Shuaa Partners Ltd, the private equity arm of Shuaa Capital psc, today announced the close of its 'Frontier Opportunities Fund I, L.P.' (the 'Fund') with total commitments of $100m.
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The objective of the Fund is to provide its limited partners with long-term capital appreciation through select equity investments in both existing and start-up businesses in the Levant region.
The Fund will have a four-year investment horizon and its focus will be on Syria, but it will also consider investments in Lebanon and Jordan. The fund will target both existing and new opportunities in the telecommunications, financial services, real estate and hospitality sectors, but will also consider investing in other sectors on an opportunistic basis.
'With recent economic growth picking up, clear liberalization trend, a young and growing population, and under-investment for the past three decades, Syria represents an early investment opportunity. Over the last few years, Syria has attracted significant foreign investment commitments from neighboring and GCC countries. Several large projects have been announced in industries ranging from building materials, to oil refineries, real estate and financial institutions. Syria has demonstrated its progress in its ability to encourage the capital inflows, and our investors wanted to allocate a small part of their portfolios to have an exposure at what could potentially prove to be a very high growth market,'
said Mr. Iyad Duwaji, Chief Executive Officer of Shuaa Capital and Chairman and founder of Shuaa Partners.
'This is a unique opportunity and the first ever such product that allows its investors a professionally managed exposure to a country that has not yet been targeted by a wide range of investors before. We are well positioned to attract and execute transactions in Syria given our first-hand knowledge of the country and our first-mover advantage,' added Mr. Duwaji.
The Fund has already deployed capital by investing in Syriatel the leading GSM operator in Syria with over 55% market share, 2.8 million customers, and a low penetration rate by regional standards. It is also understood that the Fund is considering partnering with UAE companies to set up in Syria.
Shuaa Partners is regulated by the Dubai Financial Services Authority ('DFSA') and is incorporated in the Dubai International Financial Centre ('DIFC') as Shuaa Partners Ltd.
http://www.ameinfo.com/141029.html
6.12.07
Large forces in the global capital markets
Four rising players will continue to grow in wealth and importance, even if interest rates rise and oil prices drop.
December 2007
One glance at the distribution of wealth around the world and the shift is obvious: financial power, so long concentrated in the developed economies, is dispersing. Oil-rich countries and Asian central banks are now among the world’s largest sources of capital. What’s more, the influx of liquidity these players have brought is enabling hedge funds and private-equity firms to soar in the pecking order of financial intermediation.
New research from the McKinsey Global Institute shows that the assets of these four groups of investors—the new power brokers—have nearly tripled since 2000, reaching roughly $8.5 trillion at the end of 2006 (Exhibit 1).1 This sum is equivalent to about 5 percent of total global financial assets ($167 trillion) at the end of 2006, an impressive number for players that lay on the fringes of global financial markets just five years ago.
The impact and visibility of this quartet exceed its relative size, despite the discreet way its members operate. Among other things, they have helped lower the cost of capital for borrowers around the world. In the United States, we estimate, long-term interest rates are as much as 0.75 of a percentage point lower thanks to purchases of US fixed-income securities by Asian central banks and petrodollar investors—$435 billion of net purchases in 2006 alone. Meanwhile, investors from the Middle East, pursuing returns they believe will exceed those generated by fixed-income instruments or equities in developed economies, are fueling investment in Asia and other emerging markets. Hedge funds have added to global liquidity through high trading turnovers and investments in credit derivatives, which allow banks to shift credit risk off their balance sheets and to originate more loans. Private-equity firms are having a disproportionate impact on corporate governance through leverage-fueled takeovers and subsequent restructurings.
And over the next five years, the size and impact of the four new power brokers will continue to expand.2
Oil rises to the top
In 2006 oil-exporting countries became the world’s largest source of global capital flows, surpassing Asia for the first time since the 1970s (Exhibit 2). These investors—from Indonesia, the Middle East, Nigeria, Norway, Russia, and Venezuela—include sovereign wealth funds, government-investment companies, state-owned enterprises, and wealthy individuals.
This flood of petrodollars comes from the tripling of world oil prices since 2002 and the steady growth in exports of crude oil, particularly to emerging markets. A large part of the higher prices paid by consumers ends up in the investment funds and private portfolios of investors in oil-exporting countries. They then invest most of it in global financial markets, adding liquidity that helps to explain what US Federal Reserve Board of Governors chairman Ben Bernanke described as a "global savings glut" that has kept interest rates down over the past few years. In 2006 alone, we estimate at least $200 billion of petrodollars went to global equity markets, more than $100 billion to global fixed-income markets, and perhaps $40 billion to global hedge funds, private-equity firms, and other alternative investments. This capital is invested chiefly in Europe and the United States, but regions such as Asia, the Middle East, and other emerging markets are also significant beneficiaries.
Although the added liquidity from petrodollars has helped buttress global financial markets, it may also be creating inflationary pressure in illiquid markets, such as those for real estate and art. The unanswered question is whether the world economy will continue to accommodate higher oil prices without a notable rise in inflation or an economic slowdown.
Where the wealth is . . .
The Gulf Cooperation Council (GCC) states—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)—are the largest oil exporters. Together, we estimate, they had foreign assets of $1.6 trillion to $2 trillion by the end of 2006 (Exhibit 3). Other states in the region, including Algeria, Iran, Libya, Syria, and Yemen, held an estimated $330 billion; the other oil exporters combined, about $1.5 billion. At the end of 2006, the oil exporters collectively owned $3.4 trillion to $3.8 trillion in foreign financial assets.
Much attention around the world has recently been devoted to the oil exporters’ sovereign wealth funds, which are indeed large. By some estimates, the Abu Dhabi Investment Authority (ADIA) holds nearly $875 billion in foreign assets, Norway’s Government Pension Fund $300 billion, Russia’s Oil Stabilization Fund $100 billion, and the Kuwait Investment Authority $200 billion. But oil investors as a whole are a more diverse group, with hundreds of individual players. We calculate that private individuals who actively invest in global financial markets hold at least 40 percent of the foreign wealth purchased with petrodollars. Also important are the oil-exporting states’ central banks (such as the Saudi Arabian Monetary Agency) and private-equity-like funds, including Dubai International Capital.
. . . and where it’s going
Compared with traditional players such as pension funds and mutual funds, the assets of petrodollar investors are relatively modest. Still, they have been growing at an impressive rate of 19 percent a year since 2000 and will continue to increase their impact on world financial markets because of escalating energy demand from China, India, and other emerging markets. Even in a base case with oil prices reverting to $50 a barrel,4 the oil-exporting countries would have net capital outflows5 of $387 billion a year through 2012—an infusion of more than $1 billion a day of capital into global financial markets. Over the next five years, we estimate, this flow would generate investments of $1.4 trillion in equities, $800 billion in fixed-income securities, and $300 billion for private-equity firms, hedge funds, and real estate. The oil exporters’ total foreign assets would grow to at least $5.9 trillion in 2012.
If oil prices remained at $70 a barrel until 2012—and they neared $100 in November 2007 as this article went to press—foreign assets purchased with petrodollars would grow to $6.9 trillion by then. This figure implies an inflow of almost $2 billion a day into global financial markets. Even if oil prices declined to $30 a barrel, foreign assets purchased with petrodollars would grow robustly (Exhibit 4). This enormous pool will continue to provide liquidity for capital markets but may also cut investment returns and create inflationary pressures in areas such as real estate.
Reserves: Asia’s opportunity cost
Second in size to petrodollars are the reserves of Asia’s central banks—reserves that have grown rapidly as a result of rising trade surpluses, foreign-investment inflows, and exchange rate policies. In 2006, Asia’s central banks held $3.1 trillion in foreign-reserve assets, 64 percent of the global total and nearly three times the amount they held in 2000. Compared with petrodollars, these assets are concentrated in just a handful of institutions. China alone had amassed around $1.4 trillion in reserves by mid-2007.
Unlike investors with petrodollars, Asia’s central banks have channeled their funds into conservative investments, such as US treasury bills. We estimate that by the end of 2006, these institutions had $1.9 trillion more in foreign reserves than they needed for exchange rate and monetary stability.6 Because they could have invested that sum in higher-yielding opportunities, the forgone returns represent a significant opportunity cost (Exhibit 5). On the relatively conservative assumption that alternative investments in a higher-yielding capital market portfolio might yield 5 percent more than US Treasury bills, that cost for Asia’s major economies, in 2006 alone, was almost $100 billion—1.1 percent of their total GDP.
What to do with growing reserves?
As trade surpluses accumulate, the opportunity cost of Asia’s reserves will become even greater. If recent growth continues, they will reach $7.3 trillion in 2012. Even if China’s current-account surplus declined dramatically over the next five years and Japan’s remained the same, Asia’s reserve assets would grow to $5.1 trillion by 2012 (Exhibit 6).
n a quest for higher returns, some Asian governments have begun to diversify their assets by channeling some of their reserves to sovereign wealth funds similar to those of oil-exporting nations. The Government of Singapore Investment Corporation (GIC), established in 1981, now has an estimated $150 billion to $200 billion in assets and according to public statements has plans to increase them to $300 billion. Korea Investment Corporation (KIC) has $20 billion in assets, the new China Investment Corporation (CIC) $200 billion. The assets of Asia’s sovereign wealth funds could collectively reach $700 billion in the next few years, with the potential for even more growth.
Such a shift will benefit Asian nations through higher investment returns and spread the "Asian liquidity bonus" beyond the US fixed-income market. Given the large and rapidly growing amounts of reserves used to purchase assets, however, US interest rates won’t necessarily rise as a result. Over time, a greater share of the investments made by the sovereign wealth funds may stay within Asia, spurring the development of its financial markets.
Beneficiaries of liquidity
Hedge funds and private-equity funds are among the beneficiaries of the added liquidity that Asian and oil-rich countries bring to global markets. Assets under management in hedge funds totaled $1.7 trillion by the middle of 2007. But after taking into account leverage, we estimate that their gross investment assets could amount to as much as $6 trillion, more than the foreign assets of investors from oil-producing countries or Asia’s central banks.8
Although the failure of several multibillion-dollar hedge funds in mid-2007 may slow the sector’s growth, investors usually look to the long term; it would take several years of low returns before these vehicles lost their appeal. What’s more, oil investors are big clients of hedge funds and private-equity funds, with around $350 billion committed today, and high oil prices could more than double that sum over the next five years. Even if the growth of the hedge funds’ assets were to slow significantly—say, to 5 percent a year—by 2012 they could still reach $3.5 trillion (Exhibit 7). Taking into account leverage, hedge funds would then have gross investments of $9 trillion to $12 trillion, about a third of the assets that mutual funds around the world will have in that year.
Hedge funds as financial engines
Thanks to the size and active-trading styles of hedge funds, they play an increasingly significant role in global financial markets: in 2006 they accounted for 30 to 60 percent of trading volumes in the US and UK equity and debt markets, and in some higher-risk asset classes, such as derivatives and distressed debt, they are the largest type of player (Exhibit 8). Although petrodollar investors and Asia’s central banks add liquidity by bringing in new capital, hedge funds do so by trading actively and playing a large role in credit derivative markets. In this way, they increase the number of financing options available to borrowers (including private-equity firms) that might have found it hard to attract financing in the past, and their active trading improves the pricing efficiency of financial markets.
How risky?
Worries persist that the hedge funds’ growing size and heavy borrowing could destabilize financial markets. But our research finds that over the past ten years several developments have reduced—though certainly not eliminated—the risk of a broader crisis if one or more funds collapsed.
For one thing, their investment strategies are becoming more diverse (Exhibit 9). Ten years ago more than 60 percent of their assets were invested in directional bets on macroeconomic indicators. That share has shrunk to just 15 percent today. Arbitrage and other market-neutral strategies have become more common, thereby reducing herd behavior—one reason most hedge funds withstood the US subprime turmoil in 2007. Several large quantitative-equity arbitrage funds simultaneously suffered large losses, indicating that their trading models were more similar than previously thought. But, overall, the sector emerged relatively unscathed.
In addition, banks now manage risk more capably; the largest appear to have enough equity and collateral to cover losses from their hedge fund investments. Our analysis indicates that the top ten banks’ total exposure to credit and derivatives risk from hedge funds is 2.4 times equity—a relatively high capital adequacy ratio of 42 percent.
Private equity: small but powerful
Private equity has gained prominence less because of its size than its impact on corporate governance. Although assets under management rose 2.5 times, to $710 billion, from 2000 to 2006, the private-equity industry is roughly half the size of the hedge funds, smaller than the largest petrodollar fund (the ADIA), and growing more slowly than either.
Even so, thanks to typical investment horizons of four to five years, concentrated ownership positions, and seats on the board of directors, private-equity funds can embark upon longer-term, and therefore potentially more effective, corporate-restructuring efforts. Not all private-equity firms live up to that billing, however. Our research shows that only the top-performing ones sustainably improve the operations of the companies in their portfolios and generate high returns.
The growing size of individual firms—and "club deals" combining the muscle of several firms or investors—have enabled them to buy ever-larger companies. Private-equity investors accounted for one-third of all US mergers and acquisitions in 2006 and for nearly 20 percent in Europe (Exhibit 10). This wave of buyouts has prompted CEOs and boards at some companies to find new ways of strengthening their performance.
Size limits risk
Private-equity firms may also amplify the risks in financial markets—particularly credit risk—because they like to finance takeovers with leveraged loans and use their growing clout to extract looser lending covenants and better terms from banks. The credit market correction of mid-2007, however, jeopardized the financing for many private-equity deals.
Even if private-equity defaults rose sharply, they would not be likely to have broader implications for financial markets. In 2006 private-equity firms accounted for just 11 percent of overall corporate borrowing in Europe and the United States. If their default rates rose to 15 percent of all deals—the previous high was 10 percent—the implied losses would equal only 3 and 7 percent, respectively, of 2006 syndicated-lending issuance in Europe and the United States (Exhibit 11).
Growth signals a structural shift
Despite the difficult experience of some recent buyout deals, we believe that global private-equity assets under management will double to $1.4 trillion by 2012. Our projection assumes that fund-raising remains at its 2006 level in Europe and the United States and grows at half its previous rate in Asia and the rest of the world. If current growth rates in fund-raising continued, private-equity assets would reach $2.6 trillion in 2012 (Exhibit 12).
Either way, that kind of growth represents a fundamental shift in the development of financial markets. For the past 25 years, financial intermediation in mature economies has migrated steadily from bank lending to the public-equity and debt markets. The rise of private equity and the private pools of capital in sovereign wealth funds herald the resurgence of private forms of financing.
The road ahead
Regardless of whether interest rates rise or oil prices drop, the four new power brokers will continue to grow and shape the future development of capital markets. To ease the transition to the coming financial order, the players can take some useful steps.
Because capital markets function on the free flow of information, sovereign wealth funds and other types of government-investment units9 in Asia and in oil-exporting nations should consider disclosing more information about their investment strategies, target portfolio allocations, internal risk-management procedures, and governance structures. (Norway’s Government Pension Fund is a model in this respect.) Funds can allay concerns that politics will play a role in their decisions—and reduce the likelihood that regulators will act too aggressively—by publicly stating their investment goals.
Policy makers in Europe and the United States should base any regulatory response to the activities of the new power brokers on an objective appraisal of the facts. In particular, they ought to distinguish between direct foreign acquisitions of companies and passive investments by diversified players in financial markets.
Banks must protect themselves against the risks posed by hedge funds and private-equity funds. In particular, they need tools and incentives to measure and monitor their exposure accurately and to maintain enough capital and collateral to cover these risks. Currently, it is difficult to assess the dangers stemming from illiquid collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs). Ratings agencies and investors alike must raise their risk-assessment game.
With the growth of credit derivatives and collateralized debt obligations, banks have in many cases removed themselves from the consequences of poorly underwritten lending. As institutions originate more and more loans without putting their own capital at risk for the long-term performance of those loans, regulators should find ways to check a decline in standards. Concerns about the rise of the four power brokers are rational. But we find cause for qualified optimism that the benefits of liquidity, innovation, and diversification they bring will outweigh the risks.
Diana Farrell and Susan Lund
http://thinkingmoose.blogspot.com/2007/12/large-forces-in-global-capital-markets.html
December 2007
One glance at the distribution of wealth around the world and the shift is obvious: financial power, so long concentrated in the developed economies, is dispersing. Oil-rich countries and Asian central banks are now among the world’s largest sources of capital. What’s more, the influx of liquidity these players have brought is enabling hedge funds and private-equity firms to soar in the pecking order of financial intermediation.
New research from the McKinsey Global Institute shows that the assets of these four groups of investors—the new power brokers—have nearly tripled since 2000, reaching roughly $8.5 trillion at the end of 2006 (Exhibit 1).1 This sum is equivalent to about 5 percent of total global financial assets ($167 trillion) at the end of 2006, an impressive number for players that lay on the fringes of global financial markets just five years ago.
The impact and visibility of this quartet exceed its relative size, despite the discreet way its members operate. Among other things, they have helped lower the cost of capital for borrowers around the world. In the United States, we estimate, long-term interest rates are as much as 0.75 of a percentage point lower thanks to purchases of US fixed-income securities by Asian central banks and petrodollar investors—$435 billion of net purchases in 2006 alone. Meanwhile, investors from the Middle East, pursuing returns they believe will exceed those generated by fixed-income instruments or equities in developed economies, are fueling investment in Asia and other emerging markets. Hedge funds have added to global liquidity through high trading turnovers and investments in credit derivatives, which allow banks to shift credit risk off their balance sheets and to originate more loans. Private-equity firms are having a disproportionate impact on corporate governance through leverage-fueled takeovers and subsequent restructurings.
And over the next five years, the size and impact of the four new power brokers will continue to expand.2
Oil rises to the top
In 2006 oil-exporting countries became the world’s largest source of global capital flows, surpassing Asia for the first time since the 1970s (Exhibit 2). These investors—from Indonesia, the Middle East, Nigeria, Norway, Russia, and Venezuela—include sovereign wealth funds, government-investment companies, state-owned enterprises, and wealthy individuals.
This flood of petrodollars comes from the tripling of world oil prices since 2002 and the steady growth in exports of crude oil, particularly to emerging markets. A large part of the higher prices paid by consumers ends up in the investment funds and private portfolios of investors in oil-exporting countries. They then invest most of it in global financial markets, adding liquidity that helps to explain what US Federal Reserve Board of Governors chairman Ben Bernanke described as a "global savings glut" that has kept interest rates down over the past few years. In 2006 alone, we estimate at least $200 billion of petrodollars went to global equity markets, more than $100 billion to global fixed-income markets, and perhaps $40 billion to global hedge funds, private-equity firms, and other alternative investments. This capital is invested chiefly in Europe and the United States, but regions such as Asia, the Middle East, and other emerging markets are also significant beneficiaries.
Although the added liquidity from petrodollars has helped buttress global financial markets, it may also be creating inflationary pressure in illiquid markets, such as those for real estate and art. The unanswered question is whether the world economy will continue to accommodate higher oil prices without a notable rise in inflation or an economic slowdown.
Where the wealth is . . .
The Gulf Cooperation Council (GCC) states—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)—are the largest oil exporters. Together, we estimate, they had foreign assets of $1.6 trillion to $2 trillion by the end of 2006 (Exhibit 3). Other states in the region, including Algeria, Iran, Libya, Syria, and Yemen, held an estimated $330 billion; the other oil exporters combined, about $1.5 billion. At the end of 2006, the oil exporters collectively owned $3.4 trillion to $3.8 trillion in foreign financial assets.
Much attention around the world has recently been devoted to the oil exporters’ sovereign wealth funds, which are indeed large. By some estimates, the Abu Dhabi Investment Authority (ADIA) holds nearly $875 billion in foreign assets, Norway’s Government Pension Fund $300 billion, Russia’s Oil Stabilization Fund $100 billion, and the Kuwait Investment Authority $200 billion. But oil investors as a whole are a more diverse group, with hundreds of individual players. We calculate that private individuals who actively invest in global financial markets hold at least 40 percent of the foreign wealth purchased with petrodollars. Also important are the oil-exporting states’ central banks (such as the Saudi Arabian Monetary Agency) and private-equity-like funds, including Dubai International Capital.
. . . and where it’s going
Compared with traditional players such as pension funds and mutual funds, the assets of petrodollar investors are relatively modest. Still, they have been growing at an impressive rate of 19 percent a year since 2000 and will continue to increase their impact on world financial markets because of escalating energy demand from China, India, and other emerging markets. Even in a base case with oil prices reverting to $50 a barrel,4 the oil-exporting countries would have net capital outflows5 of $387 billion a year through 2012—an infusion of more than $1 billion a day of capital into global financial markets. Over the next five years, we estimate, this flow would generate investments of $1.4 trillion in equities, $800 billion in fixed-income securities, and $300 billion for private-equity firms, hedge funds, and real estate. The oil exporters’ total foreign assets would grow to at least $5.9 trillion in 2012.
If oil prices remained at $70 a barrel until 2012—and they neared $100 in November 2007 as this article went to press—foreign assets purchased with petrodollars would grow to $6.9 trillion by then. This figure implies an inflow of almost $2 billion a day into global financial markets. Even if oil prices declined to $30 a barrel, foreign assets purchased with petrodollars would grow robustly (Exhibit 4). This enormous pool will continue to provide liquidity for capital markets but may also cut investment returns and create inflationary pressures in areas such as real estate.
Reserves: Asia’s opportunity cost
Second in size to petrodollars are the reserves of Asia’s central banks—reserves that have grown rapidly as a result of rising trade surpluses, foreign-investment inflows, and exchange rate policies. In 2006, Asia’s central banks held $3.1 trillion in foreign-reserve assets, 64 percent of the global total and nearly three times the amount they held in 2000. Compared with petrodollars, these assets are concentrated in just a handful of institutions. China alone had amassed around $1.4 trillion in reserves by mid-2007.
Unlike investors with petrodollars, Asia’s central banks have channeled their funds into conservative investments, such as US treasury bills. We estimate that by the end of 2006, these institutions had $1.9 trillion more in foreign reserves than they needed for exchange rate and monetary stability.6 Because they could have invested that sum in higher-yielding opportunities, the forgone returns represent a significant opportunity cost (Exhibit 5). On the relatively conservative assumption that alternative investments in a higher-yielding capital market portfolio might yield 5 percent more than US Treasury bills, that cost for Asia’s major economies, in 2006 alone, was almost $100 billion—1.1 percent of their total GDP.
What to do with growing reserves?
As trade surpluses accumulate, the opportunity cost of Asia’s reserves will become even greater. If recent growth continues, they will reach $7.3 trillion in 2012. Even if China’s current-account surplus declined dramatically over the next five years and Japan’s remained the same, Asia’s reserve assets would grow to $5.1 trillion by 2012 (Exhibit 6).
n a quest for higher returns, some Asian governments have begun to diversify their assets by channeling some of their reserves to sovereign wealth funds similar to those of oil-exporting nations. The Government of Singapore Investment Corporation (GIC), established in 1981, now has an estimated $150 billion to $200 billion in assets and according to public statements has plans to increase them to $300 billion. Korea Investment Corporation (KIC) has $20 billion in assets, the new China Investment Corporation (CIC) $200 billion. The assets of Asia’s sovereign wealth funds could collectively reach $700 billion in the next few years, with the potential for even more growth.
Such a shift will benefit Asian nations through higher investment returns and spread the "Asian liquidity bonus" beyond the US fixed-income market. Given the large and rapidly growing amounts of reserves used to purchase assets, however, US interest rates won’t necessarily rise as a result. Over time, a greater share of the investments made by the sovereign wealth funds may stay within Asia, spurring the development of its financial markets.
Beneficiaries of liquidity
Hedge funds and private-equity funds are among the beneficiaries of the added liquidity that Asian and oil-rich countries bring to global markets. Assets under management in hedge funds totaled $1.7 trillion by the middle of 2007. But after taking into account leverage, we estimate that their gross investment assets could amount to as much as $6 trillion, more than the foreign assets of investors from oil-producing countries or Asia’s central banks.8
Although the failure of several multibillion-dollar hedge funds in mid-2007 may slow the sector’s growth, investors usually look to the long term; it would take several years of low returns before these vehicles lost their appeal. What’s more, oil investors are big clients of hedge funds and private-equity funds, with around $350 billion committed today, and high oil prices could more than double that sum over the next five years. Even if the growth of the hedge funds’ assets were to slow significantly—say, to 5 percent a year—by 2012 they could still reach $3.5 trillion (Exhibit 7). Taking into account leverage, hedge funds would then have gross investments of $9 trillion to $12 trillion, about a third of the assets that mutual funds around the world will have in that year.
Hedge funds as financial engines
Thanks to the size and active-trading styles of hedge funds, they play an increasingly significant role in global financial markets: in 2006 they accounted for 30 to 60 percent of trading volumes in the US and UK equity and debt markets, and in some higher-risk asset classes, such as derivatives and distressed debt, they are the largest type of player (Exhibit 8). Although petrodollar investors and Asia’s central banks add liquidity by bringing in new capital, hedge funds do so by trading actively and playing a large role in credit derivative markets. In this way, they increase the number of financing options available to borrowers (including private-equity firms) that might have found it hard to attract financing in the past, and their active trading improves the pricing efficiency of financial markets.
How risky?
Worries persist that the hedge funds’ growing size and heavy borrowing could destabilize financial markets. But our research finds that over the past ten years several developments have reduced—though certainly not eliminated—the risk of a broader crisis if one or more funds collapsed.
For one thing, their investment strategies are becoming more diverse (Exhibit 9). Ten years ago more than 60 percent of their assets were invested in directional bets on macroeconomic indicators. That share has shrunk to just 15 percent today. Arbitrage and other market-neutral strategies have become more common, thereby reducing herd behavior—one reason most hedge funds withstood the US subprime turmoil in 2007. Several large quantitative-equity arbitrage funds simultaneously suffered large losses, indicating that their trading models were more similar than previously thought. But, overall, the sector emerged relatively unscathed.
In addition, banks now manage risk more capably; the largest appear to have enough equity and collateral to cover losses from their hedge fund investments. Our analysis indicates that the top ten banks’ total exposure to credit and derivatives risk from hedge funds is 2.4 times equity—a relatively high capital adequacy ratio of 42 percent.
Private equity: small but powerful
Private equity has gained prominence less because of its size than its impact on corporate governance. Although assets under management rose 2.5 times, to $710 billion, from 2000 to 2006, the private-equity industry is roughly half the size of the hedge funds, smaller than the largest petrodollar fund (the ADIA), and growing more slowly than either.
Even so, thanks to typical investment horizons of four to five years, concentrated ownership positions, and seats on the board of directors, private-equity funds can embark upon longer-term, and therefore potentially more effective, corporate-restructuring efforts. Not all private-equity firms live up to that billing, however. Our research shows that only the top-performing ones sustainably improve the operations of the companies in their portfolios and generate high returns.
The growing size of individual firms—and "club deals" combining the muscle of several firms or investors—have enabled them to buy ever-larger companies. Private-equity investors accounted for one-third of all US mergers and acquisitions in 2006 and for nearly 20 percent in Europe (Exhibit 10). This wave of buyouts has prompted CEOs and boards at some companies to find new ways of strengthening their performance.
Size limits risk
Private-equity firms may also amplify the risks in financial markets—particularly credit risk—because they like to finance takeovers with leveraged loans and use their growing clout to extract looser lending covenants and better terms from banks. The credit market correction of mid-2007, however, jeopardized the financing for many private-equity deals.
Even if private-equity defaults rose sharply, they would not be likely to have broader implications for financial markets. In 2006 private-equity firms accounted for just 11 percent of overall corporate borrowing in Europe and the United States. If their default rates rose to 15 percent of all deals—the previous high was 10 percent—the implied losses would equal only 3 and 7 percent, respectively, of 2006 syndicated-lending issuance in Europe and the United States (Exhibit 11).
Growth signals a structural shift
Despite the difficult experience of some recent buyout deals, we believe that global private-equity assets under management will double to $1.4 trillion by 2012. Our projection assumes that fund-raising remains at its 2006 level in Europe and the United States and grows at half its previous rate in Asia and the rest of the world. If current growth rates in fund-raising continued, private-equity assets would reach $2.6 trillion in 2012 (Exhibit 12).
Either way, that kind of growth represents a fundamental shift in the development of financial markets. For the past 25 years, financial intermediation in mature economies has migrated steadily from bank lending to the public-equity and debt markets. The rise of private equity and the private pools of capital in sovereign wealth funds herald the resurgence of private forms of financing.
The road ahead
Regardless of whether interest rates rise or oil prices drop, the four new power brokers will continue to grow and shape the future development of capital markets. To ease the transition to the coming financial order, the players can take some useful steps.
Because capital markets function on the free flow of information, sovereign wealth funds and other types of government-investment units9 in Asia and in oil-exporting nations should consider disclosing more information about their investment strategies, target portfolio allocations, internal risk-management procedures, and governance structures. (Norway’s Government Pension Fund is a model in this respect.) Funds can allay concerns that politics will play a role in their decisions—and reduce the likelihood that regulators will act too aggressively—by publicly stating their investment goals.
Policy makers in Europe and the United States should base any regulatory response to the activities of the new power brokers on an objective appraisal of the facts. In particular, they ought to distinguish between direct foreign acquisitions of companies and passive investments by diversified players in financial markets.
Banks must protect themselves against the risks posed by hedge funds and private-equity funds. In particular, they need tools and incentives to measure and monitor their exposure accurately and to maintain enough capital and collateral to cover these risks. Currently, it is difficult to assess the dangers stemming from illiquid collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs). Ratings agencies and investors alike must raise their risk-assessment game.
With the growth of credit derivatives and collateralized debt obligations, banks have in many cases removed themselves from the consequences of poorly underwritten lending. As institutions originate more and more loans without putting their own capital at risk for the long-term performance of those loans, regulators should find ways to check a decline in standards. Concerns about the rise of the four power brokers are rational. But we find cause for qualified optimism that the benefits of liquidity, innovation, and diversification they bring will outweigh the risks.
Diana Farrell and Susan Lund
http://thinkingmoose.blogspot.com/2007/12/large-forces-in-global-capital-markets.html
5.12.07
A major new private investment firm has been formed in Dubai, the official WAM news agency reported yesterday.
Dubai Infinity Holdings was set up by a group of prominent local investors and will focus on information technology, education, healthcare, lifestyle, real-estate and entertainment sectors in the region.
Dubai is busy expanding its portfolio of foreign assets.
Government-controlled or backed firms and investment funds have chased strategic targets such as European aerospace giant EADS in which Dubai International Capital bought a 3.12 per cent stake.
Another target was the upscale Barneys New York retail chain, which Dubai investment company Istithmar wrested from a rival Japanese bidder.
Dubai is busy expanding its portfolio of foreign assets.
Government-controlled or backed firms and investment funds have chased strategic targets such as European aerospace giant EADS in which Dubai International Capital bought a 3.12 per cent stake.
Another target was the upscale Barneys New York retail chain, which Dubai investment company Istithmar wrested from a rival Japanese bidder.
29.11.07
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.”
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.”
24.11.07
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
Mr. David Rubenstein, founder of the worlds largest private equity firm The Carlyle Group, has in his many industry presentations cited Christopher Columbus (the famous early voyager to the Americas) as a first in Private Equity! To fund his voyage to discover the “new world,” Columbus pitched his plans to Queen Isabel of Castille for the $10,000 he was trying to raise. The Queen after three years of ‘due diligence' finally made the deal with Columbus promising him 10% of the profits, 5% of the gold, reimbursement for all expenses in advance, and a title of admiral for life. Nice deal!
Similarly, as a reflection of the historic role Arab voyagers and traders have played in world civilization, Mr. Arif Naqvi, CEO of one of the largest Private Equity funds in the MENA (Middle East North Africa) region, has also been referencing the voyages of Sinbad the Sailor and the early Arab seafarer traders and the spice routes carrying frankincense from Yemen. This historical role is certainly being manifested today as well in the form of the economic boom the MENA region is experiencing.
An Industry Emerges
Driven by a three-fold oil price increase in the last four years, the Gulf Cooperative Council (GCC) nations have experienced extraordinary economic boom clocking an average 6.1% GDP growth in the last three years and liquidity estimated by KMPG to be in excess of US$2.3 trillion.
At the same time, the Islamic Finance industry continues to grow un-abated with an estimated US$ 750 billion in global assets growing 15-20% annually – with the GCC accounting for 2/3 rd of its size (S&P and HSBC analysis.)
The result of these two trends is a boom in Private Equity investments in the GCC and the broader MENA (Middle East & North Africa) which includes a growing trend of Islamic Private Equity funds as well. According to the 2007 Dow Jones Private Equity report, the MENA region has raised $16 billion since 1994 out of which $10 billion were raised in 2006. $1.1 billion are estimated to be Islamic Private Equity funds.
Today – local Private Equity players Abraaj Capital, Global Investment House, Millenium Finance Corp.(MFC) and even the global PE behemoth Carlyle Group have setup mega funds in excess of $1 billion focused on the region. Of these mega funds, the MFC funds are marketed as Islamic PE funds.
So what is Islamic Private Equity anyway? What is driving this trend and what is the impact of this trend?
Convergence of Islamic Finance & Private Equity
Commenting on Islamic Private Equity, Mr. Fuad Al-Shehab, General Manager of Investment Group at Kuwait based Boubyan Bank which together with Ryada Capital recently launched the $150 million Ryada Islamic Private Equity Fund said, “Private Equity is a natural fit for Islamic investors since at the core of Shari'ah principles money should be directed to the real economy through investing in businesses that offer ethically acceptable products and services. This means that returns should be earned through active involvement and participation in the business risk in Shari'ah compliant investments.”
There's certainly a growing realization that private equity amongst its other benefits is quite compatible with Islamic finance.
To understand the principles that are driving this convergence it's important to understand some core underlying principles. Aamir A. Rehman, a former Global Head of Strategy at HSBC Amanah, and Boston Consulting Group consultant, explains that Islamic finance is more than just financial contracts. He has identified the following core basic tenets of Islamic finance that Sharia' scholars draw upon:
1. If something is immoral, one cannot profit from it
2. To share reward, one must also share risk
3. One cannot sell what he or she does not own
4. In any transaction, one must clearly specify what he or she is buying or selling and one price is being paid
Mr. Rehman says that as the Islamic Finance industry is growing it is also maturing in terms of its richness of products being offered—from commercial banking, insurance to structured products, the Industry has near like-for-like parity with conventional offering. However, he points out that the Industry still needs to deepen and address a variety of investment product gaps. As real estate and equity assets have matured, and structured products and cash management products are maturing--sophisticated products such as Private Equity, Fixed income or hedging products are just emerging in the markets.
Mr. Rehman sees the Islamic private equity sector specially poised for expansion. He bases the natural partnership between Islamic Finance and Private Equity on conceptual and commercial grounds.
Conceptually, he contends that Islamic finance ethos actually seeks “real economy” impact which Private Equity is geared to deliver. Infact he says that the Private equity model represents classic Mudarabah with the GP / LP structure being a strikingly pure example of what a Mudarabah is envisioned to be. Meanwhile, he says that the traditional “Banking” model is inherently constraining with risk-free deposit and lending, and limited equity positions resulting in clients not sharing the upside.
Commercially, Mr Rehman highlights the growing interest and comfort within family businesses to seek private equity in rationalizing their assets. At the same time Sharia compliance is also becoming an important ‘exit' consideration. Another commercial aspect is the affect of the GCC markets that have severely corrected themselves giving private equity additional prominence.
Fundamentals of Private Equity in the MENA Region
MENA region is seeing a tremendous interest by the global Private Equity industry. David Rubenstein, the Managing Director of Carlyle Group recently commented that, “My proposition is that [the Middle East ] will be the fourth private equity center of the world five to 10 years from now.” Meanwhile a report titled “The most influential people in global private equity,” published by "Private Equity International'' magazine, four regional players were recognized as movers and shakers of the industry. These are Mr. David Jackson of Istithmar, Mr. Arif Naqvi of Abraaj Capital, Mr. Sameer Al Ansari of Dubai International Capital and Mr. Hareb Al Darmaki of Abu Dhabi Investment Authority.
Today there are a total of approximately 40 plus MENA region based Private Equity players which have grown manifolds in the past two years. In a recent report by Zawya and KPMG, as of mid-2006 there were an estimated US$13 billion in private equity capital currently under management off which 90% had been raised in the last two years.
MENA Region Private Equity Funds Raised, 1997-2006
Source: Zawya/ KPMG 2006
Also in 2006, the average fund size had increased to US$ 284 million, a three fold increase from that in 2003, when the average fund size was between US$ 80 million and US$ 100 million.
Sector Focus of PE Investment, 1997-2006
Source: Zawya/ KPMG 2006
Three of the key fundamentals that are also driving this trend are governments' tremendous strides in improving the regulatory environment, liberalization of the economies, and major infrastructure development demands.
The latest 2008 Doing Business– World Bank Report which investigates the regulations that enhance business activity and those that constrain it covering 178 economies showed Egypt and Saudi Arabia as the Top 10 reformers globally, with Egypt being #1. Similarly, the 2007 Global Competitiveness Report , by the World Economic Forum , has several countries in the Middle East and North Africa region in the upper half of the rankings led by Kuwait (30th), Qatar (31st), Tunisia (32nd), Saudi Arabia (35th) and the United Arab Emirates (37th).
Also, according to an Abraaj Capital analysis the privatization pipeline in the MENA region is expected to cross US$ 1 trillion with approximately 147 privatization transactions either announced or planned in the next ten years. Majority of these privatizations are for infrastructure assets such as roads, airports, bridges, public transit systems, seaports, power stations, power lines, gas pipelines, and communications networks.
‘Exit' Strategies and Other Challenges
While US$ 6.5 billion has been invested by Private Equity firms since 1998, only 5% (US$ 0.3 billion) has been realized in exits.
The industry is still in the investing phase so the jury is still out on the success and returns by the industry. However, viable exit strategies remain perhaps the biggest challenge for the industry. Even with the massive correction that the regions public markets recently faced, IPO market in the GCC is still one of the most promising exit routes for private equity managers to exit.
Some notable exits include Injazat Technology Funds recent sale of their investment in Atos Origin Middle East (AOME) through the sale of the company to HP, achieving a significant internal rate of return (IRR) of 75%. Also, Raya Holding, yielding a return of over 40 per cent for Injazat and was soon after listed on the Cairo Exchange. The most celebrated early exits for the industry was Abraaj Capitals sale of logistic company Aramex to Arab International Logistic for US$ 189 million in cash.
Some of the other challenges facing the industry include still evolving regulatory limits to foreign ownership, and the regions' family and government dominated businesses rather unstructured relationship style of negotiating, agreeing to equity terms, and board management expectations.
No Pain No Gain
However, it's in the midst of these challenges that those with a vision are investing and realizing tremendous opportunities. Mr. Rubenstein of the Carlyle Group recently in his comments differentiated between ‘emerged' and ‘emerging' markets. He made the argument that these two type of markets need to be treated differently and that the best investors will go beyond just ‘emerged' markets (ie China, India) and look to truly emerging economies that are slowly turning the corner and where returns will be maximized.
Given the relative infancy of the PE industry in the MENA region, its fair to say that the Christopher Columbus and Sindbad's have just set sail, but there's no denying that a tremendous opportunity awaits for those seeking this ‘new world.'
By Rafi-uddin Shikoh
Posted, Nov 22, 2007
Strong economic growth sparks Gulf IPO boom
DUBAI: Stock flotations are booming in the Gulf region, spurred by strong economic growth, a wealth of spare cash created by record-high oil prices and government encouragement, market specialists say.The most recent case, an initial public offering by Dubai port operator DP World, shows the magnitude of demand. The state-owned company yesterday said it had raised $4.96bn in an IPO that was 15 times oversubscribed.
The Middle East's largest IPO ever, it compared with $5.9bn for all 26 offerings made in the GCC in the first nine months of this year.
"Strong GDP growth averaging eight per cent per year, excess liquidity due to high oil prices, structural reforms by regional governments and privatisation initiatives have all contributed to an increase in the number of IPOs," said Tamer Bazzari, a partner in the Dubai-based Rasmala investment bank.
Before DP World's IPO, the largest public share offer was made by Saudi Telecom in 2003.
It raised more than $4bn dollars by selling a 30pc stake, a third of which went to two public pension funds.
"Saudi Arabia and the UAE are at the forefront of IPO activity in the region, having accounted for 70pc of all GCC IPOs over the last decade," Bazzari said.
Saudi IPOs in the first nine months of this year amounted to $3.7bn, compared with $1.6bn in the UAE and $389 million in Qatar.
The trend had been growing in the GCC, with total closed IPOs reaching $1.5bn in 2004, $6bn in 2005 and $7.5bn last year, according to Abu Dhabi-based private equity firm Gulf Capital.
The region accounted for the bulk of IPOs in the Middle East, which Ernst and Young said numbered 87 last year with a total value of $10.8bn.
"It will continue to grow sharply ... The appetite continues to be high," said Brad Bourland, chief economist at Riyadh-based Jadwa Investment.
"There are about 100 (new) IPOs in the pipeline," he said, while Gulf Capital said IPOs between this year and 2010 should exceed 106.
"Regional liquidity, combined with increasing interest by international investors, is expected to contribute to the success of future IPOs," Bazzari said.
Gulf countries are enjoying handsome windfalls on the back of record-high crude prices, which have pumped huge funds into their economies and jumpstarted multi-billion-dollar infrastructure projects that had been delayed.
Abundant liquidity appears also to face a shortage in investment opportunities as almost all IPOs in the region are over-subscribed.
Early last year, investors from GCC countries slept in tents and cars in Doha as they swamped the Qatari capital for an IPO by Al Rayan bank. The newly formed lender had offered 55pc of its capital for $1.13bn and ended up six times oversubscribed.
The Middle East's largest IPO ever, it compared with $5.9bn for all 26 offerings made in the GCC in the first nine months of this year.
"Strong GDP growth averaging eight per cent per year, excess liquidity due to high oil prices, structural reforms by regional governments and privatisation initiatives have all contributed to an increase in the number of IPOs," said Tamer Bazzari, a partner in the Dubai-based Rasmala investment bank.
Before DP World's IPO, the largest public share offer was made by Saudi Telecom in 2003.
It raised more than $4bn dollars by selling a 30pc stake, a third of which went to two public pension funds.
"Saudi Arabia and the UAE are at the forefront of IPO activity in the region, having accounted for 70pc of all GCC IPOs over the last decade," Bazzari said.
Saudi IPOs in the first nine months of this year amounted to $3.7bn, compared with $1.6bn in the UAE and $389 million in Qatar.
The trend had been growing in the GCC, with total closed IPOs reaching $1.5bn in 2004, $6bn in 2005 and $7.5bn last year, according to Abu Dhabi-based private equity firm Gulf Capital.
The region accounted for the bulk of IPOs in the Middle East, which Ernst and Young said numbered 87 last year with a total value of $10.8bn.
"It will continue to grow sharply ... The appetite continues to be high," said Brad Bourland, chief economist at Riyadh-based Jadwa Investment.
"There are about 100 (new) IPOs in the pipeline," he said, while Gulf Capital said IPOs between this year and 2010 should exceed 106.
"Regional liquidity, combined with increasing interest by international investors, is expected to contribute to the success of future IPOs," Bazzari said.
Gulf countries are enjoying handsome windfalls on the back of record-high crude prices, which have pumped huge funds into their economies and jumpstarted multi-billion-dollar infrastructure projects that had been delayed.
Abundant liquidity appears also to face a shortage in investment opportunities as almost all IPOs in the region are over-subscribed.
Early last year, investors from GCC countries slept in tents and cars in Doha as they swamped the Qatari capital for an IPO by Al Rayan bank. The newly formed lender had offered 55pc of its capital for $1.13bn and ended up six times oversubscribed.
23.11.07
Middle East Series: Finance and Investments
SM Goh was quoted recently as stating that he was disappointed at Singapore’s inability to gain a larger share of the investment funds coming out of the Middle East….. and when you consider that this segment of the local banking industry has been growing at 20-30% per year, it gives a hint of how prodigiously the liquidity in the Middle East must be growing.
This segment centres around three main themes (in my view), which will be outlined below. It is worth noting that the liquidity relating to these themes mainly relate to the six richer GCC (Gulf Cooperation Council) countries: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, which are relatively more stable politically, foreigner-friendly, and boast strong services industries due to their affluence and consequent strong soft capital — all necessary ingredients\for a strong financial industry infrastructure. Equally importantly, they are strong direct beneficiaries of high oil prices — with the probable exception of Bahrain.
The first thread is the development of the domestic financial markets. The booming regional economy has boosted the profits of banks, with tailwinds in the form of huge and growing business volumes and a low cost of funds and labor (due to high liquidity as a result of easy oil money) providing the momentum. Given the excellent demographics (one of the fastest growing regional populations) and oil money, foreign banks have been fast getting into the act by setting up branches in the region, leading to rapid growth of assets under management, a phenomenal increase in debt issuance; and accelerated innovation of new products, especially in the area of Islamic finance, with the creation of new Islamic banks. In the capital markets, the stock exchanges in Saudi Arabia and the UAE grew >100% in 2005, and that in Kuwait and Qatar grew >60%; this was due to high oil prices, entry of foreign funds (private equity, hedge funds) as well as a private sector investment boom in areas such as real estate, financial services, industrials and telco infrastructure. In recognition of global interest coming into the region, the UAE launched the Dubai International Financial Exchange (DIFX), the first exchange in its region created to list securities from many different countries, targeted to attract large numbers of international brokers and investment banks and hence establish the city as a regional financial hub. The first theme is one of expanding and liberalising local capital markets and financial services industries in the region.
In particular, Islamic finance has become the largest growth sector within banking globally - growing by 10 to 15 per cent a year. It is worth US$300-500B as of September 2006. This is the second major theme. This banking concept is based on interpretations from the Qur’an, and its two central tenets are that no interest can be earned on loans, and socially responsible investing. The first is self-explanatory, the second means investing responsibly to assure that the money does not go for “bad” purposes, such as investments in drugs, weapons, alcohol, pornography, and terrorism — not much different from the Western concepts of ethical investing. Islamic financial instruments are not only available within the Middle East bond markets; they are increasingly being made available in foreign markets eager to attract Arab money. There are now Sukuk (Islamic) bonds listed on the London Stock Exchange, and Islamic countries like Malaysia, with decade-long experience in Islamic funds and with legal infrastructure in place, are looking to capture the market with their Islamic credentials. Key Islamic finance instruments include Sukok bonds (Islamic bonds, mentioned above), takaful insurance (cooperative insurance compliant with Islamic beliefs), and Islamic investment funds. Given the need to raise foreign capital (through infrastructure bonds) to invest in new infrastructure projects in the Middle East (oil money not enough) as well as offshore banking services to manage their burgeoning petrodollar assets, Middle East demand for Islamic banking services are expected to grow further.
The third theme relates to the overseas investments being made by the Middle East nations, especially the GCC member states. This is mainly done through their cash-rich state investment agencies, and also partly by corporates looking at other markets outside the GCC region to diversify and hedge market risk (of operating in a single market facing increasing foreign competition). Generally, their investment markets may be divided into several categories: stable Western markets, including the US (less so since Sep 11) and Europe (their old colonial masters and also in close proximity), moderate/relatively stable Muslim countries like Pakistan, Malaysia and Indonesia, high-potential/hotspots such as China (especially their banks) and India, and neighbouring countries like Jordan, Egypt and North Africa. Investments can be portfolio-type (ie. no controlling interest) or direct investments, which tend to be strategic (eg. Dubai Ports’ port acquisitions in Hong Kong and P&O in Europe); real estate is a major preference, especially Asian property. Again, the rules apply: no companies that traffic in alcohol, pork, pornography or gambling, and also Islamic financing is typically used to avoid violating religious rules. This trend also partly explains the growth in Islamic financing.
In the Singapore stock market, the most obvious beneficiary from growth in the Middle East financial and investments sector are not banks, but real estate. The former has not achieved any significant penetration into the Middle East nor developed any strong exposure to outflowing Middle Eastern funds, while the latter fit the profile for the investment preferences of Middle East investors: Asian, prime real estate, key regional hub, friendly population and Muslim neighbours. One may note the ease with which large placements by Ho Bee and SC Global were taken up as evidence of interest in the local real estate sector.
This segment centres around three main themes (in my view), which will be outlined below. It is worth noting that the liquidity relating to these themes mainly relate to the six richer GCC (Gulf Cooperation Council) countries: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, which are relatively more stable politically, foreigner-friendly, and boast strong services industries due to their affluence and consequent strong soft capital — all necessary ingredients\for a strong financial industry infrastructure. Equally importantly, they are strong direct beneficiaries of high oil prices — with the probable exception of Bahrain.
The first thread is the development of the domestic financial markets. The booming regional economy has boosted the profits of banks, with tailwinds in the form of huge and growing business volumes and a low cost of funds and labor (due to high liquidity as a result of easy oil money) providing the momentum. Given the excellent demographics (one of the fastest growing regional populations) and oil money, foreign banks have been fast getting into the act by setting up branches in the region, leading to rapid growth of assets under management, a phenomenal increase in debt issuance; and accelerated innovation of new products, especially in the area of Islamic finance, with the creation of new Islamic banks. In the capital markets, the stock exchanges in Saudi Arabia and the UAE grew >100% in 2005, and that in Kuwait and Qatar grew >60%; this was due to high oil prices, entry of foreign funds (private equity, hedge funds) as well as a private sector investment boom in areas such as real estate, financial services, industrials and telco infrastructure. In recognition of global interest coming into the region, the UAE launched the Dubai International Financial Exchange (DIFX), the first exchange in its region created to list securities from many different countries, targeted to attract large numbers of international brokers and investment banks and hence establish the city as a regional financial hub. The first theme is one of expanding and liberalising local capital markets and financial services industries in the region.
In particular, Islamic finance has become the largest growth sector within banking globally - growing by 10 to 15 per cent a year. It is worth US$300-500B as of September 2006. This is the second major theme. This banking concept is based on interpretations from the Qur’an, and its two central tenets are that no interest can be earned on loans, and socially responsible investing. The first is self-explanatory, the second means investing responsibly to assure that the money does not go for “bad” purposes, such as investments in drugs, weapons, alcohol, pornography, and terrorism — not much different from the Western concepts of ethical investing. Islamic financial instruments are not only available within the Middle East bond markets; they are increasingly being made available in foreign markets eager to attract Arab money. There are now Sukuk (Islamic) bonds listed on the London Stock Exchange, and Islamic countries like Malaysia, with decade-long experience in Islamic funds and with legal infrastructure in place, are looking to capture the market with their Islamic credentials. Key Islamic finance instruments include Sukok bonds (Islamic bonds, mentioned above), takaful insurance (cooperative insurance compliant with Islamic beliefs), and Islamic investment funds. Given the need to raise foreign capital (through infrastructure bonds) to invest in new infrastructure projects in the Middle East (oil money not enough) as well as offshore banking services to manage their burgeoning petrodollar assets, Middle East demand for Islamic banking services are expected to grow further.
The third theme relates to the overseas investments being made by the Middle East nations, especially the GCC member states. This is mainly done through their cash-rich state investment agencies, and also partly by corporates looking at other markets outside the GCC region to diversify and hedge market risk (of operating in a single market facing increasing foreign competition). Generally, their investment markets may be divided into several categories: stable Western markets, including the US (less so since Sep 11) and Europe (their old colonial masters and also in close proximity), moderate/relatively stable Muslim countries like Pakistan, Malaysia and Indonesia, high-potential/hotspots such as China (especially their banks) and India, and neighbouring countries like Jordan, Egypt and North Africa. Investments can be portfolio-type (ie. no controlling interest) or direct investments, which tend to be strategic (eg. Dubai Ports’ port acquisitions in Hong Kong and P&O in Europe); real estate is a major preference, especially Asian property. Again, the rules apply: no companies that traffic in alcohol, pork, pornography or gambling, and also Islamic financing is typically used to avoid violating religious rules. This trend also partly explains the growth in Islamic financing.
In the Singapore stock market, the most obvious beneficiary from growth in the Middle East financial and investments sector are not banks, but real estate. The former has not achieved any significant penetration into the Middle East nor developed any strong exposure to outflowing Middle Eastern funds, while the latter fit the profile for the investment preferences of Middle East investors: Asian, prime real estate, key regional hub, friendly population and Muslim neighbours. One may note the ease with which large placements by Ho Bee and SC Global were taken up as evidence of interest in the local real estate sector.
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