GCC private banking ‘opaque’, says new report

Private banking in the GCC is complex, fragmented and opaque and is set to remain so, according to a new report by Insight Discovery.

The study showed that there are 61 private banks in the region, making it a very competitive market.

However it was found that those 61 institutions targeted either high net worth individuals or mass affluent customers, but rarely both.

The number of private bankers employed by each organisation in the GCC ranges from 1 or 2 to well over 50 and all of the international private banks in the region have a base in Dubai.

Nigel Sillitoe, chief executive of Insight Discovery, said: “We are emphatically not the first researchers to look at the GCC’s private banking sector. We are, though, probably the first to ask this question: “who are the region’s 61 private banks?’ Although the industry is notoriously opaque, it is still possible to gain clear insights into the trends that matter.

“There are undoubtedly opportunities for players with the correct strategies and ability to execute. However, there are also challenges – specific to the region – which will likely persist indefinitely. These are the issues that we examine,” he said.

The report found that most of the business handled by the private banks for GCC clients is booked through IFCs that are outside the region.

Private banks which have either closed or sold their GCC business operations in the last year include Clariden Leu, Lloyds TSB, Merrill Lynch, Morgan Stanley, Pictet and Vontobel. Those to have opened up GCC operations include Arbuthnot Latham, LGT and Nedbank Private Wealth.

Approximately three quarters of the private banks have minimum account sizes of $1m plus and a quarter of the private banks in the region are targeting clients in Saudi Arabia or the Levant.

Sillitoe said: “We agree with the general consensus that private banking is developing more rapidly in the GCC than in established markets such as Europe and North America. Moreover, it is clear that Dubai has emerged as the regional hub for the provision of private banking (and related) services to HNWIs.

“For a number of valid reasons, many of the private banks serve their clients in the GCC region through their offices in other international financial centres (IFCs). Therefore, it will be interesting to see how Dubai and the other centres in the GCC region, which have ambitions in private banking, evolve over time,” he said.

New Middle East infrastructure fund targets 7% returns

A new GCP Sovereign Infrastructure Fund to be managed by investment boutique, Gravis Capital Partners, is to focus on investments in infrastructure projects across the Middle East.

The fund, which is expected to launch in December this year, is aiming to raise $250m.

The $250m will be invested in infrastructure debt secured against major operational infrastructure projects in GCC member states such as Saudi Arabia, UAE, Qatar, Bahrain, Kuwait and Oman.

Gravis Capital Partners has teamed up with Exotix Partners, a Dubai based frontier markets investment bank, to launch the infrastructure fund.

Philip Southwell, chief executive of Exotix, said: “The most attractive markets given the project finance market and scale would be Saudi Arabia and Abu Dhabi.”

The debt will primarily be on floating rates linked to the three-month US dollar Libor, with sovereign-backed cash flows.

Once the fund has been fully invested, it will target an annualised dividend yield of at least 7%.

However, for the first financial period, ending 31 December 2014, the trust will target an annualised yield of 5%.

The fund is looking to attract major investors such as pension funds and insurance companies.

GCP, which is the only debt infrastructure fund listed in the UK, estimates that more than $2,100bn of potential infrastructure spending is available in the six Gulf states, compared to $310bn in the UK.

Stephen Ellis, a partner at GCP, said: “There is a major and unique opportunity, with huge infrastructure projects across the region.”

Emerging market pension funds ready for Sharia-compliance

Global demand for Sharia-compliant pension funds could reach $190bn, according to the Global Islamic Banking Centre at Ernst and Young (EY).

Ashar Nazim, partner at Global Islamic Banking, EY, speaking to Gulf News, said that emerging markets such as Saudi Arabia, the UAE and Malaysia are seeing increased demand for retirement plans that are Sharia compliant.

The maturity of the sukuk market and Sharia-compliant equity indexes mean that there are sufficient assets available for many pension funds to begin their Sharia-compliant proposals, he added.

Within the GCC member states, the mainstreaming of Islamic finance means that there will be a boost to demand for pension funds to be inclusive and offer Sharia-compliant retirement alternatives.

Nazim said: “This is, however, the beginning of a long journey. It begs the question whether we have the criteria in place, and the structures and tools to enable the effective management of this emerging asset class. We believe there will be a gradual evolution over the next 18 to 36 months.”

According to Nazim, the challenges facing the shift towards Islamic pension funds include, operational changes, legal and regulatory issues and customer focus.

Improved corporate governance needed in the Gulf to access capital markets and reduce fund costs

Stronger corporate governance could boost Gulf companies’ access to capital markets and lower cost of funds, according to a Standard & Poor’s report.

The report found that governance standards in the Gulf Corporation Council (GCC) region still lag those of corporations globally.

Only 6.3%, or two of the 32 GCC corporations, were rated by S&P as having “strong” management and governance.

This compares to 9.5% in EMEA and 7.5% of rated companies globally. The study found that corporate governance  among Gulf companies is relatively weak in a global comparison, although practices are steadily improving.

The report stated that: “Corporate governance has long been the Achilles’ heel of companies in the Gulf. Yet, we believe corporations in the region are now recognising that strengthening their management and governance practices could improve their access to capital markets and cut the cost of raising debt.”

The poor quality of governance standards can deter international investors from looking for investment opportunities in the Gulf region.

“Potential investors face closely controlled company ownership, a general lack of transparency, and the vagaries of individual states’ jurisdictions with respect to creditor protection. This leaves them open to the risk of weak management and, in extreme cases, fraud,” said the report.

However, Standard Bank suggests that firms, regulators and governments in the GCC are beginning to take corporate governance more seriously.

“While developments are taking place in legislation, we believe companies will need time to make a cultural shift towards greater transparency and to develop expertise within the governance area.”

Gulf Capital to launch $550m GCC Private Equity Fund

Gulf Capital, the Abu Dhabi-based private equity firm, has announced its plan to launch a $550m fund to invest across the Middle East and North Africa.

The GCC Equity Partner III Fund will primarily focus on investment opportunities in the UAE and Saudi Arabia.

Karim El Solh, chief executive officer of Gulf Capital, said: “We’re very focused on the Gulf, mainly UAE and Saudi, and sometimes spillover to Egypt and Jordan.”

Gulf Capital currently manages assets worth in excess of $2.5bn. The firm’s private equity strategy is to “acquire strategic stakes in highly profitable and fast growing companies in select industries in the Gulf region.”

Speaking to reporters, El Solh said that the seed capital for the fund will be $100m, while the full amount of the fund is expected to be raised by the end of 2014.

Gulf Capital has not yet invested approximately 30% of a previous $533m fund and expects to close two more deals this year, according to El Solh.

Back in September, Gulf Capital announced that it had hired the independent financial advisory group, Rothschild, to advise it on a share listing for its largest asset, oil and gas services firm Gulf Marine Services, on an overseas stock exchange in early 2014.

Gulf Capital is a leading alternative asset management company, set up in 2006, to take advantage of private equity opportunities in the Gulf Cooperation Council (GCC) region.

Financial advisory group, Rothschild, employs 3000 people across 42 countries and provides strategic, M&A, wealth management and fundraising advice and services to governments, companies and individuals across the globe.

Beyond The Crisis: Private equity in North Africa

North Africa has been wracked by political turmoil since early 2011, but private equity firms are looking beyond the problems and continuing to find opportunities in the region

By Anna Lyudvig

Following the Arab Spring and continued political instability, several North African countries are facing difficult economic situations in the short term, with growth rates especially diminished in the countries that experienced regime change. However, private equity (PE) investors buying into the region, who need to take at least a medium-term economic view and focus on the fundamentals of a business, are still finding grounds for optimism.

Proponents argue that the case for the region is clear. North Africa accounts for around one third of the continent’s total GDP and is home to over 17% of its population. Moreover, the region has long-held trade and investment connections with Europe and the Middle East, and as the world’s developed economies are emerging from the global financial crisis, North Africa’s governments are poised to capitalize on these relationships to the benefit of their economies.

“You have a strong underlying macroeconomic environment, supporting the investment, whether it is attractive demographics or high per capita income,” according to Ahmed Badreldin, senior partner and head of MENA for the Abraaj Group, a leading investor in growth markets, which manages $ 7.5bn in assets.

Over the last decade, strong growth, an expanding middle class, and a global trend that is seeing more investors seeking growth from a broader and more varied range of markets is driving an increased international investor interest in the region, says Nayel Georges Vidal, director, Tunis at Emerging Capital Partners (ECP), a pan-African private equity firm that has raised over $2bn for investment across the African continent, including North Africa.

“An emerging market fund of funds would once not have looked at Africa to invest; now they are thinking that 10-15% of their capital should be there. Investors continue to show strong interest in Morocco and Algeria,” says Vidal. “While they are cautious on Egypt and Libya in the short term, there is potential for good growth after political stabilization.”

Vikas Papriwal, UAE head, SWF and PE practice at KPMG, agrees, saying that once the effects of the Arab Spring fade, one can expect to see investment returning. “If you look at the more macro trends, there is around $145bn of dry powder in the system globally, which needs to be invested soon. In Africa, there is a massive need for capital and the region has high growth potential; in North Africa, we are seeing funds being raised in various sectors including infrastructure and telecoms,” he says.

Investment focus

The Abraaj Group believes that the story of investing in North Africa still holds. In July, it completed its first exit in Tunisia, making a “significant return” despite the political backdrop.

“If you look at empirical evidence, you will find that the companies we have invested in or have looked at in the past are still growing at 15-20% every year despite the Arab Spring,” says Badreldin.

Abraaj is currently raising capital for its second mid-market fund for North Africa, investing in Egypt, Tunisia, Algeria and Morocco, focusing on mid-market strategy with a target size of around $15-30m. The group has local offices in the above countries, which is very important to source these transactions. “You cannot do North Africa using a suitcase banker approach,” stresses Badreldin.

Given the negative investment sentiment towards Egypt, it may come as a surprise that CedarBridge Partners, a $65m private equity firm with a mandate covering geographically the whole Mena region, has a particular focus on the country. The company invests in small and medium enterprises mainly in healthcare, education and retail, and has one current active investment in CIRA, one of the largest educational groups in Egypt.

“We have been investing or looking for opportunities despite the political turbulence. Our schooling business has been growing year-on-year, and it is rewarding,” says Imad Ghandour, managing director at CedarBridge Partners.

Ghandour says that while investment sentiment has been up and down over the past 2.5 years, it is now a case of “wait and see” until things have settled down politically.

“Our general view of Egypt is that it is a stable market despite political turbulence and it is a big market, which you cannot ignore. We have been investing in Egypt over the past five years from various funds and it has been generally rewarding. At the micro level the businesses continue to do well even if the macro picture does not look that rosy,” he says.

The two other countries the firm is considering are Tunisia and Morocco, while Algeria and Libya cannot yet be considered for regulatory or political reasons, according to Ghandour.

PE firms are currently concentrating their attention on sectors which are defensive and have growth potential, whether they are export focus or consumer-driven. Infrastructure, hospitality, financial services and agriculture are a few common investment themes.

ECP, which looks at deals in the region of $40m to $120m, invests in companies that operate in business environments characterized by limited competition or in sectors where Africa has either a comparative advantage or an unmet need.

“This strategy maintains diversification within ECP’s investment portfolio and provides our investors with greater, risk-adjusted returns that are generally uncorrelated to the US and other global markets,” says Vidal.

In North Africa, ECP Fund I (which is fully exited) invested in and helped grow four major infrastructure companies, whereas ECP’s Fund II (that closed at $523m in December 2005), is currently in the post-commitment phase. It has two portfolio companies based in North Africa: Générale Assurance, one of Algeria’s largest private insurance companies and Société d’Articles Hygiéniques (SAH), Tunisia’s leading producer of absorbent hygiene products.

Meanwhile, country-specific funds also play a role, such as the Moroccan Infrastructure Fund (MIF), which was established in December 2006 with MAD800m ($95.67m) of commitments to capitalize on the demands for infrastructure needed during Morocco’s growth spurt. The fund is a joint venture between ECP and Attijari Invest, the private equity arm of Attijariwafa Bank, Morocco’s largest bank. MIF targeted numerous sectors including telecoms, transportation, energy, power and water, and ports.

According to Vidal, MIF holds minority positions through equity investments that typically range in size from MAD50m to MAD150m ($6m-$18m). “MIF recently exited its entire position in Osead Maroc Mining, the full exit representing 8.4x MIF’s initial funded investment and an internal rate of return of 94%,” he says.

More rewarding than the GCC?

In the context of the wider MENA region, the North African private equity industry is in a nascent state, but many experts believe it is more fertile ground for such investment than the GCC, in terms of market access and revenue potential.

“I think North Africa is one of the most promising sub-regions where capital is well appreciated and rewarded as opposed to the Gulf region where there is an abundance of capital,” says Ghandour. “You can find good deals, not as many as you would like, but better than what you will probably find in Saudi Arabia.”

Badreldin agrees. “In North Africa you can invest in companies with attractive valuations and get higher returns. In the GCC you can get the same company and pay 30-40% more in terms of the valuation.”

For pan-emerging market players such as Abraaj, the competitive field in North Africa is relatively clear, he adds.

“There is not too much competition in private equity, because the market is very young and there is enough opportunity for everybody,” continues Badreldin.

For KPMG’s Papriwal, from a private equity point of view it is very hard to find a lot of businesses of scale to invest into, while the other big issue is exit, because the local markets are fairly illiquid or small.

“I think because there are not that many fund managers on the ground, which have credible track record, it is also hard to do fund-of-fund type investment. I think you need to be on the ground clearly to meet management and companies,” he says.

Despite the deepening of the African PE industry, there are still significant barriers to entry, agrees ECP’s Vidal. “As a GP, you need to demonstrate significant investment experience. In particular, it is important that you have experienced multiple investment cycles and know how to execute across turbulent markets. This is critical for developing exit strategies and ultimately achieving above-market returns,” he stresses.

However, for experienced investors, challenges can also present opportunities, he says, adding that Africa has a perceived risk that is higher than its actual risk, resulting in limited competition and attractive valuations for investors.


One challenge to the reputation of private equity investment in North Africa lies in overcoming investors’ misconceptions of the effect of political instability in the region. The risk/return reward trade-off for investment can be significant if correctly managed by experienced professionals.

“During politically volatile times, private equity investors can benefit from providing essential long-term growth equity to entrepreneurs or leading businesses while temporary liquidity constraints are impacting their ability to access other sources of financing. In fact a number of prohibitive investment regulations have been lifted by the new governments in the region, allowing for easier access by foreign investors,” says Vidal.

One way in which ECP mitigates political risk is by investing in companies with pan-African operations. During times of conflict, the asset manager reports regularly to its LPs, and maintains support of its investee companies.

Vidal points out that the effects of political uprisings can be short-lived, citing the case of the firm’s investment in Tunisian SAH. While operations closed for two weeks in January 2011, business picked back up quickly and domestic sales, which were down by 40% in January 2011, had recovered in March and surpassed their 2010 level by April. Since then, SAH pursued with strong double digit growth in revenues and achieved more than 30% growth in revenues in 2012 compared to 2011. Since the Fund’s investment in 2008, the company has more than doubled its revenues and EBITDA.

For players like CedarBridge Partners and the Abraaj Group, political risk is not that high on the agenda. Ghandour points to country-specific risks such as the currency depreciation in Egypt, whereas for Abraaj’s Badreldin, the key challenge is around security. “We can always price in the political risk, but it is very hard to price in the security risk. The elections or impeachment of President, you can always price it in, because the technocrats are largely the same and you know which way the ball will fall.”

“The problem is when the country enters a security situation - what is happening now in Cairo. This results in curfew, which impacts businesses, people’s ability to get to work, so you can have a negative spiral effect,” he concludes.

Global aims to double AUM under new asset management head

Global Investment House plans to dramatically increase its assets under management (AUM), which currently stand at $4bn, under their new asset management leader.

Raul Biancardi, who was appointed as head of the asset and wealth management arm of the Kuwait-based company last month, told Mena FM: “We’re looking to more than double that [AUM] number. Global is really going through a tremendous renaissance now, and I’ve been delighted to be chosen to help deliver that growth.

“That growth is going to come from many different asset classes. We’re speaking to investors every day. We’re asking them what they would like to see from us.”

Global struggled during the financial crisis, and in December 2008 defaulted on $200m worth of loans. Since then, it has undergone a high-profile process of restructuring.

Biancardi said: “It had some issues during the crisis, but the persistence of the team in carrying on providing clients with an excellent service and competitive returns at the same time as finalising the restructuring, I thought was very impressive. I think the firm is very well equipped to grow the asset and wealth management businesses. Global has zero debt now, it’s in great shape and is one of the few firms that has a true pan-GCC presence; I think that’s a huge advantage going forward.”

Biancardi said he wanted to build on Global’s existing expertise in the GCC as well as reach new markets through partnership deals with international asset managers. Real estate and private equity are two current areas of focus where he hopes to be able to bring new offerings to clients.

“In real estate, both regionally and internationally, we’ve accumulated a lot of experience and real estate continues to be attractive, so we’ll be bringing significant investment opportunities to our clients from real estate projects,” said Biancardi. “The same goes for private equity; we’ll be looking to bring privately owned companies on a deal-by-deal basis to our clients so there are opportunities in every asset class.

“Additionally we want to roll out a new set of wealth management services for our clients and we’re working hard to develop those and bring in some new talent to be able to help us deliver it,” he said.

Biancardi has had a 25-year career in asset and wealth management, which included senior roles at Lehman Brothers and NCB Capital.

Markets steady from Syrian crisis shakes

Market wobbles in Dubai and elsewhere following the Syrian crisis have provided food for thought, but fund managers are unperturbed

By Anthony Strzalek and James Brockett

The return of market volatility in Middle Eastern markets sparked by the Syrian crisis has led some to question whether GCC markets remain a safe haven for investors.

The threat of military intervention by foreign powers in Syria, escalating the ongoing civil conflict there, led to some of the most significant market falls seen on GCC exchanges in recent years. On August 27, the Dubai Financial Market (DFM) fell by 7%, its largest single-day fall since 2009, while the Saudi Tadawul lost 4% and Kuwait’s index 6%.

While the Russian-brokered deal for the removal of chemical weapons has meant the threat of US-led military action has receded, the fall in Dubai’s market, which was the worst among major global markets in response to the crisis, was food for thought for investors who had viewed the UAE as a safe haven.

However, regional fund managers remained relatively unperturbed by developments, pointing out that the volatility follows a remarkably positive year for UAE markets in particular.

Qutaiba Hawamdeh, fund manager of AB Invest’s Arab Bank MENA Fund, added: “Due to MENA regional geopolitical uncertainties rising over the past year, coupled with global economic factors, we have been trimming the funds’ risk exposures gradually on the back of the rallies that have taken place until the very recent escalating developments of the Syrian situation.

“The markets deteriorated severely in the last few days of August, wiping out the appreciation that has taken place during the month and closed in the red.”

However the firm’s flagship Arab Bank Mena Fund dropped less than its benchmark Dow Jones Mena index during the month, he added.

Overall in August, the MSCI Arabian Markets index fell by -1.7%, while the UAE saw a 4.5% decline.

Amer Khan, fund manager of SHUAA’s Arab Gateway Fund, said: “From a relative value perspective, we’ve performed well, and that’s been on the back of our country allocations as well as our slightly outsized cash level, which we had raised, booking gains through the market rally. Our UAE and Qatar allocations were hardest hit – the former because volatility was higher partially as a result of the substantial YTD gains investors were sitting on, the latter because we expected it to be slightly more insulated than it turned out to be.”

He said the market wobbles would not prompt any major change of tack. “We’re long term fundamentally oriented investors and we see so change in the rather attractive underlying fundamentals of the region,” Khan added.

Qutaiba Hawamdeh also spoke positively of future growth in the region. He said: “We are firm believers in the region’s long-term growth potential. Geopolitical uncertainties have always been, and are likely to remain, an important factor of the region’s valuation parameters. Strategically, the region still enjoys relatively attractive economic fundamentals, especially in the GCC area.”

But he concluded: “Given the MENA region’s geopolitical complexities, large retail investor base and combined with the inherent risks in an emerging market environment, the likelihood of volatility for the short to medium term are inescapable.”

On vacation no longer…

Nigel Sillitoe, CEO, Insight Discovery

At first glance, it may appear that not much has been happening in the financial services sector of the Gulf Cooperation Council (GCC) countries in the last few weeks. Many people have been observing Ramadan, while others have been enjoying annual vacations in cooler climes. Globally, developed markets have been outperforming Emerging Markets and the price of gold has fallen quite sharply.

However, this summer has seen important changes to the ways in which global investors perceive the stock markets of the United Arab Emirates (UAE) and Qatar. On 11 June, MSCI said that its indices for the two countries would be promoted to its universe of Emerging Markets with effect from May next year. At present, MSCI classifies both countries as Frontier Markets.

Insight Disccovery and Zawya surveyed 141 investors and other market participants to learn how this development has been viewed. Every survey respondent thought that the promotion of the two countries is good news. Almost every respondent thinks that the flow of funds from portfolio investors to the two stock markets will increase as a result: however, there is a diversity of opinion as to how much money will actually be involved.

Kuwait and Oman (with about one third of survey respondents each) were identified as the GCC markets that are most likely to be the next ones to be promoted to MSCI’s Emerging Markets universe. Moreover, more than 80% of respondents think that the promotion of the UAE and Qatar will accelerate the momentum for Saudi Arabia’s Tadawul market to be similarly upgraded.

Needless to say, all this is widely seen as being good news for both international and local/regional asset management companies. Taking a three-to-five year view, almost half of the survey respondents said that they could foresee an asset price bubble occurring somewhere in the GCC region.

Meanwhile, the UAE economy has not been on vacation. On 5 August, HSBC noted that its purchasing managers index (PMI), a single-figure measure of the performance of the country’s non-oil sector rose from 54.1 in June to 54.5 in July. Activity is accelerating even as other Emerging Markets have been slowing. HSBC’s PMI for the non-oil sector of Saudi Arabia indicated that activity there, too, is still growing fairly steadily.

In this part of the world, growing economies need increasing numbers of expatriates. And expatriates need asset management companies, life insurance companies and advisors to provide them with the financial products that they need to save and invest. It remains to be seen what is the impact of the fall in the price of gold on investment demand for the yellow metal. While it is likely to remain a favoured asset class of non-resident Indians (NRIs) who are working in the GCC countries, I suspect that some of those investors will have been disappointed by its recent performance. At the margin, they may well be looking to invest in other asset classes.

Overall, then, it is reasonable to expect a lot more ‘noise and action’ from international life companies and asset management companies in coming weeks relative to the last few weeks. The vacation is over.

Nigel Sillitoe is CEO of Insight Discovery, a strategic research company based in the UAE. E-mail: [email protected]. Website: www.insight-discovery.com

Franklin Templeton Launches New GCC Bond Fund

Franklin Templeton Investments have launched a new fixed income product focusing on the region, the Franklin GCC Bond Fund.

The fund aims to provide investors with access to rapidly growing bond markets in the Gulf Corporation Council (GCC) nations.

The new fund is a sub-fund of Franklin Templeton Investment Funds (FTIF), a Luxembourg-domiciled SICAV.

The company said that with the strong economic growth posted by GCC member countries in the past decade, bond markets have thrived and the GCC now boasts some of the fastest growing bond markets in the world.

Franklin Templeton’s chief investment officer, Global Sukuk and MENA Fixed Income, Mohieddine (Dino) Kronfol, said: “The GCC region has some of the world’s strongest credit metrics and is endowed with 30% and 20% of the world’s proven oil and gas reserves, respectively.  Regional debt markets have been developing rapidly over the past 10 years and have achieved scale in terms of market size, issuance volumes and trading activity.

“We believe the outlook for regional debt markets is extremely positive as GCC countries continue to develop external as well as domestic money, bond and sukuk markets. We expect GCC markets to continue delivering strong risk adjusted returns with low correlations to major fixed income and equity markets.”

The fund will invest in fixed or floating-rate debt securities and obligations issued by government, government-related or corporate entities located in GCC member countries. There is also scope for the fund to invest in similar securities and obligations in the wider MENA region. The fund aims to maximise total investment return consisting of a combination of interest income, capital appreciation and currency gains in the long term.

Dino Kronfol will be supported in the role by portfolio manager Sharif Eid and senior research analyst Franck Nowak.

Franklin Templeton Investments (ME) Limited is regulated by the Dubai Financial Services Authority.