Executive Magazine

Profits for the public

by Gabriel Chahine, Jad Bitar & Lina el-Zein June 24, 2013

written by Gabriel Chahine, Jad Bitar & Lina el-Zein

The region’s healthcare sector currently faces several pressing priorities, including rising rates of lifestyle ailments such as diabetes and heart disease, a growing population and problems of accessibility and quality of care. In addition, the predominant financial model, in which the state assumes most of the financial burden of care, is unsustainable. Both factors have led private equity (PE) firms in other markets to invest into healthcare infrastructure and the delivery of services, thus addressing societal needs while generating attractive returns.
Yet, PE investors in the Middle East and North Africa have made only minimal contributions to the reshaping of the healthcare sectors in the countries of the Gulf Cooperation Council (GCC) and elsewhere in the region.

During a recent roundtable discussion organized by the Middle East and North Africa Private Equity Association (MENA PEA) for PE firms, consultants and healthcare practitioners, four factors were named to explain the lack of industry investments in healthcare projects: mismatched investment horizons, state involvement, regulatory surprises and a lack of clarity about exit strategies. This notwithstanding, MENA PEA members affirmed that private equity can and should be a key contributor as GCC countries seek to improve healthcare and bring better services to their populations.

Patience is a virtue

Before advocating stronger PE involvement in Arab healthcare, there are barriers that need to be addressed. First, most PE investors seek deals with a short timeline and a high rate of return. The ideal scenario is to make an investment, improve operational efficiency and then exit the investment after three to four years while aiming for a high return. Healthcare deals, in contrast, often take far longer to pay off, and returns are not necessarily as attractive. Greenfield projects offer potentially higher returns, but require a longer timeline. One rule of thumb is that PE investments in healthcare require a minimum of five years to ensure proper returns.
The second barrier to PE investments is the large presence of GCC governments in healthcare. In many markets, the state remains the primary healthcare player, regulating the industry and operating most hospitals and care facilities. Many governments have publicly stated that they want private companies to enter the healthcare sector, but at the same time are increasing their own role — which sends a mixed message.

For example, the Saudi Health Ministry recently announced the launch of 420 health projects, including the construction of 127 hospitals, in addition to the 259 it already operates, at a cost of $3.2 billion. Such moves in effect “flood the market”, leaving little room for PE investors. These measures also put the public sector into competition with the private sector for scarce resources, such as talent.

Third, a lack of clarity on regulations — both new rules and enforcement — also makes investors cautious. “We don’t necessarily dislike regulations per se,” said Nicolas Murat, a partner at Dubai-based Levant Capital. “What we dislike are surprises: new rules that we didn’t anticipate, or an unexpected application of the rules.”

Last, many participants in the MENA PEA roundtable were hesitant about healthcare investments because they do not offer a clear “exit strategy”, a path to divest investments once they have achieved their target returns. Only a handful have successfully launched initial public offerings, such as Dallah Healthcare Holding Co. on the Saudi Stock Exchange last November, or Abu Dhabi-based NMC Health Plc on the London Stock Exchange in August 2012.

Remedies, opportunities

To overcome these obstacles and engage in the healthcare sector, PE firms can deploy several solutions. One promising approach is public-private partnerships (PPPs), or collaboration arrangements between governments and private companies. These arrangements have already been used in the GCC for building such infrastructure as airports and power plants. They are a potential stepping stone for the state-operated healthcare segment to attract more private-sector players such as PE firms.

Under a typical healthcare PPP, the government reduces its involvement and no longer operates facilities or delivers care. Instead, the government exercises an oversight role, identifying gaps in accessibility and quality, regulating the market and offering incentives to attract commercial players. PE investors inject capital into profitable opportunities — such as promising for-profit companies — and contribute their expertise in clinical, administrative or support services to improve performance.

There are several successful healthcare PPPs already under development in the region. Egypt last year signed PPP deals for the construction of a 200-bed gynecology and obstetrics university hospital, a new general hospital and a blood bank and pediatric and emergency-care ward at an existing facility, all in Alexandria.

While the tendering of these healthcare projects was disrupted two years ago in the wake of the Arab uprisings, the contracts are now ongoing, according to the information available from Egypt’s PPP central unit, notably with the participation of the Cairo-based PE firm, Bareeq Capital.

The Saudi Health Ministry is currently investigating several PPP opportunities, and there is an established track record of successful healthcare PPPs in the EU, including Spain and several Scandinavian countries. These examples provide guidance for structuring the PPP mechanism.

A second avenue is for PE firms to look beyond hospitals and clinical operations. While the most obvious components of healthcare, they are also complex and require specific expertise. More accessible opportunities for PE investors exist in adjacent categories, such as medical supplies, pharmaceuticals and laboratory and diagnostic services.

For example, Gulf Capital, a PE house, acquired a diagnostic imaging company in Egypt with 13 centers in 2009 and then made add-on acquisitions in Saudi Arabia, Jordan and Turkey. The company expects to run 37 centers by the end of this year, making it by far the biggest diagnostic imaging chain in the region. The company can now use its bargaining power to secure good pricing deals and financing on equipment. “It’s possible to add value in the sector by improving the quality of operations and implementing standardized procedures, and, via tele-radiology, provide specialized services in more remote areas that would otherwise not be available,” said Jonas Voelker, vice president of Gulf Capital.

PE houses can also move one degree away from clinical care by building administrative, finance and support capabilities for healthcare operators. Or they can take over some service elements from governments that are too busy building and operating hospitals. Such ventures would allow PE investors to tap into the expertise they have already built up in areas such as software, equipment and human capital through their investments in other industries.

Last, PE houses must recalibrate the expectations of their investors by clearly communicating that healthcare is not like other industries. Investments take longer to pay off and often have complex exit strategies, thus requiring greater patience. One investment house, ReAya Holding, keeps its investments as long as it takes — including some greenfield investments such as a vaccine production plant — giving them time to mature.

Following Dubai’s lead

Healthcare investment is more difficult than other industries where PE investors have succeeded in the past. Yet the opportunities are compelling. Given the scope of the region’s healthcare challenge over the coming decades, PE firms that choose their strategies and targets carefully — in markets where the government has established clear expectations, as has occurred in Dubai — will find success. They will generate attractive returns for their investors, and they will help build a stronger and healthier GCC overall.

June 24, 2013 0 comments

The Buzz

The drone that brought it home

by Farea al-Muslimi June 24, 2013

written by Farea al-Muslimi

The drone debate in America has become depressingly polarized. While critics point to the civilians killed and argue that most of the suspects could be captured, proponents counter that the targets are legitimate, that there are checks and balances and that, unfortunately, some level of ‘collateral damage’ is inevitable. That’s how things look from Washington — or even Yemen’s capital Sana’a — and that’s why many in the West welcomed Obama’s speech last month in which he suggested new limits on the use of drones.

But this debate becomes increasingly irrelevant if one considers how such policies have created complex realities on the ground in remote areas across Yemen. Crucially, drone strikes are counter-productive for both the governments of Yemen and the US. They cost Yemen monetarily, have destroyed social cohesion, created local conflicts, deter humanitarian work and, for the US, help fuel the forces that Obama and others claim to be fighting. A few examples may help illustrate my case.

In May 2010, Jaber al-Shabwani, deputy governor of the tribal province Mareb and a high-level security official, was tasked by the central government with negotiating the handover of some militants to security forces. Instead, he was accidentally killed by what was believed to be an American strike. The next day, his powerful Al-Shabwani tribe, which resides in an oil-rich governorate, attacked the local capital and bombed oil pipelines. The attacks devastated Yemen’s oil output, with losses of millions of dollars, while the tribe took control of the governorate by force and had armed clashes with security for days.

See Farea al-Muslimi discussing drones at the US Senate

Related article: America’s killing machines

On another occasion, June 2012, Hussein Saleh — a humanitarian worker with the International Committee of the Red Cross — was on a mission in the southern province of Abyan — an area targeted by many drone strikes. He was working to give humanitarian assistance when an alleged US strike killed him.

Bringing it all back home

Yet few cases emphasize the counterproductive and self-defeating nature of US drone policy better than the killing of Hameed al-Radmi in the village of Wessab — my home — in central Yemen this past April. Wessab was killed in the early evening by a suspected US drone strike, with Yemeni officials later alleging that he was affiliated with Al-Qaeda in the Arabian Peninsula (AQAP).

In the village, however, many treat these claims with suspicion. Radmi was known to lead a very normal life — dedicating his energy to helping people in the area. Unlike Yemen’s powerful sheikhs and other stakeholders, he was not perceived to be greedy and did much of his work for no personal financial gain. In recent months he had become a major force in the region: enforcing the law, demanding development projects from the government, speaking on behalf of villagers and standing up to corrupt sheikhs.

Among the projects he was actively engaged in was a new road for the area, which would make a big difference in connecting Wessab to the outside world. The government had started to develop the road, after decades of false promises, and Radmi was playing an effective role in holding local officials to account. Two days before he was killed, he personally went around Wessab asking people to sign a petition stating that anyone making trouble for the company building the road should be forced to pay a $2,500 penalty. Compare this to Wessab’s current members of Parliament, who rarely visit and have done little to improve infrastructure in recent years, and you can see why many in the area mourn his passing.

Fueling the conspiracies

His death has created hostility towards the US and left locals with more questions than answers. Clearly it was possible to capture and question him — everyone in the area knew where he was and he was not known to travel heavily armed.

Strangely, for some members of the village the killing has changed their perceptions of Al-Qaeda. If Radmi was involved, they reason, AQAP could not be the dangerous organization they hated, but is perhaps a better alternative to their government officials and sheikhs.

Others have come to the conclusion that Radmi was killed not because he was Al-Qaeda but because he had angered powerful stakeholders in the area. Parliamentary elections are less than a year away and Radmi was being tipped to run — especially with his increasing popularity. His challenge to the established order made him a threat.

“Hameed al-Radmi was killed because the election date is soon”, says Wadah Al-Qadhi, chairman of Wessab’s regional branch of the coalition for change movement during the 2011 uprising. Qadhi, who knew Radmi well, points fingers at some of those security figures who were previously Radmi’s allies. He alleges that local stakeholders are using the US to take out regional rivals.

About an hour before Radmi was killed, the head of the local government was riding with him in his car. Rumors circulate that he put a tracking system in the vehicle, allowing the US drone to locate him. Despite the fact that there is no concrete evidence for these claims, the official was afraid to leave his house for days after the bombing in fear of angry locals.

No cause for optimism

The only thing that is clear is the real reasons for Radmi’s killing are unknown and are likely to remain so. But the allegations raise serious questions about whether US officials are being played by local stakeholders to engage in local conflicts.

When asked whether I was optimistic about the recent Obama speech, in which he claimed that all the targets could not be captured and are a threat to US national security, I said no. Clearly the debate they in the US were having was not the same one that Yemenis affected by drones were engaged in.

America’s policymakers may continue to debate the effectiveness of the drones based on their accuracy and “casualty-free” operations or even based on the legality and “procedures”. But until the scope of the arguments in the West more accurately reflects the local complexities and the carnage being wrought on our lives, the decisions they make will end up justifying the unjustifiable.

Farea al-Muslimi is Executive’s Yemen correspondent

June 24, 2013 0 comments

New banks on the block

by Maya Sioufi June 24, 2013

written by Maya Sioufi

Political turbulence and economic uncertainty have not stopped new banks from opening their doors in Lebanon. For this month’s special report on the banking sector, Executive spoke to the general managers of four debutante institutions — Cedrus Invest, LiBank, Lucid Investment and Optimum Invest — with an aim to assess their performance, strategies, goals and concerns.

The founders of Cedrus and LiBank described Lebanon as the optimal location for their clients and their operations. “We decided [to set up] in Lebanon because of our Lebanese and Arab client base, the banking sector’s good reputation and conservative regulator, the lighter cost structure relative to London and Geneva and because it is convenient to have a base in Lebanon,” says Raed Khoury, co-general manager of Cedrus.

Lucid Investment and Optimum Invest are not exactly new — they were established nearly ten years ago — but a management overhaul at each encouraged Banque du Liban, Lebanon’s central bank, to upgrade their licenses to match their diversified portfolios of services.

The four banks profiled share a focus on private equity (PE). Whether pursuing opportunities in London, like LiBank and Cedrus; in Ghana, like Optimum Invest; in Lebanon, like Lucid Investment or in the Middle East, these bankers are rolling up their sleeves to find promising companies for their investors’ capital.

The banks are betting on PE opportunities to provide them with an edge in the aggressive world of finance. “Large investment banks are not interested in small [PE] projects in Africa, so there is scope for our size of companies,” says Albert Letayf, chief executive of Optimum Invest.

Corporate strategy, management and financial advice will all feature in the banks’ menus of products. They offer consulting services for business strategy, capital fundraising through equity or debt, financial management and the implementation of corporate governance frameworks.

As offerings vary from one institution to another, the types of clients that the banks target differ, too. Cedrus and Optimum Invest cater to the private banking needs of high net worth individuals in Lebanon and the Middle East. LiBank will look more widely, from the region to Brazil and Asia.

Lucid Investment’s target clientele is Lebanese companies. “Our main focus is on investment banking as there is high demand for this and [corporations] are highly underserved in Lebanon,” says Wael Zein, CEO of Lucid.

While it is still too early to judge their performance after a year or less in operation, one promising sign is that the banks seem to have taken into serious consideration the importance of solid corporate governance standards, such as the establishment of boards of directors that include independent members.

The main concern for these new banks remains the political instability in Lebanon, forcing them to look abroad to hedge themselves. LiBank is considering opening an office in London to cater to its expatriate Lebanese clients. Cedrus, too, has an operational presence in the city, where it is developing a real estate investment opportunity for its clients. Optimum is focusing on private equity deals in Africa, and Lucid Investment aims to develop a roster of clients that includes Middle Eastern corporations headquartered outside Lebanon.“We are managing our business on a day-to-day basis, and that is very difficult for a bank. We have to follow our clients and make sure [that] if they are doubtful about Lebanon and the banking sector, we can render the services they are expecting in connection with Lebanon from outside Lebanon,” says Tony Ghorayeb, chairman of LiBank.

Meet the banks in-depth below

1. Cedrus Invest Bank

Armed with a lucrative address book after 15 years of working at Barclays in Dubai, Raed Khoury and Fadi Osseili returned home to Beirut to set up Cedrus Invest Bank, which began operations in February 2012.

With the majority of their clients from the Middle East, the bankers voted for Beirut to be their base. Besides the fact that it is home, the country’s solid banking sector, conservative regulator and lighter cost structure — compared to heavier cost structures in major financial centers such as London and Geneva — tipped the balance in favor of Lebanon’s capital.

Khoury and Osseili, who together own 8 percent of the bank, invited clients whose wealth they had managed for years to own a stake of the new financial institution. More than 25 shareholders took up the opportunity to invest in the bank — 75 percent from Lebanon and the remainder from Saudi Arabia — and open an account with the new Beirut-based private bank. Cedrus currently has $400 million in assets under management.

With 25 employees, Cedrus Invest is offering wealth management for the affluent with a minimum deposit requirement of $1 million, as well as family office and corporate advisory services for companies with at least $15 million in assets. The wide scope of services brought about $2.4 million of profits last year, the firm’s first year of operation.

With 11 family offices in its roster of clients, this business accounts for 30 percent of the bank’s overall profits. Having focused on the financial wealth of companies last year, the Lebanese bankers have expanded family office services in 2013 by adding corporate governance offerings such as succession planning and board nominations. The bank itself has two independent board members — Ghazi Youssef, an economist and member of parliament, and Assaad Razzouk, a clean energy entrepreneur — on its board of directors.

To stand out among local competition, Cedrus is offering its clients regional private equity (PE) opportunities through direct investments in companies and not through funds. With an average investment of $30 million per company, the bank is currently offering its clients two opportunities in this area: a healthcare company in Saudi Arabia and an industrial company in the United Arab Emirates. It is also considering PE opportunities in Lebanon for smaller sized deals of up to $10 million.

Beyond the region, Cedrus and a Lebanese family office are in final negotiations to acquire a real estate development project in Belgravia, a prime location in London, for $90 million. Cedrus will own 25 percent of the development in London and the Lebanese family, whose name wasn’t disclosed, will own 75.

The aim is to transform the development into serviced apartments with a target internal rate of return north of 18 percent. Cedrus intends to offer this investment opportunity to its clients as soon as it guarantees the loan for the development from credit-wary banks, an exasperating task in a downturn.
Looking ahead, Cedrus anticipates growth across its line of businesses and expects to generate profits of $5 million in three years. The main challenge will be to maintain a steadily positive income, despite the lack of stability in Lebanon and the region. “Our clients are from the region so we would like to see stability; we need the Arabs to come to Lebanon and the Lebanese expatriates to come too,” says Khoury.

2. Levant Invest Bank

What do the Harris School of Public Policy, the Levant Business Union, Brazil and Hong Kong have in common? Levant Invest Bank (LiBank), the newest financial institution to set up
in Lebanon. Having opened its doors in January 2013 in Beirut, LiBank aspires to be the boutique investment bank of choice for the diaspora of the Levant region.

With $30 million of paid-in capital, LiBank plans to become a profitable but low-key advisory investment bank, something akin to the Lazard Bank of the Middle East. Set up by Tony Ghorayeb, who is also the co-chairman of the Dean International Council at the University of Chicago’s Harris School of Public Policy, and his colleague Salim Chaar, the idea for the establishment of this financial institution came out of the Levant Business Union — an association of which Ghorayeb is the secretary general.

Between Ghorayeb and Chaar, their previous experience working in Latin America and in Asia respectively reflects the aims they hold to establish a global clientele. When he worked in Brazil, Ghorayeb developed and maintained solid relationships with the Lebanese diaspora of South America. Chaar was on the other side of the globe, serving as the head of Indosuez in Hong Kong and Singapore for over 12 years.

Ghorayeb’s Latin American connection extends from LiBank’s client base to its shareholder structure. A group of Lebanese Brazilian businessmen including David el-Etter, founder of Nicoboco, one of most successful producers of sportswear in Latin America, and Jamal Fatah, the agent of electronics company Olympus in Brazil, together own 12.5 percent of the bank.

LiBank’s diverse shareholder base also features the Qatari group Al Salam International, which own 15 percent, a Saudi Syrian group with a 10 percent stake, a Syrian Turkish group holding 5 percent ownership and the Lebanese real estate brokers Care Group, owned by Victor Najarian, with a 10 percent stake. Ghorayeb and Chaar own 20 percent of the bank together.

By the end of next year, the founders plan to have $50 million to $100 million of assets under management. Their ultimate objective is to provide their clients with specific projects to invest in. That’s where Ghorayeb’s son Kayssar comes in. With a background in banking in London and management consultancy in Chicago, he is developing the private equity side of the bank and is currently working on several regional deals over $50 million in size.

Their other main area of focus is on services for family offices, and they intend to open a branch in London to cater to this market. LiBank is also geared to offer their clients a palette of corporate governance services, an issue the bank has taken seriously by electing three independent directors to their board: Patrick Zurstrassen, former chief executive of Indosuez, Graham Wisner, a lawyer at American law firm Patton Boggs, and Andre Bandali, the Central Bank-appointed interim chairman of the now liquidated Al Madina Bank.

With 17 employees on board, the founders are hoping to be profitable by the end of this year. In the immediate term, they are researching private equity opportunities on a project-by-project basis to provide their clients with the highest returns. But they are concerned that new regulations — from the increase in capital requirements to the additional scrutiny of banks — may place a costly burden on the nascent bank, especially during a time of regional and domestic uncertainty.

Whether it will develop its platform in Beirut or elsewhere, LiBank aims to become the investment banker for the growing Middle Eastern diaspora.

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3. Lucid Investment

After operating for eight years under the name Addima as a corporate finance, strategy and management-consulting firm with offices in Beirut, London and Riyadh, a change in ownership of the firm compelled the company to become a financial institution under the new name Lucid Investment. Becoming the bank of choice for corporate Lebanon is what this newly restructured financial institution aims to accomplish.

The founders of the new financial institution, Samir Taleb, Wael El Zein and Kamel Abdallah together own the vast majority of the firm, which was granted its financial institution license from the central bank in 2011 and kicked off operations in 2012. While the last two founders were also behind Addima, Taleb joined from Optimum Invest where he owned a minority stake. Trained as a civil engineer, Taleb worked in the family business at Dar Al Handassah as well as in investment banking in a private family holding.

The remaining three shareholders joined last year and are of Lebanese origin: Wael Sinioura, a former senior banker at Arab Bank and son of former prime minister Fouad Sinioura, Joseph Raad, former banker at Credit Libanais, and Habib Jaafar, a Nigeria-based businessman.

With an initial paid-in capital of $5 million, the objective of the founders is to increase the capital of Lucid to $20 million by the end of the year by gradually taking on new shareholders and upgrading the license to an investment bank.

The firm’s main focus is advise Lebanese companies and regional firms, from startups to well-established businesses. Its services include assisting companies with their capital needs and advising about potential merger and acquisition targets. Lucid will maintain some of Addima’s prior offerings as well, such as strategy consulting and corporate finance services. Its roster of clients features Lebanese companies such as the food chain Kabab-ji and Internet service provider Terranet.

As the owners of the companies they serve could also happen to be high net-worth individuals, Lucid is catering to their personal wealth management needs. It has set up a capital markets division, but it stresses that private banking is not its area of focus for revenue.

Their core activity remains corporate advisory. And when a company they are advising needs capital, the firm seeks external investors. Currently they are working on two Lebanon-based private equity deals. It has structured a $25 million fund that acquired 70 percent of a Lebanon-based hospitality business with worldwide operations. The second equity deal that the firm is working on is for a Lebanon-based conglomerate valued at around $150 million and looking to raise $25 million.

With 15 employees on board and a 2013 revenue target of $2 million, Lucid Investment aims to be profitable by the end of this year, its second year in operation. For future growth, it is focusing on providing corporate advisory and investment banking services to medium-sized corporations in Lebanon and the region, especially to companies owned by the Lebanese diaspora. “Financing the company with equity means opening your books to someone new, and this was a major issue in the past. Now we are starting to feel that [families and corporations] are more open to having partners with them,” says Wael El Zein, chief executive of Lucid Investment.
4. Optimum Invest

Optimum Invest has been around since 2004, so why does it feature among the new financial houses on the block? Because it was only at the end of last year that it officially became a financial institution, after Banque du Liban, Lebanon’s central bank, upgraded its license. Along with the new status came a new shareholder base, a new management and a new strategy.

The main business of Optimum Invest used to be fixed-income brokerage for banks in Lebanon and the Middle East. With a majority stake owned by Antoine Salame and two Lebanese partners, the financial institution wanted to diversify its services. That’s when Albert Letayf came in. With a background in private banking at Saradar and Banque Libano-Francaise, among others, he bought out one partner — Samir Taleb, who went on to found Lucid Invest — and is now the chief executive of Optimum Invest.

With a paid-in capital of $5 million, Optimum expanded its services and grew its revenues by 20 percent in 2012. Its most prominent achievement was establishing a fixed-income fund that invests in Lebanese Eurobonds in partnership with Beirut-based Arab Reinsurance Company. The fund is entirely seeded by local insurance companies. Launched in January 2012, the Caerus Lebanon Debt Fund has raised $20 million and generated a net return of 6.65 percent in its first year of operation — better than the Blom Bond Index, a tracker of Lebanese Eurobonds, that ended the year down 1.7 percent.

With 17 employees on board, Optimum’s ultimate objective is to offer its clients hand-picked investment opportunities. In partnership with Los Angeles-based real estate investment firm Colony Capital, headed by Lebanese-American businessman Tom Barrack, Optimum set up a $10 million feeder fund that offered an opportunity for its clients to invest in real estate in the United States.

But it’s in Africa where the founders have placed their biggest bets on future growth. Investing part of their own money to align with the interests of their investors, Optimum is eying the world’s second most populous continent for lucrative returns with current projects including a real estate fund and an education fund that aims to establish universities, both in Ghana. “[Ghana] is more politically stable and one of the less corrupt countries in sub-Saharan Africa,” says Letayf. Optimum is also looking to launch a power fund in Africa but would not disclose more.

The company’s offerings include corporate advisory services as well as wealth management services, but it is the asset management arm, with its private equity (PE) offerings, that will be its main focus.

“In Lebanon, we signed the Foreign Account Tax Compliance Act (more commonly known as FATCA) so there is no more banking secrecy with the US. We are in a world where everything that is opaque and muddy will disappear,” says Letayf as he explains his preference for PE opportunities over private banking business.

To comply with the trend towards transparency and accountability, Optimum has set up a board of directors with one independent member: Pierre Gaspard, advisor to the chairman of Saradar Group. There are plans to elect a second independent board member, but a deadline is yet to be set.

As Optimum works to establish itself as a boutique, asset-management investment bank for the Middle East and Europe, it’s toward the world’s poorest continent that the firm is seeking the most lucrative returns to offer to its investors.

June 24, 2013 0 comments

The Buzz

Business briefing: 24 June 2013

by Executive Staff June 24, 2013

written by Executive Staff

Economics and Policy

Saudi Arabia has switched its weekend to Friday-Saturday, bringing the kingdom into line with the other Arabian Gulf states.

Covering the net

by Robert Biddle June 21, 2013

written by Robert Biddle

Good role models are hard to find. Thus insurers on a quest for new business lines would do well to pay close attention to Estonia, the small Baltic republic where cyber security is writ larger than anywhere.

In April, Estonian President Toomas Hendrik Ilves highlighted his country’s success in safeguarding Internet freedom and implementing cyber-security measures. In an opinion piece in the International Herald Tribune, Ilves explained that Estonia’s cyber-security achievements came on the tails of a countrywide cyber attack five years earlier that targeted government websites, newspapers and banks and overloaded servers to the point of shutting down the country’s digital infrastructure for days.

While the attacks on Estonia were harsh, they were just part of a rising tide. As consumers, corporations and small businesses have moved onto the net, criminals and online mercenaries have followed. This, in turn, has created a huge need for online actors to protect individual and group rights of market participants. The situation today has reached the point where this protection system is moving beyond the need for technical and legal measures to a need for online insurance — not as a channel for marketing standard products such as a life plan, but as cyber insurance, such as corporate covers of financial liabilities related to data breaches.

In coverage terms, cyber insurance is a wide term for first-party and third-party liability protections. First-party policies can reimburse companies, for example, for the direct and indirect economic damage of having data destroyed by a malware (malicious software) attack. Third-party cover could be vital for companies that host online debates where hosts may be held accountable for libel found on their sites, or it may jump in when data hosting companies are held liable for exploitation of credit card numbers that were hacked from their servers.

Related articles: Lebanon’s insurance industry dead in the water

Insurers’ thankless task

The United States Department of Commerce describes cyber-insurance as potentially an “effective, market-driven way of increasing cyber security.” This is a reference to the value that insurers can add to the expanding web economy by identifying market needs of customers and researching what areas of business are most vulnerable, while advocating for cyber-security solutions.

Estonian President Ilves called the attacks on his nation a “blessing”, because they inspired Estonia’s commitment to cyber security and pushed the government and private sector to invest in better protection at a time when cyber assaults were nowhere near as threatening as attacks can be today. As further sophistication of malware comes in tandem with the increasing breadth of services the Internet has to offer, cyber-security solutions help in preventing such attacks.

But these methods cannot be relied on as the only defense, and here is the point where insurance companies, with their sound commercial interest in prevention, can step in to compel clients to greater preparedness and at the same time provide the security that they need if they fall prey to an attack.

Even with our terrible connection speeds…

Lebanon is a country where e-banking is slowly reaching a threshold of prevalence and this means that cyber insurance is something that providers and commercial clients need to be aware of, ideally without suffering direct wake-up calls akin to the pre-paid card fleecing that two banks in the Gulf suffered earlier this year.

The expansion of cyber insurance into the Lebanese market is inevitable, according to Roger Zaccar, director of Commercial Insurance, who told Executive, “People are going to come to realize how important Internet security is, and how to buy insurance.”

But Zaccar sees a misconception among customers that insurance takes the place of cyber security. “No one can insure them if we don’t have a certificate from a company that says [their security systems] are up-to-date.”

According to computer security software corporation Symantec, global cyber attacks surged 42 percent in 2012 from 2011, and of those targeted, 31 percent were small businesses. Without risk management or an IT department, Zaccar explains, small firms try to take security measures into their own hands.

Given that 90 percent of Lebanon’s firms are small and medium-sized enterprises that likely don’t have the means to understand and mitigate risk, many Lebanese businessmen could be vulnerable.

Even so, Zaccar believes the Lebanese market is not quite ready yet. “We are starting to have small stories [of cyber attacks] here and there, but I think in a year and a half, we are going to see a bigger movement [towards cyber-insurance policies],” he says.

A nascent niche

There are also fundamental challenges that limit the growth of this new line of products and these apply to Lebanon as to every other market. Even conceptually, while some risks are easier to define and therefore easier to insure, such as loss of finance, income and information, there are others, such as reputational damage, that are more difficult to define.

Compounded on this wide range of vulnerabilities is the lack of actuarial data to assess security products, leading to insurance policies that are often more generally inclusive, meaning higher premiums for businesses, which might prefer to bear the risk instead.

More specific to Lebanon is the lack of national awareness of the importance of cyber security. Zaccar says, “There is no cyber-insurance culture… because there is no cyber-security culture.”

So far banks, for example, have experienced petty fraud — think stolen credit cards. These losses amount to little and can be covered by the banks themselves. Unless a business or bank has been hit hard by cyber crime, similar to the case of Estonia, industry experts agree that most firms will overlook the need for proper cyber security.

As Lebanon’s market for cyber insurance and cyber security unfolds, these factors will need to be addressed and, as Zaccar puts it, “tailored” to the country’s needs.

While cyber-security firms continue to find solutions to battle cyber crime, insurers must prepare their underwriting capacities in anticipation of the certain growth of demand for this new business specialty. This could include operations such as designing transparent policies and determining which security products Lebanese companies need in order to be granted coverage for eventualities ranging from downtime caused by data theft, to liability cases from people whose privileged information has been stolen from a cyber-insured corporation.

June 21, 2013 0 comments

Society

Carsten Schaeffer

by Thomas Schellen June 21, 2013

written by Thomas Schellen

Ferrying about 1 million passengers from the Middle East to Germany and onward in 2012, Lufthansa continues to make its mark on a region that aviation giants such as Emirates and Etihad call home. Executive sat with Lufthansa’s Carsten Schaeffer, vice president of sales and services in Southeast Europe, Middle East and Africa, to talk about Lufthansa’s success in the region.

What is the size of Lufthansa as we speak at the end of April 2013?

To do our numbers justice, I should talk about the full year 2012 in which we had 75 million passengers in Lufthansa Passenger Airlines and 103 million in the whole group, which includes Swiss International Airlines, Austrian, Air Brussels and German Wings.

If we talk about flights that originate from the Middle East and Africa, who do you see as your biggest competitors?

In Africa, Air France is our biggest competitor, mainly in the French-speaking countries. There is a bit of competition from the [United Kingdom] carriers in Nigeria, which is one of our key markets in Africa. In the Middle East region, obviously the Gulf carriers are very active. As much as we enjoy a big chunk of the traffic to the North Atlantic, they do to Asia. In Lebanon we are not necessarily in direct competition. The big-source markets in the [Gulf Cooperation Council] countries are the ones that we focus on.

Some of the region’s big carriers of today are very young airlines by comparison. Lufthansa has a long history and has operated a service to Beirut as far back as 1956. Where is Lufthansa located today in the age mix of aviation identities?

Mentally, I think we are a young airline. We keep reinventing ourselves, trying to maintain the heritage that we have and which works to our favor, and also adapting to the ever-changing aviation environment. With the challenges of the low-cost carriers in Europe and the rise of the Gulf carriers, we have to stay young. We are forced to stay on our feet and are forced to stay young. For that we are [currently] going through another reshaping and redesign of the way we do business and also the way we sell our product.

Carsten Schaeffer was in Beirut to gain an impression of the city

What is the main aspect of this redesign?

[The question is] how can we be leaner and faster in decision making and how can we adapt to the new ways of selling which are much more technology-driven? Sales in the past were often relationship-oriented. Since more and more people buy through systems, the web — our own and other websites — the technology that we apply to sales has to be as convenient and as competitive as possible — this is one of the key aspects that we focus on.

Are you working on any new additions to the selection criteria offered to online customers?

We want to change it into more of an ‘Amazon’ idea where, in a central European environment, people want to go on a city break vacation and have the desire to spend some nice time. They don’t come with a predetermined mindset as to which city they want to visit — it can [for example] be Barcelona, Stockholm or Prague — and ask for some ideas.

Would it ever be possible to have short trips to Beirut included in the suggestions for city breaks to Europeans?

One of the reasons why I am here was that I wanted to gain a first impression of Beirut. Beirut still has an image issue and I think it takes your work, my work and the work of others to educate the world about what this city has to offer. And what we know also from portals such as TripAdvisor is that nothing works better than a recommendation by somebody you trust. I personally love to eat; I love wines, and if I start recommending restaurants in Beirut and go to Beirut for dining out, friends who have similar requirements will start following that advice.

What do you see as your competitive edge in appealing to international passengers?

We will never be Asians in the way we perform service but what I always enjoy when I fly Lufthansa is the way in which the crew treats me as an individual, holds a conversation and presents a European lifestyle when it comes to knowledge of the wines they are serving or the kinds of foods. Other companies in our field struggle with not having a heritage and infuse little things to create something like a heritage through the look and feel [of their products]. Let’s say we are intrinsically German and we don’t need an additional list of languages that we offer. We offer English, German [and other languages], but that is something that you can always rely on.

When it comes to onward passengers, transit visa requirements in Germany have always struck me as obsolete and perhaps uselessly stringent. Is that an issue for your Middle Eastern business?

We wish that European governments would create friendlier environments for the airlines and the transit visa issue is very close to our hearts because it restricts our capabilities in the market. As we discussed this here earlier [in today’s staff meeting], I realize how difficult it can be if you need a visa. In the markets that I am responsible for here in the region, a lot of nationals have these kinds of problems.

But why is it that Lebanese need a transit visa when flying via Frankfurt for example to the United States? In other European airports, such as Amsterdam, London or Paris, they don’t need a transit visa.

I don’t understand the logic behind it but we have to abide by the local rules. We talk to the German government and the response is that there is a persistent procedure in all the Schengen countries. That is not necessarily our experience, and we would love to change that.

How about long-term labor costs? Do you feel disadvantaged vis-à-vis Gulf carriers?

We work in a different environment when it comes to labor; unionized and non-unionized is a different equation. At the same time, Lufthansa has always enjoyed very loyal staff, which is to our benefit because we believe in experience and practice in the servicing field. It is part of our success model over time. Since we are going through structural changes, there will be situations where it will be more difficult to explain to the staff in which direction we are going, but that is only a phase in time and I am not concerned in the long run.

Did the mess surrounding the Berlin Brandenburg Airport and the extreme delay in its opening cause a headache for you?

We built our schedule around the capacity of the new airport and started a lot of new destinations where we are also depending on transferring traffic. Berlin’s Tegel Airport is great for local traffic but it is definitely not the gateway where you can transit. We have operational issues in Tegel and we don’t have the transfer passengers, which affects our bottom line tremendously.

Berlin to Beirut was one of the new routes that you created in time for the new airport’s expected opening in June 2012. Was there an impact on Beirut traffic and what is your ambition for the connection between the two cities?

We saw an impact on Beirut [traffic] but even more so in central European flights that now connect through Tegel instead of the new airport. For now, we rely more on the Lebanese market to Berlin than the Berlin market to Lebanon but with more good news in German and central European media about Lebanon, we would love to have a more balanced exchange on both ends, and that is what we are fighting for on all levels.

June 21, 2013 2 comments

The Buzz

Business briefing: 21 June 2013

by Executive Staff June 21, 2013

written by Executive Staff

Economics and Policy

High Syrian demand for Lebanese manufactured goods caused industrial exports to surge by 6.3 percent in the first three months of 2013.

Business briefing: 20 June 2013

by Executive Staff June 20, 2013

written by Executive Staff

Economics and Policy

Most Lebanese bankers have apparently coalesced around the candidacy of François Bassil as head of the Association of Banks in Lebanon, ahead of the group’s July 5 election.

The art of banking

by Maya Sioufi June 20, 2013

written by Maya Sioufi

As Raymond Audi, chairman of Bank Audi, Lebanon’s largest bank, walked me through the four floors of their headquarters in Downtown Beirut, I would have thought I was in a major contemporary art gallery were it not for the bankers conducting their daily activities.
Banks across the world are building art collections and multi-million dollar pieces adorn the walls of the largest bank offices. Germany’s Deutsche Bank, which started its art collection in 1979, features the world’s largest corporate art collection. Its New York offices even have a different art theme for each floor. Picture working in that environment.

Swiss bank UBS’ art collection features a painting by American pop artist Roy Lichtenstein, with a similar one sold at Christies for over $4 million in November 2011. How better to impress clients than to have a piece by Lichtenstein hanging in the meeting room? The bank has a five-year partnership started in April 2012 with New York’s Guggenheim museum to identify and support a network of art, artists and curators from South and Southeast Asia, Latin America, and the Middle East and North Africa.

Lebanese deck the halls

Similar to the décor of JP Morgan’s Wall Street offices, the entrance of Bank Audi’s main headquarters hosts a six-meter tower sculpture by French artist Jean Dubuffet. At auction in Christie’s in November 2011, a two-meter sculpture by Dubuffet fetched $1.2 million.
From French artists such as Dubuffet, Bernar Venet and Francois Rouan to Lebanese artists such as Paul Wakim, Jean Marc Nahhas and Shafiq Abboud, Bank Audi has a wide collection of modern and contemporary art in its Beirut headquarters with some valued at exorbitant prices.

Many pieces of contemporary art are owned by Lebanese banks

In its Swiss offices, the bank holds a collection of old masters’ paintings from renowned artists of the 16th century, such as Lucas Cranach the Elder, and the 17th century, such as Jan Van Goyen. Villa Audi, the bank’s art space in Beirut, hosts its collection of mosaic art, the bank’s first purchase of art pieces which started prior to the Lebanese civil war. The estimate of the entire art collection was not disclosed.

Bank Audi is not the only Lebanese bank building an art collection. Focusing primarily on Lebanese art, BankMed started developing its collection in 1995 and its modern art pieces are hung on the walls of its branches throughout Lebanon.

While the bank started its collection by acquiring a piece by a French artist, its focus is on Lebanese art, which now accounts for about 80 percent of its collection. The bank owns the largest private collection of the renowned late artist Paul Guiragossian.

“When we started investing in Guiragossian, we wanted to stop the pieces from leaving the country as a lot of people were buying his pieces and at that time, [the banks] were the only ones able to afford keeping the national heritage in the country,” says Diala Choucair, head of communication at BankMed who did not disclose the estimate of the bank’s art collection. Choucair, who takes charge of all matters related to art for the bank, is now keeping an eye out for pieces to embellish the bank’s new headquarters that will be completed in two years.

Beyond an art collection

Involvement with the art world goes beyond merely acquiring a piece for a corporate art collection. Some banks are turning sections of their premises into art spaces. Since 2011, Byblos Bank has held six exhibits in its headquarters in Beirut for Lebanese artists Chucrallah Fattouh, Charbel Samuel Aoun, Rawya Zantout, Hrair, Krikor Nourikian and Dory Younes.
Falling under the bank’s corporate social responsibility (CSR) practices, the bank does not charge a fee for the sale of pieces during the exhibits. “We are now thinking of art as part of our CSR to help Lebanese emerging artists at different levels of maturity in their work. If promoting them means helping by buying a piece we will do it,” says Nada Tawil, head of communications at Byblos Bank. A piece by Aoun adorns the walls of the office of Semaan Bassil, vice chairman of the board and general manager of the bank.

A Jean Marc Nahhas sketch on an office wall in Bank Audi’s headquarters

Byblos Bank is not the only bank hosting exhibits in its offices. FFA Private Bank turns its first floor into an art space twice a year. With art consultant Nada Boulos el-Assaad on board since 2009, FFA provides local artists with a platform to display their pieces and, similar to Byblos Bank, does not take a fee for the sale of art pieces.

To support Lebanese art, FFA acquires a piece from each exhibition it hosts. Its collection now includes paintings by Marwan Sahmarani and Oussama Baalbaki, a photograph by Joe Kesrouani and a sculpture by May Rishani. “FFA invests primarily in Lebanese art but is open to works from the region. The main focus has been on semi-established artists but the focus is changing to emerging talents,” says Reem Moukarzel, FFA’s marketing and communication manager.

Behind the Beirut Art Fair

Extending sponsorship of art outside their offices, banks have backed the Beirut Art Fair since its debut in 2010. With over $2 million in sales and 11,000 visitors last year, organizers of the art fair are expecting sales of $3 million and 13,000 visitors at the fair in September. BankMed, the fair’s largest sponsor, has supported the event from the beginning. “It is a national effort more than a sponsorship,” says Choucair as she explains how the bank first decided to sponsor the fair in 2010.

In partnership with the organizers of the Beirut Art Fair, Byblos Bank sponsored a photography competition for Lebanese photographers last year. The winner of the competition, 25-year-old Dory Younes, hosted a solo exhibit in the bank’s headquarters in April 2013. The competition will take place this year as well, with the winner to be granted a solo exhibition in 2014.

Byblos Bank plans to focus on photography going forward as it develops its understanding of the art world. “You can’t be the blind leading the blind. We want to build credentials for people to start thinking about us [as art experts] so we decided to partner with the Beirut Art Fair so they teach us and we decided to help young photographers,” adds Tawil.

Cutting edge partnerships

Up until this year, the involvement of the banking sector with art involved corporate art collections, hosting art exhibits or sponsoring events. However, in May, the AUB Byblos Bank Art Gallery opened on the university’s campus to expose students to cutting-edge art.
The gallery, which is sponsored by Byblos Bank, will host exhibitions for foreign and local artists with the first exhibition entitled “Art in Labor: Skill, De-skilling, Re-skilling,” running until July 27, 2013. The non-commercial gallery will host art “that can make you stop and think,” says Tawil.

A shoe by Lawrence Abu Hamdan and a long tube by NY-based Gregory Sholette are displayed in the art gallery at AUB.

Banks’ courtship with the art world is taking on different shapes and forms. As these activities help brush the image of the banks, they also aim to promote Lebanese artists. Given the lack of national museums and government funding for local talent, this support is welcome news for Lebanon’s growing and buzzing art scene.

June 20, 2013 0 comments

Banking 2013: Looking for better horizons Society

Raymond Audi

by Maya Sioufi June 20, 2013

written by Maya Sioufi

Standing six meters tall, French artist Jean Dubuffet’s blue, red, white and black sculpture decorates the entrance of the Beirut headquarters of Bank Audi, Lebanon’s largest bank. It is one among many modern pieces that adorn the head office. Old masters’ paintings also feature in Bank Audi’s corporate art collection on display in their offices in Switzerland. The bank’s mosaic pieces are placed at Villa Audi, the bank’s art space. For this month’s special report, Executive visited Raymond Audi, the bank’s chairman and a Lebanese art patron, for an insight on the bank’s art collection.

Walking into the Bab Idriss headquarters, one cannot but notice the impressive tower sculpture of Dubuffet. Why did you choose to acquire this piece 12 years ago for the entrance of the headquarters?

When we had to find a sculpture piece for the entrance, I wanted to have a sculpture by French artist Bernar Venet, but my son, who is my art mentor, suggested to have a more colorful piece. We went to the Dubuffet foundation because we knew the person responsible for the art collection of [French automaker] Renault. It was very expensive and it is one of our most valuable pieces. I told Venet that we will switch him to another place in the bank and his piece is now placed at the Wadi Abou Jmiel entrance of the bank. He promised me that he will offer to Lebanon one big piece, like when the French artist Arman offered a piece [Hope for Peace] to the Lebanese army [in 1995]. I’m still expecting one day he will come and offer a piece for the town.

Raymond Audi takes pride in the bank’s art collection

When did Bank Audi first start its art collection?

Before the [Lebanese Civil War started in 1975], I was collecting mosaics and I bought piece after piece from several places to decorate the walls of our branches. After buying a bank in Switzerland and spending time there after the war, we discovered that it was a good opportunity to start collecting Flemish and Spanish art because of the tax benefits on art investments. So we collected about 13 valuable pieces from renowned artists such as Pieter Brueghel (the younger) and Lucas Cranach (the elder) that are in our Swiss offices. As I started moving in and out of Lebanon, I started supporting Lebanese artists and buying some beautiful pieces from artists such as Paul Wakim and Jean Marc Nahhas.

How do you go about acquiring a piece of art?

I hate to go to the launching of art exhibitions at galleries because you are surrounded by lots of people and the gallery owners want you to buy immediately. That’s why I don’t go. I go suddenly when I am free and without saying who I am. If I find something nice, I buy. I don’t have art advisors [except for my] son, [who] knows a lot about art, especially modern art.

Related article: The Art of Banking

Who is your favorite artist?

For me, Paul Wakim is one of the best, and he is a fantastic guy. I knew him from his early days when he was painting with cats all around him.
With time, I discovered he does not deserve to be helped. I helped him raise the value of what he is doing in such a way that he should at least help me in developing our art collection. Anytime I ask for a good piece, he prices it highly, and he is becoming greedy. I am not happy about him, but for me, he is one of the best.

What are your thoughts on the Lebanese art market today?

We don’t have a national museum that collects pieces of art and gives them a proper reference. The galleries, which are the main art dealers, are over-inflating the prices on pieces that are of bad quality. They are not differentiating between the good and bad quality pieces.

Do you acquire art for investment purposes? To sell them for profit?

It is becoming more and more of an investment, and the value of our art collection [which remains undisclosed] is very high. But the choice of the piece depends on its quality more than on its value. Some good painters are not paid what they deserve, and some are very well paid for what they don’t deserve. This is the current art situation, and I pay very close attention to it.

With art pieces fetching exorbitant prices, some industry experts are saying art valuation is a bubble that will eventually pop. Do you agree?

We feel that art is becoming a kind of haven for [some] investors because they don’t know what to do with their money, especially for the ones that are asked questions like, ‘From where did you get your money, how did you make it’ and so on. They don’t like to answer these questions, so they prefer to invest in art.

Some large investment banks are offering their private banking clients an opportunity to invest in funds dedicated to art. Is this something that Bank Audi would consider?

No.

Would you consider opening a gallery?

We don’t want to be a seller or merchant of art. We have in Villa Audi a display ground where we feature a retrospective of artists that passed away, for them to be better known after their death. I would like to create a museum for mosaics at Villa Audi, but unfortunately archeology in Lebanon is a major problem. Authorities consider any collector as a smuggler. Any new minister that wanted to help was dismissed. Villa Audi is not officially a museum, but in fact it is a museum.

June 20, 2013 0 comments