver exceptional results for our clients,” he added.

Panceltica’s Group Turnover in 2007 was US $123.9 million and it had a market capitalisation on IPO of US $467.4 million, specialising in building onsite steel structures for housing and mixed-use projects in the Middle East.

The company hopes to benefit from the ongoing building boom in the Gulf and has plans to expand rapidly throughout the region. It is rolling out a new technology that enables it to build light-weight steel-framed structures up to eight times more quickly than traditional construction techniques.

“It’s our aim to position Panceltica as the region’s leading supplier of fast-track housing. We firmly believe our alliance with Ithmar Capital, with its true knowledge of the GCC investment landscape, will provide us with the necessary platform to achieve our ambitious regional expansion plans,” said Paul Fraser, Panceltica’s CEO.

Ithmar believes the UAE’s economic prospects remain robust with no apparent let up in the current boom. The sector remains upbeat, with analyst reports estimating the value of projects planned and underway in the GCC at US $1.1 trillion. Half of these are infrastructure development initiatives and of these, more than two thirds are still in the design and planning phase, a tenth are out to bid and 15% are currently under construction.

“The UAE is undoubtedly the largest of the GCC’s construction sector with the highest growth. The Emirates currently has US $300 billion worth of projects under way. Key drivers of the UAE’s real estate sector are its increasing population, strong GDP growth, high liquidity and pro-active government policies,” added Khaldoun Haj Hasan, Co-Founder and Managing Partner of Ithmar Capital.

“The Middle East’s construction industry is ripe for private equity involvement to assist partners in growing and realising their maximum value while providing an excellent vehicle for investors,” he concluded.

Private equity deals set for big boom in and around Mideast

2008-03-05T09:16:00.001-08:00

Private equity deals set for big boom in and around Mideast
http://archive.gulfnews.com/articles/08/03/04/10194638.html

03/04/2008 07:19 PM | By Babu Das Augustine, Banking Editor

Dubai: The Middle East North Africa and South Asia (MENASA) region is set for a big boom in private equity deals this year and the next few years, according to leaders of private equity industry in the region.

Speaking ahead of the Fourth Private Equity International Middle East Conference to be held in Dubai on Tuesday and Wednesday industry representatives said the region is fast emerging as a hot target for private equity investors from across the world as the regional private equity sector is becoming a part of the mature emerging market private equity industry.

Dubai International Capital, the private equity arm of Dubai Holding has about 10 per cent of its total assets under its management invested in the region. The company expects this share to increase substantially during the next few years.

New horizon

"The regional governments are keen to privatise, private family businesses are becoming more open to private equity participation and international private equity firms and professionals are seeing the region as an important investment destination. We see huge opportunities in the horizon and are ready to utilise them," said Sameer Al Ansari, executive chairman and chief executive of Dubai International Capital.

International speakers attending the conference said Middle East is fast maturing as a fundamentally strong market.

"Last year private equity firms across emerging markets raised $59 billion. Out of this about 10 per cent was from the Middle East. Within the region Gulf States are becoming a very important source of capital," said Sarah Alexander, founding president of the Emerging Market Private Equity Association.

The huge infrastructure developments underway in the region combined with the transition of family owned private enterprises are expected be a catalyst in the growth of private equity in the region, according to Arif Naqvi, Vice Chairman and Group Chief Executive Officer, Abraaj Capital.

"We see the boom for at least 10 years ahead. Even if the oil prices are to tumble by 50 per cent from the current level, the region will be still left with trillions of dollars in surplus to support the infrastructure development and the economic growth," said Naqvi.

The economic boom in the region, according to private equity industry players has increased the acceptability of the industry in the region.

"There is a huge funding gap in the region. While the banks have been typically into name lending and asset lending, the region lacks equity funding in the form of Angel funds, venture capital or private equity. What we see is just the beginning of a big trend," said Ansari.

Sovereign funds

While the big international private equity players have just started to make acquisitions here, experts said sovereign wealth funds would follow these funds into the region.

"Sovereign funds which have emerged big source of capital will soon turn their focus on assets closer home," said Howard S. Marks, chairman of Oaktree Capital.

Keeping up with the growth, the regional private equity industry witnessed substantial growth in fund raising activity.

According to latest figures from Abraaj Capital, PE firms raised a cumulative $22.8 billion from 2002 to 2007 with six firms accounting for 50 per cent of the fund raising activity in the region.

Leading private equity players in the region said yesterday that the international credit crunch would not affect the regional firms or deals.

"It is a fact that firms will have to accept some amount of widening credit spreads. However, availability of funds will be abundant because of the bulging regional liquidity and funds from the developed world looking for emerging opportunities," said Naqvi.

Acquisition: Abraaj buys 40% of Bosicor

Abraaj Capital, a leading regional private equity firm focused on Middle East, North Africa and South Asia (MENASA) announced yesterday that it has acquired a 40 per cent stake in the holding company of Bosicor Group (Bosicor), one of Pakistan's leading integrated oil companies.

The private equity deal provides Abraaj with 40 per cent shareholding in Bosicor's two group companies: Bosicor Oil Pakistan Limited and Bosicor Chemical Pakistan Limited. Abraaj will also acquire a minority stake in Bosicor Pakistan Limited (BPL.

The group's subsidiary, BPL, currently operates the fifth-largest oil refinery in Pakistan, with a rated capacity of 30,000 barrels per day (bpd) and a market share of 12 per cent. Established in 1995, BPL is listed on all three stock exchanges in the country. The investment in Bosicor was made through Abraaj Capital's $2 billion Infrastructure and Growth Capital Fund (IGCF).

The investment will fund the establishment of a petrochemical plant and a refining unit that will provide the Bosicor Group with an initial aggregate refining capacity of 145,000 bpd and create an integrated platform that operates across the full value chain in the oil sector.

"This investment in the future of Pakistan - one of many made by Abraaj Capital and the first by IGCF - will greatly enhance the country's ability to fuel its ongoing economic expansion," said Arif Naqvi, Vice Chairman and Group Chief Executive Officer, Abraaj Capital.

Unicorn Global Private Equity buys into Bahraini firm

2008-03-03T13:06:00.001-08:00

Unicorn buys into Bahraini firm
Manama: Tue, 04 Mar 2008

Unicorn Investment Bank said its unit Unicorn Global Private Equity Fund I
has acquired a 55 per cent equity stake in Manama-based Gulf Strategic Partners (GSP), which operates throughout the GCC and India.

The investment in GSP is the fifth one by Unicorn’s Private Equity Fund, an official said.

The company's previous investments include Orimix Concrete Products, a leading ready-mix concrete producer based in Fujairah, UAE; Al Assriya Industries Holding Company in Kuwait and US-based companies Precision Time in Utah and Ellington Leather in Oregon.

Established in 2004, GSP specialises in pre-operational cleaning services for petrochemical, power, oil and gas and process facilities.

GSP has partnerships with international companies to provide high-technology, world-class solutions to industry in the GCC.

GSP’s services include chemical cleaning, steam blows, hydromilling, high velocity flushing and decontamination cleaning.

GSP’s unique technology solutions allow cleaning of new and existing facilities much faster and more effectively than conventional technology. The demand for such services is growing rapidly as new plants are commissioned across the region.

Commenting on the acquisition, Aamir Khan, managing director of Global Private Equity at Unicorn, said: “GSP has developed outstanding technology solutions to serve the largest industries in the region – oil, gas and power. There is growing demand for their services and they have already developed relationships with some of the largest players in the region, which is remarkable for such a young company."

"We look forward to working with GSP’s highly experienced management team to support the company’s next phase of growth throughout the region," he noted.

Wayne Giles, managing director of GSP, said, "Our partnership with Unicorn will provide us with the capital we need to grow our business and take it to the next level. We are witnessing tremendous demand for our services and are excited at the opportunity of working with Unicorn’s team to explore regional expansion opportunities," he added.-TradeArabia News Service

Middle East IPO firms appreciate by 201% in 2007

2008-03-02T07:59:00.000-08:00

Middle East IPO firms appreciate by 201% in 2007

INTERNATIONAL. GCC stock markets are poised for a glut of over 80 Initial Public Offerings (IPOs) which could be worth in excess of US$ 10.5 billion over the next three years. Significantly, IPOs measured in 2007, appreciated on average by 201%, even with over-subscription per IPO falling to a more realistic 6.3 times, according to industry reports.

“To realise an average return of 201% despite regional market depreciation of 9% last year, is an extraordinary achievement. Investors, both regional and international will undoubtedly be drawn to the upcoming IPOs over the next three years,” commented Deep Marwaha, Senior Conference Manager of the 3rd Middle East IPO Summit.

Abu Dhabi-based Gulf Capital identified 83 maiden offers in the GCC, for which, managers have been assigned for 42 and another 41 have announced their intention to tap the equity market. The total number of IPOs in the GCC during the 2007-2010 period is expected to exceed 116, including 33 in 2007 and 83 offers in the coming years.

Morgan Stanley estimates a total of 110 IPOs in Saudi Arabia alone by the end of next year. The bank's Saudi unit has mandates to manage seven IPOs this year, including one by Saudi Basic Chemical Industries (SABIC) that may raise US$80 million.

In the UAE, the National Bank of Abu Dhabi (NBAD) has already announced it expects to manage at least eight IPOs this year, with three aiming to raise at least US$1 billion by the end of June. NBAD managed three IPOs last year and one so far this year.

The total raised by IPOs increased by 40% year-on-year to US$10.5 billion during 2007 with the UAE witnessing US$5.1 billion, followed by Saudi Arabia (US$4.81 billion), Qatar (US$389 million), Oman (US$156 million) and Bahrain (US$69 million).

One reason for such a market-bucking performance is widely put down to the pricing strategy of public offerings in the GCC. “Many IPOs last year were sold at a discount to book value and to earnings and appreciated quickly once on the market,” said Marwaha.

The nerves of investors have also been soothed by the sound regional market fundamentals and high levels of liquidity, not to mention GDP growth and record budget surpluses. “The GCC oil revenues are currently US$ 1.2 billion per day. With tensions over Iran and political posturing by Venezuela, any notion of softening prices were dispelled recently when oil prices shot back up towards US$ 100 per barrel,” added Marwaha.

In addition the region’s non-oil sectors are now beginning to make sizeable contributions towards GDP growth. "Most GCC governments have outlined more than US$1 trillion in capital expenditure for oil and non-oil sectors in the next five-to-six years, which will have a multiplier effect for the private sector which will require more funds to be raised in the stock markets," noted Marwaha.

Middle East’s IPO Summit which takes place on 16-19 March 2008 at the Abu Dhabi Intercontinental Hotel, will host investment experts, regulators and market leaders who will examine regulatory issues as well as new products and issues impacting the investment environment and includes a Middle East Investment Day with an Executive Masterclass by contrarian investment guru, Hong Kong-based Dr Marc Faber.

The Middle East IPO Summit Chairman is Mamdoh Al Rouhani, Managing Director of MS&L, Saudi Arabia. "With large IPOs in the pipeline across many Middle Eastern markets, the need for professionals to share information and network with each other is more important than ever," he said.

Among the market movers and shakers taking part in the Summit will be speakers from the Global Investment House, Deutsche Bank, Ithmar Capital, Abraaj Capital, Algebra Capital, AB Capital, The National Investor, NBK Capital, Jeffries, KPMG, Emirates Financial Services, Rasmala Investments, Calyon, UBS, Alpen Capital, Samba Financial Group and Bank of New York Mellon.

For more information on the 3rd Middle East IPO Summit visit www.iposummit.com
Author: Moussa Ahmad
Source: BI-ME
Published: 02 March 2008

GCC has the Best Global Investment Climate

2008-02-18T12:22:00.000-08:00

The six Gulf Co-operation Council states are witnessing the best investment climate and marking the highest growth in a decade. "This is substantiated by huge market capitalisation which has taken place and a likely entry of new initial public offerings (IPOs)", Hassan Salim Al-Ammari, CEO, Al-Tawfeek Co. for Investment Funds, said on June 15. The occasion was the launch of Shariah-compliant GCC Equity Fund, a Bahrain Monetary Agency-approved open-ended fund with a target capital of $100m.

The company has decided to invest the fund in listed and unlisted Shariah-compliant equity and equity-related securities in the GCC countries - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE. Ammari said: "We'll invest 70% of it in listed and the remaining 30% in unlisted Shariah-compliant equity and equity-related securities in the region".

The new fund offers an opportunity to invest in the GCC equity markets. It reflects Al-Tawfeek's confidence on the outlook of the GCC economies. It will broaden Al-Tawfeek's range of investment funds and provide an opportunity to invest in an exciting era of the GCC, dominated by ongoing economic reform and a period of extraordinary growth reminiscent of the oil boom of the 1970s.

Al-Tawfeek company is a member of the Saudi Dallah AlBaraka Group, a leading provider of Shariah-compliant investment funds in the region. Dhafer Salih Al-Qahtani, general manager of the company, gave a presentation on the fund and its focus on the GCC. The fund offers bimonthly liquidity after three months with a minimum subscription of $15,000 for individuals and $100,000 for institutions.

The fund was launched at a time when the region was at the centre of world attention. In 2004, the GCC posted its highest growth in a decade. The region's corporate earnings had a growth of more than 50% compared to 40% in 2003. The combined net oil exports of the GCC exceeded $180 bn in 2004, up $35 bn from 2003.

With over $765 bn in market capitalisation and a number of new entrants (new IPOs) expected from the Saudi-based National Commercial Bank and Almarai, a number of new investment opportunities are bund to follow. With plans underway for a new capital market law in Saudi Arabia and Qatar, the introduction of Bahrain's Financial Harbour and the launch of the Dubai International Financial Centre, the region aims to position itself among international financial markets, creating further depth and diversity.

Dubai-based SHUAA Capital has been appointed as the investment manager of the fund. "SHUAA Capital has a 25-year history and a strong track record of investing in the GCC equity markets", its Managing Director, Asset Management Group, Haissam Arabi, said. SHUAA Capital has won the 2004 Euromoney award for excellence for being the "best equities house in the UAE". In addition, SHUAA Capital has successfully completed a variety of transactions for a number of institutions in the UAE.

Bahrain-based Gulf Clearing Co. has been appointed as custodian and administrator of the fund. The firm is a big fund custody and administration service provider with assets under custody exceeding $5 bn, according to its Vice President Ali Al-Laith.

A Shariah board will advise on the fund's Shariah-compliance. The board includes Dr. Abdul Sattar Abu Ghuddah, Abdullah Ibn Suleiman Al-Manai, Dr. Abdul Latif Al-Mahmoud, Dr. Ezzedine Bin Mohammed Khouja, and Dr. Ahmad Mohieldin Ahmad.

Al-Tawfeek is a specialised financial firm incorporated in 1992 in the Cayman Islands. It is one of the financial arms of Dallah AlBaraka Group. The group is one of the largest conglomerates in Saudi Arabia with total assets exceeding $12 bn, and with companies operating from more than 40 countries. Since its inception, Al-Tawfeek has launched a number of Shariah-compliant investment funds covering a variety of asset classes including equities, corporate debt, real estate, private equity, venture capital, leasing and reconstruction. It has yielded high returns for its investors in a number of Shariah-compliant investment funds.

NBAD to launch GCC equity fund; bullish on Gulf and Mena markets Monday, February 11, 2008

2008-02-17T15:27:00.001-08:00

NBAD to launch GCC equity fund; bullish on Gulf and Mena markets
Monday, February 11, 2008

ABU DHABI — The National bank of Abu Dhabi (NBAD) which is bullish on GCC and Mena markets will be launching a GCC equity fund in the first quarter of 2008.

"We are very optimistic on the GCC and Mena region due to accelerating liberalisation of markets and economies, more privatisation, more regional integration, sustainable and strong organic domestic growth. Our newly formed internationally credentialed team will be launching a very exciting GCC equity fund in the first quarter of 2008," revealed Nazem Al Kudsi Chief Investment Officer, Asset Management Group, NBAD.

He expects 2008 and 2009 will be positive years as well but cautioned investors to be patient. "The UAE, GCC and Mena markets are relatively new and are emerging. Hence, just like any growing market there will be huge growth spurts, followed by slowdowns and consolidations. It will not be a straight line up," he said.

But, for the patient, non-emotional investors who can ignore the day-to-day coughs and sneezes of the market the rewards should be plentiful. "We think the outlook for IPOs in 2008 and 2009 is very good, the broad economy is still strong and there is still an appetite from foreign investors for an attractive investment in the region," Al Kudsi concluded.

National Bank of Abu Dhabi (NBAD)'s local funds swept Gold, Silver and Bronze medals as they outperformed the market and other local funds in 2007, according to a study by Zawya-Dow Jones.

"NBAD research and portfolio management team put together outstanding performance numbers in 2007 as NBAD Growth fund, the top performing fund in the UAE, was up almost 63 per cent on a total return basis and beating the market by nearly 18 per cent or 1,800 basis points," he said.

NBAD UAE Trading Fund, the second top performing fund in the UAE, was up 60.31 per cent while NBAD UAE Distribution Fund, the third top performer in 2007, was up 59.23 per cent. NBAD UAE Growth, Trading, and Distribution Funds were the first three in the top 10 list of all funds in the UAE based on their performance in 2007 while NBAD Islamic Fund also featured in the top 10 list. NBAD UAE Growth Fund features in the top 10 list of all funds in Mena as the 6th best fund in the entire region last year.

Daman: IPO flow will be more robust for UAE and GCC

2008-02-17T09:29:00.000-08:00

The Dubai International Financial Exchange (DIFX) will list its first United States-based company this week, paving the way for a series of similar public offerings set to come on board from the North American markets.

According to Dubai’s Daman Investments, lead manager of the initial public offering of Buffalo-based Nanodynamics, the move will go some way to cement the emirate’s place as a global exchange.

Shehab Gargash founded Daman (now Daman Investments) in 2001 and serves as Chief Executive Officer of the Dubai-based private joint stock company.

His company is capitalised at Dh200 million and is a privately held, non-bank financial services group focused on developing capital market opportunities within the UAE and the Middle East.

During his 12 years in the UAE banking industry, Gargash’s previous roles have been in marketing, distribution, trade finance and investment banking, first with Citibank, from 1989 to 1993 and later with the Emirates Bank Group (1993 to 2001).

With an MBA from the George Washington University in the United States, Gargash (pictured above) is also a founding board member of Young Arab Leaders and the Arabian Real Estate Investment Trust, and was appointed to the Dubai Chamber board of directors last March. He is a frequent public speaker and is well known for his popular daily column – now in its 10th year – in the Arabic newspaper Al Ittihad.

Gargash discussed with Emirates Business the regulatory hurdles facing regional stock markets, concerns over fair equity research and valuations, and monitoring front-running.

He gave his forecasts for the regional stock markets this year, and talked about the challenges that could slow down the rise in foreign investment in the UAE.

Gargash also warned the region’s asset managers to have “a sharper knowledge” of events happening beyond their borders, as the correlation gets closer between local and global markets.

What does the listing of the first US firm on the DIFX, announced last week, mean for the exchange?

I think it’s very significant because it’s exactly the reason an exchange such as the DIFX was set up. It was established to attract quality listings from around the world and to create a marketplace for people to be able to trade those securities.

Having a US company come in on the bourse is a fulfillment of that promise. I think it has put the DIFX on the road to a global-quality exchange.

What is the significance of an alternative energy and clean technology company listing on the DIFX and do you see this sector becoming an industry that will see gains in 2008?

Yes, with increased worries about environmental issues – and about the economic logic behind environmental matters – clean technology is becoming an area of increased importance for corporations.

Nanodynamics is a pioneer at utilising nano technology advances that enable companies to have more potent solutions, which are more cost-effective and very friendly for the environment.

Any other companies you are talking to for the UAE or regional stock markets?

We will give more details later but Nanodynamics is one of a chain of similar IPOs we are working to bring into the DIFX from the US markets.

All of them will be very nice IPO stories – very good management behind good business models. We are very selective in picking those companies we believe will be successful and those that show an ability or potential for continued success.

What do you think are the reasons behind the slowdown of the flow of initial public offerings?

I don’t think initial public offerings have been slow, I think they are a function of demand and we have just exited two years of a negative period in our stock markets. So by definition you are going to have fewer IPOs than usual.

But we have not seen them stop and that’s very important. We had some very important local IPOs over the past year and going forward into this year it looks very promising. So I think the IPO flow will be more robust going forward because the markets have sort of picked up now.

At the DIFX specifically we have seen a very successful IPO with Dubai Ports World. This one [IPO of Nanodynamics] hopefully is running very nicely and indications are good for the first US initial public offering on the DIFX.

And 2008 promises to be a very positive year for in terms of getting more companies on board and more activity through the exchange.

In the first half of 2007, foreign investor buying volume on the Dubai Financial Market tripled and foreign investors accounted for about 30 per cent of the total DFM trading, it was reported. It then retreated. Where do you think this figure will stand for the first half of 2008?

I think foreign institutional investors have discovered the UAE markets, both local markets and regional, such as the DIFX. They have discovered the Gulf is a very promising emerging market. The risk-reward proposition makes a lot of sense to them. So I expect to see more participation from them in local and daily activity here.

That will increase the volatility from one side but it will certainly increase the amount of traffic and volume we will see through our local exchanges on a daily basis.

What are other possible hurdles impeding the rise in foreign investment in the UAE?

The foreign investors are going to bring their own processes and logic to the market so we’re going to see a quantum shift in the way the market transacts.

We’ve seen that, if you compare today and five years ago, there is a big difference in that as well. But I think going forward we are going to see a more rigid interpretation of things like profitabilities, of reading the results of the companies, in daily trading volumes, in triggering stops, in short-selling eventually and in margin trading.

All of those will be new concepts coming into our market as it becomes a closer market, a closer reflection of what an international market looks like.

What is your 2008 forecast for regional stock markets?

I think it is a very significant shift we are seeing. We are seeing a natural shift, there is closer correlation than previously between what is happening locally and globally, and I think that’s why it’s very evident in the quick dip and pick up that we saw last week or the week before on the local exchanges.

Approximately 30 per cent of the daily volume is from foreign institutional investors on the DFM. That itself is a telltale sign that the correlation is going to increase and not decrease going forward.

So asset managers in the region today have to have a sharper eye and a sharper knowledge of what happens beyond their borders.

They could get away without that knowledge in the past but not anymore. For 2007, I remember I said 10 to 15 per cent from 2006 and I was proven wrong because until October we were negative. But then we jumped up about 30 per cent so I think quarter four made up for our expectations and exceeded it.

This year I will be anxious because of the volatility of the international markets, which was not as big a factor a few months ago as it is today.

Also, with oil price high it makes things a little more uncertain. I wouldn’t venture a guess but I would be very comfortable that 2008 will be a positive year and will be based on the results we are seeing in terms of the fourth quarter earnings from 2007 and going very early on into 2008.

I think the growth will remain healthy for the companies. Also, we can’t forget a new factor in 2008, which is the listing of private companies.

We have a whole batch of two-year-old companies on the local markets that are going to be listed. For instance Al Qudra announced it would list this year.

So you’ve got several of the similarly aged, two-year-old companies that are due for listing and will create a whole new cycle of momentum, at least on the speculative side that will be positive for the stock market indices.

So I will not give a number this time but I think 2008 will be a positive year and I think it’s going to be interesting. It won’t be for the faint-hearted because I think it’s going to be a roller coaster in terms of the dealings with short-term volatilities.

What do you think are some of the regulatory challenges facing the stock markets here?

I think the main thing is to successfully regulate the shift from a small, fairly quiet local market into the next emerging market.

You have to put in place proper guidance and enforce proper regulations to enable you to successfully do that so you don’t have a chaotic situation.

What do you think about the Securities and Commodities Authority’s recent concerns about equity research and the way some analysts are reaching their valuations? Do you think this type of research should be regulated?

I think the SCA has a reason to worry because while some research we see out there is very good, some other leaves a lot to be desired.

I think it will be important that we don’t put in place too many guidelines that stifle research, which get researchers worried about what they say so they end up saying nothing.

Because I think research is an important component of the environment and it gives good guidance to the investors in making their final investment decisions.

Do you think the SCA should monitor front-running?

The SCA needs to put in place a lot more practical and convenient guidelines for investors in general. It has done a lot since it was set up, but there is a lot more to do. I think it is on the right track.

How do you deal with front-running at Daman?

We comply [laughs]. We are regulated by the SCA or by the Central Bank, and by the Dubai Financial Services Authority. So we are regulated in three environments depending on which business it is.

We are in constant and very constructive discussions with the regulators because it’s very important for the regulators to also positively interact with the companies in the market to come up with an environment that is protected from one side, but that is also conducive to business.

How do you ensure that your brokerage research that is provided to clients is not mixed with the buy side?

We do not publish our research; it is done for our internal purposes now. In the future we will be publishing research but for now we do not have published research.

KSE trading seen surging after 8.4% growth in Jan

2008-02-11T11:48:00.001-08:00

KSE trading seen surging after 8.4% growth in Jan

GCC markets witnessed mixed trends as four out of six regional indices recorded monthly gains in Jan-08. However, the biggest bourse in the region in terms of market capitalization , Saudi Arabia, witnessed strong selling pressure as it benchmark index reported monthly decline of 13.4% in Jan-08. However, buying interest was seen in the Kuwait markets as its index recorded 8.4% growth during the month. We believe that the trading activity is likely to increase in the coming month as the investors take positions after analyzing annual results and corporate announcements.

Kuwait Budget 2008/09
Kuwait’s Cabinet has approved the country’s budget for the fiscal year 2008/09 (Apr’08 to Mar’09) which still needs to be sanctioned by Kuwait’s Parliament. The revenues estimated for 2008/09 is KD12.68bn, around 52.4% up from KD8.32bn estimated in the 2007/08 budget. As expected, a majority of Kuwait’s estimated revenues for 2008/09 will be on account of oil revenues. The oil revenue is projected to comprise around 92% of the total revenues for 2008/09. The oil revenues for 2008/09 is estimated at KD11.65bn, up 56.4% from KD7.45bn estimated for 2007/08. The non-oil revenues for 2008/09 is estimated at KD1.03bn, up only 17.9% from KD0.87bn estimated for 2007/08. The rise in non-oil revenue is attributed to an increase in taxes on net income and earnings for non-oil companies and fees on goods and services.

Similarly the total expenditures for 2008/09 is estimated at KD17.80bn, up 57.5% from KD11.30bn estimated in the 2007/08 budget. The higher expenditure projected for 2008/09 is due to the cabinet decree targeting the settlement of the KD5.47bn deficit to be paid in installments to the Public Institute For Social Security (PIFSS), which is Kuwait’s social security system. As per IMF Article IV report published in April 2006, PIFSS has accumulated a substantial actuarial deficit, which amounted to around KD7bn in 2004 and this move appears to be an attempt at recapitalization. However it is important to note that this expenditure of KD5.47bn is non-recurrent in nature. On account of this significant increase in the expenditure, Kuwait’s Cabinet has estimated a deficit of KD5.12bn for 2008/09. And considering the fact that around KD1.27bn of national revenue will be contributed to Reserve Fund for Future Generations (RFFG), the overall deficit for 2008/09 is estimated at KD6.39bn.

Without considering the transfer of KD5.47bn to PIFSS (which is non-recurrent in nature), the total expenditure projected for 2008/09 is KD12.33bn, which is 9.1% higher than the previous year. Though the break-up of this expenditure is not available at this point of time, we expect to see higher allocation of capital expenditure. Increase in capital expenditure has positive impact on the overall economy with maximum impact on sectors like construction, cement and real estate. This will have a trickle-down effect on other areas of economy as well by contributing to achievement of targeted rates of growth and creation of new jobs.
It is important to note that historically Kuwait has projected the budget on a conservative basis. This is illustrated from the fact that for the fiscal year 2006/07, Kuwait achieved an actual budget surplus of KD5.20bn as against an estimated budget deficit of KD2.60bn. For the fiscal year 2007/08, Kuwait has estimated a deficit of KD2.98bn. However during the first six months of current fiscal, the country has already recorded a revenue surplus of KD5.75bn.

For the budget for the fiscal year 2008/09, sources at the Ministry of Finance have quoted that the oil revenue was estimated on the basis of a daily production of 2.2 million barrels of crude. We believe the Kuwait has again projected the budget revenues on a conservative basis. The actual average production for the first nine months of current fiscal was 2.48mb/day and we do not foresee a substantial reduction in view of higher prevailing oil prices. On the expenditure side, Kuwait has also historically spent less than budgeted figure. This is illustrated from the fact that for the fiscal year 2006/07, Kuwait’s actual expenditure was KD10.31bn as against an estimated expenditure of KD11.12bn.
However the fiscal year 2008/09 might be different than the previous years. We might see an actual deficit in 2008/09 (unlike the previous years) in case the entire amount of KD5.47bn is paid during the year to PIFSS. As per our estimates, the actual deficit for 2008/09 will be lower than the projections by Kuwait’s Cabinet.

IPO frenzy in 2007
The number of new companies which offered parts of its shares to public (IPOs) reached 41 during the year 2007. Out of these 41 companies, 38 have been listed at the time of writing of this report and three are yet to be listed. Out of these, 36 issues were listed in 2007. Out of the 41 companies which floated their shares in 2007, 28 companies were from Saudi Arabia, six from UAE and two each from Oman, Qatar and Kuwait and one from Bahrain.
Out of 41 issues, maximum number (16) were from insurance sector, followed by services (9) and Industrial (8). Alahli Takaful Co has been the biggest gainer since float, gaining 1,017.5%, followed by Al Ahlia Cooperative Insurance Co. and Malath Cooperative Insurance and Reinsurance gaining 915% and 825% respectively. It is notable that we have found a negative correlation between the price change (on listing and after one month of float) and oversubscription. It means that appreciation in the price of any offering in secondary market is heavily determined by its fundamentals rather than just frenzy.
Improved capital market conditions have been driving the IPOs in the GCC region which have resulted in investors’ growing interest in the regional equity markets. Private companies and family businesses are opening up to the prospects of a public listing. There is also tremendous rise in disposable income and savings on the back of increasing oil prices has enabled investors to lap up the offerings made by the companies. This is also attracting corporate to go for listing as can be seen from the fact that more than 50 companies are looking to tap the market in the medium term.

Market activity
GCC bourses saw 39.9bn shares being traded in the month of Jan-08 as compared to 27.5bn in the previous month. Also, the value of shares traded on the bourses increased to US$136.7bn in Jan-08 as compared to US$100.5bn reported in the previous month.
The breadth of GCC stock markets was skewed towards decliners in Jan-08 as 280 stocks registered monthly decline as compared to 249 advancers. The strong sell-off seen in the Saudi market can be seen from the fact that the Saudi bourse saw only 13 advancers as compared to 97 decliners in Jan-08.

Middle East on Front Lines of Global Talent War

2008-02-07T19:18:00.000-08:00

Middle East on Front Lines of Global Talent War

Middle Eastern markets are booming, unlike those in Europe and the U.S. Now, the Gulf is attracting investors seeking to tap into the vast resources of the region. Wall Street banks are also expanding overseas in search of high-growth markets with the potential to boost revenue and offset volatility at home. Goldman Sachs, Morgan Stanley and other investment banks have already secured banking licenses and set up shop there. Meanwhile, Islamic finance is shaping up to be one of the fastest-growing sectors in global finance. A recent Lipper Hedge World report notes that demand is soaring for alternative investments that comply with Shariah law to take off in the second half of 2008.

Amid the trend, the need for talent in the Middle East is surging. A new study conducted by international communications consultancy, Hill and Knowlton, shows that the demand for talent has never been greater. According to executive search firm, A.E. Feldman, there is a lot of investment in the Gulf and with that comes increasing demand for talent. The firm reports that salaries are skyrocketing as banks seek to lure top candidates. Investment bankers as well as risk, private equity and real estate professionals are among those in short supply. Those able to demonstrate strong modeling skills, transaction experience and excellent communication skills are in a prime position to gain from the trend.

Soaring oil prices have made the Gulf not only one of the fastest-growing regions in the world, but also a pool of great wealth. The sovereign investment arms of Saudi Arabia, Bahrain, Qatar, United Arab Emirates (UAE), Oman and Kuwait have an estimated $1.5 trillion at their disposal, according to Reuters. The Dubai International Financial Centre (DIFC) is creating new infrastructure as part of its efforts to become a global Islamic finance hub, according to a Gulf News report.

As investors flock to the Middle East, job opportunities in the region are exploding. The Middle East is on the front line of the global war for talent, according to the results of the 8th Annual Corporate Reputation Watch study by international communications consultancy, Hill and Knowlton. Dave Robinson of Hill and Knowlton Middle East, says the report has highlighted a critical issue for the region. “With governments and companies in the Middle East adopting aggressive growth strategies and with the move towards international business practices, the need for the best graduate talent has never been greater.”

Meanwhile, interest in the Middle East as a market for alternative investments is at an all time high, according to a recent Hedge Week report. The report states, “The development of the Dubai International Financial Center and the growth of the financial industry in Qatar and Bahrain have focused attention on opportunities for asset managers in a region characterized by rapidly growing wealth and increasing investor sophistication.”

Islamic finance in the Gulf is gaining popularity and assets of banks in the sector are growing faster than their counterparts in conventional banking, reports Gulf News. Globally, assets of Islamic financial institutions are estimated to be more than $500 billion.

The main principle of Islamic finance is that all forms of interest are forbidden. All money must also be invested in purely ethical industries. And the Islamic financial model works on the basis of risk sharing. Banks and individuals share the risk of any investment on agreed terms, and divide any profits between them.

Though Shariah law obviously poses certain challenges for the hedge fund industry, financial engineers are examining how to create structures that provide attractive levels of performance while conforming to Shariah principles, according to Hedge Week. In fact, Lipper Hedge World reports that Deutsche Bank’s regional head of Middle East structuring said he expects demand for hedge funds that comply with Shariah law to take off in the second half if the year.

Dubai’s commitment to world class institutions profiled by Oxford Business Group

2008-02-07T19:14:00.000-08:00

Dubai has committed to establishing world-class institutions in a variety of fields, from finance to communications, and from health care to education, says The Report: Dubai 2007, published by Oxford Business Group (OBG), the highly acclaimed UK-based publishing, research and consultancy service organization.

As a result of this determination to invest in development as a centre for finance, technology, communications, advertising and many other sectors, the emirate's nationals now enjoy one of the highest per capita incomes in the world, and yet, says The Report, Sheikh Mohammed bin Rashid Al Maktoum, ruler of Dubai, likes to mention that he has realized only 10% of what he wants to build for Dubai.

Sheikh Hamdan bin Mohammed Al Maktoum, Crown Prince of Dubai and Chairman, Dubai Executive Council, highlights this when he tells The Report in an exclusive interview: "The success of the government relies heavily on the availability and skills of the public sector workforce.

"We need to ensure that the government continues to maintain and develop its capabilities of attracting, developing, motivating and retaining skills and talent to ensure it keeps pace with the evolving requirements of the economy and the citizens.

"In addition, a structured focus on quality and efficiency is necessary to ensure that service levels are continuously upgraded through the streamlining of processes and leveraging of IT."

Referring to the Mohammed bin Rashid Al Maktoum Foundation for Dubai, Sheikh Hamdan says: "Sheikh Mohammed bin Rashid Al Maktoum launched this personal initiative to develop future leaders and create a knowledge-based society throughout the region.

Based in the UAE, the foundation aims to promote knowledge and human development, focusing specifically on research, education and promoting equal opportunities for the personal growth and success of youth in the region. The foundation's programmes are also aimed at further enhancing the standing of scholars and intellectuals throughout the Arab world.

"Another objective of the foundation is to encourage efforts to find innovative answers to obstacles that are preventing economic and social development. Therefore, it will help establish small and medium sized enterprises and create a panel of decision makers in all relevant fields to communicate with one another and exchange insights that will go towards finding fast and efficient solutions.

"The foundation's mandate is significant since it is seeking to reverse a negative trend in the Arab world by identifying gaps and investing its efforts in filling them. Job creation, for instance, is a critical matter considering the fact our region now needs 15m jobs in the next 20 years. The Arab world needs 74m-85m new jobs. Emphasis needs to be placed on improving the work environment.

Currently, the Arab world is ranked 107 among 170 countries in terms of establishing new businesses. These figures represent major obstacles to the region's development - challenges, essentially, which the foundation intends to turn into opportunities for improvement and growth."

The Report: Dubai 2007, available in print form or online, is regarded as the premier guide for foreign direct investment into the emirate's vibrant economy, and an invaluable guide to many facets of Dubai, including its macroeconomics, infrastructure, political landscape and sectoral developments.

Deutsche CEO talks fed cuts and world market-especially the development of the DIFX

2008-01-28T08:22:00.000-08:00

Deutsche CEO talks Fed cuts and world market

Henry Azzam, Chief Executive Officer of the Middle East and North Africa division of Deutsche Bank, has been at the forefront of financial innovation in the Middle East for many years, especially the development of the Dubai International Financial Exchange.

Before joining Deutsche Bank on May 1, 2007, Dr Azzam was CEO of Amwal Invest, an investment bank he founded in May 2005 and has guided it through its first two years of operations, and the Chairman of Dubai International Financial Exchange. Before establishing Amwal Invest, Dr Azzam was the CEO of Jordinvest (2001-2004), MD of Middle East Capital Group (1998-2001), AGM and Chief Economist of the National Commercial Bank, Jeddah Saudi Arabia (1990-1998) and Vice-President and Chief Economist of Gulf International Bank, Bahrain (1983-1990). He has five books published in the UK, the last one being The Arab Economies Facing the Challenge of the New Millennium.

Azzam (pictured above) tells Emirates Business of his reaction to the US Federal Reserve’s dramatic move to cut interest rates last week in the wake of global market turbulence, his belief that there will be at least another one per cent cut later this year, and his assessment of how Deutsche Bank is placed in the whirlwind blowing through the world’s financial markets.

What is your reaction to the surprise rate cut by the US Federal Reserve as a response to the recent declines in world stock markets?

Well, it was the biggest cut in 20 years, and the message sent to the markets is that the Fed is worried that the gloomy sentiment on Wall Street and around the world could make recessionary expectations come true. By lowering rates in a surprising way, the Fed wanted to be ahead of market expectation in the hope of changing the sentiment and the mindset of investors, inject liquidity and encourage lending and spending.

Several commentators have argued that big rate cuts bring a deflationary risk, as was the case in Japan in the late 1980s. How do you assess this risk?

I would not go that far. The US economy is more dynamic today than that of Japan in the late 1980s, and policy-makers in the US tend to be more proactive – they tend to take action on the monetary and fiscal stand faster with the aim of shaping future expectations. We also have a more visible phenomenon in the US than elsewhere of “creative destruction” – where the weaker institutions that fail tend to be acquired by stronger ones.

Do you think the Fed has been forced into these measures by Wall Street to rescue the markets?

I don’t think the Fed took these measures to help rescue stock markets. These measures were implemented mainly for economic reasons. Recently, more and more people were raising the spectre of a recession, and if more people talk about it and expect it, then there is a good chance that it will happen. This is why the Fed stepped in at the right time in a big way, hoping that lower rates could eventually work more into the system to help spur capital investments by businesses, provide some relief to home-adjusted mortgages and encourage more consumption. Therefore, the Fed acted in the interest of the broader economy, not just stock markets.

Has the Fed done enough?

I think it is too early to say that. The Fed gave the system an injection in the hope of reviving it, but more needs to be done. In the weeks and months ahead, markets expect Fed funds to drop further to 2.5 per cent, from their current levels of 3.5 per cent, supported by the $150 billion (Dh550bn) fiscal stimulus package.

What is your view of the strength of the American banking system now? Is there still a danger of collapse?

Banks with huge losses need to recapitalise, and they have started to do so. Some are drawing on the capital resources of the sovereign wealth funds. These funds have a historic opportunity to acquire assets in major financial institutions of the world and, therefore, it is expected there will be more capital-raising activities in the months ahead. As such, I don’t think we will see collapses on the US banking scene, but that does not preclude mergers or acquisitions down the road. Some banks may decide to sell assets or businesses, while others may put more emphasis on certain banking activities and downgrade others.

How is Deutsche Bank’s position in all this?

Deutsche Bank is well placed against the competition, and was less affected by the sub-prime market crisis compared to others. Our financial results are due next month, and then the markets will get first-hand information on our overall performance.

Can you summarise the strategy of Deutsche Bank in the Middle East?

Internationally, we are a global investment bank with a strong retail presence in Germany, East Europe, and some other parts of the world. In the Middle East and North Africa we are a wholesale investment bank, not a retail bank. Our emphasis is on investment banking, across the full range of activities – corporate finance, mergers and acquisitions, IPOs, debt issuance, transaction banking, Islamic finance and global markets. We are also strong in asset management, and provide services to sovereign wealth funds, corporations and big family funds. We also have a flourishing private wealth management business in the region, and as more wealth filters down to people in the Gulf we stand ready to provide them with a sophisticated wealth management service.

What role does Islamic finance play in this overall strategy?

We are at the frontiers of Islamic finance, always introducing new structures and products to meet the needs of the sophisticated Shariah-compliant client base. Islamic finance is at the heart of our investment banking and global markets operation, not only out of our regional head office in Dubai but also from our branches and offices in London, Riyadh, Doha and elsewhere.

How important is the Gulf on the world economic scene?

I am sure you have heard the term Bric – the emerging economies of Brazil, Russia, India and China. I like to think of it as Brics, where the S stands for Saudi Arabia, including the rest of the Gulf. With a total GDP of around $800bn, the six Gulf countries have become a sizeable market for goods and services and are experiencing double-digit growth rates in nominal terms and at around an average of six per cent in real terms. They have a huge requirement for infrastructure finance over the coming few years, with the private sector itself implementing its strategy of growth and expansion.

While capital resources are available, what the region needs are financial institutions that can provide sophisticated structures and financing schemes. Both Abu Dhabi and Qatar require complicated project finance structures, and while the local banks can provide the much-needed commercial loans, the international investment banks could come up with financial structures, hedging techniques and international placements of equity and debt, including sukuks. Deutsche Bank has a presence in Egypt and Algeria, where we aim to expand our current offering to include corporate finance, global markets, asset management transaction banking, and private wealth management services.

What about the UAE, and Dubai in particular? What are the financial requirements?

Abu Dhabi and Dubai have varied financial requirements. Abu Dhabi, of course, is rich in oil and gas, and may have less requirements to raise equity capital than Dubai. But the two would require financial structuring, debt raising, hedging, project finance and asset management; services that are offered by international investment banks. Dubai was successful in attracting massive foreign investment and banks today stand ready to provide debt finance that companies and projects in the emirate require. The market is the best indicator of the viability of Dubai as an investment option, and international banks are standing in line to offer their services.

Deutsche Bank has a close relationship with the Dubai International Financial Exchange. Can you tell me about that?

Deutsche Bank was one of the first to come to the DIFC, and we are in full support of their vision and continue to play an active part in their success story. We were one of the earliest supporters of the DIFX and we stand ready to do all that is needed to make it a success. Our regional Middle East hub is in the DIFC, with more than 140 employees and growing. The DIFC has developed into a regional financial centre, and this is only the beginning. Deutsche Bank is well positioned to support future DIFC expansion and we see a promising future for the DIFX as the Region’s international exchange.

Do you think the DIFX has taken off?

Yes, with DP World as an anchor listing, trading volumes are picking up, we expect more companies from the region and around the world seeking primary or secondary listings here. The acquisition the DIFX did with the Nasdaq will add the necessary breadth and depth to the exchange. The listing of DP World has shown that the DIFX could be the market of choice to list for companies operating on the regional and international sphere. DP World was a successful flotation, many times oversubscribed, with the flotation price determined by the market through a book-building exercise. It’s worth pointing out that the flotation of DP World’s shares took place just at the time when the sub-prime market crisis was unfolding, at a time when speculation was rife regarding the possibility of a re-evaluation of regional currencies.

Will the global financial uncertainty affect the flow of investment into DIFX and other regional markets?

The UAE today attracts international portfolios seeking investments in a promising emerging market. However, the local stock markets have become less of a diversification play from what it used to be before. Therefore, if big global investors reduce their exposure to emerging markets because of the current problems then the region’s stock markets will be affected. It is all part of the process of the rebalancing of portfolios that is happening now, which gives more weight to cash and fixed income than it does to equities.

Where will the next round of flotations come from, in your opinion, from government privatisations or from the listing of family businesses?

I think there will be flotations from both. Increasingly, we expect to see more family businesses going public and government institutions being privatised through public flotation. These initial public offerings require the financial sophistication and placement power of an international investment bank, such as Deutsche Bank, to come up with the right market price, provide underwriting, placement and equity research. We bring credibility to the process and an acceptable counter-party risk for regional and international investors and portfolios. With more companies being listed on the DIFX or the DFM or the Tadawul, these exchanges will gain market depth and diversification, contributing to the financial development of the region.

by Frank Kane on Sunday,January 27,2008

Investment choices in 2008 a UAE perspective

2008-01-19T15:56:00.000-08:00

The potential for a global economic slowdown and US recession has left UAE investors facing tough choices over where to invest their money in 2008.

With the shockwaves of the sub-prime crisis still being felt in markets around the world, and the US economy expected to be weak through the first half of 2008 – and possibly for most of the year – investors would be forgiven for being somewhat defensive.

Those who have stakes in global markets must assess which regions will best insulate their investments from the fallout of a possible recession, and on a local level, decide if the construction and oil boom in the UAE still provide a safe haven against a global economic tumble.

Over the past year UAE-based investors have been exposed to an increasing number of attractive investment opportunities, including a host of initial public offerings, and Gulf markets, which have generated arguably the highest profitability rates of all emerging markets.

Investors are now faced with the challenge of picking sectors and stocks that are likely to perform well in the region, and at the same time side-stepping the effects of a tumbling dollar and a weak US economy.

EXISTING INVESTORS

The advise to those with existing global investments is to shift money to a place where the US economy cannot hurt your returns, and seriously consider emerging markets, especially the Middle East and Africa (MEA).

Corporate earnings in 2008 in the GCC are likely to be higher than that of MEA, with the aggregate profit for GCC establishments expected to grow by 12 per cent in 2008, up from five per cent in 2007.

Among the four largest GCC countries, Qatar is expected to maintain its attractiveness as the fastest growing country in the region in 2008, with an estimated earnings per share (EPS) growth of 29 per cent.

Aalaeddine Chahbi, a hedge fund manager for Evolvence Capital, said: “Globally there are only a couple of regions with growth rates of more than 15-20 per cent, and they are usually in the Middle East or Africa. For example, Angola has an expected GDP growth of around 25 per cent, which is outstanding by any standards historically.

“From a risk-management point of view, I would definitely avoid the US market, and all the markets that are correlated with it because whether the talk about a recession is justified or not, there is still the general feeling there, which is enough to cause a recession.

In Europe, earlier in the week, fears of a recession hit shares of companies such as metals producers, technology providers and construction firms. The losses offset strong gains for companies in sectors that are less attuned to economic cycles, including healthcare, utilities and telecommunications.

The expectations for 2008 “are too high in our view, and we advise to start the year with a defensive portfolio structure”, said Societe Generale’s European equity strategists.

They prefer consumer staples, including pharmaceutical and utility firms.

Investment veteran Jim Rogers pointed this week to agricultural commodities as a possible tool to immunise global investments against markets shifts. Rogers said the US economy is headed for its roughest recession in years, counselling investors to opt for commodities and to avoid a dollar he expects will be under pressure for “years to come”.

Commodities, a traditional inflation-sensitive investment, are a good play for 2008, and in the event of a global recession, agricultural commodities would be an outstanding defensive investment, he said.

Christopher Wyke, commodity product manager at Schroders, said strong demand for natural resources – particularly from developing economies – will remain a key support of rising energy, metals and agriculture prices in 2008.

“On the supply side, many inventories are at, or close to, record lows. Furthermore, the quantity of the world’s arable land continues to decline steadily due to issues such as desertification and urbanisation in developing countries.

“In sharp contrast to the turbulence witnessed in the equity and bond markets, many commodities performed strongly when the sub-prime mortgage market woes were at their peak during the summer,” Wyke added.

On a local level, investors in the UAE and other GCC states can take solace in reports that economies in the Middle East are set for sustained growth, and will outstrip other emerging markets in 2008.

A recent Goldman Sachs report said: “The GCC economy by 2050 could be comparable in size to Germany or Italy using relatively conservative assumptions. Under more aggressive assumptions of high population growth, better use of technology and improving education, the region’s economy could overtake that of the United Kingdom, and GDP could equal that of the G7 over the same period.”

Evolvence Capital’s Chahbi, however, issued a note of caution for those looking for gains in the UAE property market. “With local property you can’t be naive anymore; at one point of time all you had to do was buy any kind of property and the price would appreciate.

“Now you have to do your due diligence and consider prime locations in Dubai, which you know will appreciate for offer and demand reasons,” he said.

“In the UAE there will be a balance between offer and demand during 2008 and 2009, which will then turn in favour of demand – which means the prices are likely to go up again.

The message, therefore, is keep investing in local property but you should be more careful and selective and look at prime locations or particular properties such as commercial property in the DIFC or in growing cities such as Abu Dhabi.”

NEW INVESTORS

For those without current investments in the UAE or the wider GCC region, the challenge in 2008 will be whether to bet on one of the IPOs likely to be launched.

Countries such as Saudi Arabia have tight capital controls on its markets, limiting the reach of foreign investors, and therefore insulating the economy from a possible recession to some extent. IPOs in the UAE will be able to ward off side effects from foreign market turbulence since the majority of the seed money is from local sources.

“Markets in this region have low correlations with global markets and economies, so I don’t think this potential recession will impact equity and IPO markets here. Saudi Arabia has a capital control system in place, so if you want to purchase a pitch in Saudi you have to be a national, giving the market insulation – especially in the IPO market – from international investors,” said Chahbi.

“The UAE is less insulated. But for the types of markets that are more or less open, so far most of the IPO money is local. Most of the money going into the equity markets is from the GCC region. And they are offering less risk in this case,” he added.

Investors looking at global markets would be wise to be aware of Goldman Sachs recent move to change its rating and price targets on several US retailers. The recent weakening in the labour market and further slowing in consumption could send the US into a mild recession during mid-fiscal 2008.

The brokerage said a second half-margin recovery could be at risk if retailers do not plan inventory levels prudently enough.

“The department stores’ sales and margins get hit the hardest due to their highly discretionary sales mix and season-driven inventory positions, and apparel manufacturers are second in line,” said Goldman.

With consumer trends set to soften further, Goldman said it would continue to advise investors to maintain a defensive investing posture through the first half of fiscal 2008 at a minimum.

Meanwhile, property markets in Eastern Europe look like a safe bet and are seen as a chance to generate sturdy returns throughout the year.

Chahbi: “Markets such as Croatia and Bulgaria and countries on the Mediterranean will not necessarily be hit by what’s happening in the global economy in the real estate sector because of high local demand.”

Gold: the great insulator

Historically, gold has always been a good bet against inflation, or a hedge against inflation. So whenever you start to see inflation the hedging instrument is typically gold. People start buying gold because they no longer trust their currency and, therefore, the price of gold appreciates. Gold will not only be somewhat immune to a recession but it will also profit from it because it has a hedge value – all the more if the dollar keeps depreciating.

This is evidenced in recent news that gold futures rose above $900 an ounce for the first time. High oil prices, a weak dollar and fears of a US recession led uneasy investors to keep buying the metal.

An ounce of gold for February delivery on the New York Mercantile Exchange jumped $6.50 to $900.1 in early trading, an all-time high and a psychologically important milestone. Gold later slipped to $898.70 an ounce but remained in record territory.

“It’s a reflection of market sentiment: gold is a hedge against uncertainty and right now it’s the best bet,” said Carlos Sanchez, a precious metals analyst at CPM Group in New York. “None of the other investment options look that great and gold does.”

Western pension funds eye Mena equity

2008-01-19T15:48:00.000-08:00

Western pension funds eye Mena equity

Private equity funds based in the Middle East and North Africa (Mena) region will be the next target for Western pension funds and endowments, top industry executives have said.
"The Mena region is becoming the fourth centre [after the US, Europe and Asia] of global private equity investing globally out of the region, and attracting global funds to invest locally," said Dr Karim El Sohl, chief executive officer of Gulf Capital, a UAE-based investment firm.
Speaking to Emirates Business on the sidelines of the Meed Private Equity Conference in Dubai yesterday, Dr El Sohl said the average fund size in the region had witnessed a huge leap in the last four years.

"Larger private equity funds have been set up from the region and for the region, targeting larger transactions. Last year saw the launch of a fund in excess of $1bn and the closing of a $1bn transaction," said Michael Lee, CEO of Bahrain-based Ithmar Bank.
The Carlyle Group said last year it plans to invest around $1bn in the Mena region in the next three to five years. Deutsche Bank partnered with Abraaj Capital for its $1.4bn 'Infrastructure and Growth Capital Fund' for providing acquisition finance launched in 2006.

The fund will have a holding period of 10 years. Intel Capital raised $50m for its Middle East and Turkey Fund in 2005. The UK's 3i set up a partnership with Dubai-based Ithmar Capital for its Fund II portfolio launched in 2005. "The growing size of funds and transaction deals over the last five years means private equity in the region has become an established asset class," Dr El Sohl said.

"Funds from the region are now well and truly plugged into the global network and there's increased sophistication from regional players who are attracting global funds for regional investment," said Faisal Belhoul, Founder and Managing Partner of Dubai-based Ithmar Capital, which will launch its $1bn Fund III portfolio in the fourth quarter of this year.

Funds in the GCC region can deliver a IRR, or internal rate of return - the interest rate at which a certain amount of capital today would have to be invested in order to grow to a specific value at a time in the future - of 30 to 40 per cent to investors, which makes it significantly better than investment vehicles investing in some other regions, according to Dr El Sohl. Belhoul agreed that with current dynamics as strong as they are, funds can look to achieve an IRR of 30 to 40 per cent.

According to Zawya.com and Gulf Capital data, control buy-outs accounted for 43 per cent private equity deals in the Mena region last year, followed by strategic minority stake acquisition (26 per cent) and minority financial investment, which accounted for 17 per cent of total private equity investments in the Mena region last year. Private equity returns from the Mena are expected to outperform global returns this year, executives said.

According to a survey by the Emerging Markets Private Equity Association last year, the average net IRR for private equity commitments in the Middle East stood at 22.8 per cent. The average IRR for commitments in the US was 17.2 per cent and 23.1 per cent in Asia.

by Nitin Nambiar on Wednesday,January 16,2008

Gulf Capital to list shares on ADSM in 2009

2008-01-01T10:43:00.000-08:00

Abu Dhabi: Regional private equity firm Gulf Capital plans to list its shares on the Abu Dhabi Securities Market (ADSM) by the middle of 2009, its chief executive officer said on Monday.

"It's mandatory for a private joint stock company to have an average 10 per cent return on equity in the first two years of operations preceding an initial public offering," Karim Al Solh told Gulf News.

Immediate measures

"We will have to meet this ADSM requirement before we file our prospectus for listing. We should be able to meet the requirement before the middle of 2009," Al Solh said.

The source of Gulf Capital's funding is from pension funds, banks, insurance companies, family businesses and from an array of leading businessmen across the Gulf region.

Oil and gas, water, construction, telecommunications, education, financial services, logistics and healthcare are among the areas the company has identified for investment for its business growth. Abu Dhabi-based Gulf Capital's current assets include a controlling 60 per cent stake in Sharjah-based Metito, a water desalination and water treatment company. Metito has operations in 20 countries.

Gulf Capital was established in May 2006 with a capital base of Dh1.225 million from 300 shareholders in the Gulf.

By Himendra Mohan Kumar, Staff Reporter
Published: January 01, 2008, 00:37

Petrodollars Create the New Financial Power Brokers in the World

2007-12-23T08:13:00.000-08:00

The Dec 2007 article by McKinsey outlines the world's new financial power brokers. In summary

The new financial power brokers are oil-rich countries, Asian Central banks, hedge funds and Private Equity firms. Their assets have tripled since 2000. Even though it constitutes only 5% of the total global assets, their rise over the last 5 years has been astounding.

The 4 entities (oil-rich countries, Asian Central banks, hedge funds and Private Equity firms – in that order) have helped lower the cost of capital for borrowers around the world. In the United States, it is estimated that long-term interest rates are as much as 0.75 of a percentage point lower thanks to purchases of US fixed-income securities by Asian central banks and petrodollar investors—$435 billion of net purchases in 2006 alone.

At the end of 2006, the oil exporters collectively owned $3.4 trillion to $3.8 trillion in foreign financial assets. Second in size to petrodollars are the reserves of Asia's central banks. In 2006, Asia's central banks held $3.1 trillion in foreign-reserve assets, 64 percent of the global total and nearly three times the amount they held in 2000. China alone had amassed around $1.4 trillion in reserves by mid-2007.

Hedge funds have added to global liquidity through high trading turnovers and investments in credit derivatives, which allow banks to shift credit risk off their balance sheets and to originate more loans. Private-equity firms are having a disproportionate impact on corporate governance through leverage-fueled takeovers and subsequent restructurings.

Net/net - Regardless of whether interest rates rise or oil prices drop, the four new power brokers will continue to grow and shape the future development of capital markets. In particular pay close attention to the Middle East. The Gulf Cooperation Council (GCC) states—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)—are the largest oil exporters. Recently, an Abu Dhabi based fund bought 5% stake in Citigroup. Dubai has reinvented itself as a financial powerhouse not just dependent on oil. Since the Gulf is situated between Asia and Europe, it is becoming a hub for travel and logistics.

Taking this to the next level, I predict that the Gulf would be a major source of opportunity for software vendors - since development in economic areas would necessitate software automation and streamlining of processes. The other 2 areas for software vendors are India and China - due to the sustained high rate of growth. from Sunny Kumar

I would add to this from the Life Science and Healthcare perspective as well as the continued growth in infrastructure and facilities investments is also creating a global hub for these activities.

See some interesting videos about Dubai
CBS 60 minutes - Part 1 (the cheapest room at the Burj-al-Arab hotel is $2000 a night)
http://www.cbsnews.com/sections/i_video/main500251.shtml?id=3366044n

CBS 60 minutes - Part 2
http://www.cbsnews.com/sections/i_video/main500251.shtml?id=3366046n

A nice report by Richard Edelman - CEO of Edelman PR firm
http://www.edelman.com/speak_up/blog/archives/2007/09/dubai_image_and.html

from Sunny Kumar

Are All Sovereign Investors Becoming More Activist?

2007-12-20T08:47:00.000-08:00

Are All Sovereign Investors Becoming More Activist?

Morgan Stanley announced a $5 billion investment from the Chinese Investment Corporation (CIC) which will convert to a 9.9% share in the company. This is now the third purchase by a relatively large sovereign wealth fund in a major US or EU financial institution in the last month or so.

Last week, Singapore's GIC and an undisclosed middle eastern investor invested in UBS helping take its Tier 1 capital ratio to 12%. Two weeks before that Abu Dhabi Investment Authority (ADIA) paid $7.5 billion for a stake in Citi. Other smaller investors such as Qatar and Dubai's Istithmar suggests that this is an ideal time for investment in western financial institutions.

In a time when the heady dealmaking of only half a year ago has slown, the purchases by these sovereign funds have stood out. However, the increasing willingness to make and announce these strategic stakes has reached a new level. and clearly these funds are big enough to move markets...

It seems a simple story– banks needing to shore up troubled balance sheets meet cash-rich sovereign investor seeking higher returns/distressed assets. In fact their cash holdings helped make them attractive capital sources. Morgan Stanley data had already suggested that in 2007, SWFs bought $46 billion in western financial institutions – and Chinese banks another $8 billion.

These financial sector recipients have an interest in disclosing the funding. They lock in long-term investors for a considerable period rather than a series of smaller, potentially shorter term ones to shore up capital base amid write downs – in an attempt to persuade investors of their solvency. In a sense they are borrowing both the capital and the reputation of these long-standing long-term investors. But is their strategy shifting?

Wessel noted last week in the WSJ:

The best, oldest SWFs are at least as shrewd as Citigroup, UBS and Merrill Lynch, and that is scary enough. The new ones, swollen with oil revenues or proceeds of currency-market dealings, are like teenagers with more inherited wealth than they can handle.

the most challenging thing is what we don't know about these funds. We don't yet know the effect of sovereign funds being a key capital source and what strings are attached. of course many sovereign funds were already large contributors to funds - and certain asset classes. But surely the nature of the investors affects the intermediary role of their targets.

Such deals do build on pre-existing relationships. In many cases these asset managers had already been involved in managing some of the funds, so it is natural who to turn to in a time of need. But there are challenges. These funds are not transparent. ADIA may be a long-standing investor about whom we know almost nothing. Will the availability of such funds that do not demand a board stake affect corporate governance? Influence is possible without management stakes.

What is somewhat surprising for me was the relatively significant stake size - about 9% for GIC's stake in UBS and just under 5% for ADIA's citi stake. Surprising because these two funds have tended to take only small stakes and to avoid disclosure.

When I tried to categorize the sovereign investment universe sometime ago, both GIC and ADIA seemed fit in a more conservative sovereign wealth fund category, in contrast to the more strategic, activist new investment vehicles in the gulf which modeled themselves on private equity firms.

perhaps with the number of splashy deals these more reticent-to-disclose investors are more willing to make their holdings public and seek higher returns like their counterparts are doing. but does it mean the line between the likes of Temasek and GIC is blurring?

Even ADIA may be becoming more activist. In addition to the Citi stake, ADIA has made a few other larger purchases, stakes in Apollo, EFG-Hermes among others. None are management/controlling roles. It also made its first significant London purchase in decades. Perhaps it is taking somewhat larger stakes, perhaps it is also more willing to disclose the stakes it has.

yet, ADIA's investments remain different from those of more active investment vehicles in the gulf but because of its size (arounf $650?) any move is significant.

But what about China? Where does it fit in?

CIC's strategy is an unknown quantity. Lou Jiwei, its main manager has stressed that the CIC will be a stabilizing investor and noted the role of SWFs in supporting financial institutions. So perhaps today’s news about the stake in Morgan Stanley should not come as a surprise. But Keith Bradsher suggests that the decision to invest in Morgan Stanley came from the highest levels of Chinese government– perhaps reminiscent of the Blackstone deal which happened before CIC was officially launched. Quick, nimble decision making is thought to have characterized the but given the lack of transparency and political oversight, it may become clearer where the buck stops on China’s investment.

CIC's ultimate goal may be to be a coordinating body for Chinese foreign investment. 2/3 of CIC’s initial $200 billion are spoken for - 1/3 accounted for central Huijin - its stakes in state banks another 1/3 will recapitalize policy banks. And CIC is seeking bids to manage part of the remaining $60 or so billion from asset managers. Overall, given its stakes in the banks and other holdings, CIC has a considerable financial sector weighting. So far not very diversified?

the CIC is clearly under pressure not to invest in a loss-making investment and to make enough money to cover its financing costs. Especially as more funds may be sent its way as China seeks to farm out its dollars to a variety of institutions (state banks are now holding more reserves in dollars) rather than just the central bank. And equity investment outflows are still in early stages.

In the case of both China and Abu Dhabi, investment in US financial institutions may reflect a shift between dollar assets. Both tend to have significant dollar holdings, especially on a flow basis, though China has much more than Abu Dhabi. In China’s case, they might prefer to own part of a US investment bank rather than US treasuries, especially if there are potential for spinoffs. After all, overall the chinese government and most gulf states have to collectively buy a lot of dollars or watch their currencies appreciate.

Several funds are or may support the outward investment of national companies or strategically investing in sectors in which they might hope either to gain technology transfer or synergies with SOEs and financial institutions. several questions emerge - how effective are governments at picking winners? there is also a risk that the sovereign investors might be expected to bear the greater risk of such investment and if so. what will be the implications of their broader strategy? and this might increase asset protectionism.

Some Chinese officials have suggested it support external purchases of Chinese funds. It was recently suggested that CIC along with several Chinese companies might bid for Rio Tinto, though this was denied.

Libya's fund suggested that it plans to invest in foreign (US) companies that were best placed to help Libya develop and diversify its economy. Little information is available but some form of joint venture is not impossible. Whilst in Paris, Qaddafi suggested investment of as much as $100b abroad.

Brazil's foreign ministry has touted a fund that would support Brazilian investments abroad – and reduce further reserve accumulation and possibly reduce. But the institutional structure is uncertain – current plans include using a national development fund. and the central bank has opposed using reserves.

Many GCC funds are investing abroad in sectors of strength or future development for their states. These joint ventures include aluminum, manufacturing, consumer goods of interest in the gulf. Watch this space for a closer look.

Finally - While these strategic stakes are considerable and have significant political and regulatory implications… including the impact of sovereign funds as the new go-to capital source, the imbalances are so significant that these strategic stakes show only part of the story. Because of exchange rate policies – ie a reluctance to allow currencies to appreciate against a falling dollar, many countries are scaling up central bank intervention to neutralize speculative inflows – adding to their reserves. As such they are adding to their conservative - primarily dollar - assets. In a paper released yesterday, Brad Setser and I argue that on the whole, currency diversification by the GCC investment funds this year has been offset by – largely dollar – reserve accumulation. A trend that will likely remain unless official and de facto dollar peggers allow more appreciation and slow their dollar purchases.

Rachel Ziemba | Dec 19, 2007

Emirates Aluminium closes a $4.9bn record financing deal

2007-12-16T14:40:00.000-08:00

Emirates Aluminium closes a $4.9bn record financing deal
Emirates Aluminum Company (EMAL), the joint venture equally owned by Mubadala Development Company (Mubadala) and Dubai Aluminum, announced today that it has closed its $4.9bn limited recourse bank financing.

EMAL received over $15bn of commitments for the facilities, which consist of a $1.8bn, sixteen year term loan, a $270m letter of credit facility and a $2.8bn six year equity bridge loan. Further financing for EMAL of up to $2bn is expected to be launched into the credit markets during the construction of the smelter, bringing the total financing to almost $7bn.

This is the largest single commercial financing, to date, for any project in the Arabian Gulf. EMAL was advised in relation to the funding by Citigroup and Sullivan and Cromwell LLP.

The investment is being arranged by a syndicate of international and regional banks led by Abu Dhabi Commercial Bank, BNP Paribas, Calyon, Royal Bank of Scotland, Standard Chartered, Sumitomo Mitsui Banking Corporation, Citigroup, Emirates Bank International, Export Development Canada, Export Finance and Insurance Corporation, Goldman Sachs Credit Partners, Mashreqbank and National Bank of Abu Dhabi.

'The aluminum smelter project is a cornerstone of the enhanced industrial sector that is planned to help pursue Abu Dhabi's vision for a diverse and sustainable economy,'

said HE Khaldoon Khalifa Al Mubarak, CEO and Managing Director, Mubadala and Chairman of the Board of EMAL.

'This financing demonstrates the strength of the project and its sponsors. It is important to hold the confidence and optimism of the lending community in respect to the future of development of Abu Dhabi'.

Abdulla J M Kalban, Chief Executive Officer of DUBAL and Vice Chairman of EMAL, echoes these sentiments, saying that both DUBAL and Mubadala have solid track records with regard to devising and implementing successful projects in the past, that have more than delivered on their promises.

'This engenders confidence among investors,' says Kalban. 'The excellent growth potential for the aluminum industry in the region boosts the overall confidence of the marketplace even further.'

The financing is for the first phase of EMAL's planned development of constructing a 700,000 tonnes per year aluminum smelter at the Khalifa Port and Industrial Zone in Abu Dhabi. Upon completion of the additional pot lines intended in the second phase, EMAL will be the largest single site aluminum smelter in the world with total annual production capacity of 1,400,000 tonnes of aluminum.

EMAL commenced site works on the first phase of the smelter at Al Taweelah in Abu Dhabi earlier this year. The smelter project represents Abu Dhabi's entry into the aluminium industry as it joins the ranks of major regional and international producers. The smelter is scheduled to commence production in 2010.

Commenting on the financial close, EMAL's CEO, Duncan Hedditch, said: 'Our finance team has achieved an outstanding and historic result which reflects, I believe, the very strong fundamentals of our project.'

General Manager Project Finance, Fahad Saeed Al Raqbani, commented: 'The results achieved in no small way reflect the efforts of our advisors Citigroup and Sullivan and Cromwell, who have met the challenge of what was a tight timetable for a financing of this scale. We are very pleased with the overall result.'

http://www.ameinfo.com/142067.html

Shuaa Partners closes 'Frontier Opportunities Fund I, L.P.'

2007-12-08T17:10:00.000-08:00

Shuaa Partners Ltd, the private equity arm of Shuaa Capital psc, today announced the close of its 'Frontier Opportunities Fund I, L.P.' (the 'Fund') with total commitments of $100m.

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The objective of the Fund is to provide its limited partners with long-term capital appreciation through select equity investments in both existing and start-up businesses in the Levant region.

The Fund will have a four-year investment horizon and its focus will be on Syria, but it will also consider investments in Lebanon and Jordan. The fund will target both existing and new opportunities in the telecommunications, financial services, real estate and hospitality sectors, but will also consider investing in other sectors on an opportunistic basis.

'With recent economic growth picking up, clear liberalization trend, a young and growing population, and under-investment for the past three decades, Syria represents an early investment opportunity. Over the last few years, Syria has attracted significant foreign investment commitments from neighboring and GCC countries. Several large projects have been announced in industries ranging from building materials, to oil refineries, real estate and financial institutions. Syria has demonstrated its progress in its ability to encourage the capital inflows, and our investors wanted to allocate a small part of their portfolios to have an exposure at what could potentially prove to be a very high growth market,'

said Mr. Iyad Duwaji, Chief Executive Officer of Shuaa Capital and Chairman and founder of Shuaa Partners.

'This is a unique opportunity and the first ever such product that allows its investors a professionally managed exposure to a country that has not yet been targeted by a wide range of investors before. We are well positioned to attract and execute transactions in Syria given our first-hand knowledge of the country and our first-mover advantage,' added Mr. Duwaji.

The Fund has already deployed capital by investing in Syriatel the leading GSM operator in Syria with over 55% market share, 2.8 million customers, and a low penetration rate by regional standards. It is also understood that the Fund is considering partnering with UAE companies to set up in Syria.

Shuaa Partners is regulated by the Dubai Financial Services Authority ('DFSA') and is incorporated in the Dubai International Financial Centre ('DIFC') as Shuaa Partners Ltd.

http://www.ameinfo.com/141029.html

Large forces in the global capital markets

2007-12-06T17:33:00.000-08:00

Four rising players will continue to grow in wealth and importance, even if interest rates rise and oil prices drop.

December 2007

One glance at the distribution of wealth around the world and the shift is obvious: financial power, so long concentrated in the developed economies, is dispersing. Oil-rich countries and Asian central banks are now among the world’s largest sources of capital. What’s more, the influx of liquidity these players have brought is enabling hedge funds and private-equity firms to soar in the pecking order of financial intermediation.

New research from the McKinsey Global Institute shows that the assets of these four groups of investors—the new power brokers—have nearly tripled since 2000, reaching roughly $8.5 trillion at the end of 2006 (Exhibit 1).1 This sum is equivalent to about 5 percent of total global financial assets ($167 trillion) at the end of 2006, an impressive number for players that lay on the fringes of global financial markets just five years ago.

The impact and visibility of this quartet exceed its relative size, despite the discreet way its members operate. Among other things, they have helped lower the cost of capital for borrowers around the world. In the United States, we estimate, long-term interest rates are as much as 0.75 of a percentage point lower thanks to purchases of US fixed-income securities by Asian central banks and petrodollar investors—$435 billion of net purchases in 2006 alone. Meanwhile, investors from the Middle East, pursuing returns they believe will exceed those generated by fixed-income instruments or equities in developed economies, are fueling investment in Asia and other emerging markets. Hedge funds have added to global liquidity through high trading turnovers and investments in credit derivatives, which allow banks to shift credit risk off their balance sheets and to originate more loans. Private-equity firms are having a disproportionate impact on corporate governance through leverage-fueled takeovers and subsequent restructurings.

And over the next five years, the size and impact of the four new power brokers will continue to expand.2
Oil rises to the top

In 2006 oil-exporting countries became the world’s largest source of global capital flows, surpassing Asia for the first time since the 1970s (Exhibit 2). These investors—from Indonesia, the Middle East, Nigeria, Norway, Russia, and Venezuela—include sovereign wealth funds, government-investment companies, state-owned enterprises, and wealthy individuals.

This flood of petrodollars comes from the tripling of world oil prices since 2002 and the steady growth in exports of crude oil, particularly to emerging markets. A large part of the higher prices paid by consumers ends up in the investment funds and private portfolios of investors in oil-exporting countries. They then invest most of it in global financial markets, adding liquidity that helps to explain what US Federal Reserve Board of Governors chairman Ben Bernanke described as a "global savings glut" that has kept interest rates down over the past few years. In 2006 alone, we estimate at least $200 billion of petrodollars went to global equity markets, more than $100 billion to global fixed-income markets, and perhaps $40 billion to global hedge funds, private-equity firms, and other alternative investments. This capital is invested chiefly in Europe and the United States, but regions such as Asia, the Middle East, and other emerging markets are also significant beneficiaries.

Although the added liquidity from petrodollars has helped buttress global financial markets, it may also be creating inflationary pressure in illiquid markets, such as those for real estate and art. The unanswered question is whether the world economy will continue to accommodate higher oil prices without a notable rise in inflation or an economic slowdown.
Where the wealth is . . .
The Gulf Cooperation Council (GCC) states—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)—are the largest oil exporters. Together, we estimate, they had foreign assets of $1.6 trillion to $2 trillion by the end of 2006 (Exhibit 3). Other states in the region, including Algeria, Iran, Libya, Syria, and Yemen, held an estimated $330 billion; the other oil exporters combined, about $1.5 billion. At the end of 2006, the oil exporters collectively owned $3.4 trillion to $3.8 trillion in foreign financial assets.

Much attention around the world has recently been devoted to the oil exporters’ sovereign wealth funds, which are indeed large. By some estimates, the Abu Dhabi Investment Authority (ADIA) holds nearly $875 billion in foreign assets, Norway’s Government Pension Fund $300 billion, Russia’s Oil Stabilization Fund $100 billion, and the Kuwait Investment Authority $200 billion. But oil investors as a whole are a more diverse group, with hundreds of individual players. We calculate that private individuals who actively invest in global financial markets hold at least 40 percent of the foreign wealth purchased with petrodollars. Also important are the oil-exporting states’ central banks (such as the Saudi Arabian Monetary Agency) and private-equity-like funds, including Dubai International Capital.
. . . and where it’s going

Compared with traditional players such as pension funds and mutual funds, the assets of petrodollar investors are relatively modest. Still, they have been growing at an impressive rate of 19 percent a year since 2000 and will continue to increase their impact on world financial markets because of escalating energy demand from China, India, and other emerging markets. Even in a base case with oil prices reverting to $50 a barrel,4 the oil-exporting countries would have net capital outflows5 of $387 billion a year through 2012—an infusion of more than $1 billion a day of capital into global financial markets. Over the next five years, we estimate, this flow would generate investments of $1.4 trillion in equities, $800 billion in fixed-income securities, and $300 billion for private-equity firms, hedge funds, and real estate. The oil exporters’ total foreign assets would grow to at least $5.9 trillion in 2012.

If oil prices remained at $70 a barrel until 2012—and they neared $100 in November 2007 as this article went to press—foreign assets purchased with petrodollars would grow to $6.9 trillion by then. This figure implies an inflow of almost $2 billion a day into global financial markets. Even if oil prices declined to $30 a barrel, foreign assets purchased with petrodollars would grow robustly (Exhibit 4). This enormous pool will continue to provide liquidity for capital markets but may also cut investment returns and create inflationary pressures in areas such as real estate.
Reserves: Asia’s opportunity cost

Second in size to petrodollars are the reserves of Asia’s central banks—reserves that have grown rapidly as a result of rising trade surpluses, foreign-investment inflows, and exchange rate policies. In 2006, Asia’s central banks held $3.1 trillion in foreign-reserve assets, 64 percent of the global total and nearly three times the amount they held in 2000. Compared with petrodollars, these assets are concentrated in just a handful of institutions. China alone had amassed around $1.4 trillion in reserves by mid-2007.
Unlike investors with petrodollars, Asia’s central banks have channeled their funds into conservative investments, such as US treasury bills. We estimate that by the end of 2006, these institutions had $1.9 trillion more in foreign reserves than they needed for exchange rate and monetary stability.6 Because they could have invested that sum in higher-yielding opportunities, the forgone returns represent a significant opportunity cost (Exhibit 5). On the relatively conservative assumption that alternative investments in a higher-yielding capital market portfolio might yield 5 percent more than US Treasury bills, that cost for Asia’s major economies, in 2006 alone, was almost $100 billion—1.1 percent of their total GDP.
What to do with growing reserves?

As trade surpluses accumulate, the opportunity cost of Asia’s reserves will become even greater. If recent growth continues, they will reach $7.3 trillion in 2012. Even if China’s current-account surplus declined dramatically over the next five years and Japan’s remained the same, Asia’s reserve assets would grow to $5.1 trillion by 2012 (Exhibit 6).

n a quest for higher returns, some Asian governments have begun to diversify their assets by channeling some of their reserves to sovereign wealth funds similar to those of oil-exporting nations. The Government of Singapore Investment Corporation (GIC), established in 1981, now has an estimated $150 billion to $200 billion in assets and according to public statements has plans to increase them to $300 billion. Korea Investment Corporation (KIC) has $20 billion in assets, the new China Investment Corporation (CIC) $200 billion. The assets of Asia’s sovereign wealth funds could collectively reach $700 billion in the next few years, with the potential for even more growth.

Such a shift will benefit Asian nations through higher investment returns and spread the "Asian liquidity bonus" beyond the US fixed-income market. Given the large and rapidly growing amounts of reserves used to purchase assets, however, US interest rates won’t necessarily rise as a result. Over time, a greater share of the investments made by the sovereign wealth funds may stay within Asia, spurring the development of its financial markets.
Beneficiaries of liquidity

Hedge funds and private-equity funds are among the beneficiaries of the added liquidity that Asian and oil-rich countries bring to global markets. Assets under management in hedge funds totaled $1.7 trillion by the middle of 2007. But after taking into account leverage, we estimate that their gross investment assets could amount to as much as $6 trillion, more than the foreign assets of investors from oil-producing countries or Asia’s central banks.8

Although the failure of several multibillion-dollar hedge funds in mid-2007 may slow the sector’s growth, investors usually look to the long term; it would take several years of low returns before these vehicles lost their appeal. What’s more, oil investors are big clients of hedge funds and private-equity funds, with around $350 billion committed today, and high oil prices could more than double that sum over the next five years. Even if the growth of the hedge funds’ assets were to slow significantly—say, to 5 percent a year—by 2012 they could still reach $3.5 trillion (Exhibit 7). Taking into account leverage, hedge funds would then have gross investments of $9 trillion to $12 trillion, about a third of the assets that mutual funds around the world will have in that year.
Hedge funds as financial engines

Thanks to the size and active-trading styles of hedge funds, they play an increasingly significant role in global financial markets: in 2006 they accounted for 30 to 60 percent of trading volumes in the US and UK equity and debt markets, and in some higher-risk asset classes, such as derivatives and distressed debt, they are the largest type of player (Exhibit 8). Although petrodollar investors and Asia’s central banks add liquidity by bringing in new capital, hedge funds do so by trading actively and playing a large role in credit derivative markets. In this way, they increase the number of financing options available to borrowers (including private-equity firms) that might have found it hard to attract financing in the past, and their active trading improves the pricing efficiency of financial markets.

How risky?

Worries persist that the hedge funds’ growing size and heavy borrowing could destabilize financial markets. But our research finds that over the past ten years several developments have reduced—though certainly not eliminated—the risk of a broader crisis if one or more funds collapsed.

For one thing, their investment strategies are becoming more diverse (Exhibit 9). Ten years ago more than 60 percent of their assets were invested in directional bets on macroeconomic indicators. That share has shrunk to just 15 percent today. Arbitrage and other market-neutral strategies have become more common, thereby reducing herd behavior—one reason most hedge funds withstood the US subprime turmoil in 2007. Several large quantitative-equity arbitrage funds simultaneously suffered large losses, indicating that their trading models were more similar than previously thought. But, overall, the sector emerged relatively unscathed.

In addition, banks now manage risk more capably; the largest appear to have enough equity and collateral to cover losses from their hedge fund investments. Our analysis indicates that the top ten banks’ total exposure to credit and derivatives risk from hedge funds is 2.4 times equity—a relatively high capital adequacy ratio of 42 percent.
Private equity: small but powerful

Private equity has gained prominence less because of its size than its impact on corporate governance. Although assets under management rose 2.5 times, to $710 billion, from 2000 to 2006, the private-equity industry is roughly half the size of the hedge funds, smaller than the largest petrodollar fund (the ADIA), and growing more slowly than either.

Even so, thanks to typical investment horizons of four to five years, concentrated ownership positions, and seats on the board of directors, private-equity funds can embark upon longer-term, and therefore potentially more effective, corporate-restructuring efforts. Not all private-equity firms live up to that billing, however. Our research shows that only the top-performing ones sustainably improve the operations of the companies in their portfolios and generate high returns.

The growing size of individual firms—and "club deals" combining the muscle of several firms or investors—have enabled them to buy ever-larger companies. Private-equity investors accounted for one-third of all US mergers and acquisitions in 2006 and for nearly 20 percent in Europe (Exhibit 10). This wave of buyouts has prompted CEOs and boards at some companies to find new ways of strengthening their performance.
Size limits risk

Private-equity firms may also amplify the risks in financial markets—particularly credit risk—because they like to finance takeovers with leveraged loans and use their growing clout to extract looser lending covenants and better terms from banks. The credit market correction of mid-2007, however, jeopardized the financing for many private-equity deals.

Even if private-equity defaults rose sharply, they would not be likely to have broader implications for financial markets. In 2006 private-equity firms accounted for just 11 percent of overall corporate borrowing in Europe and the United States. If their default rates rose to 15 percent of all deals—the previous high was 10 percent—the implied losses would equal only 3 and 7 percent, respectively, of 2006 syndicated-lending issuance in Europe and the United States (Exhibit 11).
Growth signals a structural shift

Despite the difficult experience of some recent buyout deals, we believe that global private-equity assets under management will double to $1.4 trillion by 2012. Our projection assumes that fund-raising remains at its 2006 level in Europe and the United States and grows at half its previous rate in Asia and the rest of the world. If current growth rates in fund-raising continued, private-equity assets would reach $2.6 trillion in 2012 (Exhibit 12).

Either way, that kind of growth represents a fundamental shift in the development of financial markets. For the past 25 years, financial intermediation in mature economies has migrated steadily from bank lending to the public-equity and debt markets. The rise of private equity and the private pools of capital in sovereign wealth funds herald the resurgence of private forms of financing.
The road ahead

Regardless of whether interest rates rise or oil prices drop, the four new power brokers will continue to grow and shape the future development of capital markets. To ease the transition to the coming financial order, the players can take some useful steps.

Because capital markets function on the free flow of information, sovereign wealth funds and other types of government-investment units9 in Asia and in oil-exporting nations should consider disclosing more information about their investment strategies, target portfolio allocations, internal risk-management procedures, and governance structures. (Norway’s Government Pension Fund is a model in this respect.) Funds can allay concerns that politics will play a role in their decisions—and reduce the likelihood that regulators will act too aggressively—by publicly stating their investment goals.

Policy makers in Europe and the United States should base any regulatory response to the activities of the new power brokers on an objective appraisal of the facts. In particular, they ought to distinguish between direct foreign acquisitions of companies and passive investments by diversified players in financial markets.

Banks must protect themselves against the risks posed by hedge funds and private-equity funds. In particular, they need tools and incentives to measure and monitor their exposure accurately and to maintain enough capital and collateral to cover these risks. Currently, it is difficult to assess the dangers stemming from illiquid collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs). Ratings agencies and investors alike must raise their risk-assessment game.
With the growth of credit derivatives and collateralized debt obligations, banks have in many cases removed themselves from the consequences of poorly underwritten lending. As institutions originate more and more loans without putting their own capital at risk for the long-term performance of those loans, regulators should find ways to check a decline in standards. Concerns about the rise of the four power brokers are rational. But we find cause for qualified optimism that the benefits of liquidity, innovation, and diversification they bring will outweigh the risks.

Diana Farrell and Susan Lund

http://thinkingmoose.blogspot.com/2007/12/large-forces-in-global-capital-markets.html

A major new private investment firm has been formed in Dubai, the official WAM news agency reported yesterday.

2007-12-05T11:17:00.000-08:00

Dubai Infinity Holdings was set up by a group of prominent local investors and will focus on information technology, education, healthcare, lifestyle, real-estate and entertainment sectors in the region.

Dubai is busy expanding its portfolio of foreign assets.

Government-controlled or backed firms and investment funds have chased strategic targets such as European aerospace giant EADS in which Dubai International Capital bought a 3.12 per cent stake.

Another target was the upscale Barneys New York retail chain, which Dubai investment company Istithmar wrested from a rival Japanese bidder.

PE funds tap into new group of Asian investors

2007-11-29T09:02:00.000-08:00

India-focused private equity (PE) funds have historically sourced money from so-called limited partners, or LPs, (institutions and individuals who invest in such funds) in the US and Europe.
But, the singular dependence on these markets may now be on the wane, albeit slowly, as Asian LPs begin to make inroads into the Indian PE market.
PE investors say that the interest from LPs in the region has consistently grown during the last two-three years. Some of these institutions have deployed money as part of global or pan-Asia funds, with a mandate to also invest in India. Some have invested directly in India-specific funds.
For instance, Asian LPs composed 70% of IDFC Private Equity Co. Ltd’s second fund, which raised $440 million (about Rs1,747 crore); the firm is a subsidiary of Infrastructure Development Finance Co. Other instances include Beacon India Advisors Pvt. Ltd (sponsored by Dubai-based Baer Capital Partners), Helion Venture Partners and Baring Private Equity Partners (I) Pvt. Ltd.
According to industry estimates, Asian LPs account for upwards of 10% of the PE money currently raised or allocated to India. In 2006, the total PE money raised for India was $2.88 billion, according to the Emerging Markets Private Equity Association (Empea). For 2007, the estimate is $663 million through June; this not factoring in the surge of billion-dollar and half-billion-dollar funds announced later in the year. There is no publicly available data on the region-wise sources of LP money flowing into India, and consultants to LPs such as US-based Cambridge Associates Llc. do not release their data.The Asian LPs most often named by PE investors include Abu Dhabi Investment Co., Asian Development Bank, Dubai International Capital Llc. and Government of Singapore Investment Corp. But LPs scoping out India run across the region.
As Asian LPs expand their footprint in India, fund managers have an opportunity to diversify their investor portfolio and protect themselves from the ripple effects of foreign economic slumps. Fund managers felt the need for a diversified investor base acutely after the US Internet bust that started in 2001 and led to a three-year slump in investing activity. With more than 90% of India’s PE money inflows dependent on the US at the time, fund managers often found themselves unable to close deals because the money committed by their US LPs never came through.
Deepak Shahdadpuri, founder and managing director at Beacon, says there should be a mix of investors—endowments, fund-of-funds, family offices, corporates, etc.—and geographical diversity so that there is a mix of LPs from across the US, Europe, Asia and Western Asia. “The ideal mix and geographical diversity depends on each fund,” he says. “At Beacon, we are looking at 40% from Europe, 40% from West Asia and 20% from the rest of the world.” The factors that pull any LP to India have been simple and universal: a chance for returns upward of 30%. But the difference in Asia is that, besides the most prominent investors mentioned, its LPs have been late to recognize or prioritize the India story. Their interest in India is picking up now as this market has shown profitable exits. “All along it was a notional mark to market,” says Luis Miranda, president and CEO of IDFC Private Equity. “Today people are seeing cash returns.”
India might also have some advantages over its Bric (Brazil, Russia, India and China) peers in having a more open way of conducting business.
“The biggest single source of increased interest in fund-of-fund investment in recent times is from the Middle East,” says Somak Ghosh, president of corporate finance at Yes Bank Ltd. This shift seems to come as various factors push those economies to look to new places for investment like never before.
But, most importantly, “the Middle East interest will increase because of oil prices creating a huge surplus there,” says Jayanta Banerjee, managing director and head of PE and growth capital at Lehman Brothers. “There are relatively less questions about India than other emerging markets from a risk-return profile.”
Meanwhile, Mizuho Bank Ltd, Sumitomo Trust and Japan Alternative Investment Co. have made investments, according to industry sources who did not want to be named. The sources added that Japan has great untapped potential as a source of LPs.
Varun Sood, managing partner at LP Capvent India Advisors Pvt. Ltd, said: “Normally, they (the Japanese) are the last to come in.” The investment level from any of Asia’s LPs will largely depend on how much extra cash they have and how they allocate to PE as an asset class. Says Sood: “You can’t just invest in PE when you don’t have a surplus.”

Opportunities in Islamic Private Equity

2007-11-24T07:17:00.001-08:00

Opportunities in Islamic Private Equity

Mr. David Rubenstein, founder of the worlds largest private equity firm The Carlyle Group, has in his many industry presentations cited Christopher Columbus (the famous early voyager to the Americas) as a first in Private Equity! To fund his voyage to discover the “new world,” Columbus pitched his plans to Queen Isabel of Castille for the $10,000 he was trying to raise. The Queen after three years of ‘due diligence' finally made the deal with Columbus promising him 10% of the profits, 5% of the gold, reimbursement for all expenses in advance, and a title of admiral for life. Nice deal!

Similarly, as a reflection of the historic role Arab voyagers and traders have played in world civilization, Mr. Arif Naqvi, CEO of one of the largest Private Equity funds in the MENA (Middle East North Africa) region, has also been referencing the voyages of Sinbad the Sailor and the early Arab seafarer traders and the spice routes carrying frankincense from Yemen. This historical role is certainly being manifested today as well in the form of the economic boom the MENA region is experiencing.

An Industry Emerges

Driven by a three-fold oil price increase in the last four years, the Gulf Cooperative Council (GCC) nations have experienced extraordinary economic boom clocking an average 6.1% GDP growth in the last three years and liquidity estimated by KMPG to be in excess of US$2.3 trillion.

At the same time, the Islamic Finance industry continues to grow un-abated with an estimated US$ 750 billion in global assets growing 15-20% annually – with the GCC accounting for 2/3 rd of its size (S&P and HSBC analysis.)

The result of these two trends is a boom in Private Equity investments in the GCC and the broader MENA (Middle East & North Africa) which includes a growing trend of Islamic Private Equity funds as well. According to the 2007 Dow Jones Private Equity report, the MENA region has raised $16 billion since 1994 out of which $10 billion were raised in 2006. $1.1 billion are estimated to be Islamic Private Equity funds.

Today – local Private Equity players Abraaj Capital, Global Investment House, Millenium Finance Corp.(MFC) and even the global PE behemoth Carlyle Group have setup mega funds in excess of $1 billion focused on the region. Of these mega funds, the MFC funds are marketed as Islamic PE funds.

So what is Islamic Private Equity anyway? What is driving this trend and what is the impact of this trend?

Convergence of Islamic Finance & Private Equity

Commenting on Islamic Private Equity, Mr. Fuad Al-Shehab, General Manager of Investment Group at Kuwait based Boubyan Bank which together with Ryada Capital recently launched the $150 million Ryada Islamic Private Equity Fund said, “Private Equity is a natural fit for Islamic investors since at the core of Shari'ah principles money should be directed to the real economy through investing in businesses that offer ethically acceptable products and services. This means that returns should be earned through active involvement and participation in the business risk in Shari'ah compliant investments.”

There's certainly a growing realization that private equity amongst its other benefits is quite compatible with Islamic finance.

To understand the principles that are driving this convergence it's important to understand some core underlying principles. Aamir A. Rehman, a former Global Head of Strategy at HSBC Amanah, and Boston Consulting Group consultant, explains that Islamic finance is more than just financial contracts. He has identified the following core basic tenets of Islamic finance that Sharia' scholars draw upon:

1. If something is immoral, one cannot profit from it
2. To share reward, one must also share risk
3. One cannot sell what he or she does not own
4. In any transaction, one must clearly specify what he or she is buying or selling and one price is being paid

Mr. Rehman says that as the Islamic Finance industry is growing it is also maturing in terms of its richness of products being offered—from commercial banking, insurance to structured products, the Industry has near like-for-like parity with conventional offering. However, he points out that the Industry still needs to deepen and address a variety of investment product gaps. As real estate and equity assets have matured, and structured products and cash management products are maturing--sophisticated products such as Private Equity, Fixed income or hedging products are just emerging in the markets.

Mr. Rehman sees the Islamic private equity sector specially poised for expansion. He bases the natural partnership between Islamic Finance and Private Equity on conceptual and commercial grounds.

Conceptually, he contends that Islamic finance ethos actually seeks “real economy” impact which Private Equity is geared to deliver. Infact he says that the Private equity model represents classic Mudarabah with the GP / LP structure being a strikingly pure example of what a Mudarabah is envisioned to be. Meanwhile, he says that the traditional “Banking” model is inherently constraining with risk-free deposit and lending, and limited equity positions resulting in clients not sharing the upside.

Commercially, Mr Rehman highlights the growing interest and comfort within family businesses to seek private equity in rationalizing their assets. At the same time Sharia compliance is also becoming an important ‘exit' consideration. Another commercial aspect is the affect of the GCC markets that have severely corrected themselves giving private equity additional prominence.

Fundamentals of Private Equity in the MENA Region

MENA region is seeing a tremendous interest by the global Private Equity industry. David Rubenstein, the Managing Director of Carlyle Group recently commented that, “My proposition is that [the Middle East ] will be the fourth private equity center of the world five to 10 years from now.” Meanwhile a report titled “The most influential people in global private equity,” published by "Private Equity International'' magazine, four regional players were recognized as movers and shakers of the industry. These are Mr. David Jackson of Istithmar, Mr. Arif Naqvi of Abraaj Capital, Mr. Sameer Al Ansari of Dubai International Capital and Mr. Hareb Al Darmaki of Abu Dhabi Investment Authority.

Today there are a total of approximately 40 plus MENA region based Private Equity players which have grown manifolds in the past two years. In a recent report by Zawya and KPMG, as of mid-2006 there were an estimated US$13 billion in private equity capital currently under management off which 90% had been raised in the last two years.
MENA Region Private Equity Funds Raised, 1997-2006
Source: Zawya/ KPMG 2006

Also in 2006, the average fund size had increased to US$ 284 million, a three fold increase from that in 2003, when the average fund size was between US$ 80 million and US$ 100 million.
Sector Focus of PE Investment, 1997-2006
Source: Zawya/ KPMG 2006

Three of the key fundamentals that are also driving this trend are governments' tremendous strides in improving the regulatory environment, liberalization of the economies, and major infrastructure development demands.

The latest 2008 Doing Business– World Bank Report which investigates the regulations that enhance business activity and those that constrain it covering 178 economies showed Egypt and Saudi Arabia as the Top 10 reformers globally, with Egypt being #1. Similarly, the 2007 Global Competitiveness Report , by the World Economic Forum , has several countries in the Middle East and North Africa region in the upper half of the rankings led by Kuwait (30th), Qatar (31st), Tunisia (32nd), Saudi Arabia (35th) and the United Arab Emirates (37th).

Also, according to an Abraaj Capital analysis the privatization pipeline in the MENA region is expected to cross US$ 1 trillion with approximately 147 privatization transactions either announced or planned in the next ten years. Majority of these privatizations are for infrastructure assets such as roads, airports, bridges, public transit systems, seaports, power stations, power lines, gas pipelines, and communications networks.

‘Exit' Strategies and Other Challenges

While US$ 6.5 billion has been invested by Private Equity firms since 1998, only 5% (US$ 0.3 billion) has been realized in exits.

The industry is still in the investing phase so the jury is still out on the success and returns by the industry. However, viable exit strategies remain perhaps the biggest challenge for the industry. Even with the massive correction that the regions public markets recently faced, IPO market in the GCC is still one of the most promising exit routes for private equity managers to exit.

Some notable exits include Injazat Technology Funds recent sale of their investment in Atos Origin Middle East (AOME) through the sale of the company to HP, achieving a significant internal rate of return (IRR) of 75%. Also, Raya Holding, yielding a return of over 40 per cent for Injazat and was soon after listed on the Cairo Exchange. The most celebrated early exits for the industry was Abraaj Capitals sale of logistic company Aramex to Arab International Logistic for US$ 189 million in cash.

Some of the other challenges facing the industry include still evolving regulatory limits to foreign ownership, and the regions' family and government dominated businesses rather unstructured relationship style of negotiating, agreeing to equity terms, and board management expectations.

No Pain No Gain

However, it's in the midst of these challenges that those with a vision are investing and realizing tremendous opportunities. Mr. Rubenstein of the Carlyle Group recently in his comments differentiated between ‘emerged' and ‘emerging' markets. He made the argument that these two type of markets need to be treated differently and that the best investors will go beyond just ‘emerged' markets (ie China, India) and look to truly emerging economies that are slowly turning the corner and where returns will be maximized.

Given the relative infancy of the PE industry in the MENA region, its fair to say that the Christopher Columbus and Sindbad's have just set sail, but there's no denying that a tremendous opportunity awaits for those seeking this ‘new world.'

By Rafi-uddin Shikoh
Posted, Nov 22, 2007

Strong economic growth sparks Gulf IPO boom

2007-11-24T07:14:00.001-08:00

DUBAI: Stock flotations are booming in the Gulf region, spurred by strong economic growth, a wealth of spare cash created by record-high oil prices and government encouragement, market specialists say.The most recent case, an initial public offering by Dubai port operator DP World, shows the magnitude of demand. The state-owned company yesterday said it had raised $4.96bn in an IPO that was 15 times oversubscribed.

The Middle East's largest IPO ever, it compared with $5.9bn for all 26 offerings made in the GCC in the first nine months of this year.

"Strong GDP growth averaging eight per cent per year, excess liquidity due to high oil prices, structural reforms by regional governments and privatisation initiatives have all contributed to an increase in the number of IPOs," said Tamer Bazzari, a partner in the Dubai-based Rasmala investment bank.

Before DP World's IPO, the largest public share offer was made by Saudi Telecom in 2003.

It raised more than $4bn dollars by selling a 30pc stake, a third of which went to two public pension funds.

"Saudi Arabia and the UAE are at the forefront of IPO activity in the region, having accounted for 70pc of all GCC IPOs over the last decade," Bazzari said.

Saudi IPOs in the first nine months of this year amounted to $3.7bn, compared with $1.6bn in the UAE and $389 million in Qatar.

The trend had been growing in the GCC, with total closed IPOs reaching $1.5bn in 2004, $6bn in 2005 and $7.5bn last year, according to Abu Dhabi-based private equity firm Gulf Capital.

The region accounted for the bulk of IPOs in the Middle East, which Ernst and Young said numbered 87 last year with a total value of $10.8bn.

"It will continue to grow sharply ... The appetite continues to be high," said Brad Bourland, chief economist at Riyadh-based Jadwa Investment.

"There are about 100 (new) IPOs in the pipeline," he said, while Gulf Capital said IPOs between this year and 2010 should exceed 106.

"Regional liquidity, combined with increasing interest by international investors, is expected to contribute to the success of future IPOs," Bazzari said.

Gulf countries are enjoying handsome windfalls on the back of record-high crude prices, which have pumped huge funds into their economies and jumpstarted multi-billion-dollar infrastructure projects that had been delayed.

Abundant liquidity appears also to face a shortage in investment opportunities as almost all IPOs in the region are over-subscribed.

Early last year, investors from GCC countries slept in tents and cars in Doha as they swamped the Qatari capital for an IPO by Al Rayan bank. The newly formed lender had offered 55pc of its capital for $1.13bn and ended up six times oversubscribed.

Middle East Series: Finance and Investments

2007-11-23T09:51:00.000-08:00

SM Goh was quoted recently as stating that he was disappointed at Singapore’s inability to gain a larger share of the investment funds coming out of the Middle East….. and when you consider that this segment of the local banking industry has been growing at 20-30% per year, it gives a hint of how prodigiously the liquidity in the Middle East must be growing.

This segment centres around three main themes (in my view), which will be outlined below. It is worth noting that the liquidity relating to these themes mainly relate to the six richer GCC (Gulf Cooperation Council) countries: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, which are relatively more stable politically, foreigner-friendly, and boast strong services industries due to their affluence and consequent strong soft capital — all necessary ingredients\for a strong financial industry infrastructure. Equally importantly, they are strong direct beneficiaries of high oil prices — with the probable exception of Bahrain.

The first thread is the development of the domestic financial markets. The booming regional economy has boosted the profits of banks, with tailwinds in the form of huge and growing business volumes and a low cost of funds and labor (due to high liquidity as a result of easy oil money) providing the momentum. Given the excellent demographics (one of the fastest growing regional populations) and oil money, foreign banks have been fast getting into the act by setting up branches in the region, leading to rapid growth of assets under management, a phenomenal increase in debt issuance; and accelerated innovation of new products, especially in the area of Islamic finance, with the creation of new Islamic banks. In the capital markets, the stock exchanges in Saudi Arabia and the UAE grew >100% in 2005, and that in Kuwait and Qatar grew >60%; this was due to high oil prices, entry of foreign funds (private equity, hedge funds) as well as a private sector investment boom in areas such as real estate, financial services, industrials and telco infrastructure. In recognition of global interest coming into the region, the UAE launched the Dubai International Financial Exchange (DIFX), the first exchange in its region created to list securities from many different countries, targeted to attract large numbers of international brokers and investment banks and hence establish the city as a regional financial hub. The first theme is one of expanding and liberalising local capital markets and financial services industries in the region.

In particular, Islamic finance has become the largest growth sector within banking globally - growing by 10 to 15 per cent a year. It is worth US$300-500B as of September 2006. This is the second major theme. This banking concept is based on interpretations from the Qur’an, and its two central tenets are that no interest can be earned on loans, and socially responsible investing. The first is self-explanatory, the second means investing responsibly to assure that the money does not go for “bad” purposes, such as investments in drugs, weapons, alcohol, pornography, and terrorism — not much different from the Western concepts of ethical investing. Islamic financial instruments are not only available within the Middle East bond markets; they are increasingly being made available in foreign markets eager to attract Arab money. There are now Sukuk (Islamic) bonds listed on the London Stock Exchange, and Islamic countries like Malaysia, with decade-long experience in Islamic funds and with legal infrastructure in place, are looking to capture the market with their Islamic credentials. Key Islamic finance instruments include Sukok bonds (Islamic bonds, mentioned above), takaful insurance (cooperative insurance compliant with Islamic beliefs), and Islamic investment funds. Given the need to raise foreign capital (through infrastructure bonds) to invest in new infrastructure projects in the Middle East (oil money not enough) as well as offshore banking services to manage their burgeoning petrodollar assets, Middle East demand for Islamic banking services are expected to grow further.

The third theme relates to the overseas investments being made by the Middle East nations, especially the GCC member states. This is mainly done through their cash-rich state investment agencies, and also partly by corporates looking at other markets outside the GCC region to diversify and hedge market risk (of operating in a single market facing increasing foreign competition). Generally, their investment markets may be divided into several categories: stable Western markets, including the US (less so since Sep 11) and Europe (their old colonial masters and also in close proximity), moderate/relatively stable Muslim countries like Pakistan, Malaysia and Indonesia, high-potential/hotspots such as China (especially their banks) and India, and neighbouring countries like Jordan, Egypt and North Africa. Investments can be portfolio-type (ie. no controlling interest) or direct investments, which tend to be strategic (eg. Dubai Ports’ port acquisitions in Hong Kong and P&O in Europe); real estate is a major preference, especially Asian property. Again, the rules apply: no companies that traffic in alcohol, pork, pornography or gambling, and also Islamic financing is typically used to avoid violating religious rules. This trend also partly explains the growth in Islamic financing.

In the Singapore stock market, the most obvious beneficiary from growth in the Middle East financial and investments sector are not banks, but real estate. The former has not achieved any significant penetration into the Middle East nor developed any strong exposure to outflowing Middle Eastern funds, while the latter fit the profile for the investment preferences of Middle East investors: Asian, prime real estate, key regional hub, friendly population and Muslim neighbours. One may note the ease with which large placements by Ho Bee and SC Global were taken up as evidence of interest in the local real estate sector.