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.

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.

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.

PE funds tap into new group of Asian investors

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

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