When it comes to private equity in frontier markets in the Middle East, then the name of MerchantBridge usually springs to mind, especially when it comes to Iraq, probably the last true PE frontier market in the Middle East and undoubtedly the most challenging. The late Basil Al Rahim, in his last interview before his untimely death in an air crash in Iraq, spoke to Mike Gallagher
Iraq and Saudi Arabia are two of the toughest markets for private equity in the Middle East, and few have had any success. Navigating Iraq's treacherous and highly unstable environment and dealing with the extremely secretive family businesses in Saudi Arabia is what MerchantBridge seems to do better than almost any other company and it is where MerchantBridge has earned its laurels.
It completed nine private equity transactions in Europe and the Middle East over the past five years and made investments in companies with an enterprise value of $4.5 billion, generating an IRR in excess of 40 per cent on realised and unrealised private equity and direct investment transactions.
In Iraq, MerchantBridge is already engaged in telecommunications (Asiacell), commercial banking (Mansour Bank) and oil and gas services.
Recent activity has included a $220 million transaction with the Lafarge cement company for the 15 year lease of the Karbala Cement Plant, making it the region's largest private equity deal in 2010. Lafarge was brought in as the technical partner in the rehabilitation of the existing cement plant in Karbala.
MerchantBridge is the largest private investor to date in Iraq with current investments of over $1.5 billion in debt and equity.
The business was originally formed in 1997 as the Safron Group, later rebranded MerchantBridge, and is a joint venture between Bankers Trust and a number of merchant groups from Saudi Arabia, UAE, Oman, Egypt and Lebanon.
MerchantBridge has offices in London, Dubai, Beirut, Baghdad and Riyadh and also offers corporate finance advisory services in select situations to multinational corporations and governments including having been the advisor to the UK Ministry of Defence on their offset programme in Saudi Arabia.
Rahim, in his days before he became the Chief Executive and founder of MerchantBridge, was a Managing Director at the Carlyle Group in Washington DC and helped set up their international business. He started his career at Gulf International Bank and received his commercial bank training at Citibank and his investment bank training at Morgan Stanley and Brown Brothers Harriman in New York.
"We completed a deal with Lafarge in 2010 and we are taking over a cement plant that was owned by the Government, almost like a dual key contract. It is a two million ton plant which was operating at 10 per cent of its capacity. We are rehabbing it up to its capacity again," he told Banker Middle East.
If a PE house is putting money into a cement plant in a frontier market like Iraq, surely that is a sign that the economy has turned the corner?
Absolutely. There are a lot of indications about this, especially in Iraq. It shows
that the Government has started functioning properly because the regulatory environment allows things like this to take place. It shows that getting access to finance is easier because these deals always need financing and it highlights the core premise, which is investor confidence, i.e. that the future is looking up, that things are not so bleak.
What is the primary focus of the cement investment? Is it purely on the expectation of increased infrastructure spending? Is it on the expectation increased demand for residential real estate?
Iraq is a bit of an unusual market because once the economy starts firing on all cylinders, there will be growth in every single sector. As far as cement is concerned, it is housing, and depending on who you believe, the demand is for anywhere between one million and three million housing units and they need that today, not over the next 10 years or anything. There is a huge shortfall today.
If you look at the oil sector, if you believe even half of what the oil companies are saying, then there is a tremendous need for cement. If you add infrastructure projects, hospitality, commercial etc, and the country is currently consuming about 10-12 million tons, whereas it should be consuming 35 million tons, so the demand is there.
MerchantBridge has been operating in Iraq for the last six years. Are you seeing more PE activity there now?
Well, yes, we are seeing more investment, but not all FDI (foreign direct investment) is private equity, obviously. It depends on how narrowly you define the private equity model. If you are going to stick to the classic interpretation of private equity where you invest in mature companies that have stable cashflows, and if you think you are going to be able to improve or add value by attaching another asset; well that model may not be applicable in Iraq.
If you say 'I'm looking for a good company with a good management team, with stable cashflows and with a stable market share which I am going to buy and improve' then there is not going to be many candidates.
If you think of private equity in a wider manner, then there are things that you can do.
How do you deal with the due diligence aspect, which must be far more difficult in a frontier market like Iraq?
It is not always straightforward. This is where you create value, frankly speaking. It is very easy to go into a Tiffanys or De Beers and buy very expensive diamonds because you know that everything has been checked. It is more difficult if you have to go and look for it in the souks and the bazaars and under the dust. It is a much more challenging, longer concept; there is no doubt about that.
Generally, we discovered that our gestation periods for deals, especially in places like Iraq, easily go over 12 months. I like the idea of being able to go into a room with all the documents and being able to close a deal in three months, but it just doesn't happen like that.
How do you go about raising funds for markets like Iraq?
We don't raise blind pools, especially because raising money for frontier markets is difficult with blind pools. You cannot say 'I'm raising money for investments in Iraq; just give me your money and I will see what is out there.' What we have found from our deals is that you have to raise money in a very targeted and selected basis. You have to know the kinds of investors which have an appetite for this sort of thing. It is not a broad, shotgun approach.
What kinds of exit opportunities does Iraq offer investors? Is it purely trade sales, or do IPOs, given the performance of the ISX (Iraq Stock Exchange) provide alternative opportunities?
Your primary exit is always a trade sale, more than an IPO and you have to keep that in mind. Often the public markets are not that sophisticated; they are not that developed. Sometimes you do a deal where the size doesn't allow you to exit that easily. The IRRs you look at should be north of 40 per cent.
What about other quasi-frontier markets in the region for PE. Where are they?
There are three interesting markets in the region. There is Iraq, but it is a real frontier market; Saudi Arabia is interesting and it is a serious market with lots of depth and of course, the other really interesting market is Turkey.
Morocco is interesting and we have done a few deals there going back to the late 1990s/early 2000s. Egypt is also interesting and people have done interesting transactions there.
The difference between Iraq and other parts of the region is that Iraq was more of a socialist country and ended up having a lot more state-owned enterprises, but the rest of the region has more family-owned businesses.
Why, if Saudi Arabia is such a huge market, do we hear so little about PE there?
I'll tell you why. The Saudi market is a family-owned market, family-owned businesses. If there is a good deal out there, somebody from the family who wants to do the deal is going to call up his best friend or cousin or his brother and they are going to do the deal. When you come in as a professional private equity investor, unless somebody is going to be nice to you and bring you into their deals, you are going to get the leftover stuff.
When the good deals get done, it is when there is enough liquidity in the market for people to do all their own deals.
So there are not many buyout opportunities then?
No, there isn't. That is my whole point. The good deals get snapped up immediately. There is enough wealthy, smart and knowledgeable people that can take care of them. If you look at how many private equity deals have been done in Saudi Arabia, given the size of the market, there are very, very few.
What kinds of circumstances would make for a preferable PE environment in the Kingdom?
I think it will be a while before we see a vibrant private equity market. We will have to see the breakup of the big family conglomerates and more standalone businesses that don't have very deep pockets to fall back on etc etc. You have to have the situation of the patriarch passing the business on, then the brothers deciding to divide the business etc. There is a generation to wait, in my opinion, but you could get lucky and you could do the odd deal. It is not that there isn't the odd deal.
This interview took place shortly before Basil Al Rahim was killed in a plane crash in Northern Iraq on Friday, 4 February. Al Rahim and Abdallah Lahoud, a Partner at MerchantBridge, were en route from Sulaimaniyah to Beirut when their plane crashed in unknown circumstances over Iraq. Also on board were two JP Morgan employees, Murad Megalli and Javier Zurita and three crew. There were no survivors. Banker Middle East would like to offer its condolences to the families and colleagues of all those who perished.
© Banker Middle East 2011
