Middle East Investment Banks of The Future

A collection of four articles published in Euromoney, January 2012: Jadwa finds opportunities in tough times

Saudi base gives Islamic specialist a platform for regional expansion.

Jadwa Investment is a Saudi bank, based in Riyadh and operating according to Shariah principles. It works with individual, corporate and institutional clients, offering asset management, brokerage, corporate advisory, equity research and other investment banking services.

The bank gained its investment banking licence from the Capital Markets Authority in 2006. Its founding partners include prominent local individuals, not least its chairman, Prince Faisal bin Salman bin Abdulaziz al Saud.

The backdrop over those five years has not been easy for the firm, according to chief executive officer Ahmed al Khateeb, who had headed HSBC’s private banking operations in Saudi Arabia.

"We have been living in interesting times," he says. "We made the decision to start Jadwa in early 2006 and immediately we saw a dramatic collapse of the regional stock markets in February 2006. By the time we had started to get good momentum in our business we had the 2008 credit crisis. This year, [we had] the EU sovereign debt crisis and the Arab Spring."

Despite such difficulties, Saudi Arabia can rely on its oil exports to ensure its economy remains active, particularly with the high oil prices of recent years. For investment banks, however, there is the added difficulty that the market remains in large part closed to international investors. According to Al Khateeb, this undermines the growth potential of Jadwa and other banks, although there are hopes that the regulator might open up the market.

"The closed nature of the Saudi market has an impact on the investment banks," he says. "We support fully any moves by our regulators to open up the market to foreign investors. It would improve market liquidity and slowly institutionalize the investor base. For example, if Saudi Arabia was to join the MSCI Emerging Markets Index, we would represent 3% to 4% of the market weight and we should expect $8 billion to $10 billion from fund managers into the Saudi market."

Jadwa has remained focused on Saudi Arabia and, to a lesser extent, the wider Gulf Cooperation Council market in its first five years of operations. This is likely to remain the case, but Al Khateeb does not rule out doing some business further afield.

"Our primary market is Saudi Arabia and the rest of the GCC region, and these markets will remain strong for the coming five to 10 years and so these markets are keeping us very busy," he says. "However, from time to time we see attractive opportunities elsewhere, which we consider. For instance, we invested about £150 million in UK property in 2010, based on strong client interest and our own positive view of the opportunity."

In terms of economic sectors, Al Khateeb says Jadwa has identified particular interests for the coming years. "We develop products that fit our views on key themes, while meeting our clients’ tenor, liquidity and yield requirements," he says. "Since 2010, we have been looking for opportunities in health care, education, agriculture and energy."

The recent financial turmoil has seen many international investment banks scale back operations in the Gulf region, but Al Khateeb says the changing nature of the market also offers an opportunity. "The recent global crisis has generally been a net negative for the banking sector, but it has allowed Jadwa to differentiate itself from competitors," he says.

Narrow focus pays off for GulfMerger

Kuwait-based firm has big ambitions in the Gulf’s growing middle market.

GulfMerger, set up in 2007, is an independent investment bank providing advisory services for mid-market mergers and acquisition deals. The bank is based in Kuwait, and has offices in Saudi Arabia and Lebanon.

The company has kept a narrow focus and not expanded into other areas of investment banking. Yann Pavie, its founder and chief executive officer, says this approach has paid off for the firm, which was named by Euromoney as best M&A house in Kuwait in 2008 and 2010.

"We set up with a focus on mid-market M&A deals," he says. "We thought regional firms were trying to do too many things too early, and focusing would allow us to have more of a competitive edge. As a result, we’ve done the most M&A deals in the region compared with any of our peers. We’ve done deals in almost every possible sector."

The bank typically gets involved in transactions with a value of $25 million to $250 million, although it has done some work on larger deals worth up to $400 million.

Among its more recent publicized deals, it acted as the buy-side adviser for Kuwait’s City Group Company when it bought a 51% stake in the Jordanian firm Comprehensive Multiple Transportation Company in March 2010. It also acted as sole adviser to the Kuwait-based Alrai Media Group on raising $53 million for a five-year acquisition finance facility in June of that year.

The bank is now advising on nine mid-market deals in the Saudi market alone. It employs 14 M&A bankers, with recent hires including Ramzi Abukhadra and Ghiath Refai, formerly of JPMorgan Chase and Morgan Stanley respectively, to work in its Riyadh office. It is also recruiting staff for its new office in Beirut.

Most of the clients come from within the region, but the bank is in talks with companies from beyond the Middle East that are weighing up a possible entrance into the market. "This is an area that has potential and we’d like to play a role in that," he says.

Alongside its core M&A advisory services, GulfMerger occasionally makes its own investments. According to Pavie, this is done on an opportunistic, rather than a structured, basis, and it has made two to date, in the telecoms and retail sectors. There are longer-term plans for the bank to expand into a wider range of product areas and countries, with the next market likely to be the UAE. However, it seems unlikely it will rush the process.

"Our vision is to build GulfMerger into a diversified mid-market investment bank, with a presence across every single geography in the Middle East," says Pavie. "But we need to be realistic and we have to be systematic in our approach. In the next three to five years, our focus will continue to remain on the M&A side, but with a broader geographic footprint."

GulfMerger has not released details of its financial performance, but Pavie claimed it has grown its revenues every year and is profitable. Given the difficulties many investment banks have faced in the region in recent years, the relatively cautious approach taken by GulfMerger appears to be working well.

NBK Capital out to follow in parent’s footsteps

National Bank of Kuwait’s universal banking ambitions are closely tied to the growth of its investment banking and markets unit.

NBK Capital’s ties to its parent bank, one of the leading financial institutions in the Middle East, are a vital factor in its growth, providing access to a far wider range of clients and deals than it might otherwise have. NBK Capital works closely with the international banking group at NBK and only expands into markets where its parent bank has a presence. NBK is active in 16 countries around the Middle East, Europe, Asia and North America, offering plenty of potential for further growth by the investment banking division.

Chief executive officer Salah Al Fulaij says this close relationship with its parent will remain at the centre of NBK Capital’s strategy in the future.

"We’re an added value to the commercial bank," he says. "We will always be an extension for NBK. It’s an advantage for us, because if a foreign client is looking for an investment in Kuwait or vice versa they usually come to us because they know we have the reach and know the markets."

The advantages that come with having a large parent company are all the more welcome in the troublesome market conditions that now prevail. NBK Capital does not release its own financial data, but the indications from NBK’s consolidated accounts are that profits have been under pressure.

The profits of the investment banking and asset-management segment of NBK have declined from KD15 million ($54 million) in 2008 to KD13.3 million in 2010. During the same period, net operating income fell from KD27.3 million to KD24.1 million, although the value of its assets did rise, from KD52.8 million to KD77.9 million. The falling investment-banking profits are in contrast to the record of NBK group as a whole, whose profits rose from KD257.8 million in 2008 to KD302.9 million in 2010.

The investment banking arm was set up in 2005 and has offices in Kuwait, Dubai, Istanbul and Cairo, and employs more than 170 investment professionals. It offers financial services in four main areas: alternative investments; asset management; brokerage and research; and investment banking.

The brokerage division covers the capital markets in Kuwait, the Gulf Cooperation Council (GCC) and other international financial centres, with online brokerage covering the six GCC markets. The research team, which was set up in 2007, is focused on companies in the MENA region. It has been gradually expanding and now covers companies in some 10 market sectors, including construction, telecoms, retail and transport.

The investment banking division is divided into financial advisory, equity capital markets and debt capital markets teams. NBK Capital said it has completed more than $3.6 billion in merger and acquisition (M&A) transactions since 2005. Generally, it focuses on the mid-market segment, rather than very large or small deals. Among the biggest deals it has been involved in was as the buy-side advisor to NBK when it acquired a majority stake in Al Watany Bank of Egypt in 2007 for $516 million, in what was the largest acquisition of a private sector bank in that country.

Al Fulaij acknowledges that business has been tough in recent years. "On the investment banking side and the equity capital markets, it has been difficult," he says. "In Kuwait and the region, there have not been a lot of M&A deals, and in Kuwait really no meaningful IPOs have taken place."

Brokerage volumes have also been low. However, there have been some areas where business has been stronger, such as in the debt capital markets. The bank advised the local United Real Estate Company on a KD40 million bond issue in June 2010 – the first bond issue in the local currency for two years. NBK Capital followed that with a KD50 million bond issue for local consumer finance firm Commercial Facilities Company, which was finalized last month.

"We’ve got two more bond issues lined up," adds Al Fulaij. "We see more opportunity for bond and sukuk [Islamic bond] issues, and also restructuring. Those companies realize it’s not going to be a quick, V-shaped recovery and they have to accept the new norm of the current environment."

Al Fulaij said that government-backed projects will provide a key source of business for the future. The government launched a five-year, $100 billion development plan in 2010, which, if it goes ahead as planned, could provide a huge boost to the local economy and should provide plenty of work for the country’s investment banks, not least through the planned public-private partnership (PPP) schemes.

"Where we see the opportunity for the future is the government development plan, starting by advising the government on its PPP programme," says Al Fulaij. "The government development programme is the big play."

Star of the future: Sarah al Suhaimi, Jadwa Investment

Sarah al Suhaimi took over as head of Jadwa’s asset management division in June, after the departure of Fadi Tabbara. She has been with the company since May 2007, soon after the bank was set up and a month before it launched its first fund. She was in charge of portfolio management before her recent promotion.

The division has been key to the success of the bank. It is the only area that has managed to grow its revenue every year, from SR15 million ($4 million) in 2007 to SR95.9 million in 2010. Indeed, in 2008 and 2009 it earned more revenue than any other part of the bank. Its growth is helping to bring new clients into the business, expanding from its initial focus on ultra-high-net-worth clients to include Saudi and regional institutional investors.

"In 2011, we won several mandates from insurance companies and large government-linked institutional investors," says Al Suhaimi. The asset management division has 20 funds, which invest in public and private equity, and real estate. The latter is focused on the UK market, while public equity funds invest in regional and international markets. The private equity activities are all in Saudi Arabia.

Maintaining growth will be a challenge for Jadwa, given the market conditions around the region. The number of investment firms in Saudi Arabia declined from more than 110 in 2008 to 94 by the end of 2010 and has continued to fall.

"The weak regional stock markets, combined with intense competition among local, regional and international asset managers, has shrunk and fragmented the revenue pool to levels where we are seeing a steady stream of managers shut down or exit from the market," says Al Suhaimi. "We expect this to continue and accelerate, as client money flows to the more stable managers.