Executive Magazine

IMF cautions against complacency

by Abigail Fielding-Smith December 3, 2008

written by Abigail Fielding-Smith

On October 8 the International Monetary Fund issued the final report of its annual consultation with Lebanon. The report sounds out the resilient position of Lebanon throughout the global financial crisis but cautioned that “underlying vulnerabilities remain large.” After commending Lebanon for weathering the crisis due to “buoyant activity in construction, tourism, commerce and financial services,” the IMF released a preliminary estimate of 9 percent growth for 2009 with “at least 8 percent this year.”

The fund attributed the increase in government revenues to the reintroduction of gasoline excises but recognized that increasing fuel prices have also increased inflation in the country this year. Figures show that the cost of living had increased by 4 percent in the year-to-September but many economists doubt the accuracy of this, fearing that the actual level may be significantly higher.

“Little headway has been made on critical structural reforms, including addressing the loss-making electricity sector, raising the value added tax (VAT) rate, eliminating extra-budgetary funds, and overhauling the budget process,” the IMF added. In conclusion, the fund stated: “Despite the economy’s impressive resilience to the crisis, Lebanon continues to suffer from high underlying vulnerabilities. Domestic stability rests on the fragile political system split along confessional lines, and the country lies at the crossroads of regional tensions. The government’s debt remains among the highest in the world, and almost half of it is denominated in foreign currency. The large banking system depends on short-term deposit inflows from nonresidents to roll over its large exposure to the sovereign.”

December 3, 2008 0 comments

Private Equity

Lebanon – Kabab-ji‘s stars and stripes

by Executive Staff December 3, 2008

written by Executive Staff

The popular Lebanese food chain Kabab-ji is a success story of entrepreneurial knack, making the restaurant an attractive target for private equity investment. The restaurant recently received growth capital from a financing round led by MENA Capital with several co- investing limited partners. The deal is the first of its kind, with a Lebanese business reaching out to a Lebanese private equity shop to finance growth outside of the Middle East’s own burgeoning economies to a Western consumer market.

Kabab-ji has a history of product freshness since its owner and CEO Toufic Khoueiri first started the chain in 1993. Its reputation has since allowed it to expand to franchises throughout the Middle East with locations in Bahrain, Jordan, Kuwait, Qatar, Saudi Arabia, Sudan, and the UAE, making it the preeminent Lebanese food chain. With its menu of fresh and health-oriented cuisines, the franchise is looking to expand to the US market where there is a high demand for good quality food at reasonable prices. While Kabab-ji’s management recognized and believed in the potentials, the deal was dependent on MENA Capital’s own judgment and decision to work with the business in expanding and operating in a new and quite different market.
According to Ziad Maalouf, MENA Capital’s senior vice president, the firm chose to finance the deal because “the increasing acceptance of ethnic foods in the US is creating long-term market opportunities for concepts such as Kabab-ji.” Maalouf acknowledged the fierce competition in the US’ traditional fast-food sector and the domination of mega-chains that are not only recognized in the States but the world over, but also pointed out that “a clear leader has yet to emerge in the small ethnic segments such as Lebanese/Mediterranean food.”
The idea certainly holds promise. With the restaurant set to open in the heart of Washington, DC, it can expect instant popularity from a crowd of young professionals and others who are already spending their evenings at Tapas Bars, and Ethiopian and Indian restaurants. Once the establishment is open for business, Americans can benefit from authentic shish taouk, kibbeh and labneh complemented by fresh hummus, fattoush, and wara’ ainab. If the meals are matched with traditional Lebanese drinks, other producers in Lebanon might seize the opportunity to market araq to match desserts in the summer, or one of many Bekaa- produced vintages throughout the year. According to Maalouf, “consumers of Lebanese/Mediterranean and other less mainstream ethnic foods have often scarified on issues such as comfortable surroundings and excellent service in exchange for the ability to try something new and exotic.” Thus, he believes that, “Kabab-ji’s focus on quality, freshness, and tasteful food should position the company well to become the leading brand in the fast- casual segment of this cuisine.”

The meat of the deal
MENA Capital structured the deal as a joint-venture between Khoueiri and the MENA Capital Private Equity Fund I with capital commitments of $50 million. According to Maalouf, “Kabab-ji will bring the name, know-how, management, and vast experience in the field, while the Fund and the other investors will provide capital, financial oversight and assist in the business strategy.” The deal’s strategy is longer than some with an exit foreseen in five to seven years via an initial public offering or a strategic sale to an industry leader in the US. MENA Capital estimates a very lucrative finishing position for the deal with an exit that will yield an internalized rate of return of over 35%. Although the make- up of MENA Capital’s limited partners is unclear, the deal indicates that other possibilities for Lebanese firms looking for private equity to finance growth outside of the region are viable and MENA Capital has expressed a willingness to “assist the company’s growth until the time is ripe for exit,” according to Maalouf. Ideally, Kabab-ji could achieve initial success and attract more funding from MENA Capital if there are viable opportunities to expand once in the US.

Family over franchise
Although private equity helped Kabab-ji’s plans to expand into the US market, not all financing has to come through fund managers and return-seeking investors. Indeed, the strong cohesion of the family model found in the Middle East retains its roots in the US as well and Lebanese Taverna, a popular Washington, DC restaurant chain, has been a showcase for how to harness the traditional business model of Lebanese firms and achieve success in the US market without outside capital. Lebanese Taverna started as a single restaurant in 1979 after Tanios Abi- Najm moved his family from Lebanon to the US in 1976. According to his son and co-founder Dany Abi-Najm, the idea behind the restaurant was “taking a chance and working as a family, pooling all our resources” to help get the business going. The Abi-Najm family started the first restaurant with family financing and co-signed loans. What began as a single restaurant supported by an idea has grown into 11 branches throughout the metropolitan DC area after the family self-financed several expansions by reinvesting profits and using personal savings as capital.

Opportunities for others
Maalouf wants to replicate the strategy and is confident that “there are many opportunities for Lebanese companies to expand in the US market, especially companies in the food and hospitality sectors.” He prefaced this with the caution that doing business in the US is very different from Lebanon, and requires more complex arrangements, believing that any US expansion “should be carried out with the help and guidance of professional investment firms like MENA Capital that can assist in not only analyzing the viability of the investment with regard to its potential risks and rewards, but also in structuring the complex legal and capital aspect of the transaction, securing strategic partners, if needed, and helping introduce the concept to the US market through strategic planning and brand positioning.”

December 3, 2008 0 comments

Consumer Society

Lebanon – Sunning grapes

by Michael Karam December 3, 2008

written by Michael Karam

The $27 million, 6.5 million bottle, Lebanese wine industry is, after nearly half a decade of treading water, entering an exciting new phase of evolution. The change is coming from a group of boutique producers making low quantities of high-quality wines from a wider range of Lebanese terroir.

Less is more
The trend began at the turn of the new century, with the establishment of a clutch of micro-wineries, each producing 20-50,000 bottles. Genuine garagistes wanting to make wine from ancestral plots started small, often using plastic fermentation tanks and the most rudimentary equipment, calling on family and friends to help pick grapes at harvest. Crucially, they were not all from the Bekaa Valley, the traditional wine growing area. These wines offered variety.
Today, by and large they are thriving. Château Belle-Vue in Bhamdoun is currently doing brisk trade selling all its 24,000 bottles to online club members, of which 60% live abroad, mostly in the UK, the US, Dubai and Turkey. Owner Naji Boutros, a former Merrill Lynch executive, and his American wife Jill can now boast a wine listed in the Sotheby’s Wine Encyclopedia and a fistful of international plaudits. Jezzine’s Karam Winery, the only winery in south Lebanon — with a production of 50,000 bottles — can be found on MEA, Lebanon’s national carrier, as well as some of the best restaurants in Beirut and the Washington, DC, area. In 2006, it was featured in Decanter.
The Maronite Church, employing a French winemaker, is also getting in on the act, producing high-quality wines from eight monasteries throughout Lebanon. Finally, Domaine Kanafar in the Western Bekaa has just produced 3,000 of what will eventually be 50,000 bottles by 2010 and up to 200,000 bottles thereafter, from grapes grown on its own 15-hectare vineyard. At the moment, though, things are a bit rough and ready. “We are literally operating out of a garage,” said one of the partners cheerily.
Elsewhere, the celebrated Nissan CEO, Carlos Ghosn, is rumored to be involved in Wines of Lebanon, a new winery, which will eventually be based in Batroun, where three other producers — Batroun Mountains, Edde and Aurora wineries — are already established.
But the age of the Lebanese boutique winery finally arrived on a biting but sunny day in Paris on November 12, when at Le Georges V Hotel wines from two wineries owned by the Syrian-Lebanese company Johnny R. Saadé Holding were unveiled to the wine press. The first was the Syrian Bargylus, whose grapes are grown on 20 hectares of land at Jebel al-Ansariyeh on the outskirts of the port city of Lattakia and which produced its first harvest in 2006. The second was Lebanese Château Marsyas, which picked its first grapes one year later in 2007.
One doesn’t launch ordinary wines at the Georges V, nor does one get the backing of Stephane Derenoncourt, one of France’s most respected wine makers, if the product is not up to scratch. The approval from some of France’s most respected palates was unanimous and one sensed that Lebanese wine had moved into a new, sunnier place.

A post-war revival
The Lebanese wine sector flourished in the mid-1990s. Long established arak producers such as Ghantous Abou Raad, Touma, Le Brun, as well as a few determined entrepreneurs were inspired by a newly-whetted global appetite for wines from what was known in the trade as the New World — Australia, California, South Africa, Chile, New Zealand and Argentina — and saw an opportunity to position post-war Lebanon among these exciting new producers.
Lebanese wine was not unknown. The buccaneering Serge Hochar had planted the Lebanese flag on the wine map in the late 1970s, while Chateau Ksara, Lebanon’s oldest producer and relative newcomer Chateau Kefraya had established strong local brands with a loyal following, even during the 1975-1990 Civil War. But the 1990s saw new names and new labels. Domain Wardy, Clos St Thomas, Heritage, Fakra, Massaya (a bold Franco-Lebanese joint venture) and Cave Kouroum joined the established triumvirate. A new, sexier, more robust sector was born.

Souring times
Then things hit a bit of a trough. Massaya walked out on the Union Vinicole du Liban, Lebanon’s cheerful but notoriously ineffective grouping of wine producers, citing a lack of vision in the marketing of Lebanese wine. The OIV (Organisation Internationale de la Vigne et Vin) decided not to hold its 2005 congress in Beirut for security reasons and plans for a National Wine Institute were shuffled from ministry to ministry. The institute, if it ever becomes a reality, will be responsible for all areas of grape growing and wine production — viticulture, viniculture, legal issues, commercial concerns, quality control and analysis — as well as the eventual creation of a system similar to, and inspired by, the French appellation d’origine controlle; it would protect and guarantee the name and quality of Lebanese wine. Sadly, individual ministries with their own agenda often delayed or refused to sign-off on what is clearly an initiative designed to enhance and guarantee the quality and reputation of Lebanon’s most high-profile export.
Yes, Lebanese wine was a solid product with an equally solid fan base abroad, especially in the UK, where the groundwork laid down by Château Musar had given it an almost mythical appeal. And yes, both Châteaux Kefraya and Ksara were, and still are, steaming ahead and massaging their respective bottom lines by dominating the shelves of the local market and the wine lists of Lebanese restaurants all over the world.
But Lebanon should have been producing the world’s sexiest wine. High quality, scarcity and a great storyline should have seen to that. Yet, it appears a serious lack of vision, organization and negligible government support meant that the sector was punching well below its weight.

We will always have Paris
But back to Paris and the rarefied setting of Le Georges V. For the record, Bargylus and Chateau Marsyas will eventually produce 300,000 bottles between them — 50,000 from Bargylus and 250,000 from Marsyas — although current production is still only 20,000 and 50,000, respectively, 75% of which has been earmarked for export, primarily to France and the fiercely competitive UK market. The company has invested $15 million in the Château Marsyas winery and $4 million at Bargylus. A further $10 million has also been allocated to an on-site wine museum and hotel in Lebanon.

Family roots
The project, the latest venture for a family that has interests in real estate development, tourism and finance, is being run by Johnny Saadé’s sons Karim and Sandro. “My father wanted to buy a wine property in Bordeaux, but decided to go back to his roots and make wine in Syria,” said Karim, explaining that Bargylus was the name given to the Alawite Mountains in Greco-Roman culture. “We want to create a high-quality wine and we want to avoid certain practices such as buying grapes from other producers. We want to cultivate our own grapes. Wine is part of our family history.”
Sandro Saadé admitted that the project had faced many challenges. “To establish our Syrian operation, we needed a governmental decree,” he explained. “Other problems were in the size of plots that were very small, which made the process longer, as well as more expensive as local landowners increased prices when they heard we were interested in buying land. It took us three to four years to produce the first vintage. Unlike in Lebanon we had to start from scratch in Syria.”
Other problems stemmed from an inherent lack of wine culture. “Workers did not understand that they could not throw cigarettes on the land and there are no proper laboratories to analyze the wine,” Sandro said. “We are creating a wine culture in Syria and Lebanon, a culture that, through projects like the museum, will celebrate and promote our wine heritage.”
Derenoncourt, who is consultant for both wineries, concurred. “This project is very important,” he said in Paris. “I visited both sites in Lebanon and Syria with the Saadé brothers and fell in love. We discussed the projects and saw that we were faced with two options: either to create a mass [market] wine by irrigating the land or adapting the vines to the terroir over time and allowing nature to work. We chose the latter and have been able to make a good wine with very young vines.”

Michael Karam is the author of ‘Wines of Lebanon’, winner of the 2005 Gourmand Award for best New World Wine book

December 3, 2008 0 comments

By Invitation

The public and private spheres – partners in prosperity

by Rabih Abouchakra December 3, 2008

written by Rabih Abouchakra

Water, transportation, energy and telecommunications infrastructures are essential building blocks of a nation. Infrastructure plays a vital role in supporting a high standard of living and facilitating trade, thereby extending a country’s global reach. But some governments are not equipped to make the necessary investments. Thus, many government organizations are tapping the private sector’s capital, technology and expertise in financing, developing, and managing public sector infrastructure projects.

These public-private partnerships (PPPs) can benefit all involved. Governments meet obligations without debt, the public receives better services, and the private sector is presented with a wider market. Further, when coupled with the right policies and institutional environment, PPPs can become catalysts for economic growth. The opportunity to drive such growth is particularly rich in the Middle East and North Africa (MENA) region, where many governments are under pressure to develop infrastructure with limited resources.

Relaxing budgetary constraints
The idea of private investment in public infrastructure may seem incongruous. After all, the need for affordable water and electricity and the protection of public interests have historically made infrastructure a natural fit for public-sector management. But governments face a number of challenges in delivering such services: public pressure for lower prices causes services to lose money; mismanagement and corruption result in budget shortfalls; available funds, technology and human resources don’t keep pace with change.
Private sector partners, which can offer funding and other resources, may provide the remedy. Partnerships generally fall into one of four major categories: leases and contracts, concessions (e.g. rehabilitate, lease/rent and transfer), greenfields (e.g. build, operate and transfer), and divestitures (e.g. partial privatization). “Greenfield” agreements, which focus on new facilities, are the most common PPPs because they offer the best opportunities for governments to divest risk and for investors to earn a significant return.

Sectors and geographies
A necessary service to which the public has an inherent right is considered a ‘public good’, but projects with a greater degree of public good tend to have lower returns, inspiring less interest from investors.
Fresh water, for example, must be affordable to the public. Its low ROI makes it unattractive to the private sector. Transportation infrastructure projects are also a public good; however, with a dependable cash flow, they attract a larger percentage of private dollars. Energy, broken into subsectors, creates numerous possible ventures. Telecommunications has a high rate of return. Investments track these patterns: The greatest number of PPP projects are undertaken in the energy sector, but the greatest amount of investment occurs in the telecom sector.
In terms of regional distribution, the largest share of PPP arrangements is still found in OECD countries, followed by East Asia and Latin America. Despite the fact that PPP agreements remain in their infancy in the Middle East, with more reformed regulatory systems and opening up of economies, PPP investments are expected to increase in number and value.

Fueling economic growth
PPPs can free up government resources and fuel growth if certain factors are in place. The first one is the right number of PPP contracts. The more launched, the higher the rate of gross domestic product (GDP) growth. The second is the right value of PPP projects. Higher-value projects inject financial resources into the economy and help decrease government expenses. Third is the right type of PPP contracts. The extensiveness of the PPP contract has the greatest influence on economic growth; as private- sector involvement increases, so does the quality of the project and the knowledge transfer.
PPP projects can bring many improvements. Countries with a large number of such projects generally enjoy better infrastructure, resulting in a higher standard of living and elevated levels of productivity. PPPs foster service expansion, as private partners invest more resources in customer service to generate more profits. PPPs operate with greater efficiency, as investors introduce practices that reduce waste and improve revenue collection. Private investors also have the capital to invest in specialized training, resources and technology. Finally, PPPs can distribute risk in the ways most advantageous to all parties.

Attracting PPPs
While infrastructure PPPs can offer win-win-win results for the public, private, and community arenas, they carry a fair amount of risk for their investors due to their large, lengthy and capital-intensive natures. PPPs are often funded in foreign currency, particularly in developing countries that lack liquid financial markets, yet revenues are collected in local currency, which may be less valuable in global currency markets. They also present a commercial risk triggered by tariff restrictions. Costs to enter into a PPP agreement are typically high, and it is often difficult to form an exit strategy — for instance, selling a bridge is not always an easy prospect.
For these reasons, private firms are naturally selective of the environments in which they invest their capital. Their modes of entry and their investment choices in general are a representation of their ‘risk-return’ tolerance and affect their willingness to commit resources (physical, financial and intangible know-how). In general, investors will enter into countries with large markets and low political and economic risks.
If a government wants to help determine how potential investors answer those three questions, it must:
• Minimize economic and political risks: The government can attract more PPPs to its market by minimizing risks to the private investor where possible. Governments with well- established and enforced policies against corruption, combined with low business transaction costs, a transparent legislative system and exchange rate and monetary stability are far more attractive to the private sector, particularly for projects that require a sizeable investment of capital and knowledge.
• Optimize private-sector commitments to maximize the PPP’s positive effect on the economy: The government needs to promote contractual agreements that encourage the private sector to invest more money, transfer more expertise, and increase accessibility and product choice.
• Secure a sound regulatory system to maximize resource commitment and transfer of know-how: Competitive markets yield benefits for consumers and government alike, but the government must also establish policies that encourage competition.

The groundwork for global development
PPPs can positively influence a nation’s GDP. However, they are not magic bullets. Their influence on economic growth is entirely dependent on the number and value of PPPs in the country, the type of PPP contract, and the policy and institutional environment. With the right circumstances in place, PPPs can prove to be a win-win-win partnership (public, private, and community arenas):
• The government meets its obligations without debt on its balance sheet, reduces its deficit, and lays the foundation for economic development.
• The public receives services that are often more reliable and of a higher level of quality than services provided solely by the public sector.
• The private sector finds a new and wider market in which to expand and invest its finances in a stable, long-term cash flow.

Rabih Abouchakra is a partner and Mona Hammami a principal at Booz & Company

December 3, 2008 0 comments

Tourism

Maghreb – Traveling tides may trickle

by Executive Staff December 3, 2008

written by Executive Staff

One axis of economic development in the Maghreb is the fast growing tourism sector, which Morocco and Tunisia have made a top priority. Algeria, which can afford to fall back on its oil and gas industry, is looking to develop its tourism sector, although the country’s perpetual security problems will make it more of an “adventure” destination than a getaway. Since 2006, Algeria has pushed through legislative reforms to facilitate foreign and local investment in the tourism sector and reports indicate that the country is particularly interested in developing cultural tourism.

Tourism in the Maghreb, while briefly faltering after September 11, 2001, recovered and then rapidly advanced to record levels in Tunisia and Morocco. But many analysts worry that a decline in tourist arrivals to the region is imminent. Tourism contributes nearly $3 billion a year to Morocco’s economy and the Tourism Ministry is implementing a plan, ‘Morocco 2010’, to increase the number of tourist arrivals to 10 million by 2010. Growth levels have been encouraging, but there was some stagnation in the crucial summer period of 2008. According to the Tourism Ministry’s Observatory of Tourism Statistics, tourism receipts had not evolved in the period of January – August 2008 ($4.76 billion) compared to the same period of 2007 ($4.8 billion). However, the number of tourist arrivals to the kingdom was up 2% for the same period. A period of stagnation or even decline in tourist arrivals to the kingdom could easily come about in 2009, as Europeans cut back on spending in response to the financial crisis and Morocco may be forced to revisit or delay some of the objectives of its 2010 plan.

Tunisia
Tunisia’s tourism action plan looks further ahead to 2016 and aims to improve the marketing of the country to European markets. A new round of contracts with leading tour operators is being counted on to reverse a regression in the flow of tourists to the country, as are improvements in hotel capacity. Mega-projects such as Tunis Sports City and Mediterranean Gate City, scheduled to reach completion in the coming years, will also boost arrivals. Tunisia is also looking to expand interregional tourism, and held Tunisian tourism week in the Libyan capital Tripoli in January of 2008.
Economic liberalization in Morocco and Tunisia is ushering in an era of unprecedented closeness between these countries and their Western European neighbors to the north. Closer relations mean a boost to sectors like tourism, which has been increasingly dynamic over the past several years. The global economic downturn could expose the flipside of this closeness if the Maghreb’s economic dependence on Europe is not met with the support that was promised when Western markets seemed invincible.

December 3, 2008 0 comments

Private Equity

Maghreb – Opportune shores

by Executive Staff December 3, 2008

written by Executive Staff

North Africa started in 2008 as the least-noticed market in the region, but it has emerged to become a new investment destination for private equity firms. While most region specific funds use some form of the monicker ‘Middle East and North Africa’, the later half was almost forgotten until this year, when North Africa came to mean more than just Egypt and more than occasionally big buyout deals. The growing popularity is derived from the diverse industries and opportunities waiting to be tapped in the Maghreb and Libya, as they emerge from their economic infancy in 2009 with potential for growth as destinations for regional and international private equity.

Private equity firms did not have dedicated operations in the Maghreb until the late 1990s. Capital Invest, based and doing deals in Morocco, launched their operations in 2000 after significant regulatory changes induced the firm to structure a fund for investors looking to work with businesses in the kingdom. Capital Invest’s local status enabled it to navigate Moroccan legal and regulatory challenges that prove daunting for foreigners. However, most Morocco-dedicated funds fail to look to the rest of the Maghreb and are myopic in their vision for expanding companies within smaller domestic markets. Only some have recognized that big business lies in financing regional expansion plans for businesses, increasing the potential consumer base and building rapport with host governments in the remainder of the region.
The asset class can supply the demands of North Africa, where a chronic lack of financial intermediaries stymies growth, hinders entrepreneurship, and cripples the ability and desire to innovate. While private equity is not the only fund type — Julius Baer launched a Northern Africa Fund for listed equities in 2008 — it offers a distinct advantage for the numerous small-and medium-sized enterprises often managed by entrepreneurs and other firms, where the business model is attractive but cannot succeed without financing. Another plus, although pitched to a lesser extent in the region’s trade circles, is the ability of private equity fund managers who go into a deal, spot flaws in corporate governance, and revamp firms and encourage them to become more transparent. Local fund managers and their counterparts in Europe and the Middle East will look to two markets in particular: Tunisia, which holds title to the most developed business environment for private equity investing, and Libya, where Qaddafi’s socialist model had first led to an obliteration of the private sector but where the revolutionary-cum- leader is now seemingly coming to terms with economic reality and advocates the need to (re)develop a veritable private sector, encouraging legislation to emphasize the point.

Tapping Tuninvest
Within North Africa, Tunisia has the longest history of private equity firms. In the 1990s, Tuninvest began to serve Tunisian businesses but then grew with backing from the International Finance Corporation, which supported the firm’s expansion to the rest of the Maghreb — Algeria and Morocco — that share many similarities with the Tunisian market, including similar legal systems and traditions. The timing was perfect and excess liquidity from the Gulf seemed to strengthen Tuninvest’s fundraising climate at a time when exit opportunities were coming into sync. With the region’s bulwark bourses in Casablanca and Tunisia performing exceptionally well, opportunities for strategic sales to numerous European and Gulf firms were beginning to expand into the Maghreb’s markets.
In 2008, Tuninvest’s Maghreb Private Equity Fund II closed at $193 million, 25-50% higher than its initial targets, displaying a trend to find qualified general partners and fund managers as well as the increased attractiveness for the asset class in North Africa. The close was lengthy, which Tuninvest attributed to legal constraints affecting investors in the fund, including the International Finance Corporation, the European Investment Bank, the African Development Bank, and the UK government’s CDC Group.
Tuninvest’s fund is already 50% invested and the remaining capital will be used to finance businesses throughout North Africa, including the region’s more frontier markets in Algeria and Libya. Egypt-based Citadel Capital is taking similar steps and in 2008 opened an Algerian office, with others set to open in both Libya and Syria soon. In these new markets, Tuninvest will balance the larger market risks with higher potential rewards through lucrative deals, which are financed from Citadel Capital raising its capital on a deal-by-deal basis.

Libya
Just west of Egypt lies a market with amazing potential and ameliorating regulatory climate, which has encouraged private equity shops to scout for deals. This is a result of Libya having the largest proven oil reserves in Africa, egged on by the introduction of Law 443 in 2006, which has encouraged the development of Libya’s private sector. Colony Capital, a global investor in private equity with an emphasis on real estate deals, received the green light from Libyan regulators to move forward with a deal to buy out a government-owned oil refining and distribution business. This agreement amazed investors at the end of 2007 because the size of the investment, at $5.9 billion, would have made buyout target Tamoil the largest in Africa to date, beating hefty deals in both Egypt and South Africa. Secondly, Colony Capital won the bid over The Carlyle Group, the ubiquitous buyout shop.
Although the specifics surrounding the deal are not clear, some have speculated that Colony Capital was to usher in other interested limited partners who were investing in the deal to get a taste for the Libya market. One limited partner, Equity International, planned to use the transaction as a base off which to spot homebuilding opportunities and other potential partnerships with the Libyan government, which plans to build 530,000 new houses by 2012. Other co-investors might have been courting the government with further potential opportunities through partnerships with the Libyan Investment Authority, which invests $40 billion in assets from oil revenues through Libya’s own sovereign wealth fund. In 2008, however, the momentum of the deal lost traction. The reason cited by a number of businessmen is the political risk in dealing with a still overly-controlling Colonel Qaddafi and a regime type that is still impervious to standard business methods and best practices. Some attributed the 2008 failure of the deal to a continued reluctance and non- cooperation on the part of the Libyan government in handing over Tamoil’s financial records.
Colony Capital’s problems do not plague all of the country’s private equity deals and others demonstrated that it is very possible to work with a local partner who, by law, must own a 35% stake of the business. In 2006, Venture Capital Bank BSC and Global Emerging Markets successfully completed a buyout of Challenger ltd. for a 40% stake. In early 2008, Libya piqued the interest of private equity firm Klesch to invest in an $8 billion project for oil refining and an aluminum smelter.
Egged on, Libu Capital, set up by Phoenicia Group Libya, raised $95 million from Libyan investors, including the Libyan Arab African Investment Group, and planned to raise the remaining $205 million for a $300 million close in 2008 from foreign investors. The fund is aiming to deal with projects in the country’s lucrative oil services and construction outfits to supply the demand for homemade cement and other downstream building materials. The move to seek additional funding came from “investor enthusiasm,” according to a press statement. Ryad Sunusi, president and CEO of Phoenicia Group, warned investors not to partner with funds lacking the backing of the Libyan government or with no practical experience in the country. Citing Lion’s Pride, Tuareg Capital, and Marj Ventures, he noted that they have “a very limited understanding of the Libyan legal and business environment and no strategic game plan or long-term planning and relationships for managing a successful investment portfolio.”
The movements in the Libyan market in 2008 reflect a slowly-growing optimism. Fund managers and investors will continue to watch Libya from the sidelines as the government moves forward with private sector development plans. Further moves to increase the country’s exit possibilities will encourage investors in a similar fashion that occurred in early 2007, when Libya inaugurated its first stock market, which Libyan Minister of Economy and Trade Tayeb Essafi explained as a gesture to reinforce investor confidence and to, most likely, offer a forum in which traders can buy and sell assets without the tight control of the government.

Smart partnering
Navigating the regulatory thresholds in North Africa demands from private equity funds a focus on strategy, particularly recruiting a due diligence team with extensive local contacts and relationships with each country’s institutions and the people behind them. The need to understand reputations and size up markets with the most accurate information is the only way to sharpen business acumen during fund lives of five to seven years. Competition from firms with broader regional mandates, including those funded with capital from the GCC, have expressed willingness to do deals on a case-by-case basis in North Africa, but the deals with the most hidden underlying value are not only with large, headline- grabbing buyouts. Small-and-medium-sized enterprises, which North Africa has in abundance, are often undervalued and need some private equity as well as the savoir-faire of the funds’ operations teams to bring in attractive prices at the exit.

December 3, 2008 0 comments

Consumer Society

IWC – Watch wealth

by Executive Staff December 3, 2008

written by Executive Staff

Luxury wristwatches are a status symbol in a region where material goods are the best indicator of a person’s wealth. Covered with gems or multifunctional features, watches tend to tell the story of their owner.

From pocket watches to wristwatches with multiple complications, mechanical timepieces have been revamped one century to the next. In the 1970s they faced a crisis, as quartz watches became fashionable. “During this period, it was the Middle East that partly saved IWC, due to special orders some important people used to place with us,” said renowned IWC designer Kurt Klaus. IWC has worked for over 30 years in the Middle East, initially perceived as a niche market where the company supplied royal families in Dubai and Oman.
Today, wristwatch makers are taking a keen interest in the region, perceived as a lucrative market because of its recent oil riches. “The Middle East is an important region for brands where diamond and gold watch sales account for a big share of the market. Arab clients tend to appreciate flashy watches with gold plating and stones, while this is not usually the case in Europe,” said Mher Atamian of Atamian Ets. There is still room for growth, however. According to Gianfranco D’Attis, brand manager at IWC, today only 5-10% of the company’s turnover is generated in the Middle East. “I would say we sell less than 5,000 pieces every year in the region,” he added.

Time in the Emirates
Roland Streule, regional brand manager of Rado, stressed that the wristwatch industry, especially high-end products, were doing well, particularly in the Middle East. “The UAE is the biggest importer of Swiss-made watches in the region, followed by Saudi Arabia,” he recently told Gulf News. Visitors to Dubai form a large segment of the market for wrist watches in the UAE. “There’s a big floating population in Dubai and they are big buyers of Swiss watches,” Streule said.
For IWC the UAE market is also the strongest in the region, due to the massive tourism influx in the emirate every year. “It is followed by Turkey and then Lebanon, where people are attracted to the brand’s classy understatement and chic,” D’Attis added.
In the Middle East the popularity of brands varies from one country to another. Among IWC’s line-up, the most popular collection is the Portuguese line, which represents a 50% share of the company’s commercial turnover. “The second best line is the Pilot which accounts for 20 to 25%. Such figures are replicated, however, all over the world as these two lines represent about 75% of our yearly turnover,” D’Attis explained.
Atamian said that his company, which carries brands both targeting the middle and high-end segment of the population, has experienced larger growth levels in the latter. “Our high-end leading brands are Breguet, Blancpain, IWC, Jaeger-LeCoultre and Ulysse Nardin. In the category between $1,500 and $5,000, TAG Heuer leads the way while Baume & Mercier, Longines and Hamilton have seen significant improvements. Our best-selling brands in the medium segment would be Tissot, CK, D&G and Ferre,” he said.
IWC developer Kurt Klaus believes that future watch trends lie in larger timepieces. “The fashion started initially with the Portuguese and is still going strong. Nonetheless, the smaller Portuguese design is also quite popular with high-powered women,” he pointed out.
In order to promote their designs more efficiently, companies have developed extensive distribution networks. Atamian has boutiques located in major cities in Lebanon and Syria. As for IWC, the recent trend adopted by the company has been to curb the number of points of sales. “We are investing a lot in our distribution network, as we want to grow in terms of image while making it more exclusive. We have thus reduced the number of boutiques from 1,200 to 800,” D’Attis stated.
The company is also relying on powerful marketing campaigns as well as entertainment events such as the recent watch making class that was held in Lebanon during the month of November. “IWC is a wholesale brand that reaches out to a special clientele, something that can be achieved only through strategic local partnerships,” D’Attis said.

Challenges ahead
Many challenges await wristwatch makers in the Middle East. One is the emergence of multifunctional devices, a 21st century staple. Various watch analysts have doubts as to whether the wristwatch industry can survive the cell phone and the iPod war — except maybe for segments including technology watches that are equipped with GPS and other gadgets, cheap watches and luxurious masterpieces.
On the other hand, Atamian said, gadgets such as cell phones and iPods will have no effect on watch sales as a piece is no longer perceived to be a device that only shows time. “It has become a jewelry piece or a fashion accessory that is a necessity on every wrist.”
The manager believes that the grey market remains the biggest problem for distributors. “Unauthorized watch dealers import and sell watches at prices below suggested market prices. These dealers do not have high overheads, such as customs duties or VAT, while their shops are located in relatively moderate areas with low rents. They can thus afford to sell their products with minimal profit margins. Often, clients are not aware that watches sold on the grey market will not always be covered by the guarantee if they are damaged. Also, some of the watches sold on the grey market are in fact second-hand items, renovated and sold as new,” he said.
According to Streule, “it was difficult to quantify how much damage fake products were doing to the sales of original products. It is possible that those who buy fake products can’t afford to buy the original so it is not a loss.” Today, the biggest source of fake watches is China. “We are working everywhere with the local authorities to combat fake products and in the recent past we have confiscated several thousand watches in the Far East, including China,” Streule said.
A further challenge awaiting wristwatch makers and distributors alike is the adverse economic condition and rampant recession that have darkened forecasts around the world. Atamian explained that the sales in the high-end segment almost doubled from previous levels, but the recent worldwide problems will definitely have an effect, it just “remains to be seen by how much.”
In order to mitigate the effects of the recession, IWC is focusing more on emerging markets including India and Turkey where the economic pressure will be less significant. For D’Attis, luxury products will certainly suffer from the recession, as more people become unnerved by gloomy prospects for the future. “Nonetheless, I believe that this will have a greater impact on lower end segments, essentially timepieces that fall in the $5,000 bracket, while higher end products remain less affected. People who can afford watches priced between $7,000 and $20,000 will not stop buying luxury items,” he said.

December 3, 2008 0 comments

Banking

Oman – The vault of profit

by Executive Staff December 3, 2008

written by Executive Staff

Omani banks have enjoyed substantial insulation from the turmoil of the international financial crisis. Banks across the sultanate have reported robust, double-digit growth performance throughout 2008. “Whilst the non-fee income of these banks to some extent was diminished by the fall in the local market,” said Global Investment House (GIH), “core income growth supported their superior performance.” The Omani government’s economic diversification plans to move away from hefty reliance on hydrocarbons is a major driver the banking sector’s continuous success. Unlike its Gulf counterparts, the Central Bank of Oman has announced there is no need for it to lend money to domestic banks, seeing as the sultanate has no problems with liquidity. However, in order to ease a possible forthcoming liquidity crunch, GIH said the central bank has “relaxed the compliance to the lending ratio requirement of the banks by indefinitely deferring its earlier decision to implement a stricter lending ratio of 82.5% from 85.0% imposed in June [2008].” In addition, the central bank authorized local banks to hold 3.0% of the 8.0% reserve requirement as CDs and cash portfolios of banks. “This move,” asserted GIH, “is expected to reintroduce liquidity worth RO300.0mn [$779 million].” The Economist Intelligence Unit expects Oman’s real GDP growth to fall to 5.7% in 2009, due to the inevitable downward motion of the global economy.

Top ranking banks in Oman are reveling in their combined profits and powerful performance in 2008. According to GIH, the combined profits of banks in the sultanate increased by 37.6% during the first nine months from $325.8 million to $448.3 million. The two leading banks — by market capitalization, market share of total sector credit, and deposits — Bank Muscat and the National Bank of Oman (NBO), posted significant year-on-year profit growth of 43.9% and 20.4%, respectively, by the end of the third quarter. None of the domestic banks reported any declines in profits. Although NBO and Oman International Bank (OIB) were “the two laggards in terms of profit growth,” noted GIH (NBO with 20.4% and OIB with 11.5%), it “is commendable that when some of the major regional banks in the GCC registered decline in profits, even the laggards in the Omani banking sector registered double digit growth.” Furthermore, “NBO commented that the growth in its profits for the nine month period reflected balanced growth across all the sectors and improvement in its cost to income ratio from 42.4% during 9M07 to 39.9% in 9M08.”

Forecast
All in all, the persistent diversification and efforts to increase confidence by the central bank and Capital Market Authority of Oman will go a long way in boosting the local markets. In addition, GIH commented that “the strong performance of Omani banks backed by core income growth reflects [the general] positive outlook on the sector in the medium term.” After their robust performance in 2008, the sultanate’s banks should continue to operate quite nicely well into and throughout 2009.

December 3, 2008 0 comments

Tourism

Lebanon – Hedonists hooray!

by Executive Staff December 3, 2008

written by Executive Staff

In spite of the images of conflict and war associated with Lebanon over the last few years, the Land of the Cedars has (again) become one of the region’s party hubs, as the Lebanese paradox seems to attract many a night owl.

Hassan is a Moroccan banker working in Dubai. Ibiza, Saint Tropez and Mykonos bear no secrets for him. This summer, he spent a five-day vacation in Lebanon. “I would love to party at one of the open space bars and visit Gemmayze,” he said a week before his arrival. Gemmayze is one of Beirut’s trendy streets sought after by partygoers for bar- hopping. “I have heard so much about the Lebanese night life!” Hassan added.
According to Paul Ariss, president of the Syndicate of Restaurant and Café Owners, there are some 6,000 restaurants, cafés, pubs, night-clubs and discos in Lebanon, with the majority of restaurants, cafés and pubs targeting a clientele aged 17 to 35. A serious percentage of those enjoy a steady income and relatively low expenses, since most of the young women and men still live with their parents and clubbing and dining out is a major source of entertainment for them. Moreover, one million expatriates in the Arab world and Africa regularly visit Lebanon, and one of their favorite activities is discovering new places and menus.
Open space bars, beach parties and beautiful girls dancing against the backdrop of golden fireworks have become part of the Lebanese landscape. “Lebanon, as a party destination, can’t be compared to other countries in the region,” said Tony Habr, owner of Addmind, a company that creates, develops and manages concepts in the food, beverage and hospitality business.
For Ramzi Adada, owner of Riva, a company that manages Island at the Riviera Beach hotel and employs over 80 people, Lebanese nightlife has evolved dramatically in the last 15 years. “While Lebanon used to lag behind Europe, it recently has caught up with most international clubbing scenes. The only type of entertainment we might still miss being gigantic clubs such as the ones in Ibiza, capable of accommodating 10,000 people,” he explained.

City with a soul
Lebanon being at the vanguard of the party trade can be attributed to the relatively lax regulations compared to its regional neighbors. “In the UAE more restrictions are imposed on clubs, which are, as an example, expected to close at three in the morning, whereas in Beirut they still receive people until dawn,” Habr said. The manager also pointed to the Lebanese crowd, which is able to liven up any venue. Clubs and bars alike are well decorated and are usually built around a sophisticated concept. “Beirut is a city with a soul, unlike other cities in the region, with the exception of Cairo that has another beat to it, one definitely more oriental. In Lebanon, East meets West,” Adada pointed out.
Nazih is a Jordanian investment banker who visited Lebanon this summer. Instead of spending four days like he originally planned, he ended up staying for more than a week. “The places here are unlike anything I have ever seen and people are also extremely friendly,” he said.
For Adada, one of the industry’s main strengths resides in the permanent metamorphosis and innovative approach. The local hedonistic culture gives the sector a powerful edge.
Quality of service provided is another strength of the Lebanese party trade. “Lebanese have gotten used to a certain level of quality on which they are not ready to compromise,” said Michel Razouk, manager of Rand R. The company, which employs about 70 people, runs and operates Sushi Bar, Cactus, and Graffiti Café as well as the L2 lounge-restaurant in Saida.
The reason behind the success of Lebanese venues? A very competitive market and a savvy client base. “Lebanese tend to lose interest rapidly, which forces club owners to redesign their venues every two years, while this period is usually longer for clubs in the West,” explained Habr.
The Lebanese party scene has been revamped in the last few years. Long gone are old-fashioned dance floors, as today the young women dance on tabletops instead. The scene resembles a huge house party where most people know each other. After all, about 80% of the clients are local, while this figure is only 50% in Jordan. Adada explained that at Island, about 60% of clients are Lebanese and the rest foreigners, many of them Syrians and Jordanians.
“Gemmayze, however, caters to a different crowd than what can be seen on the club scene and this might explain the growing number of Europeans we have seen in recent months,” said Razouk who estimates they might account for about 10% of the clientele.

Partying pays
Revenues depend upon the type of venue. While Razouk said that bar tabs start at $25 per person, club owners estimate an average ticket bill to end up between $80 and $150 per head. “Profitability is much higher for clubs, bars and cafés than for restaurants as profit margins are higher when alcohol is served,” Razouk pointed out. Adada believes that clubs can generate yearly revenues of three to five million dollars and have profit margins of about 35 to 40%.
In such a thriving sector, rumors of corruption abound. Habr reckoned that in some of the capital’s largest clubs tables may be sold to the highest bidder. “Corruption exists all over the world; it is not ethical but it is a reality, especially as some managers may think that someone who’s ready to splurge $500 on a table will certainly spend more. At the end of the day it is all about the manager,” he said. Last summer around the capital Arab tourists were paying hundreds of dollars for a reservation.
Despite some drawbacks, the industry is trying to replicate its success abroad. Habr said that his company started expanding after the 2006 War. “The war certainly pushed people to expand out of Lebanon,” Razouk, who plans to expand in Qatar with four concept restaurants, agreed. “However, the fact that Lebanon has been able to export its know-how is a great achievement in itself.”

December 3, 2008 0 comments

Private Equity

Iraq – For the intrepid investor

by Executive Staff December 3, 2008

written by Executive Staff

Is Iraq ripe for private equity investment? The idea of putting a high performing asset class in what is still considered a war zone seems anathema to many. The lengthy investment terms of private equity appear inconsistent in volatile environments, but after a read of the headlines, industry watchers need only look at the deals fund managers have already made and the willingness of investors who partner in country-dedicated funds, or on a deal-by-deal basis, to realize the possibilities of Iraq as the next destination for private equity. In early 2008, news media reported that emerging markets fund manager Mark Mobius was looking for deals for private equity investments in Iraq. Though influential, Mobius will by no means be the first, but rather follows a crew of daring investors and fund managers who have already established operations in this frontier market.

Iraq is not a monolithic conflict and since the 2008 surge, tensions have quieted down somewhat. The Kurdistan Region, in particular, offers much promise for fund managers and investors. According to Scott Ogur of Scimitar, the risks of investing are lower there, yet, “since the region is still in Iraq, most investors apply a risk premium to it that was commensurate with Baghdad.” In his view, this offers a much sought-after investment environment for those with higher appetites for risk or at least deals where “most investors have missed an important nuance, leading them to overstate risk, and therefore depress asset prices.” The perceived risk premiums investors calculate are factored into decision making when looking to generate excess returns.

A headline economy
Rising oil prices on world markets brought a windfall in revenue for Iraq’s 2008 budget, but cautious budgeting means the country will still have a surplus at the end of the year. The increased government riches are complemented by an improving security situation with fewer civilian deaths and many of Iraq’s 18 provinces relatively safe, with violence largely limited to Baghdad, Diyala, Niniveh, and Salah al-Din.
Andrew Eberhart of The Marshall Fund — the first Iraq- dedicated private equity fund and the first to do a deal in the country — believes that “Iraq’s economy needs the fundamentals — food, shelter, and electricity, but the country can also benefit from technology investment that helps meet these needs.” The Marshall Fund has matched Iraqi demand for foreign capital and the increasingly favorable regulatory structures to support capital inflows. Both the federal Iraqi and regional Kurdistan parliament passed investment laws to encourage foreign investment and protect investors through the rule of law, property ownership in certain industries, and favorable tax holidays.
According to Eberhart, “the government is willing and eager to work with outside investors and there is no need to win hearts and minds in the government.” For private equity firms weary of operating in a potentially high-risk environment, the Overseas Private Investment Corporation, an independent arm of the US government, offers insurance against potential political risks, including expropriations, acts of terrorism and war, and political strife.
Eberhart noted that there is large potential outside of the energy sector, as Iraq was and could still be “the breadbasket of the Middle East” with a large amount of arable land and agriculture employing the most Iraqis after the public sector. Snags common to other sectors are also found in agriculture, which has been victim to chronic underinvestment. Following the fall of Saddam Hussein in 2003, the industry dropped, transforming the country from a net exporter to an importer of food. According to Eberhart, “there were crops, but farmers only had access to local markets.” He explained that the vast majority of crops rot on the vine or in storage. “The ability to come in and invest in processing and distribution is enormous.”

Fundraising
The Marshall Fund is currently fundraising from private investors “who understand the very real investment opportunity that exists in Iraq and also feel there is some potential social benefit, an economic development from investment and a way to complement other efforts of regional stability,” according to Eberhart. Limited partners of this sort must share the fund’s vision as it scours for opportunities. Kyle Stelma of Dunia Frontier Consultants noted that fundraising for deals in Iraq is “an interesting environment with a huge upside. There are initial risks but several alternative investment funds have decided to focus solely on Iraq, despite perceived risks.” Stelma estimates the majority of limited partners to be “individuals with one or two institutional investors,” projecting that, “as we see more successful exits and investments, there will be more institutional investors. There are now a number of large Middle Eastern institutional investors getting close to partnering. It’s just a matter of time.” Eberhart believes that while it might still be a bit early for big institutional investors like pension funds, “we expect to see them as we demonstrate success.”
The climate for making deals in Iraq stems the government’s willingness to revive enterprises that have lain fallow for years. Stelma noted that “a number are interested in former state-owned enterprises and the government is privatizing some of them and really trying to make these transactions work.” Iraq dearly needs for financial institutions, construction outfits, and agriculture-related business to lead the country through its post-conflict development.
Ogur’s group, Scimitar, does not use blind pool funds, the typical structure of a private equity fund, having found that they “are not always the best way to align interests of fund managers and investors in the regions where we invest.” Rather, they work with investors on a deal-by-deal basis. With Scimitar’s group of investors, “when we have a deal that meets our investment criteria, we use our own funds to secure and structure the deal, and we then get commitments from our investors.” The group’s investments total a dozen over the past six years, of various sizes ranging between $5-50 million, and have realized about half of its investments. Its Iraqi focus remains in the Kurdish region where contacts run to the top levels, which is an important requisite when working in the region.

Partnering for exits
In terms of exiting investments, the focus remains on selling companies to a strategic buyer. Ogur noticed a number of strategic buyers looking toward Kurdistan as a place to own and operate profitable businesses. “Turkish investors and businesses are extremely interested in Northern Iraq, despite the political tensions that are commonly mentioned between Turkey and the Kurds,” he noted.
Stelma’s has noticed growing interest from Indian, Chinese, and Turkish conglomerates, with growing opportunities for strategic sales. Outside of petrochemicals, regional and international conglomerates are currently the main exit possibilities, although these options will grow as more players enter the market.

Future outlook
The demand for the basics after long periods of neglect under Hussein and over the past five years makes Iraq’s future outlook strong. In an official visit to the US in October 2008, Iraqi Finance Minister Bayan Jabr Solagh emphasized the need for basic infrastructure, particularly water, electricity and housing. The immediate demand for 2.5 million housing units in a population of 28 million means nearly 10% of Iraqis need new homes. This figure alone should make the heads of real estate giants and property developers spin. According to Eberhart, “the government has inherited a lot of businesses from the private sector and Saddam’s private ownership. It embraces capitalism and is anxious to privatize investment. Ministers promote plans for outside investment and there is low or no costs for taking on operations.”
Eberhart also highlighted the strong demand for banking and the financial services sector. Although JP Morgan and HSBC are already in Iraq, the huge room to grow is evident in the lack of free flow of capital and the economy staying cash-based. Financial services could help sustain the already-high consumer market demand, which Eberhart believes could “find opportunities to grow in Iraq after franchise operations demonstrated success.”
Improvements at the macro level mean increased opportunities for foreign investors to remodel many of Iraq’s industries. As the government moves forth with privatizations and plans to stimulate the different industries, private equity is an ideal asset class to restructure and redevelop a potentially dynamic economy.

December 3, 2008 0 comments