Real Estate

Forum Diary

by Executive Staff
written by Executive Staff

Many Arab countries are realizing that the call for political, economic and social reform is getting louder, especially since the spontaneous democratic groundswell that shook the region in 2005. Participants at the World Economic Forum meeting that took place in the Egyptian resort of Sharm el Sheikh last month debated the lengths to which Arab countries should go in pursuit of reform. Executive reports the highlights.

Saturday 20 May

Hosni Mubarak opens World Economic

Forum on the Middle East

Egyptian President Hosni Mubarak opens the World Economic Forum on the Middle East with a call to the international community to work together to resolve regional conflicts. “Peace and development are indivisible,” the president tells more than 1,200 government, business and civil society leaders from 46 countries meeting in Sharm el Sheikh.

“The Middle East stands at a crossroads and it is up to us to make choices. Egypt’s choice is peace as it is the only path to development. We seek international partnership based on investment and not on aid and assistance. We are confident that building democratic societies is the only way to a better future that we seek,” he says.

Klaus Schwab, founder and executive chairman of the World Economic Forum says the meeting is “the most powerful demonstration of hope and will and determination to create the necessary conditions for economic, social and political development.”

World Economic Forum on the Middle East sets action priorities

The co-chairs of the Forum set five pillars for action to help prepare the way for a more prosperous future for the region. Over the course of the three-day meeting, participants focus on democracy, peace and stability; youth and understanding; global integration; investing in the future; and the business agenda.

“Peace is the crucial component upon which all the pillars of this summit can be achieved,” says Shafik Gabr, head of Artoc Group for Investment and Development. The prosperity of future generations depends on stability in the region, he argues.

H.R.H. Princess Lola Al Faisal, vice-chair of the board of trustees and general supervisor, Effete College, Saudi Arabia, describes the next generation as a “population bulge” in which 60 million people in region are under 25-years-old. “I see this youth bulge as an asset” in which the region needs to invest through education.

The private sector will lead the way in creating jobs for the region’s youth, says Nemir Kirdar, founder, president and CEO of Investcorp. Mohamed Al Mady, vice-chairman and CEO of Saudi Basic Industries Corporation (SABIC), notes that investing in human resources through education, technology and creativity would give the young the tools needed to fill the jobs crucial to economic development.

Oil Boom: sedative or stimulant for economic reform?

The hike in oil prices has completely changed the economic climate that forms the background to reform in the Middle East. Top leaders are asked if governments are using the new budgetary resources to push forward reform or if the tough decisions are now on hold.

“Cautiously optimistic” is the reaction of Mustapha Nabli, chief economist and director, Middle East and North Africa, of the World Bank. “But the potential is still big to do better.”

William Rhodes, chairman, CEO and president, Citicorp Holdings and Citibank; and co-chair of the meeting, draws a distinction between the oil boom of the 1970s and the present one. Whereas much of the money left the region in the first boom, “I think a lot of this money will remain in the area now,” he tells a packed session audience.

He continues that this was thanks to strengthened financial systems and large-scale privatization. Rhodes calls on the private sector to “step up,” to “really get involved in working with government and international investors” to drive reform. Improved corporate governance, transparency and a proper regulatory framework in place, he argues, would only expand private sector participation in the economy which is crucial to job creation and development.

Sunday 21 May

US and Middle East set development,

reform agendas

“This is an era where ground is shifting in the Middle East,” states Robert Zoellick, US deputy secretary of state, when asked to define US policy in the region. “We can help empower. We can help the process in terms of political engagement. But it has to come from the people themselves,” he says. Amre Moussa, Arab League secretary-general, agrees that reform is necessary in the Arab world. But that change has to come from Arab societies on their own terms.

“Reform is one of the priorities of the Arab world,” Moussa says. “All countries and societies want to move ahead and have their own views of how to move ahead. Reform is an item for all of us to support but we have to be cautious because of the fragility of the security situation and uncertainty on the international scene.”

Referring to the situations in Iraq, Iran, Palestine and Darfur, Moussa says that “we have to get back to a situation of dialogue.”

Getting to work in the Middle East

Generating new jobs for a rapidly growing labor force is an imperative for most Middle Eastern countries – even the relatively wealthy members of the Gulf Cooperation Council. Participants in a session on the topic discussed the additional challenge of creating jobs that would satisfy the career aspirations of their highly educated nationals. Traditionally, local college graduates have been absorbed into an oversized public sector. In an era of privatization and liberalization, however, this solution is no longer viable.

H.E. Sheikh Mohammed Bin Essa Al Khalifa, chief executive of the Bahrain Economic Development Board, Bahrain, says his country’s objective was to create incentives for private employers to hire Bahraini nationals, without resorting to quotas or expensive government subsidies.

Labor market reform can help create the conditions for employment growth, but it won’t generate jobs themselves, notes Augusto Lopez-Claros, chief economist and director of the Global Competitiveness Network for the World Economic Forum. For that, he says, the GCC countries need an “engine of job creation.” Increased trade – particularly increased intra-regional trade – could be that engine. “But this is an area where the Middle East, including the Gulf countries, are falling behind with respect to the rest of the world,” Lopez-Claros says.

Israel and Palestinians hold highest level talks in 11 months

Israel and the Palestinians hold their highest-level meeting since June 2005 at the Forum. Both sides say the meeting between Tzipi Livni, deputy prime minister and minister of foreign affairs of Israel, and Mahmoud Abbas, president of the Palestinian Authority, is the first, and that more will follow. Livni also announces that Israel will release a part of the frozen tax revenue due to the Palestinians.

Abbas and Livni both call on the Hamas-led Palestinian government to recognize Israel’s right to exist, to renounce violence and to recognize international peace agreements made by their predecessors as a crucial step towards continuing the peace process.

Saeb Erekat, head of PLO Negotiations Affairs Department of the Palestinian Territories, urges the international community to help ease the crisis facing the Palestinians.

Meanwhile Munib Masri, Chairman, PADICO (Palestinian Territories), unveils a new private sector initiative to push for a Palestinian government of national unity. “The private sector took its place to say we want to be part of this process and have a national unity government which could be the answer to the wishes of the Palestinians and Israelis,” he says.

“Red carpet in, red tape out”: rebranding the Middle East

Business leaders discuss the roles of marketing and branding in the promotion of the Middle East as a destination for tourism and inward investment. During a WorkSpace session, participants consider how the image of the Middle East might be revolutionized and propose a number of innovative campaign ideas.

The main outcomes are:

n Create a task force of stakeholders from the private sector to fund a marketing campaign for the Middle East. Appoint a campaign champion.

n The private sector will work to ensure that sufficient money is made available to fund the campaign.

n Bring Middle Eastern leaders together so that stakeholders can understand better what the region offers and represents.

n Efforts will be made to project Middle Eastern opinion leaders onto the international stage.

n Proposals to progress a campaign entitled "Red Carpet In, Red Tape Out" greeted with enthusiasm by participants.

Trading the way into the global economy—

Increasing trade ties at the multilateral, regional and bilateral level will enhance the Middle East’s participation in the global economy, agree panelists in a session devoted to trade.

Trade officials from Egypt, India and the US discuss the importance of trade in creating jobs, increasing competitiveness and driving development.

They stress the need for not only free trade among nations, but also fair trade that has benefits for both the developing and developed worlds.

World Economic Forum launches Egyptian Education Initiative

Egypt adopts the Forum’s Education Initiative, which aims to improve schooling in the country through information and communication technologies. Launched with the First Lady of Egypt, Suzanne Mubarak, and the Prime Minister of Egypt, Ahmed Mahmoud Nazif, the Egyptian Education Initiative (EEI) is announced at the Forum.

“Investing in our children’s education is investing in Egypt’s future,” says Yousry El Gamal, Egyptian minister of education.

The EEI will focus on four tracks: pre-university education, higher education, lifelong learning and e-learning industry development. The first phase of the EEI will impact 820,000 students in 2,000 schools and over 300 colleges.

Monday 22 May

World Economic Forum on the Middle East outlines action agenda

The 1,100 participants at the World Economic Forum on the Middle East commit to increase the role of the private sector in driving the Arab world development agenda. The meeting’s co-chairs deliver a joint list of outcomes from the three-day conference which includes restarting Israeli-Palestinian talks after 11 months and the launch of the Egyptian Education Initiative to benefit 820,000 children in 2,000 schools.

Other achievements of the meeting include:

n Participants expand a valuable network fostering communication and exchange among young people through the Forum’s Young Global Leaders community.

n For the first time, the Women Leaders Program brings together women ministers from across the region to construct a five-year action plan for public- and private-sector policies to address the region’s gender gap.

n The Forum takes initial steps in launching a private sector-funded branding campaign for the Middle East under the banner “Red Tape Out, Red Carpet In.”

n The Forum recognizes social entrepreneurs for their achievements in promoting sustainable business practices in Egypt.

n Egypt’s National Competitiveness Council publishes its third report.

n Agreement is reached to consider amendments to the open skies policy for Egypt.

Queen Rania sees winds of change blowing in right direction

Queen Rania of Jordan closes the Forum with a positive review of reform sweeping the Arab world. In a conversation with Professor Klaus Schwab, founder and executive chairman of the Forum, the Queen says “when we look at reform in our part of the world, different countries are moving at different paces but there is reason to be optimistic.”

The Queen says she hoped that when the World Economic Forum on the Middle East convenes in Jordan next year, greater regional stability would bring “a bit more clarity and visibility into the future.”

Touching on the theme of the meeting, “The Promise of a New Generation,” Queen Rania says that to realise such a promise, the Arab world needed to “implant the right values.” Principal among these she says was communication, both within and across borders.

Leave the business of business

to business

Middle Eastern business leaders urge governments around the world not to intervene in free trade. “Governments should not meddle with these issues… if we believe in free markets, then they have to be free,” says Naguib Sawiris, chairman and CEO of Orascom Telecom Holding. His comments follow several well-publicized cases including Dubai World; Mittal Steel and Enel’s failed bids for their foreign competitors.

Despite his decision to cede control of US ports acquired in a P&O takeover because it sparked a US political outcry, Dubai World Executive Chairman, Sultan Ahmed Bin Sulayem, remains upbeat. “America is an exception… it’s a misperception and a political battle that we got caught between and this won’t deter us. This doesn’t make it a no-investment area,” he tells session participants.

Panelists says they as the business community would work closer with governments to fight negative perceptions of the Arab world following September 11. These perceptions are not only a political problem, but negatively impact business activities.

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Finance

A waste of space

by Nicolas Photiades
written by Nicolas Photiades

Since its independence, Lebanon has always been gold rich. In fact, during the prosperity years of the 1960s and early 1970s, the country was a net buyer of gold, increasing its gold reserves to a total of 9.22 million ounces today. Lebanon is considered to have the largest gold reserves among Arab countries and is ranked in the top ten countries and supra-nationals worldwide in terms of gold tonnage held. Indeed, with 286.8 tons of gold, Lebanon ranks 19th in the world behind countries such as the UK (with 311.3 tons, ranking 17th), Austria (307.5 tons, ranked 18th), Russia and India (14th and 15th respectively). The top countries in gold tonnage are the US in first place, Germany in second, the IMF in third, France in fourth, Italy in fifth and Switzerland in sixth.

A hefty sum indeed

At today’s prices (as at the 11th of May, 2006) of $707.2 per ounce, Lebanon’s gold reserves, which are held with the Federal Reserve in New York, the Banque du Liban (BDL) vaults, and in London (most probably at the Bank of England), are now worth a little bit more than $6.5 billion. A hefty sum indeed, when considering that Lebanon’s GDP is roughly $20 billion and national debt is almost $40 billion. In other words, today’s gold reserves account for 32.5% of GDP and could theoretically repay 16.25% of the country’s debt and save an average of $650 million (or more, if you repay Lebanese pound debt, which carries an average interest rate much higher than 10%) a year in interest payment on the debt. Instead, Lebanon’s gold reserves are sitting idly in vaults, yielding absolutely no return and costing the government storage and safe keeping charges.

Lebanon’s gold reserves were built up by previous Lebanese governments as a store of value and a safe haven in times of crisis. Gold and other precious metals are unique assets in that they are tangible (i.e. real) and liquid (i.e. easily traded), unlike real estate which is tangible but not liquid, or company shares and bonds which are liquid but not tangible (i.e. a share certificate is just paper). It was also believed that in case certain events occurred, such as war or economic crisis, gold would have a positive influence on any investor interested in Lebanon, unlike any other forms of investments and assets.

In a way, the government was proved right, as some investors continued to invest in Lebanon during difficult periods, thinking safely that gold would be a serious backup if things turn sour. However, a law issued in the 1980s forbidding the sale of gold reserves or their use as collateral for borrowing or as a hedging tool canceled out the positive influence gold has on foreign investments. Indeed, what’s the use of gold if it cannot be liquidated or used as part of a structured financing? By being blocked, gold reserves do not have a positive influence on investments, as investors treat them as if they do not exist. Former Premier Salim Al-Hoss, in his address to Parliament in July 1999, clearly stated that “gold is the main pillar for having confidence in the Lebanese economy”. In normal circumstances, such statement is correct, but with the specific law forbidding the sale or use of gold, Al-Hoss’ statement does not hold. With a policy of uncontrollable indebtedness, such a law puts Lebanon in a maximum handicap situation.

With gold prices hitting 25-year highs and the country drowning in a quagmire of public indebtedness and opposition to structural reforms, it is only fitting that the law blocking the use of gold reserves be lifted and national gold be used as part of a solution to repay public debt. Gold price cycles are very long, and if the world’s political tensions smooth down, they will inevitably fall again. Moreover, if one of the large holders of gold reserves in the world decides to take advantage of the high prices to sell part of it reserves, then prices will be affected negatively as well. It is therefore clear that Lebanon must take advantage of the current price cycle by abrogating this obsolete law and selling part, if not all of its current reserves.

The only solution to the debt problem

The sale of gold is the only right solution to the debt problem, as the proceeds could be used to buy (for the same amount) more liquid, interest- or income-yielding assets, which would, in time, cumulate to equal and meet the current amount of debt. Using gold as collateral for cheap indebtedness or as part of a complex structure to repay debt would only sort out things temporarily, and result in the postponement of the problem. Although essential, privatization is not a solution for debt repayment. Even if the government privatizes everything it has got, the proceeds of privatization would be grossly insufficient to repay the public debt. The current high gold prices present the country with a unique opportunity to use an asset it had long forgotten. Let us hope that at least one influential character within the government or elsewhere realizes this opportunity.

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Business

The rise of LCB

by Executive Staff
written by Executive Staff

Lebanese Canadian Bank’s (LCB) rise over the last ten years has been quite impressive. The bank was able to accomplish close to a miracle by moving from the 21st place in terms of assets and deposits in 1998 to join the elite of the ten largest Lebanese banks by 2006 and 8th in total assets and deposits by the end of the first quarter of that year. When you consider that this significant rise was accomplished over a relatively short period (six to seven years) and in the midst of a heavy dogfight for deposits among more than 50 Lebanese banks, then one can only conclude that LCB’s meteoric rise has been achieved through hard work and shrewdness on the part of the bank’s management.

An aggressive expansion strategy, which was based on an active expansion of the domestic branch network (almost 30 branches by the end of 2005) and the hiring of experienced management and personnel from other banking institutions at home and abroad, also helped the rise of LCB into the Alpha (top 10) Group of Lebanese banks. The growth of LCB is furthermore a reflection of the economic drive of the country since 1993, when the reconstruction program started to take off in the aftermath of the 1975-1990 civil war.

LCB was set up in 1988, when the current chairman, Georges Zard Abou Jaoude, with a group of Lebanese-Canadian investors, took over the Lebanese franchise of the departing Royal Bank of Canada. For years after the take over, LCB benefited from the infrastructure left behind by RBC as well as from the relations with the Canadian bank, which for a certain amount of time acted as LCB’s main correspondent and clearing agent in the international money centers. However, the bank never rested on its laurels and proceeded to modernize and increase its capital gradually throughout the years, in a massive effort to keep up with the local competition. In doing so, the bank’s capitalization moved from a relatively insignificant LBP5 million in 1988 to more than $180 million today.

In 2002 and 2003, the bank realized that it had grown too quickly in terms of assets and deposits in relation to its capital base. It therefore proceeded to tap the local capital markets by becoming one of the first banks in Lebanon to issue preferred shares in both 2002 and 2003 for amounts of $15 million each. Preferred shares are generally regarded as tier 1 capital but don’t give their holders a share of the capital or voting rights. These preferred share issues positioned the bank firmly among the big local players and transmitted a clear message to the market regarding its capacity to manage rapid growth and develop an efficient financing strategy.

Management

Looking at LCB’s financial figures and growth in the last few years, management has been able to build a strong track record, creating a much improved financial structure and a growing market share. The quality of management has been reflected not only by significant growth in deposits, but also by diversification of funding, conservative allocation of funds in light of a constraining operating environment, containment of non-performing loans, strengthening of both regulatory and economic capital, and rising profitability. Today, LCB can safely claim to have transformed a small local banking franchise into one of the largest and most profitable banks.

The current strategy is to diversify banking products and revenues, while improving the quality of service to existing and new customers. The branch network is to continue growing so as to cover strategic geographical areas, while risk management is to be enhanced in preparation for the implementation of Basel II capital regulations, which are due to start being imposed in Lebanon in 2008. Retail banking is particularly pinpointed as an area of growth by management, which sees in retail lending a way of reducing exposure to a rising number of non-performing corporate loans. Retail is also believed to have a significant potential in Lebanon as well as in other regional countries, where the bank plans to establish branches or subsidiaries.

On geographical expansion, there are plans to establish a presence in countries of the Levant and the Gulf, as well as in any other country where the Lebanese diaspora is important. For instance, the bank has already established a representative office in Canada (Montreal), where more than 300,000 Lebanese immigrants live. The bank’s management considers geographical expansion to be key for revenue and asset diversification, which have become essential ingredients for success. The Lebanese market has become limited in nature and is over-crowded in the sense that there are too many banks fighting for the same customers. Outside Lebanon, LCB’s management is taking a close look at countries such as Syria, Algeria and Sudan (where it already has a presence through a small stake in a local bank), as these markets are regarded as representing a significant potential.

A merger with or an acquisition of a local peer would not be carried out haphazardly, as LCB’s management would only consider candidates who bring some level of added value. A local merger or acquisition would only be carried out if synergies are strong, and if the candidate has some kind of interesting overseas franchise. The interest in the latter reflects the bank’s strong desire to diversify its franchise away from a constrained local market.

The first phase of the bank’s long-term strategy, which consisted of enlarging the size of the balance sheet, increasing deposits and boosting revenues, has so far been accomplished with success. The second phase of the strategy is now more geared towards an optimization of the balance sheet size, a diversification of assets and revenues, and the exploration of untapped markets, which represent significant potential.

Shareholders and support

At present, LCB is principally owned by holding companies, namely Perpetual Holding (35%), the Hamdoun family (24%), George Zard Abou Jaoude (15.5%), NJO Holding (10%), Amwal al-Khaleej (4.95%) and the Nasrallah family (4.5%). Individual shareholders make up the remainder.

The shareholders have shown a significant interest in their banking investments by supporting management’s plans for growth and injecting capital when necessary. The shareholders have been instrumental in the rise of the bank into the top ten bracket of Lebanese banks and are currently active in improving corporate governance, which is still an issue amongst Lebanese banks. By supporting the bank financially and making clear efforts to spread decision making among many individuals within management, the shareholders have instilled a certain degree of trust among customers. In addition, the implicit support of the central bank (BDL) for the Lebanese banking sector as a whole is a further indication of stability and implicit support.

Profitability and performance

The bank’s profitability has been impressive for the last five years. Net profits have risen from $7.4 million in 2002 to reach $26 million by the end of 2005. At the end of 2005, the bank’s return on assets (which is calculated as net profits divided by average total assets) was one of the highest among the ten largest Lebanese banks at 1% (1.1% in 2004). The bank has been quite efficient in its treasury and capital markets activities during the last three years, but made the bulk of its profitability from traditional lending activities and from high yielding government securities.

The bank is clearly aiming at building a more diversified and constant income stream, as it realizes that the Lebanese market offers limited opportunities. However, LCB has improved the cost efficiency of its funding base, and has started to place its funding more efficiently. Increasing non-interest income remains a priority and the bank has been active in developing its treasury and fee income generating capabilities. The rise in profitability of the last few years was instrumental in allowing the bank to improve its capital adequacy and to strengthen its loan loss reserve as a way to cover existing and potential bad loans.

With a cost to income ratio below the 50% mark, the bank has also established itself as one of the most efficient banks in its peer group. Operating costs are being controlled, while expansion plans have yielded more revenues than they have generated costs.

Asset quality

The bank is below the industry average in terms of non-performing loans to gross loans (loans given before reserves but net of unearned interest) with a ratio of around 12% in 2005 compared to an industry average of more than 20% (2004 figures). This was due to a massive restructuring effort on the loan portfolio and an improvement in the bank’s risk assessment capabilities. The bank’s loan loss reserves, which were increased in the last few years thanks to a better profitability, covered almost 70% of non-performing loans. This figure reflects the bank’s loan optimization effort of the last few years, as well as a prudent and conservative approach towards lending.

Recoveries of delinquent loans were improved since 2003, as the bank stepped up its efforts and improved the classification system for loans. This new and more efficient loan classification methodology has allowed the bank’s credit officers to better assess credit risk and avoid potentially bad loans.

Liquidity and funding

By enlarging its branch network and stepping up its marketing efforts abroad, the bank was able to expand its customer deposit base substantially. The bank’s customer deposits have risen from a level of around $959 million in 2002 to over $2.3 billion by end of 2005, and are regarded to be stable and recurrent in nature. Customer deposits are the bank’s main funding source, while other forms of funding include principally inter-bank deposits, which remain minimal as compared to customer deposits (average inter-bank deposits account for less than 10% of the bank’s total funding).

The bank’s total liquid assets, which exclude government debt securities, were made up of cash reserves at the BDL, and covered more than 45% of customer deposits in 2005, while these were a little bit more than 40% covered by government debt securities. The latter accounted for more than 40% of total assets in 2005, but have become increasingly liquid in a developing secondary market (boosted by the sudden interest of Gulf investors in the Lebanese capital markets).

The bank still has maturity mismatches, as it funds its medium-term assets with short-term deposits, but has almost no currency mismatches. The maturity mismatch is found throughout the entire Lebanese banking sector, although the recurrent and stable nature of customer deposits mitigates this deficiency significantly. LCB’s customer deposits are highly diversified and there are virtually no concentration of deposits amongst a small number of depositors.

The bank’s capital adequacy has improved for the last few years, as reflected by a rising capital adequacy ratio from 15% in 2001 to over 22% in 2005. The consecutive issues of preferred shares in 2002 and 2003, and the planned capital increase and preferred share issue in 2006 should allow the bank’s capital to catch up with asset growth. Rising profitability has also added the flexibility of organic capital growth.

Pole position

LCB has grown significantly in the past few years, as the bank’s management and shareholders expanded the branch network, the product base, and customer deposits. Profitability was also enhanced, allowing capital to increase organically. Today, the bank is in a position where it is trying to optimize its size and exposure to Lebanon, while seeking to expand geographically in order to diversify revenues and reduce the risk level of assets. By expanding activities in markets with significant potential, the bank will inevitably reach a new level of sophistication, which will see assets and revenues diversify, and capital grow significantly over time.

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Business

Unlucky Luciano

by Michael Young
written by Michael Young

With a major Italian football scandal ushering in the World Cup in Germany, which begins in just over a week’s time, it is often difficult to remember there is more to the sport than money; there is also that old and somewhat ruffled phantom, the beauty of the game.

Aficionados have long been uncomfortable with commerce barging into the world of football. The aesthetics of the game have rarely been tolerant of the baser motives behind the sport. Many a team, from Barcelona to Inter Milan to Manchester United, to name only a few, has at one time or another been forced to nourish supporters’ refusal to see their teams depicted merely as business enterprises. Barcelona refuses advertisement on its shirts; Inter Milan’s tifosi stick to a myth that the team is politically on the left, unlike the supposed right-wing image of cross-town rival AC Milan. And United backers took none too kindly to the team’s purchase by an American magnate, seen as informed about finances but not football.

But business and football have always walked hand in hand, particularly in the past three decades, feeding off each other relentlessly, indeed inconceivable without each other: football needs money to supply the teams’ and supporters’ growing habit (a fact purists only cagily admit to), while investors are drawn to the magnificent cash cow that is football.

So what is one to make of the terrible scandal that has shaken Italian football, and which threatens to engulf the national team, the Squadra Azzura, as it makes a bid for a fourth World Cup title? In May, as the Turin team Juventus was preparing to win its 29th league title, prosecutors alleged that its general manager, Luciano Moggi, had conspired with senior officials in Italian football to pick referees for matches in which the Turin team was playing, to ensure victory. Moggi is also suspected of having pressured players into joining his son’s representation agency, and is said to have influenced the national coach, Marcelo Lippi, in his selection of capped players (Lippi denied it.) But the truly serious charge was that Moggi stood atop a pyramid of individuals – team owners, league officials, and politicians – that manipulated Italian football for personal gain. Several other teams seem to have also profited from illicit deals.

Has commerce tarnished football?

The scandal will revive complaints that damned commerce has tarnished Italian football, perhaps irredeemably. Certainly, Italy has always been corrupt on that front, with even a former star, Paolo Rossi, the high scorer in the 1982 World Cup, having been banned from the sport for a time because of match-fixing. Certainly, too, where there is as much money as in international football, there is bound to be much abuse. But the real question is whether commerce merits the blame.

One would have to go into arguments pertaining to culture to accurately answer that question. Perhaps some cultures are more comfortable with vice than others. Italy surely needs tighter control mechanisms in the naming of referees to matches, and greater oversight in the financial dealings of teams, which have been poorly managed, pushing leading clubs into bankruptcy. In that foul climate, cheating is natural.

However, the market can also be pitiless in its revenge. As news of the scandal broke, Juventus shares fell by 50 percent of their value, forcing the Agnelli family that owns the team to appoint a new chief executive. The family had earlier demanded that the entire Juventus board, including Moggi, resign. If the team is relegated to Serie B, a distinct possibility, millions of dollars of sponsorship and television money would be lost, not to mention the opportunity cost provoked by the backlash from disgusted supporters. Worse, the scandal will doubtless extend to affect the shares of other major teams being traded, amid a general sense in Italy that corruption tends to embrace everyone. Italian football may have to melt down before being recast as something more lawful and respectable.

Not commerce, but its misuse

This would be traumatic, but a clean break is not a bad thing. Italian football was shattered not by commerce, but by its misuse – through illicit market manipulations ensuring the competition was tilted in favor of the wealthy teams. These teams generate the most money, but also fall the hardest. Commerce may have made Italy’s latest sporting disgrace more likely, but only by strengthening commercial regulations that ensure decisions are more transparent and officials more accountable, will the country’s football be reborn stronger.

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Business

Georges Zard Abou Jaoude – Grand Plans Ahead

by Executive Staff
written by Executive Staff

Executive talks to Georges Zard Abou Jaoudé, chairman and general manager of Lebanese Canadian Bank, about the bank’s IPO plans, foreign expansion, capital increases and everything else in between.

E Can you give us some background about when you started thinking about an IPO and how you prepared yourself and your team?

To accompany growth and go regional with the highest solvency in the sector, and moreover, to be compliant with Basel II, you need to increase equity. IPO is the healthiest way to increase equity.

An IPO means exposure to other parties, in other words, to the public. The consequences include total transparency and disclosing every single decision. This in turn introduces a new culture. I and all the executives at all levels are convinced that our officers need to embrace this culture in order to be well-prepared for the public. I think we are now, after two years of hard work and preparation, ready for an IPO.

E Was there a particular date when you made the concrete decision to go ahead?

We are actually in the process of preparing all the ingredients for a successful IPO, while not forgetting the mood of the market, especially the Middle Eastern one.

E The number of IPOs on Arab stock markets has been held partly responsible for slides in market values across the region. IPOs need liquidity. Would you list only in Beirut?

Liquidity is important in any stock market. I feel that it exists extensively in the region because of the money factor, especially the price of oil. Maybe there was an excess of IPOs simultaneously in the Gulf region. On the other hand, in Lebanon the night is still young and the bourse still needs further developments and listings.

Deposits are over 3.5 times the size of our GDR. In other words, liquidity is not a problem and more IPOs in Lebanon are healthy for the economy. We would list first in Lebanon and then potentially in London or Luxembourg.

E Not Dubai?

Perhaps at a later stage.

E What level of capital increase did you perform in Q1 2006?

We had two issues involving capital increase: one common share issue and one preferred share issue, which is in the process of being finalized. This would represent an increase of almost 50% in capital from about $140 million to $210 million. The idea is now to float 20% of the bank in GDRs. This is merely to increase the capital to reach our target of around $350 million by the end of 2006. This is very ambitious and I would be very happy with anything near that mark.

E What kind of Gulf share would you foresee in the IPO?

Difficult to say now, but we certainly would do road shows in the Gulf through the lead manager.

E And the lead manager is?

It will be one of three major banks. It is likely to be BNP Paribas, although nothing is signed yet.

E This increased equity also means increased responsibility, and in turn higher profits and greater activity. Would you agree that LCB is one of the most aggressive banks in the Lebanese market?

We may be the most aggressive bank, keeping in mind that we hold one of the highest solvencies and one of the highest liquidities. In other words, we are the most aggressive and at the same time very conservative. That is very unusual. For the last four years, we achieved the highest return on equity and the highest growth rate.

We are confident that as we were successful in planning the past five years and achieved our goals, we could do the same for the coming years. The only difference is that beyond a certain volume, this kind of incremental growth cannot be sustained organically. Instead we have to look at mergers or acquisitions – with a preference for the latter – with a view to consolidating by acquiring banks abroad.

E In this context, then, was it a blow that BLC was acquired by someone who bid just a little bit more than you?

Sometimes conservatism does not pay. In a bid, you have to look at all the aspects – even though our Saudi and Emirati partners agreed on $240 million, we bid only $211 million and ended up as the second highest bidder. I wish BLC had stayed under a Lebanese umbrella.

E Do you have a name at the top of your list?

We do have a name, but I am not even allowed to think it out loud.

E Have you been talking to them?

Extremely gently.

E Do you see market opportunities for LCB in Gulf countries?

Yes, especially in the Emirates and Qatar. It is not easy, but we hope to get through in one way or another. In the meantime we are serving our clients in the Gulf from Lebanon.

E Have you set your eyes on other markets?

We have been in Algeria and are in the process of finalizing the majority share in an Algerian bank. Now we have our sights set on other markets, which is another reason why we need the equity increase.

E So once you have taken care of the IPO, how quickly would you move into these markets in North Africa and elsewhere?

We might be known for being very aggressive in the Lebanese market, but we have to be more careful when we go abroad. We have to test the ground and respect the restrictions imposed there. I know that my colleagues have great momentum, energy and know-how, so I think we could go in quickly but cautiously.

E Do you see possible synergies with other Lebanese banks going into the same market?

I will be happy to see other Lebanese banks sharing the same market. The more they know about the market, the easier it would be to syndicate with them.

E Here in Lebanon you have been concentrating more on retail and retail lending for some time.

In fact, we deal with corporate middle market and retail and have one of the best services on the trade finance level. Our goal is to enhance the capital market and private banking services. We feel that Lebanon lacks investment banks and this is something we are interested in.

E You have talked about a joint venture with another bank. Would that target the Lebanese market in particular?

No, it will serve the Lebanese diaspora, Arab investors and western equity. The idea of serving the diaspora came out of a need for survival. Frankly speaking, I feel that the strength of Lebanon stems from its emigrants. If you look at the country’s financial statistics, you see that every year we have a commercial deficit of around $5 billion, whereas the balance of payments is positive. This comes chiefly from the repatriation of income, so despite a huge debt-to-GDP ratio, Lebanon still lives relatively well and we have some degree of growth.

Every year a huge amount of money pours into Lebanon from outside, so if I want to be different, and serve those who are serving Lebanon, then I should go after their business. This is why our motto is to serve the Lebanese diaspora. We see major potential here.

Another opportunity we see is to strengthen the ties between the diaspora and the country itself. We intend to launch a website called Roots, which will help to galvanize the connection between the two.

E In your opinion, where is the diaspora most active?

I think that most of the first and second waves of emigrants have lost their Lebanese roots, but more recent departures, especially those in North and Central Africa, Arab countries, Canada and even Europe, still have close ties. They send a lot of money back to Lebanon. There are 250,000 in Canada, concentrated in Quebec where we have opened a representative office. There are probably at least 1-2 million in the Arab countries, and Lebanese continue to leave for the Gulf. Overall, there is a potential market of not less than 3-4 million people, which is almost equal to the resident domestic population.

E Back in Lebanon, are you relying on political stability? Would it be devastating if the proposed Beirut conference were postponed or cancelled?

Hopefully someone will inject some reason into our politicians. Fostering a healthy economy is the most important thing.

E Even if the private sector prepared a healthy economy, it still seems as if some kind of force is trying to destroy it.

This is why I am begging for some wisdom. There is a lot of available money, a surplus of petrodollars, and most of it is flying straight over our heads in Lebanon. It won’t last forever. If we could catch some while we can, it would help stabilize the debt situation enormously. We have lost many opportunities in the past. Let’s hope not to miss this one.

E On another level, you are active in non-financial areas. You give speeches on the importance of banking standards and participate in conferences, and LCB allocates time and resources to other events. How does this fit into your strategy? Is it a way to raise visibility?

We are trying to give back society what it offers us. We discovered that the more you give to society and the more you help, the more it gives back in return. It is a kind of virtuous circle. We recently launched solar energy loans, for instance, which allow people to install solar energy equipment and repay it in installments. Through this we give visibility to the bank, make money and also manage to reduce our clients’ cost at the same time.

We are saying that the environment is Lebanon’s most important equity. If we can reach the same level of solar panel usage as in Cyprus or Israel, then we can lower the national energy bill and improve the balance of payments. This is what I mean about being aggressive and conservative at the same time.

E Will your new headquarters be ready soon?

Not very soon. It is a long process as you need at least a year to get a construction permit in downtown, which is a pity. Having said that, we have almost finalized the design and from a short list of ten international architects, have chosen a German architect from Berlin who works hand in hand with “Batimat”, a highly reputable design house. The building will be one of a kind in the region.

E Last but not least, you have also applied for an Islamic Banking license. Any update on this?

We have already invested in Islamic banks in Bahrain and Sudan. In fact we have done an extensive study on Islamic banking in Lebanon and we feel we should start working in this area shortly.

We have also invested extensively in human capital to be able to sustain everything that is happening at the same time. We are tackling six or seven countries, arranging our GDRs, issuing capital increases, launching a private bank and an investment bank and applying for a financial company in Lebanon.

On top of all that, we sill have to try to remain vigilant and conservative.

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Georges Frem

by Faysal Badran
written by Faysal Badran

George Frem, who passed away in May after a valiant battle with illness, will be remembered as an astute businessman, a pioneering Lebanese industrialist, a philanthropist, and a political idealist. Many have written about the business empire he created, but few have talked about the man behind it. It is very difficult for me to write this piece with any degree of detachment as his family are dear friends.

What was striking about George Frem was the personal involvement and passion he put into everything he did. He put people first, not only in his business ventures, but also in his family life, where he always kept a firm focus on solidifying the unity of the family and its business interests. Another laudable trait of this most generous and low-profile man was his modesty and sense of identity. He was a genuine patriot and when he was appointed Minister of Industry, I went to his Paris hotel to congratulate him. Right away, my traditional cynicism about Lebanon was humbled. The man radiated hope and belief in the country and its youth. He always reminded me that the future of Lebanon rests “on you, the next generation, free from sectarianism and working for your country.” I found his idealism refreshing, but worried that his ethics and sense of good governance would run up against the ugly realities of Lebanese political life.

Yet he always felt that in business, his 6,000 or so employees were the ones doing it all and that the most important thing was to keep Lebanon alive. He acknowledged that the system had broken but that the rebuilding was in our hands. How I wish his vision was shared by more people, for George Frem, through his ventures in Saudi Arabia, where he began his professional life, and later in the US and South America, raised the profile of Lebanon, always driven by an inner force of love and respect for his country and friends.

Starting out small

It wasn’t always easy. George Frem started his career working in Saudi Arabia, at a time when air conditioning was a far-off luxury, and well before the name Frem meant so much in the paper and packaging business. Yet the group he built managed to position itself among the most well run and financially strong groups in the region, with revenues of well over $1 billion.

While the group was built almost entirely in an organic manner, he did resort to joint ventures and outright buyouts in some of the global enterprises. His most visible brand in Lebanon, Sanita, has been a genuine success story, challenging world leaders in both quality and market share, while the Indevco group of companies is run along international standards the world over. So, in many respects, Mr. Frem was running a large family business which grew into an impressive global concern. Many of the key executives were sent to blue chip executive programs in order to help the transition from a pure family business into a small multinational

On the many occasions when I corresponded with him, having lost hope in the country, he would have a contagious, upbeat attitude and spirit possessing an almost limitless optimism for the potential of the Lebanese people. We have lost another great man, and it is up to us to make sure that the country he loved so much remains a viable state, a melting pot of cultures, and an incubator for successful business ideas and the virtue of hard work. And while I hope his businesses will continue to flourish, it is his human and humane qualities that will surely be missed most.

George Frem (1943-2006)

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It hurts

by Yasser Akkaoui
written by Yasser Akkaoui

It hurts to see our politicians ignorant of the history and evolution of this great country that they are supposed to lead. It hurts that because of this ignorance we have lost opportunities.

It hurts to remember that in 1973, the first oil boom was about to explode just as Lebanon was beginning its slide into civil war. We would have been the natural beneficiary of this sudden wealth, but instead the money, potential and human capital went elsewhere.

It hurts to know that if we had been clever then, no Lebanese today would be starving and Lebanon would be a jewel, not just in the Middle East, but in the world.

It hurts to see that instead we are a bankrupt nation, living on our past and paying our way as the cut-price fleshpot of the Middle East.

It hurts that we should rely on, and fawn over, tourists rather than develop our ailing industries.

It hurts that we didn’t learn from our first mistake and that in 2005 our politicians, intoxicated by the heady fumes of megalomania, were duped into dragging the country into political deadlock, ensuring we missed out on the second oil boom.

It hurts that Gulf States are increasing their quota of Lebanese workers while we let in more maids. It hurts to know that had we been smart, we could have kept our valuable human resources and in all likelihood wooed back other Lebanese, lost to foreign job markets.

It hurts to know that the Hariri vision for economic prosperity – the vision that its detractors like to blame for the current crisis – was predicated on the inevitability of at least one, possibly two booms: peace and oil. The latter came but we had already been raped at gunpoint.

It hurts today to see the return of sectarianism, flag-waving mediocrity and the politics of segregation and self-interest.

It hurts to see our economic reform plan sabotaged for political gains, scaring away Beirut I donors and making Prime Minister Seniora politically impotent. It hurts that Lebanon is weak when it should be strong; it hurts that we are destructive when we should be creators and it hurts that we are ignorant when we should have foresight.

It just hurts.

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Money Matters

An idiot’s guide to hedge funds

by Executive Editors
written by Executive Editors

As a follow up to recent articles published in this magazine on fund managers, such as Philippe Jabre and Marc Hochar, and the numerous mentions in these articles of hedge funds, we thought we should shed some light on the meaning or definition of hedge funds, their origins as well as their characteristics.
In the financial community, the term “hedging” usually refers to entering transactions that protect against adverse price movements. A “hedge fund” could thus reduce risks through a strategy that acts as an insurance policy, and brings the level of investment risk to a minimum. However, the term “hedging” or “hedge” is very misleading as most hedge funds nowadays use strategies which are not at all “hedged” or without risk. In fact, most hedge funds only “hedge” part of their exposure to a specific market or product (whether its equities, bonds, interest rate products, etc.) and follow specific sophisticated strategies. With time, the investment community started to call these type of funds as “hedge funds”, even when the overwhelming majority were mainly exploiting market inefficiencies through the use of various sophisticated arbitrage techniques.
Their origins date back to 1949, when Alfred W. Jones set up the first hedge fund. His objective was to eliminate part of the market risk involved in holding long stock positions by short selling other stocks. He was also the first to simultaneously use short sales (the act of selling securities you don’t own, by borrowing shares from someone, selling them, repurchasing them at a later date, and then returning them to the original lender), leverage and incentive fees. In 1952, Jones converted his general partnership fund into a limited partnership, investing with several independent portfolio managers and created the first multi-manager hedge fund. By 1966, Jones’ “hedge fund” had outperformed all the mutual funds of it’s time.
A “rush” into hedge funds followed and their number increased from a handful to over a hundred within a few years (remember, this was still the late 1960s). However, there were high losses and bankruptcies during the difficult stock market times of 1969-70 and 1973-74, a period that saw a number of hedge fund managers, with the exception of such stellar luminaries as George Soros and Michael Steinhardt, wiped off the financial map.

80s boom
A new boom in the late 1980s, helped the creation of a great number of new hedge funds and by the mid-1990s, hedge funds were accused of manipulating the market and creating high volatility, although an official inquiry and study by the IMF showed no evidence of such wrongdoings. The collapse of the Asian and Russian markets in the late 1990s ensured the much publicized collapse of LTCM, although the hedge fund industry recovered relatively quickly and is today continuing to boom.
Today, the established definition of hedge funds is “all forms of investment funds, companies and private partnerships that use derivatives for directional investing; and/or are allowed to go short; and/or use significant leverage through borrowing.” Borrowing includes margin borrowing against securities, foreign exchange, credit lines and loans. By significant leverage, we mean borrowing in excess of 25%. Hedge funds have three main features: they charge clients a percentage of the profits; they aim to achieve substantial returns; and they can only take a limited number of investors.

On the map
Hedge funds are characterized by their free choice of asset classes, markets, trading style, and instruments. Most are sold on a private basis and many are incorporated offshore, while for regulatory and administrative reasons, high minimum investment levels are often required. Other characteristics include the infrequent subscription and redemption possibilities, and the fact that managers invest their own capital in their funds. Finally, hedge funds show low correlation to traditional markets and are marketed as being oriented towards absolute performance (performance above zero) instead of performance relative to a certain benchmark or reference index.
With our own Philippe Jabre, it could be said that Lebanon is somewhere on the map of the hedge funds’ world. However, when one realizes that the West had been offering this kind of alternative investment source for more than 50 years, and we in Lebanon are still cogitating about petty political issues with a complete disregard for economic development, then it is understandable why we still have an accelerating brain and youth drain. Pity.

Moody’s Upgrades NBK’s Outlook to Positive

The rating agency, Moody’s Investors Service, has upgraded the outlook on the A2 long-term foreign currency deposit rating of Kuwait’s largest bank and the top-rated Arab Bank, the National Bank of Kuwait (NBK), from stable to positive. This upgrade came amid the bank’s strong performance and continuous growth, as well as to its pioneering position in the local market. NBK posted net profits of $704m in 2005, up 37% year-on-year. The bank’s total assets reached $21.2bn at the end of 2005, while its shareholders’ equity stood at $2.2bn. Moody’s upgraded Kuwait’s sovereign ratings outlook to positive earlier this year due to the further strengthening of the country’s fiscal and external positions and the successful conclusion regarding the succession of the new emir.

Emaar Q1-2006 Net
Profits Rise 14%

Dubai-based property developer Emaar reported a 14% yearly growth in first-quarter 2006 profits to $413m resulting in a $0.28 annualized earnings per share. The company’s revenues approached $610, down 21% year-on-year. Emaar, a joint-stock company listed on the Dubai Financial Market, recently announced plans to expand its investments into the education and healthcare business. Emaar’s share was last traded at AED16.35 ($4.5).

Country Profile: Qatar

Qatari authorities unveiled the country’s budget for 2006-2007. In the budget statement, revenues are forecasted at $15.6bn, expenditures at $15bn and allocations for infrastructure projects at $5bn. The 2006-2007 budget is significantly higher than the 2005-2006 budget mainly due to the assumption of an average oil price of $36/barrel, up from $27/barrel the year before. A surplus of $632m is forecasted for 2006-2007, up from one of $60m in 2005-2006. In fact, Qatar has realized consecutive surpluses for the last five years. The country’s current spending is forecasted at $9.5bn for 2006-2007, up from $7.2bn for 2005-2006, while capital spending is forecasted at $5.5bn for 2006-2007, up from $3.2bn for 2005-2006. Allocations for health services, education and housing would reach according to the budget $1bn, $1.6bn and $192m respectively. Moody’s agency has noted that Qatar’s booming oil sector has improved the country’s public finances. Its public debt has fallen from around 90% of GDP at end-1999 to 30% of GDP at end-2005.

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Economy & Finance

Hedge your bets

by Executive Editors
written by Executive Editors

Founded by Marc Hochar, a former Lebanese investment banker who had spent his entire professional life (more than 13 years) in investment banking and global markets with US investment bank JP Morgan, Melkart Capital has become the talk of Lebanese financial circles and the region. Melkart is the first large-scale international “fund of funds” to be managed out of Beirut by Lebanese specialists. In less than 20 months, the fund has attracted around $70 million of investments from high-net-worth individuals from Europe, Latin America and, to a lesser extent, the Gulf area, as well as institutional investors, in the form of large corporations, from Europe and Latin America.

Three companies
Melkart Capital is actually made up of three companies: Melkart Capital Management, a firm incorporated in the Cayman Islands, which is an asset management company specialized in global alternative investments, including hedge funds; Melkart Capital SAL, which is a Lebanon incorporated and based company, responsible for the brokerage and distribution of investment funds in Lebanon, and the Melkart Diversified Fund, which is the actual global multi-strategy fund of hedge funds. The Melkart Diversified Fund is managed by both Melkart Capital Management and by Antarctica Asset Management, an investment management firm established in the British Virgin Islands. Antarctica is an investment advisor to Melkart Capital Management, which was founded in 2001 by former investment bankers. It specializes in hedge fund management and investment advisory with around $700 million of assets under management and a research unit based in New York. Finally, it is worth noting that Melkart Capital SAL is registered as a financial intermediary in Lebanon with a capital of LBP1 billion, and is regulated by the Central Bank of Lebanon (BDL).
The “seed” money of Melkart and its flagship fund, the Melkart Diversified Fund, was initially brought in by Marc Hochar personally as well as by a small group of international investors, who were partly brought in by Antartica. With its 5-year track record and the extensive investor relationships of its managers, Antartica has been instrumental in providing the Melkart fund with investors. Antartica still plays a vital role in the management of the Melkart fund, as it provides the necessary quality research and market and industry reports, as well as all logistical support the Melkart fund might need. Fund raising was actually carried out from the start by both Melkart and Antartica who initially joined hands to raise around $70 million in 18 months. The Melkart founders/managers raised at least 50% of the total $70 million.

Solid structure
For the moment, 60% of the Melkart fund’s total is accounted for by European investors, while Latin American investors make up around 25%. Middle East investors make up for the remaining 15%. Most of the present investors are high net worth individuals, who normally invest into the Melkart fund through international asset managers and private banks. The latter offer the Melkart fund to their customers as one of the funds they officially represent. Currently, the fund does not include many Gulf investors. The aim is to start approaching these investors when a solid enough track record would have been built, as Gulf investors are usually reluctant to invest into funds or other investment products if there is not a few years’ track record. Only Antartica has a five-year track record which shows a more than decent return, while Melkart shows an eighteen months track record. For instance, the return of the Melkart Diversified Fund (MDF) for 2005, given net of fees was close to 15%, and has already reached 5.21% for the first two months of 2006. If all goes well, the MDF should yield perhaps more than 25% for 2006.
Melkart Capital’s structure is a solid one, in the sense that its management and distribution are carried out in Beirut, while the custodian and administrator for the Fund, HSBC, is based in the Isle of Man. The latter is highly regarded by fund managers, as it is the strictest of off-shore centers in terms of regulation for anti-money laundering. Given the Beirut base of Melkart Capital SAL, the broker/distributor, an Isle of Man custodian and administrator is of prime importance. The actual funds coming from investors are placed with the Melkart Diversified Fund (MDF), which is based in the Cayman Islands. The MDF places its funds into more than 30 hedge funds throughout the world with different investment strategies. The MDF is principally invested into equity (21.7%), while the rest is spread between global macro hedge funds, event driven funds, emerging markets, distressed and credit funds, fixed income, convertible and statistical arbitrage, managed futures and commodities. The auditors of the MDF are Deloitte and Touche, while Société Générale is the leverage provider (provider of cash through a credit facility) with a pledge on the Fund’s assets. The legal counsel for the MDF, Walkers, is also based in the Cayman Islands and is of international repute.

Experience
Not only is Melkart Capital’s structure solid, with big names in support and an internationally approved legal structure, but the investment management skills and strategy are also performing. The managers (Melkart and Antartica) have a strong understanding of the hedge fund industry, have expertise in risk management and last but not least, have access to top quality managers. The investment managers (Melkart’s managers, including Hochar, and Antartica’s managers) have a combined experience of 50 years in the fields of quantitative analysis and derivatives trading, which are widely used by arbitrage hedge funds to manage risks. It is also worth mentioning that both Melkart and Antartica have extensive relationships with a large number of global fund managers, who used to be their trading counterparties, and often, their working peers.
The investment strategy of Melkart is principally to choose the right funds to invest into, as well as the right mix in terms of diversification. The Melkart investment managers pay particular attention to the volatility of the funds they are contemplating in both absolute terms and relative to their peers. The consistency of returns is thoroughly scrutinized as well as the funds’ management quality and strategy.

New niche
A background check on managers of funds is also carried out extensively. This task is seriously facilitated with the help of Antartica, which not only has the experience and track record in the field, but also sufficient resources to carry out thorough checks of funds’ managers, their strategy and reputation. Melkart’s managers nevertheless pay a visit to the funds they invest in once every two to three months. They also remain prudent in their strategy, in the sense that they make it a policy to maintain three layers of hedge inside their investment strategy.

Melkart provides its investors significant added value. it provides access to top tier hedge funds


Overall, Melkart provides its own investors significant added value, in that it provides its investors access to top tier hedge funds, which are normally closed to individuals or new investors. Through its extensive relationships in the fund management world, Melkart can identify and provide privileged access to talented new managers. The MDF itself was short listed for “Best Newcomer Fund of Funds” in the HFR 2005 European Fund of Funds Awards, while the various Antartica funds were nominated during the same year as “Best Arbitrage Fund” and “Best Fund of Funds”. MDF not only provides access to closed funds, but also its relatively small size allows for quick asset allocations switches and investments, for a customized approach for every investor, for full transparency (monthly update, statistical data, etc.), for a full diversification benefit with a minimal investment size, and for improved liquidity.
By building such a sophisticated tool and making it accessible to investors, Marc Hochar and his partners have capitalized on an extensive experience accumulated during years of work spent among the elite of world finance. Melkart can hence be safely described as a solidly constructed pioneer, which should pave the way for the establishment of a new highly specialized niche in Lebanon.

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Economy & Finance

Hedge your bets

by Executive Editors
written by Executive Editors

Founded by Marc Hochar, a former Lebanese investment banker who had spent his entire professional life (more than 13 years) in investment banking and global markets with US investment bank JP Morgan, Melkart Capital has become the talk of Lebanese financial circles and the region. Melkart is the first large-scale international “fund of funds” to be managed out of Beirut by Lebanese specialists. In less than 20 months, the fund has attracted around $70 million of investments from high-net-worth individuals from Europe, Latin America and, to a lesser extent, the Gulf area, as well as institutional investors, in the form of large corporations, from Europe and Latin America.

Three companies
Melkart Capital is actually made up of three companies: Melkart Capital Management, a firm incorporated in the Cayman Islands, which is an asset management company specialized in global alternative investments, including hedge funds; Melkart Capital SAL, which is a Lebanon incorporated and based company, responsible for the brokerage and distribution of investment funds in Lebanon, and the Melkart Diversified Fund, which is the actual global multi-strategy fund of hedge funds. The Melkart Diversified Fund is managed by both Melkart Capital Management and by Antarctica Asset Management, an investment management firm established in the British Virgin Islands. Antarctica is an investment advisor to Melkart Capital Management, which was founded in 2001 by former investment bankers. It specializes in hedge fund management and investment advisory with around $700 million of assets under management and a research unit based in New York. Finally, it is worth noting that Melkart Capital SAL is registered as a financial intermediary in Lebanon with a capital of LBP1 billion, and is regulated by the Central Bank of Lebanon (BDL).
The “seed” money of Melkart and its flagship fund, the Melkart Diversified Fund, was initially brought in by Marc Hochar personally as well as by a small group of international investors, who were partly brought in by Antartica. With its 5-year track record and the extensive investor relationships of its managers, Antartica has been instrumental in providing the Melkart fund with investors. Antartica still plays a vital role in the management of the Melkart fund, as it provides the necessary quality research and market and industry reports, as well as all logistical support the Melkart fund might need. Fund raising was actually carried out from the start by both Melkart and Antartica who initially joined hands to raise around $70 million in 18 months. The Melkart founders/managers raised at least 50% of the total $70 million.

Solid structure
For the moment, 60% of the Melkart fund’s total is accounted for by European investors, while Latin American investors make up around 25%. Middle East investors make up for the remaining 15%. Most of the present investors are high net worth individuals, who normally invest into the Melkart fund through international asset managers and private banks. The latter offer the Melkart fund to their customers as one of the funds they officially represent. Currently, the fund does not include many Gulf investors. The aim is to start approaching these investors when a solid enough track record would have been built, as Gulf investors are usually reluctant to invest into funds or other investment products if there is not a few years’ track record. Only Antartica has a five-year track record which shows a more than decent return, while Melkart shows an eighteen months track record. For instance, the return of the Melkart Diversified Fund (MDF) for 2005, given net of fees was close to 15%, and has already reached 5.21% for the first two months of 2006. If all goes well, the MDF should yield perhaps more than 25% for 2006.
Melkart Capital’s structure is a solid one, in the sense that its management and distribution are carried out in Beirut, while the custodian and administrator for the Fund, HSBC, is based in the Isle of Man. The latter is highly regarded by fund managers, as it is the strictest of off-shore centers in terms of regulation for anti-money laundering. Given the Beirut base of Melkart Capital SAL, the broker/distributor, an Isle of Man custodian and administrator is of prime importance. The actual funds coming from investors are placed with the Melkart Diversified Fund (MDF), which is based in the Cayman Islands. The MDF places its funds into more than 30 hedge funds throughout the world with different investment strategies. The MDF is principally invested into equity (21.7%), while the rest is spread between global macro hedge funds, event driven funds, emerging markets, distressed and credit funds, fixed income, convertible and statistical arbitrage, managed futures and commodities. The auditors of the MDF are Deloitte and Touche, while Société Générale is the leverage provider (provider of cash through a credit facility) with a pledge on the Fund’s assets. The legal counsel for the MDF, Walkers, is also based in the Cayman Islands and is of international repute.

Experience
Not only is Melkart Capital’s structure solid, with big names in support and an internationally approved legal structure, but the investment management skills and strategy are also performing. The managers (Melkart and Antartica) have a strong understanding of the hedge fund industry, have expertise in risk management and last but not least, have access to top quality managers. The investment managers (Melkart’s managers, including Hochar, and Antartica’s managers) have a combined experience of 50 years in the fields of quantitative analysis and derivatives trading, which are widely used by arbitrage hedge funds to manage risks. It is also worth mentioning that both Melkart and Antartica have extensive relationships with a large number of global fund managers, who used to be their trading counterparties, and often, their working peers.
The investment strategy of Melkart is principally to choose the right funds to invest into, as well as the right mix in terms of diversification. The Melkart investment managers pay particular attention to the volatility of the funds they are contemplating in both absolute terms and relative to their peers. The consistency of returns is thoroughly scrutinized as well as the funds’ management quality and strategy.

New niche
A background check on managers of funds is also carried out extensively. This task is seriously facilitated with the help of Antartica, which not only has the experience and track record in the field, but also sufficient resources to carry out thorough checks of funds’ managers, their strategy and reputation. Melkart’s managers nevertheless pay a visit to the funds they invest in once every two to three months. They also remain prudent in their strategy, in the sense that they make it a policy to maintain three layers of hedge inside their investment strategy.
Overall, Melkart provides its own investors significant added value, in that it provides its investors access to top tier hedge funds, which are normally closed to individuals or new investors. Through its extensive relationships in the fund management world, Melkart can identify and provide privileged access to talented new managers. The MDF itself was short listed for “Best Newcomer Fund of Funds” in the HFR 2005 European Fund of Funds Awards, while the various Antartica funds were nominated during the same year as “Best Arbitrage Fund” and “Best Fund of Funds”. MDF not only provides access to closed funds, but also its relatively small size allows for quick asset allocations switches and investments, for a customized approach for every investor, for full transparency (monthly update, statistical data, etc.), for a full diversification benefit with a minimal investment size, and for improved liquidity.
By building such a sophisticated tool and making it accessible to investors, Marc Hochar and his partners have capitalized on an extensive experience accumulated during years of work spent among the elite of world finance. Melkart can hence be safely described as a solidly constructed pioneer, which should pave the way for the establishment of a new highly specialized niche in Lebanon.

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