Amid the excitement, asset managers should remember there are significant business risks associated with buying assets in Iran, writes George Mitton.

Assuming western negotiators agree a deal to relieve sanctions on banking and financial transactions, Western firms will be able to invest in Iran for the first time in years. But are they wise to do so?

"This isn't like putting a bit of money into Turkey or Tunisia," says Henry Smith, associate director in the MENA analysis team at Control Risks, a consultancy. "It's potentially one of the most politically sensitive market entries."

One of the challenges with Iran, says Smith, is that amid a privatisation drive in the past 10 years, many listed companies have come under the ownership of state-linked funds connected to security forces. These entities "might be reputationally damaging", he says.

Do Western firms want to be co-owners of an Iranian company alongside an entity linked to the Revolutionary Guards? The answer is probably not.

Tied to this problem is the likelihood that investing in Iran will generate significant media coverage. With a strand of public opinion, particularly in the US, remaining vociferously opposed to detente with Iran, many journalists will be eager to uncover a scandal.

"There's a question of brand management," says Smith. "If US or Europe-headquartered funds start channelling money into Iranian Automotive on the Tehran Stock Exchange, for instance, that could generate huge media interest."

Besides these concerns, there is uncertainty over how well Iran's capital markets can absorb a sudden inflow of foreign capital. Will inflation spike as a result? Smith says Iranian financial data is untested and says it is unclear how much capital is likely to flow in, from domestic, diaspora or international sources.

That said, Iran is generating significant interest at the moment, even if a lot of people are only exploring rather than ready to execute. 

Western asset managers such as Charlemagne Capital (see previous pages) are leading the way with tie-ups with Iranian firms. Other Western companies are looking to do deals with Iranian brokerages, for instance.

COMFORT ISSUES
The question really becomes, how comfortable are Western firms with operating in the country?

"The decision will be taken at the top of the organisation," he says. "It will depend on senior management's familiarity with the market and risk appetite. 

"If you are leading the Iran project to look at assets in Iran, you will need to be able to demonstrate to internal stakeholders and external ones, regulators, banking partners, 
that you have looked at these issues."

The risks will be acute for those Western firms which decide to set up premises in the country. Creating a legal entity in Iran means companies would fall under the country's Foreign Investment Protection and Promotion Act, which gives various benefits, making it easier to acquire land and, in practice, seemingly giving better intellectual property protection.

However, "the reputational point could be stronger", says Smith. "Setting up an office is quite a bold statement."

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