Dubai firm buys Egypt bank stake
CAIRO: Commercial International Bank yesterday said a firm owned by Dubai's ruler had bought a 5.24 per cent stake in the bank, the emirate's second major investment in a year in Egypt's financial sector.
Dubai Capital Group, part of government-owned Dubai Holding, had accumulated the stake of Egypt's largest publicly traded lender from the Egyptian and London stock exchanges over the past few months, a CIB spokesman said.
Dubai Holding is owned by Dubai's ruler Shaikh Mohammed bin Rashid Al Maktoum.
"This investment (provides) us opportunities in an environment which has been challenged by the changes in the global financial services sector," Dubai Capital Group chief executive Mustafa Farid Geninah said.
Another Dubai government-owned firm bought a 25pc stake in EFG-Hermes in November.
13.7.08
GCC sates may invest $9tr abroad
Several trends have emerged indicating where a mammoth $5 trillion to $9 trillion in oil revenues in GCC states like Qatar will be invested over the next decade.
In 2002, nearly 85 percent of the Gulf's wealth was invested abroad in financial instruments mostly linked to the US dollar. However, by 2007, this had fallen to 75 percent due to the rising investment within the Gulf region itself.
There will be increased investments onshore in the MENA region and in Asia, a shift in allocation to alternative investments and more direct investment strategies, an increased sophistication and institutionalisation of the Gulf region including the growing importance of corporate governance - a soaring demand for Islamic products and greater importance of Sovereign Wealth Funds (SWFs), according to Investcorp, a Bahrain-based investment products provider with over $15bn of assets under management.
Gary Long, Investcorp President and Chief Operating Officer (COO), speaking at the Harvard Club in New York, said the oil boom will translate into an investable asset pool in excess of $10tn by 2020.
Long, who addressed the Club along with Ramzi AbdelJaber, head of Investcorp's Business Development Unit, emphasised the new and increasing tendency of GCC investors to make local investments.
Increasing investment in the MENA region and Asia had in turn led to an increased demand for alternative investments such as private equity and hedge funds.
This shift in strategy has been driven by the need to invest more aggressively in hard and social infrastructure to cater to fast-growing populations following decades of under-investment and the emergence of more attractive onshore investment opportunities buoyed by the strong regional economic growth.
Fueling these trends are predicted record figures for the region's oil revenues which will far outstrip the region's current GDP of $800bn.
(MENAFN - The Peninsula)
In 2002, nearly 85 percent of the Gulf's wealth was invested abroad in financial instruments mostly linked to the US dollar. However, by 2007, this had fallen to 75 percent due to the rising investment within the Gulf region itself.
There will be increased investments onshore in the MENA region and in Asia, a shift in allocation to alternative investments and more direct investment strategies, an increased sophistication and institutionalisation of the Gulf region including the growing importance of corporate governance - a soaring demand for Islamic products and greater importance of Sovereign Wealth Funds (SWFs), according to Investcorp, a Bahrain-based investment products provider with over $15bn of assets under management.
Gary Long, Investcorp President and Chief Operating Officer (COO), speaking at the Harvard Club in New York, said the oil boom will translate into an investable asset pool in excess of $10tn by 2020.
Long, who addressed the Club along with Ramzi AbdelJaber, head of Investcorp's Business Development Unit, emphasised the new and increasing tendency of GCC investors to make local investments.
Increasing investment in the MENA region and Asia had in turn led to an increased demand for alternative investments such as private equity and hedge funds.
This shift in strategy has been driven by the need to invest more aggressively in hard and social infrastructure to cater to fast-growing populations following decades of under-investment and the emergence of more attractive onshore investment opportunities buoyed by the strong regional economic growth.
Fueling these trends are predicted record figures for the region's oil revenues which will far outstrip the region's current GDP of $800bn.
(MENAFN - The Peninsula)
3.7.08
More foreign players flocking to region as private equity industry witnesses growth
More foreign players flocking to region as private equity industry witnesses growth
The private equity (PE) industry in the Middle East and North Africa (Mena) region has been under the spotlight over the last few years with more and more foreign players flocking to the region, said Professor Dr Rasim Kaan Aytogu, Executive Director of Tanmiyat Group.
He said the PE industry in the GCC in particular and the Mena region in general ended 2005 with a record number of funds launched and announcements made.
More than 12 funds with a total of around $3 billion (Dh11bn) of commitments started their operations in that year. International PE funds, including The Carlyle Group, 3i, and CVC, for the first time started to look for deal flow from the Middle East after having considered the region solely as a source of limited partners in the past.
Since then, the industry never looked backed. By the end of 2007, funds under management in Mena increased to 76 funds under managing $13bn. This sudden take-off can be attributed to many factors within the context of the global prominence of PE as an investment class. Economic growth, high oil prices, increasing economic liberalisation, reduced restrictions on foreign investment, privatisation of state-owned assets, and greater liquidity of regional stock markets have all been put forward as stimuli for the impressive growth of PE in the GCC.
Starting from 2002, oil prices began their continuous climb from $20/barrel, rising around 30-40 per cent annually. Liquidity from petrodollars was compounded by the repatriation of capital from the West following the 9/11 events. The excess capital was first directed towards the capital markets, which appreciated 100 per cent annually between 2003 and 2005. Liquidity then filtered into real estate, which in the past few years witnessed a flood of announced mega real-estate projects (for example, the Palm, DubaiLand and Kind Abdullah Economic City). In 2005 some of the excess liquidity moved into private equity, jump starting the industry.
Fuelled by the increasing oil prices and production, GCC economics have witnessed stellar growth in the past three years. Future economic growth is expected to be maintained in the short and medium terms and to surpass global economic growth of five per cent. Aggressive financial policies and economic restructuring by the GCC governments will ensure that growth in the non-oil sector will be over five per cent and relatively isolated from the volatility of oil prices.
Despite the windfall from higher oil revenues, the GCC governments have started selling state-owned assets at an increasing rate. This is in light of the increasing economic benefits from private sector management which have led the governments to restructure their economies during a period in which a favorable environment exists.
Airlines, power stations, desalination plants, industrial assets, postal services, banks, stock exchanges, telecom operators, and ports are some of the assets that have been or will be sold to the private sector either partially or fully. The value of the assets in all GCC privatisation programmes is estimated at as high as $1 trillion.
Within this positive environment, the PE industry has risen quickly in the GCC. Not only it is viewed as an out-performing investment class, but also more importantly, governments and economist are preaching its positive role in developing the private sector and creating strong, globally competitive local corporations. Whenever an investment in PE fund is announced, the local media has consistently praised the announcement.
Industry experts keep on reiterating whether the industry has grown too fast on the back of the excess liquidity. Although the value of investments has increased considerably in 2007, the number of transactions has staggered to an extent. Moreover, the largest three transactions have been all in Egypt, whilst the GCC has only witnessed transactions mostly smaller that $100 million, as the flow of privatisation transactions in the GCC has not yet materialised.
Aytogu believes that the quality of deal flow continues to improve, influenced by favourable macroeconomic factors. Corporate Arabia profitability is increasing steadily, and this will create bigger companies that will sooner or later need serious capital injection to maintain their growth trajectory. Banks reluctance to extend additional lending against a backdrop of a global credit crunch will also increase the chances of opening capital to private equity funds.
Egypt has emerged as the leading destination for private equity money in 2006-07. The size of the Egyptian economy, its need for capital, and the government's liberal policies have all contributed to Egypt's attractiveness. The UAE, traditionally the leading destination, remained at No2. Saudi Arabia is rapidly increasing its share, albeit from a lower base. Jordan has also maintained its attractiveness at the fourth position, despite the small size of its economy.
It is interesting to note how sensitive private equity money is to macroeconomic policies. Countries like Kuwait – third largest economy in the GCC – attracted less investment than Jordan – fifth the size of Kuwait's economy. Saudi Arabia's share of private equity investments increased only after government policies became more investment-friendly. The PE industry quickly completed the investment cycle, and the number of exits soared in value in 2007 to more that $1.5bn. The internal rate of returns (IRRs) achieved by these exits have ranged between 31 per cent and 348 per cent, very healthy returns for a nascent industry.
Exits were split between IPOs, trade sale, and financial sales. Despite the robust activity in the IPO market, IPOs as an exit route are decreasing in importance as trade and financial buyers are becoming more active. Naturally, private equity players find trade and financial sales less complicated, and hence, are exploring such exit routes more aggressively than before.
With new plans sprouting up to develop Saudi Arabia's infrastructure, particularly in the transport and communication sectors, as well as down-market industries in the supply chain of goods and services, Saudi Arabia is a slow giant ripe for the introduction of management efficiency.
A slow relaxation of regulations on private equity firms is just one of the series of measures – along building the social infrastructure of education and healthcare – where the kingdom is thoughtfully giving a thumbs-up to private equity groups looking to enter the market. This is done through obvious contacts with regulatory and other government authorities, but also with the country's major family firms.
The noticeable difference between the Saudi market and those of its neighbouring economies are the following:
• Both the UAE and Bahrain have been leaders in creating regulatory and economic environments that have been inviting and welcoming to foreign investment, particularly the development of the banking and financial sector.
• Because Saudi Arabia is the biggest market in the Gulf Co-operation Council (GCC) and its economic powerhouse, the economy is slower, more deliberate and has a regulatory scheme that is changing on a more deliberate basis.
• But the kingdom has already made significant changes, for instance the Saudi government shifted from its traditional policy to spend 60-70 per cent of GDP on defence and infrastructure to the new plan whereby more than 50 per cent of the GDP is being spent on housing, education and healthcare. To prepare the country for an era of declining demand for oil and the possible price drops associated with it.
In addition, the Saudi regulators are in need of having to set criteria, they have to be careful, then they have to make a move attributing the caution to the relative size of the country and the potential for grave errors from a regulatory or economic missteps.
Culturally, however, entry into the Saudi market is a new frontier for private equity firms. They must understand how to navigate policies by deciphering them.
There is a need for liquidity and a formal capital structure in an increasingly competitive free-market economic environment, which will result in significant merger, acquisition and divestiture activity. Many companies have capitalised on these opportunities.
The numbers
$13bn: worth of funds, which increased to 76, were under management in Mena by 2007-end
$1trn: is the estimated value of total assets involved in all GCC privatisation programmes
Challenges and trends
Robustness of economic growth: As the subprime crisis snowballs in 2008 into a global economic slowdown, the impact of such a negative turn-around in the world's economy on growth in the GCC cannot be clearly assessed. However, it is expected that the GCC will be one of the least affected regions.
Entry of international players: The previously timid interest of international players in the region was suddenly emboldened when The Carlyle Group announced its plans to raise a MENA fund for up to $750 million by 2008. The Carlyle Group is following the footsteps of many international players like 3i, TPG, Duetsche Bank, Credit Suisse, CVC, Ripplewood, HSBC, and EMP. The entry of The Carlyle Group will definitely entice many other global heavy-weights to establish funds for the region.
Larger funds: The PE industry surpassed the $100m per fund milestone in 2003, the $500m in 2005, and the $1 billion in 2006.
Track record: As regional fund managers start exhibiting their investments, their track record is being established – in most cases showing 30 per cent plus net returns. The window of opportunity for new fund managers is starting to close, and 2007 has seen some fund managers is starting to close, and 2007 has seen some fund raising efforts being aborted.
Deal flow: Business and social habits, limited opportunities in the private sector, and delayed privatisation programmes have made good deals hard to come by. Proprietary access and extensive deep business networks are essential for succeeding in the region. Regional dynamics have not allowed intermediaries to play a significant role in maturing deal flow, and hence made deal sourcing process a competitive edge for some and frustrating issue for others.
The private equity (PE) industry in the Middle East and North Africa (Mena) region has been under the spotlight over the last few years with more and more foreign players flocking to the region, said Professor Dr Rasim Kaan Aytogu, Executive Director of Tanmiyat Group.
He said the PE industry in the GCC in particular and the Mena region in general ended 2005 with a record number of funds launched and announcements made.
More than 12 funds with a total of around $3 billion (Dh11bn) of commitments started their operations in that year. International PE funds, including The Carlyle Group, 3i, and CVC, for the first time started to look for deal flow from the Middle East after having considered the region solely as a source of limited partners in the past.
Since then, the industry never looked backed. By the end of 2007, funds under management in Mena increased to 76 funds under managing $13bn. This sudden take-off can be attributed to many factors within the context of the global prominence of PE as an investment class. Economic growth, high oil prices, increasing economic liberalisation, reduced restrictions on foreign investment, privatisation of state-owned assets, and greater liquidity of regional stock markets have all been put forward as stimuli for the impressive growth of PE in the GCC.
Starting from 2002, oil prices began their continuous climb from $20/barrel, rising around 30-40 per cent annually. Liquidity from petrodollars was compounded by the repatriation of capital from the West following the 9/11 events. The excess capital was first directed towards the capital markets, which appreciated 100 per cent annually between 2003 and 2005. Liquidity then filtered into real estate, which in the past few years witnessed a flood of announced mega real-estate projects (for example, the Palm, DubaiLand and Kind Abdullah Economic City). In 2005 some of the excess liquidity moved into private equity, jump starting the industry.
Fuelled by the increasing oil prices and production, GCC economics have witnessed stellar growth in the past three years. Future economic growth is expected to be maintained in the short and medium terms and to surpass global economic growth of five per cent. Aggressive financial policies and economic restructuring by the GCC governments will ensure that growth in the non-oil sector will be over five per cent and relatively isolated from the volatility of oil prices.
Despite the windfall from higher oil revenues, the GCC governments have started selling state-owned assets at an increasing rate. This is in light of the increasing economic benefits from private sector management which have led the governments to restructure their economies during a period in which a favorable environment exists.
Airlines, power stations, desalination plants, industrial assets, postal services, banks, stock exchanges, telecom operators, and ports are some of the assets that have been or will be sold to the private sector either partially or fully. The value of the assets in all GCC privatisation programmes is estimated at as high as $1 trillion.
Within this positive environment, the PE industry has risen quickly in the GCC. Not only it is viewed as an out-performing investment class, but also more importantly, governments and economist are preaching its positive role in developing the private sector and creating strong, globally competitive local corporations. Whenever an investment in PE fund is announced, the local media has consistently praised the announcement.
Industry experts keep on reiterating whether the industry has grown too fast on the back of the excess liquidity. Although the value of investments has increased considerably in 2007, the number of transactions has staggered to an extent. Moreover, the largest three transactions have been all in Egypt, whilst the GCC has only witnessed transactions mostly smaller that $100 million, as the flow of privatisation transactions in the GCC has not yet materialised.
Aytogu believes that the quality of deal flow continues to improve, influenced by favourable macroeconomic factors. Corporate Arabia profitability is increasing steadily, and this will create bigger companies that will sooner or later need serious capital injection to maintain their growth trajectory. Banks reluctance to extend additional lending against a backdrop of a global credit crunch will also increase the chances of opening capital to private equity funds.
Egypt has emerged as the leading destination for private equity money in 2006-07. The size of the Egyptian economy, its need for capital, and the government's liberal policies have all contributed to Egypt's attractiveness. The UAE, traditionally the leading destination, remained at No2. Saudi Arabia is rapidly increasing its share, albeit from a lower base. Jordan has also maintained its attractiveness at the fourth position, despite the small size of its economy.
It is interesting to note how sensitive private equity money is to macroeconomic policies. Countries like Kuwait – third largest economy in the GCC – attracted less investment than Jordan – fifth the size of Kuwait's economy. Saudi Arabia's share of private equity investments increased only after government policies became more investment-friendly. The PE industry quickly completed the investment cycle, and the number of exits soared in value in 2007 to more that $1.5bn. The internal rate of returns (IRRs) achieved by these exits have ranged between 31 per cent and 348 per cent, very healthy returns for a nascent industry.
Exits were split between IPOs, trade sale, and financial sales. Despite the robust activity in the IPO market, IPOs as an exit route are decreasing in importance as trade and financial buyers are becoming more active. Naturally, private equity players find trade and financial sales less complicated, and hence, are exploring such exit routes more aggressively than before.
With new plans sprouting up to develop Saudi Arabia's infrastructure, particularly in the transport and communication sectors, as well as down-market industries in the supply chain of goods and services, Saudi Arabia is a slow giant ripe for the introduction of management efficiency.
A slow relaxation of regulations on private equity firms is just one of the series of measures – along building the social infrastructure of education and healthcare – where the kingdom is thoughtfully giving a thumbs-up to private equity groups looking to enter the market. This is done through obvious contacts with regulatory and other government authorities, but also with the country's major family firms.
The noticeable difference between the Saudi market and those of its neighbouring economies are the following:
• Both the UAE and Bahrain have been leaders in creating regulatory and economic environments that have been inviting and welcoming to foreign investment, particularly the development of the banking and financial sector.
• Because Saudi Arabia is the biggest market in the Gulf Co-operation Council (GCC) and its economic powerhouse, the economy is slower, more deliberate and has a regulatory scheme that is changing on a more deliberate basis.
• But the kingdom has already made significant changes, for instance the Saudi government shifted from its traditional policy to spend 60-70 per cent of GDP on defence and infrastructure to the new plan whereby more than 50 per cent of the GDP is being spent on housing, education and healthcare. To prepare the country for an era of declining demand for oil and the possible price drops associated with it.
In addition, the Saudi regulators are in need of having to set criteria, they have to be careful, then they have to make a move attributing the caution to the relative size of the country and the potential for grave errors from a regulatory or economic missteps.
Culturally, however, entry into the Saudi market is a new frontier for private equity firms. They must understand how to navigate policies by deciphering them.
There is a need for liquidity and a formal capital structure in an increasingly competitive free-market economic environment, which will result in significant merger, acquisition and divestiture activity. Many companies have capitalised on these opportunities.
The numbers
$13bn: worth of funds, which increased to 76, were under management in Mena by 2007-end
$1trn: is the estimated value of total assets involved in all GCC privatisation programmes
Challenges and trends
Robustness of economic growth: As the subprime crisis snowballs in 2008 into a global economic slowdown, the impact of such a negative turn-around in the world's economy on growth in the GCC cannot be clearly assessed. However, it is expected that the GCC will be one of the least affected regions.
Entry of international players: The previously timid interest of international players in the region was suddenly emboldened when The Carlyle Group announced its plans to raise a MENA fund for up to $750 million by 2008. The Carlyle Group is following the footsteps of many international players like 3i, TPG, Duetsche Bank, Credit Suisse, CVC, Ripplewood, HSBC, and EMP. The entry of The Carlyle Group will definitely entice many other global heavy-weights to establish funds for the region.
Larger funds: The PE industry surpassed the $100m per fund milestone in 2003, the $500m in 2005, and the $1 billion in 2006.
Track record: As regional fund managers start exhibiting their investments, their track record is being established – in most cases showing 30 per cent plus net returns. The window of opportunity for new fund managers is starting to close, and 2007 has seen some fund managers is starting to close, and 2007 has seen some fund raising efforts being aborted.
Deal flow: Business and social habits, limited opportunities in the private sector, and delayed privatisation programmes have made good deals hard to come by. Proprietary access and extensive deep business networks are essential for succeeding in the region. Regional dynamics have not allowed intermediaries to play a significant role in maturing deal flow, and hence made deal sourcing process a competitive edge for some and frustrating issue for others.
11.6.08
Private equity wave forecast for Mideast
Private equity wave forecast for Mideast
LONDON: The Middle East is set to enjoy a surge in private equity investment as Western markets continue to be squeezed by the global credit crunch, according to a report published on Wednesday. UK financial consultant Deloitte predicts strong growth on the back of the large availability of capital and says an increasing number of funds are expected to target the region, with particular focus on the Gulf Cooperation Council (GCC) states and Egypt.
Deloitte's upbeat news comes just days after Egypt's Weather Investments, which has a controlling stake in Orascom Telecom, announced the sale of 10 percent of its shares for around $1.5 billion to a group of US private equity firms led by Apax Partners, Madison Dearborn Partners and TA Associates.
The report is the latest bullish assessment of the Middle East's financial sector. Earlier this month Standard & Poors (S&P) gave what in the current global financial crisis amounts to a vote of confidence in Middle East equity markets. In its report the rating agency noted that the region's markets "have been resilient" amid the current market turmoil.
Meanwhile, Deloitte points to what it describes as a "perfect storm situation" of high levels of liquidity due to high oil prices and the increasing sophistication of the market in the region - including improved regulation and the desire of people to invest more in their home markets.
Deloitte predicts the hotspots for the coming year will predictably be the states of the GCC, along with Egypt, the only Middle East country combining scale with a history of industrialization. But Deloitte also flags up Algeria, Libya and Sudan as emerging markets, which Deloitte says are very much like GCC nations 30 or 40 years ago with "natural resources and scope for investment."
The good news is largely a reflection of the abundance of capital swirling around the region, courtesy of the seemingly unending upward climb of oil prices. But S&P noted that the scarcity of investment opportunities is also a significant factor in the performance of the region's markets. And there of course is the rub. For while private equity is desperately seeking homes for its investment bucks, there is a currently lot of cash chasing a very small number of investment opportunities in the Middle East.
Chris Ward, Deloitte's global head of corporate finance agreed supply and demand is a problem.
"Confidence levels are high for long-term growth prospects in the MENA [Middle East and North Africa] region and there is a growing awareness of private equity. But more needs to be done to raise the profile of the industry which currently has more capital to deploy than investment opportunities," he said.
There is also the issue of still restrictive foreign ownership legislation in the region, which, while changing, remains an obstacle to much investment. The key for Western private equity funds, as ever, and as Deloitte notes, will be for them to partner with local groups.
The report notes that many regional family businesses are now more familiar with private equity and are more open to talking to private equity investors. It adds that the rise in initial public offerings in the region also offers opportunities for private equity investment because many companies are likely to take on a partner when they go public that can guide them through the process.
Deloitte believes this will pave the way for Western private equity groups to make inroads into the market here. Timothy Mahapatra, managing partner for transaction services with Deloitte said: "Whilst domestic players are expected to be most active within the MENA region in the next 12 months, we are seeing a rising number of international private equity firms looking towards the region as a new and exciting area, rich in growth opportunities in what is still a relatively untapped market, to deploy capital. The attractiveness of the region from an investor perspective cannot be underestimated, with an economic climate ripe for conducting business in."
That sounds fine, but as Deloitte's report makes clear, private equity funds are primarily interested in energy, real estate and financial services sectors, all of which still continue to have restrictions on overseas investment in most Middle East states.
And while a recent report by consultant group KPMG estimated that more than 200 privatizations valued at over $1 trillion are in the pipeline in the next 10 years, the reality, as the Deloitte report notes, is that the region is unlikely to see kind the multi-billion dollar private equity deals common in American and Europe but will instead have to be content with deals of between $100 million and $1 billion.
By Michael Glackin
LONDON: The Middle East is set to enjoy a surge in private equity investment as Western markets continue to be squeezed by the global credit crunch, according to a report published on Wednesday. UK financial consultant Deloitte predicts strong growth on the back of the large availability of capital and says an increasing number of funds are expected to target the region, with particular focus on the Gulf Cooperation Council (GCC) states and Egypt.
Deloitte's upbeat news comes just days after Egypt's Weather Investments, which has a controlling stake in Orascom Telecom, announced the sale of 10 percent of its shares for around $1.5 billion to a group of US private equity firms led by Apax Partners, Madison Dearborn Partners and TA Associates.
The report is the latest bullish assessment of the Middle East's financial sector. Earlier this month Standard & Poors (S&P) gave what in the current global financial crisis amounts to a vote of confidence in Middle East equity markets. In its report the rating agency noted that the region's markets "have been resilient" amid the current market turmoil.
Meanwhile, Deloitte points to what it describes as a "perfect storm situation" of high levels of liquidity due to high oil prices and the increasing sophistication of the market in the region - including improved regulation and the desire of people to invest more in their home markets.
Deloitte predicts the hotspots for the coming year will predictably be the states of the GCC, along with Egypt, the only Middle East country combining scale with a history of industrialization. But Deloitte also flags up Algeria, Libya and Sudan as emerging markets, which Deloitte says are very much like GCC nations 30 or 40 years ago with "natural resources and scope for investment."
The good news is largely a reflection of the abundance of capital swirling around the region, courtesy of the seemingly unending upward climb of oil prices. But S&P noted that the scarcity of investment opportunities is also a significant factor in the performance of the region's markets. And there of course is the rub. For while private equity is desperately seeking homes for its investment bucks, there is a currently lot of cash chasing a very small number of investment opportunities in the Middle East.
Chris Ward, Deloitte's global head of corporate finance agreed supply and demand is a problem.
"Confidence levels are high for long-term growth prospects in the MENA [Middle East and North Africa] region and there is a growing awareness of private equity. But more needs to be done to raise the profile of the industry which currently has more capital to deploy than investment opportunities," he said.
There is also the issue of still restrictive foreign ownership legislation in the region, which, while changing, remains an obstacle to much investment. The key for Western private equity funds, as ever, and as Deloitte notes, will be for them to partner with local groups.
The report notes that many regional family businesses are now more familiar with private equity and are more open to talking to private equity investors. It adds that the rise in initial public offerings in the region also offers opportunities for private equity investment because many companies are likely to take on a partner when they go public that can guide them through the process.
Deloitte believes this will pave the way for Western private equity groups to make inroads into the market here. Timothy Mahapatra, managing partner for transaction services with Deloitte said: "Whilst domestic players are expected to be most active within the MENA region in the next 12 months, we are seeing a rising number of international private equity firms looking towards the region as a new and exciting area, rich in growth opportunities in what is still a relatively untapped market, to deploy capital. The attractiveness of the region from an investor perspective cannot be underestimated, with an economic climate ripe for conducting business in."
That sounds fine, but as Deloitte's report makes clear, private equity funds are primarily interested in energy, real estate and financial services sectors, all of which still continue to have restrictions on overseas investment in most Middle East states.
And while a recent report by consultant group KPMG estimated that more than 200 privatizations valued at over $1 trillion are in the pipeline in the next 10 years, the reality, as the Deloitte report notes, is that the region is unlikely to see kind the multi-billion dollar private equity deals common in American and Europe but will instead have to be content with deals of between $100 million and $1 billion.
By Michael Glackin
27.5.08
$4tr in Middle East Capital Eyes Equity Investments
DUBAI — Led by Abu Dhabi Investment Authority — the world's largest Sovereign Wealth Fund (SWF) with estimated assets of $875 billion — up to $4 trillion capital available for investment from the Middle East is increasingly targeting equity investments around the globe.
According to a global management consulting firm, the region's high private and public sector investment power, bolstered by rising oil revenues and increasing foreign exchanges reserves, is underpinned by SWFs which currently have a combined $3.3 trillion assets under management, up 18 per cent between 2006 and 2007.
With the Middle East based SWFs currently accounting for 50 per cent, global assets under the management of these funds are expected to reach $5 trillion in 2010 and $10 to $ 15 trillion in 2015.
"This dramatic growth is supported by rising oil revenues and by increasing foreign exchanges reserves of some Asian countries. The objectives of these funds are to protect the budget and the economy from excess volatility in exports and / or to diversify from non renewable commodity exports," said A.T. Kearney in its latest report.
"With the rapid growth of assets, SWFs are under growing pressure to invest. They have accomplished a strategic shift in the way the money is being invested," Kearney said. Traditionally, countries turned their surpluses into risk-averse financial assets. China, for example, supported the US consumption economy by buying government bonds. SWF are now favouring equity-type investments to benefit from higher revenues and to gain exposure to strategic companies with more capabilities and know-how in industries that are crucial to their own economies.
"With the world's biggest Sovereign Wealth Fund — the Abu Dhabi Investment Authority (ADIA) — as one example, the UAE is moving towards these private equity-style deals," the report said.
Kuwait Financial Centre (KFC) in a recent research titled "The Golden Portfolio," said in the GCC 36 SWFs hold 131 Gulf-listed companies accounting for 27 per cent of region's market capitalisation valued at $300 billion.
KFC's Head of Research M. R. Raghu, and Sarah Al Khaled, an analyst, pointed out that apart from the big and most quoted names like ADIA or Kuwait Investment Authority (KIA), SWFs also include a variety of government agencies that manage money either directly or indirectly. The categories may include pension funds, ministries, fully owned companies.
The report said SWFs could also be an opportunity for developed countries, when most of their economies are slowing down. "In the short-term, the SWF can help to absorb the liquidity crisis; in the long run, they will be valuable partners for Western companies to back their growth and to finance innovation," said Cyril Garbois, Principal and expert for SWF, A.T. Kearney Dubai. Early this year, SWF from Asia and Middle East injected billions of dollars of new capital into troubled financial institutions and contributed this way to the stability of the whole system.
"Because of this new way to invest, concern about the political purpose and influence of these funds, and developing countries' investors in general, has risen among Western countries. The criticisms raised when Dubai Ports World planned to purchase operating rights to several US ports through the acquisition of P&O, or when the Chinese energy firm CNOOC tried to buy Unocal, are vivid examples. International bodies such as the International Monetary Fund and OECD are working on rules to prevent discrimination against SWF but also to answer to the need of more transparency in their investment processes," the report pointed out.
The rising power of the regional SWF and their private equity oriented investments are also an opportunity for the Middle East economy itself. The study revealed that private equity and SWF investments accelerate the growth of job creations. "More than one million jobs have been created through private equity investments in Europe in the last four years" said Dr. Dirk Buchta, Managing Director, A.T. Kearney Middle East.
"With $4 trillion available in the Middle East for investment and very healthy SWFs, the outlook for economic development in the region is very positive," said Dr. Alexander von Pock, Manager of Financial Services, A.T. Kearney Middle East.
The report shows that companies financed by private equity and SWF grow faster than those traditionally financed. Private equity firms often invest in mid-size companies, mostly former family owned businesses — of which the Middle East has many
By Issac John
According to a global management consulting firm, the region's high private and public sector investment power, bolstered by rising oil revenues and increasing foreign exchanges reserves, is underpinned by SWFs which currently have a combined $3.3 trillion assets under management, up 18 per cent between 2006 and 2007.
With the Middle East based SWFs currently accounting for 50 per cent, global assets under the management of these funds are expected to reach $5 trillion in 2010 and $10 to $ 15 trillion in 2015.
"This dramatic growth is supported by rising oil revenues and by increasing foreign exchanges reserves of some Asian countries. The objectives of these funds are to protect the budget and the economy from excess volatility in exports and / or to diversify from non renewable commodity exports," said A.T. Kearney in its latest report.
"With the rapid growth of assets, SWFs are under growing pressure to invest. They have accomplished a strategic shift in the way the money is being invested," Kearney said. Traditionally, countries turned their surpluses into risk-averse financial assets. China, for example, supported the US consumption economy by buying government bonds. SWF are now favouring equity-type investments to benefit from higher revenues and to gain exposure to strategic companies with more capabilities and know-how in industries that are crucial to their own economies.
"With the world's biggest Sovereign Wealth Fund — the Abu Dhabi Investment Authority (ADIA) — as one example, the UAE is moving towards these private equity-style deals," the report said.
Kuwait Financial Centre (KFC) in a recent research titled "The Golden Portfolio," said in the GCC 36 SWFs hold 131 Gulf-listed companies accounting for 27 per cent of region's market capitalisation valued at $300 billion.
KFC's Head of Research M. R. Raghu, and Sarah Al Khaled, an analyst, pointed out that apart from the big and most quoted names like ADIA or Kuwait Investment Authority (KIA), SWFs also include a variety of government agencies that manage money either directly or indirectly. The categories may include pension funds, ministries, fully owned companies.
The report said SWFs could also be an opportunity for developed countries, when most of their economies are slowing down. "In the short-term, the SWF can help to absorb the liquidity crisis; in the long run, they will be valuable partners for Western companies to back their growth and to finance innovation," said Cyril Garbois, Principal and expert for SWF, A.T. Kearney Dubai. Early this year, SWF from Asia and Middle East injected billions of dollars of new capital into troubled financial institutions and contributed this way to the stability of the whole system.
"Because of this new way to invest, concern about the political purpose and influence of these funds, and developing countries' investors in general, has risen among Western countries. The criticisms raised when Dubai Ports World planned to purchase operating rights to several US ports through the acquisition of P&O, or when the Chinese energy firm CNOOC tried to buy Unocal, are vivid examples. International bodies such as the International Monetary Fund and OECD are working on rules to prevent discrimination against SWF but also to answer to the need of more transparency in their investment processes," the report pointed out.
The rising power of the regional SWF and their private equity oriented investments are also an opportunity for the Middle East economy itself. The study revealed that private equity and SWF investments accelerate the growth of job creations. "More than one million jobs have been created through private equity investments in Europe in the last four years" said Dr. Dirk Buchta, Managing Director, A.T. Kearney Middle East.
"With $4 trillion available in the Middle East for investment and very healthy SWFs, the outlook for economic development in the region is very positive," said Dr. Alexander von Pock, Manager of Financial Services, A.T. Kearney Middle East.
The report shows that companies financed by private equity and SWF grow faster than those traditionally financed. Private equity firms often invest in mid-size companies, mostly former family owned businesses — of which the Middle East has many
By Issac John
18.5.08
There have been no examples of any SWF abuse
While the rest of the world is still split on whether they love or hate sovereign wealth funds, or SWFs, Lehman Brothers last month became the first investment bank to announce a fully fledged division to handle and grow its business from such funds.
Even the International Monetary Fund (IMF) has waxed hot and cold on the role that sovereign funds play or have the capability of playing in the world's financial markets. On the one hand, it has called sovereign wealth funds a stabilising force; on the other, it has demanded more transparency about their business because they have the potential to carry out transactions based on non-commercial motives. The IMF has estimated that deployable assets by these funds will grow to as much as $10 trillion (Dh36.73trn) in the next five years.
This is the universe in which Makram Azar, Lehman's freshly minted Global Head of Sovereign Wealth Funds, will operate. Azar dismisses the hype surrounding sovereign funds saying the headline-grabbing deals of the past six months in Western financial institutions such as Citibank and Merrill Lynch make up a minuscule percentage of SWF activity. The bulk of investments are not in the mergers and acquisitions arena, and therefore not on a newspaper's radar.
How would you classify a sovereign wealth fund? How does it differ from a state-owned investment company?
It does not, necessarily. Different countries have different ways of deploying their wealth. We want to capture the whole universe. So, I'm not focused so much on the name, I'm focused on the client base. Wherever the money comes from the sovereign, I'm there. Lehman was the first mover in this – and I cover Norway to Alaska, not just the Gulf. Some of these institutions do much more than just mergers and acquisitions – but it is the big deals such as Citigroup or Morgan Stanley that grab the headlines. Most of the investments are below the surface, people don't actually see them.
What's your view on the guidelines that the IMF wants sovereign funds to create and follow? How do you respond to fears that investments by these funds may have political undertones?
Up to now, most of these fears have not been well founded. There have not been any examples of an abuse or a deal made by a sovereign fund for the wrong reasons. If you own five per cent of a big bank, what does it really mean? Where is the concealed agenda? I don't see it. I think this has been used a lot for domestic political reasons. The DP World investment in United States' ports [as part of the Dubai-based company's acquisition of Peninsular & Oriental Steamship Company] is a perfect example of this. There was no security threat. DP World is not a sovereign wealth fund but it is a state-controlled company. That said, there are some sensitive sectors and industries that the US in particular may want to protect – more from the Chinese, I think, than from the Gulf. So let's see where it leads in terms of the guidelines.
What do you see happening in future that can ease such fears?
Well, for one thing, the US presidential campaign will soon be over. That's one aspect. And over time, when they see that there has been no abuse or misuse of the funds for any political agenda, the fears will ease off. You build trust in a relationship over time.
What kinds of guidelines do you see coming in?
I think a lot of the guidelines will have to do with transparency and some sort of limits on the amount of control that can be exerted on companies in the West.
Will that make your job easier or harder?
Frankly, I'm neutral on this. It might define more clearly what the sovereign wealth funds can or cannot do, rather than stumbling on an obstacle after the fact, similar to what happened with DP World.
Where do you see the biggest deals happening for you in this arena?
Again, you have the deals that grab the headlines – these are only a small fraction of the pie, which today may be $3.5 trillion. Of this the investments made in the Western institutions were $60-$80 billion – which is nothing. Abu Dhabi Investment Authority, for example, has hundreds of billions of dollars but their headlining deal was Citibank for $7.5bn. The rest of their investments are below the radar, so to speak, for the newspapers. They invest their money every day in the markets – and that's what we're going after, not just the M&A deals. For instance, if they have $100bn to invest they may put 50 per cent in fixed income, 40 per cent in equity, and 10 per cent in more aggressive asset classes spanning hedge funds and private equity etc. We offer all of that. We are not here to just work on the M&A deals.
What is the average internal rate of return that you would have to look at when you get a fund-management mandate from a sovereign wealth fund?
The IRR is not ours, it is theirs. In the monetary markets, it is small return and low risk; 10 to 15 per cent would be in more aggressive investments where the IRR is greater and more than 20 per cent in private equity deals.
Where does it average out?
Well, when you put your money in the bank you get two or 2.5 per cent. You go buy a piece of real estate, you can expect a higher return. That's how they do it. In the more aggressive markets, they can expect an IRR of 10 to 15 per cent. In the less aggressive, it can be single-digit or low double-digits.
Does the competition to get SWF fund-management mandates push investment banks like Lehman to structure specific products with higher average returns?
We work with our existing products. We can create products, but at the end of the day our products channel investments into the areas in which the SWF wants to invest. For example, they may say they want to be present in the Asian markets. We tell them what to invest in and do it for them. An IRR is not something we can guarantee. We show them the returns we have generated over the past five years – we show them our track record.
What slice of the global sovereign fund market are you targeting?
The biggest possible! Lehman is the only investment bank that has created a global division that spans all the products across asset classes. I'm surprised that we are the first to do this as a global co-ordinated effort.
How much of Lehman's business do you see coming from this segment?
An increasing amount. What we are targeting is not a percentage of Lehman's business but a percentage of the SWFs' market – as large a market share as possible.
Sovereign funds are a growing financial force – is it a force for good? Or is it a force that the world should be wary of?
I don't see anything to be wary of.
Do you see them as saviours?
In the past six months they may have looked like saviours. But that's not their objective – which is to make money and get good returns on their investment. They will continue to invest wherever they see the potential to make money. They did not invest in Western financials to be saviours. They invested because they thought the sector had hit bottom and was going to bounce back.
They were wrong.
Yes. Everyone lost money on that call but so did all other investors in the equity markets during that period, including Western ones. But in five to 10 years you will see them making money on that investment.
Does that make sovereign funds more stable investors?
Yes, they do take a long-term view.
Sovereign funds today generate a lot of heated argument. One either loves them or hates them. What's the reality check here?
The world is focusing on $60-$80bn of sovereign investments that have taken place in the past six or seven months in M&A deals. If you look at the total pool of sovereign investible funds – $2-$3trn – that is a minuscule percentage. Something like 90 to 95 per cent of their investing is being done in mundane, everyday things. You can't mystify them based on the small percentage that is in the headlines. Look at Norway. It has half a trillion dollars, but nobody is saying anything bad about them. So, yes, it's a group of different countries, different people, different agendas. We cannot put them all under one blanket. Sovereign wealth funds have more money than hedge funds and private equity combined. They are different from each other. Is China, for example, the same as Saudi Arabia? I don't think so. At the same time, however, if you look at the banking crisis, all of them rushed to invest in Western financials. So there are commonalities as well – in investment philosophies, for instance.
What quantum of sovereign funds does Lehman have the mandate to manage today and how do you see that growing?
Sovereign wealth funds themselves are expected to quadruple in size over the next five years. This will come from oil revenues, commodity prices, trade surpluses – multiple things – anything that comes into the sovereign coffers. We will grow at a similar rate, or higher, as we gain market share.
Do you think the whole move towards transparency and international best practices will hurt the image of sovereign funds in the huge percentage of business they do in the non-M&A segments?
Definitely not. The liquidity and depth they bring to financial markets worldwide is seen as a boon to those markets. Because the sovereign funds have an increasing amount of money, they have to put it to work. That's very healthy for the markets; it's a lifeline for the markets.
What are the critical success factors of your division?
One is relationship-building, building trust. Others do this as part of their day job, so to speak, not in a fully dedicated manner. I wake up every day thinking about how I can take our relationships further. Secondly, it is the quality of investment products and ideas in our portfolio. You can't have one without the other.
Why are you basing this effort in Dubai? Why are you moving in from London? Is that because the IMF says half of all sovereign funds will be in the GCC in five years?
I have a map of the world in my office. If you look at it – from Norway right up there to South Korea and Alaska, Dubai is perfectly located. And of course I can focus on the Gulf more easily as well. This week I'm flying to China. Dubai is like the centre of the universe – at least the universe that I will be looking at. New sovereign funds are expected to come up – India, for example, is one. Saudi Arabia, Japan… It's fascinating!
Makram Azar, Global Head of Sovereign Wealth Funds, Lehman Brothers
Makram Azar joined Lehman Brothers in 1990. Before his new posting as global head of SWFs, he led the media, consumer and retail investment banking businesses in Europe and the Middle East. Under his leadership, Lehman Brothers was named Media M&A Bank of the Year 2007 by MediaFinance magazine for having advised on most of the significant 2007 transactions in the media sector. These included the takeover of ProSiebenSat1 by KKR and Permira, merger of Canal+ and TPS, and the sale of Endemol.
A Lebanese by birth, Azar has developed strong relationships in the region, including advising Saudi Prince Alwaleed bin Talal on an investment in Berlusconi's media company, a deal that could be seen as a precursor to regional sovereign fund investments in the West, which started more recently.
His new cross-divisional role based in Dubai, says Azar, is all about "building relationships and then doing deals together".
By Yazad Darasha on Sunday, May 18, 2008
Even the International Monetary Fund (IMF) has waxed hot and cold on the role that sovereign funds play or have the capability of playing in the world's financial markets. On the one hand, it has called sovereign wealth funds a stabilising force; on the other, it has demanded more transparency about their business because they have the potential to carry out transactions based on non-commercial motives. The IMF has estimated that deployable assets by these funds will grow to as much as $10 trillion (Dh36.73trn) in the next five years.
This is the universe in which Makram Azar, Lehman's freshly minted Global Head of Sovereign Wealth Funds, will operate. Azar dismisses the hype surrounding sovereign funds saying the headline-grabbing deals of the past six months in Western financial institutions such as Citibank and Merrill Lynch make up a minuscule percentage of SWF activity. The bulk of investments are not in the mergers and acquisitions arena, and therefore not on a newspaper's radar.
How would you classify a sovereign wealth fund? How does it differ from a state-owned investment company?
It does not, necessarily. Different countries have different ways of deploying their wealth. We want to capture the whole universe. So, I'm not focused so much on the name, I'm focused on the client base. Wherever the money comes from the sovereign, I'm there. Lehman was the first mover in this – and I cover Norway to Alaska, not just the Gulf. Some of these institutions do much more than just mergers and acquisitions – but it is the big deals such as Citigroup or Morgan Stanley that grab the headlines. Most of the investments are below the surface, people don't actually see them.
What's your view on the guidelines that the IMF wants sovereign funds to create and follow? How do you respond to fears that investments by these funds may have political undertones?
Up to now, most of these fears have not been well founded. There have not been any examples of an abuse or a deal made by a sovereign fund for the wrong reasons. If you own five per cent of a big bank, what does it really mean? Where is the concealed agenda? I don't see it. I think this has been used a lot for domestic political reasons. The DP World investment in United States' ports [as part of the Dubai-based company's acquisition of Peninsular & Oriental Steamship Company] is a perfect example of this. There was no security threat. DP World is not a sovereign wealth fund but it is a state-controlled company. That said, there are some sensitive sectors and industries that the US in particular may want to protect – more from the Chinese, I think, than from the Gulf. So let's see where it leads in terms of the guidelines.
What do you see happening in future that can ease such fears?
Well, for one thing, the US presidential campaign will soon be over. That's one aspect. And over time, when they see that there has been no abuse or misuse of the funds for any political agenda, the fears will ease off. You build trust in a relationship over time.
What kinds of guidelines do you see coming in?
I think a lot of the guidelines will have to do with transparency and some sort of limits on the amount of control that can be exerted on companies in the West.
Will that make your job easier or harder?
Frankly, I'm neutral on this. It might define more clearly what the sovereign wealth funds can or cannot do, rather than stumbling on an obstacle after the fact, similar to what happened with DP World.
Where do you see the biggest deals happening for you in this arena?
Again, you have the deals that grab the headlines – these are only a small fraction of the pie, which today may be $3.5 trillion. Of this the investments made in the Western institutions were $60-$80 billion – which is nothing. Abu Dhabi Investment Authority, for example, has hundreds of billions of dollars but their headlining deal was Citibank for $7.5bn. The rest of their investments are below the radar, so to speak, for the newspapers. They invest their money every day in the markets – and that's what we're going after, not just the M&A deals. For instance, if they have $100bn to invest they may put 50 per cent in fixed income, 40 per cent in equity, and 10 per cent in more aggressive asset classes spanning hedge funds and private equity etc. We offer all of that. We are not here to just work on the M&A deals.
What is the average internal rate of return that you would have to look at when you get a fund-management mandate from a sovereign wealth fund?
The IRR is not ours, it is theirs. In the monetary markets, it is small return and low risk; 10 to 15 per cent would be in more aggressive investments where the IRR is greater and more than 20 per cent in private equity deals.
Where does it average out?
Well, when you put your money in the bank you get two or 2.5 per cent. You go buy a piece of real estate, you can expect a higher return. That's how they do it. In the more aggressive markets, they can expect an IRR of 10 to 15 per cent. In the less aggressive, it can be single-digit or low double-digits.
Does the competition to get SWF fund-management mandates push investment banks like Lehman to structure specific products with higher average returns?
We work with our existing products. We can create products, but at the end of the day our products channel investments into the areas in which the SWF wants to invest. For example, they may say they want to be present in the Asian markets. We tell them what to invest in and do it for them. An IRR is not something we can guarantee. We show them the returns we have generated over the past five years – we show them our track record.
What slice of the global sovereign fund market are you targeting?
The biggest possible! Lehman is the only investment bank that has created a global division that spans all the products across asset classes. I'm surprised that we are the first to do this as a global co-ordinated effort.
How much of Lehman's business do you see coming from this segment?
An increasing amount. What we are targeting is not a percentage of Lehman's business but a percentage of the SWFs' market – as large a market share as possible.
Sovereign funds are a growing financial force – is it a force for good? Or is it a force that the world should be wary of?
I don't see anything to be wary of.
Do you see them as saviours?
In the past six months they may have looked like saviours. But that's not their objective – which is to make money and get good returns on their investment. They will continue to invest wherever they see the potential to make money. They did not invest in Western financials to be saviours. They invested because they thought the sector had hit bottom and was going to bounce back.
They were wrong.
Yes. Everyone lost money on that call but so did all other investors in the equity markets during that period, including Western ones. But in five to 10 years you will see them making money on that investment.
Does that make sovereign funds more stable investors?
Yes, they do take a long-term view.
Sovereign funds today generate a lot of heated argument. One either loves them or hates them. What's the reality check here?
The world is focusing on $60-$80bn of sovereign investments that have taken place in the past six or seven months in M&A deals. If you look at the total pool of sovereign investible funds – $2-$3trn – that is a minuscule percentage. Something like 90 to 95 per cent of their investing is being done in mundane, everyday things. You can't mystify them based on the small percentage that is in the headlines. Look at Norway. It has half a trillion dollars, but nobody is saying anything bad about them. So, yes, it's a group of different countries, different people, different agendas. We cannot put them all under one blanket. Sovereign wealth funds have more money than hedge funds and private equity combined. They are different from each other. Is China, for example, the same as Saudi Arabia? I don't think so. At the same time, however, if you look at the banking crisis, all of them rushed to invest in Western financials. So there are commonalities as well – in investment philosophies, for instance.
What quantum of sovereign funds does Lehman have the mandate to manage today and how do you see that growing?
Sovereign wealth funds themselves are expected to quadruple in size over the next five years. This will come from oil revenues, commodity prices, trade surpluses – multiple things – anything that comes into the sovereign coffers. We will grow at a similar rate, or higher, as we gain market share.
Do you think the whole move towards transparency and international best practices will hurt the image of sovereign funds in the huge percentage of business they do in the non-M&A segments?
Definitely not. The liquidity and depth they bring to financial markets worldwide is seen as a boon to those markets. Because the sovereign funds have an increasing amount of money, they have to put it to work. That's very healthy for the markets; it's a lifeline for the markets.
What are the critical success factors of your division?
One is relationship-building, building trust. Others do this as part of their day job, so to speak, not in a fully dedicated manner. I wake up every day thinking about how I can take our relationships further. Secondly, it is the quality of investment products and ideas in our portfolio. You can't have one without the other.
Why are you basing this effort in Dubai? Why are you moving in from London? Is that because the IMF says half of all sovereign funds will be in the GCC in five years?
I have a map of the world in my office. If you look at it – from Norway right up there to South Korea and Alaska, Dubai is perfectly located. And of course I can focus on the Gulf more easily as well. This week I'm flying to China. Dubai is like the centre of the universe – at least the universe that I will be looking at. New sovereign funds are expected to come up – India, for example, is one. Saudi Arabia, Japan… It's fascinating!
Makram Azar, Global Head of Sovereign Wealth Funds, Lehman Brothers
Makram Azar joined Lehman Brothers in 1990. Before his new posting as global head of SWFs, he led the media, consumer and retail investment banking businesses in Europe and the Middle East. Under his leadership, Lehman Brothers was named Media M&A Bank of the Year 2007 by MediaFinance magazine for having advised on most of the significant 2007 transactions in the media sector. These included the takeover of ProSiebenSat1 by KKR and Permira, merger of Canal+ and TPS, and the sale of Endemol.
A Lebanese by birth, Azar has developed strong relationships in the region, including advising Saudi Prince Alwaleed bin Talal on an investment in Berlusconi's media company, a deal that could be seen as a precursor to regional sovereign fund investments in the West, which started more recently.
His new cross-divisional role based in Dubai, says Azar, is all about "building relationships and then doing deals together".
By Yazad Darasha on Sunday, May 18, 2008
4.5.08
Case for setting up sovereign wealth fund gets stronger
Case for setting up sovereign wealth fund gets stronger
Thursday, 01 May , 2008, 15:34
With India�s foreign exchange reserves at over $300 billion and growing, there has been renewed interest in establishing a sovereign wealth fund (SWF), using a part of those reserves.
An SWF is a separate pool of assets, primarily (but not exclusively) invested outside the country, and controlled by governments to achieve economic, financial, and strategic objectives.
While there are well-established conservative international norms for investing forex reserves, this is not the case with the SWFs, which can engage in more aggressive risk-management practices.
India is a significant recipient of investments by SWFs from abroad.
While the SWFs have existed for several decades, their vastly expanded scale and scope of activities is a relatively new phenomenon.
Currently, among the institutional investors, pension funds have the largest assets, totalling around $25 trillion, while the corpus of SWFs is around $5 trillion. Industry experts estimate that the SWFs will grow to $20 trillion by 2015, while the endowment funds and foundations increase to $10 trillion.
The current stock market capitalisation of the world is around $50 trillion.
As with other institutional investors, SWFs also engage in partnership with private equity companies and hedge funds. SWFs can potentially facilitate a more efficient allocation of revenue from commodity surpluses across countries; help recycle current account surpluses; and enhance market liquidity. They also have potentially longer time horizons; and scale to employ more sophisticated risk management strategies.
Unlike in case of pension funds, there are no robust databases, either domestically or internationally, to monitor the financial flows of the SWFs. There are concerns about transparency and accountability of the SWFs, both for the home and the recipient countries. There are also concerns about conflicts of interest, potential insider trading, and reduced regulatory effectiveness.
The IMF has begun work on developing a code of conduct for the SWFs, which will include disclosure, reporting, transparency, and governance. Efforts are underway to also develop such code for hedge funds.
In India, the regulatory regime governing capital inflows does not recognise SWFs, hedge funds and private equity as a distinct category. Their investments are subject to normal prudential provisions.
There is, however, a concern that such an approach may be too benign given the complexity of the nature of transactions and the size of the SWFs. At the least, more robust database on incoming flows needs to be developed by the Reserve Bank of India (RBI).
The case for establishing a SWF in India is mixed. Most analysts feel that while India�s international investment position is not very comfortable, its gross reserves are adequate, even after considering high precautionary needs due to its current account and budget deficits. Thus, unlike most other countries, India�s case for SWF does not rely on export surpluses, conversion of non-renewable assets into a more diversified portfolio of financial and physical assets, or contingent pension reserve.
Instead, in India, a major reason for setting up an SWF is the possible use of forex reserves to finance critical infrastructure needs; and to mitigate quasi-fiscal costs of sterilising reserves. These costs arise as returns on conventionally invested reserves are 3-4%, while domestic bonds need to be financed at 7-8%.
A more aggressive risk posture for 3-5% of forex reserves ($9-15 billion) could help mitigate the extent of quasi-fiscal costs, albeit at a higher risk.
Even if India does establish such an SWF, its size will be among the smallest globally.
The largest SWF in the World is Abu Dhabi Investment Authority, with assets exceeding $1 trillion.
Russia has recently announced its intention to use its excess revenue from oil through SWFs to increase its strategic leverage.
Establishment of an SWF will enable India to be on a learning curve in regards the complexities of establishing and operating such a fund. This, in turn, could assist in devising measures to better monitor the operations of foreign SWFs in India. It will also give India a standing in participating in international discussions concerning the governance code for SWFs. Also, as India�s pension assets (currently about 15% of GDP) continue to grow, some international risk diversification would become essential. The SWF experience could then prove useful.
The challenges in setting up a SWF in India include high initial setup costs, including specialised staffing, sustaining a transparent and accountable governance structure and managing the political economy. India�s democratic checks and balances will impose constraints on SWFs, which are usually not found in the state-capitalist economies most of the SWFs are located in.
The SWF may also distract the government�s urgent need to address more critical public policy issues concerning trade imbalances, fiscal consolidation, infrastructure and human resource development needs.
By some measures, India already has a SWF called the India Infrastructure Finance Company (IIFC). The government-owned firm has set up a subsidiary in London, and has borrowed $250 million from RBI in foreign currency by issuing it 10-year government-guaranteed bonds at Libor.
IIFC is mandated to lend to Indian companies to import capital goods for infrastructure projects in India, or to co-finance external commercial borrowings (ECBs) of Indian firms in select areas. But, while this does address the concern that using reserves domestically could create adverse liquidity and inflationary impact, this may adversely impact the domestic capital goods sector, and government guarantees may create severe moral hazard problem.
In a speech in Washington DC this month, RBI governor Dr Y Venugopal Reddy outlined the broad contours of a more traditional SWF, which would invest a part of India�s excess reserves in the global markets. Reddy suggested creation of a separate entity or company, which will purchase foreign currencies from the RBI, and in turn invest in higher risk-higher return assets internationally. He also suggested that the SWF be managed by an independent sovereign entity, and not by RBI.
More India business stories
It appears there is consensus emerging in official circles for setting up a traditional SWF. On balance, there is a case for such a move, but caution is needed in implementing it to ensure that appropriate safeguards are provided. Mukul Asher / DNA MONEY
Thursday, 01 May , 2008, 15:34
With India�s foreign exchange reserves at over $300 billion and growing, there has been renewed interest in establishing a sovereign wealth fund (SWF), using a part of those reserves.
An SWF is a separate pool of assets, primarily (but not exclusively) invested outside the country, and controlled by governments to achieve economic, financial, and strategic objectives.
While there are well-established conservative international norms for investing forex reserves, this is not the case with the SWFs, which can engage in more aggressive risk-management practices.
India is a significant recipient of investments by SWFs from abroad.
While the SWFs have existed for several decades, their vastly expanded scale and scope of activities is a relatively new phenomenon.
Currently, among the institutional investors, pension funds have the largest assets, totalling around $25 trillion, while the corpus of SWFs is around $5 trillion. Industry experts estimate that the SWFs will grow to $20 trillion by 2015, while the endowment funds and foundations increase to $10 trillion.
The current stock market capitalisation of the world is around $50 trillion.
As with other institutional investors, SWFs also engage in partnership with private equity companies and hedge funds. SWFs can potentially facilitate a more efficient allocation of revenue from commodity surpluses across countries; help recycle current account surpluses; and enhance market liquidity. They also have potentially longer time horizons; and scale to employ more sophisticated risk management strategies.
Unlike in case of pension funds, there are no robust databases, either domestically or internationally, to monitor the financial flows of the SWFs. There are concerns about transparency and accountability of the SWFs, both for the home and the recipient countries. There are also concerns about conflicts of interest, potential insider trading, and reduced regulatory effectiveness.
The IMF has begun work on developing a code of conduct for the SWFs, which will include disclosure, reporting, transparency, and governance. Efforts are underway to also develop such code for hedge funds.
In India, the regulatory regime governing capital inflows does not recognise SWFs, hedge funds and private equity as a distinct category. Their investments are subject to normal prudential provisions.
There is, however, a concern that such an approach may be too benign given the complexity of the nature of transactions and the size of the SWFs. At the least, more robust database on incoming flows needs to be developed by the Reserve Bank of India (RBI).
The case for establishing a SWF in India is mixed. Most analysts feel that while India�s international investment position is not very comfortable, its gross reserves are adequate, even after considering high precautionary needs due to its current account and budget deficits. Thus, unlike most other countries, India�s case for SWF does not rely on export surpluses, conversion of non-renewable assets into a more diversified portfolio of financial and physical assets, or contingent pension reserve.
Instead, in India, a major reason for setting up an SWF is the possible use of forex reserves to finance critical infrastructure needs; and to mitigate quasi-fiscal costs of sterilising reserves. These costs arise as returns on conventionally invested reserves are 3-4%, while domestic bonds need to be financed at 7-8%.
A more aggressive risk posture for 3-5% of forex reserves ($9-15 billion) could help mitigate the extent of quasi-fiscal costs, albeit at a higher risk.
Even if India does establish such an SWF, its size will be among the smallest globally.
The largest SWF in the World is Abu Dhabi Investment Authority, with assets exceeding $1 trillion.
Russia has recently announced its intention to use its excess revenue from oil through SWFs to increase its strategic leverage.
Establishment of an SWF will enable India to be on a learning curve in regards the complexities of establishing and operating such a fund. This, in turn, could assist in devising measures to better monitor the operations of foreign SWFs in India. It will also give India a standing in participating in international discussions concerning the governance code for SWFs. Also, as India�s pension assets (currently about 15% of GDP) continue to grow, some international risk diversification would become essential. The SWF experience could then prove useful.
The challenges in setting up a SWF in India include high initial setup costs, including specialised staffing, sustaining a transparent and accountable governance structure and managing the political economy. India�s democratic checks and balances will impose constraints on SWFs, which are usually not found in the state-capitalist economies most of the SWFs are located in.
The SWF may also distract the government�s urgent need to address more critical public policy issues concerning trade imbalances, fiscal consolidation, infrastructure and human resource development needs.
By some measures, India already has a SWF called the India Infrastructure Finance Company (IIFC). The government-owned firm has set up a subsidiary in London, and has borrowed $250 million from RBI in foreign currency by issuing it 10-year government-guaranteed bonds at Libor.
IIFC is mandated to lend to Indian companies to import capital goods for infrastructure projects in India, or to co-finance external commercial borrowings (ECBs) of Indian firms in select areas. But, while this does address the concern that using reserves domestically could create adverse liquidity and inflationary impact, this may adversely impact the domestic capital goods sector, and government guarantees may create severe moral hazard problem.
In a speech in Washington DC this month, RBI governor Dr Y Venugopal Reddy outlined the broad contours of a more traditional SWF, which would invest a part of India�s excess reserves in the global markets. Reddy suggested creation of a separate entity or company, which will purchase foreign currencies from the RBI, and in turn invest in higher risk-higher return assets internationally. He also suggested that the SWF be managed by an independent sovereign entity, and not by RBI.
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It appears there is consensus emerging in official circles for setting up a traditional SWF. On balance, there is a case for such a move, but caution is needed in implementing it to ensure that appropriate safeguards are provided. Mukul Asher / DNA MONEY
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