Private equity sector faces shakeout

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.

Goldman sees $80 trillion emerging nation stock market by 2030

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.”

Dubai firm buys Egypt bank stake

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.

There have been no examples of any SWF abuse

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

Middle East IPO firms appreciate by 201% in 2007

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

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

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

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

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

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

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

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