Investcorp: The house that Kirdar built

Bahrain’s Investcorp has carved out a solid reputation over the past 30 years, but how is its founder preparing the firm for the future? Published in Euromoney, April 2013

High-profile Middle East investors picking up trophy assets are a mainstay of the market in such cities as London, Paris and New York these days. What is less often remarked on are the low-key Gulf buyers, content to undertake investment without making a song and dance about it. But for the past 30 years that is what Bahrain-based Investcorp has been doing, ever since it took a stake in the Manulife Plaza, an office building in Los Angeles in 1983.

The company, which calls itself a bank but is really more a combination of hedge fund and mid-market private equity house, also has offices in London and New York, and likes to think of itself as a bridge between the surplus wealth of the Gulf and the investment opportunities of the west.

When in Europe or the US, Investcorp likes to blend in rather than stand out. That much is obvious from the look and feel of its office on Grosvenor Street in London’s Mayfair. Designed to a template that is copied for all of its offices, it mimics the old-fashioned world of a traditional merchant bank, with thick carpets, wood-panelled walls and conservative art work. On the day we meet, Nemir Kirdar, the 76-year-old chairman, chief executive and heart and soul of the company, continues that theme with a three-piece pin-striped suit.

Euromoney first spoke to Kirdar 30 years ago, when the former Chase Manhattan banker was just setting up Investcorp, drawing in many of the most prominent political and business families in the Gulf as investors and clients. It was a novel venture for the region, subordinating the egos of wealthy individuals into a western-style investment house. In subsequent years, the Middle East has gone through several periods of boom and bust, and many individual fortunes have been made and lost. However, the basic model that Investcorp has pursued has not fundamentally changed.

"There are many companies in the industrial world that may have been started by the grandfather who then trained his son to run it after him," says Kirdar. "But two generations on, the founder’s grandchildren are less interested and may want to sell it. I said that if we could buy a promising company with good potential and present it to our investors in the Gulf, then we’d be rendering a service that was not previously available to them.

"That’s still the model today. The vision was to bring to a Gulf investor’s attention investments to which he would not otherwise have access. If he wants to invest in a publicly traded equity like British Airways, he knows how to go to his broker and acquire those shares, but if he wants to invest in a privately owned chocolate factory in Chicago, he won’t know about it; that’s where we can play a useful role."

Investcorp’s model is to look for deals and make an investment before offering its clients the opportunity to come in on the deal by taking a small percentage off its hands. The company itself tends to retain 10% to 20% of the investment in question.

"I don’t check with the clients what they want," says Kirdar. "I look at what is available for sale, and if we’re convinced that something is good enough for us, we should be able to present it to our clients as something that might be good for them too." He reckons Investcorp has placed $40 billion in investments over the past 30 years.

One of the earliest deals was the purchase in 1984 of Tiffany from Avon Corporation. Investcorp floated the luxury jeweller on the stock market three years later. That purchase is one that Kirdar and several of his colleagues cite as among the best transactions they have done.

"There have been some challenging deals that have caused me to lose even more of my hair," he says. "Tiffany, for example, was a very important deal. It was almost lost by the team that we sent to do the negotiating. When they told me we’d lost it, I thought I should go and see what I could do about it, and managed to revive it. In the end, it was probably the highest earner of all our deals. Back then, Tiffany did not have a single office outside the US. Today they’re everywhere. We helped them to come to the UK and Germany and other places."

Other transactions followed in the luxury sector, including Breguet and Chaumet in 1987, Gucci in 1989 and Saks Fifth Avenue in 1990. More prosaic companies have passed through the Investcorp portfolio too, such as convenience store chain Circle K, UK motorway service station group Welcome Break and Avecia, a speciality chemicals maker. The most recent came in February when Investcorp took a controlling stake in Aberdeen-based oil-services company Hydrasun via its Gulf Opportunity Fund for an undisclosed amount. Real estate investments have continued throughout the company’s history too and, since 1997, it has been active in the hedge fund market.

The nature of the investment game means that some deals have not come off, as Savio Tung, head of the corporate investment business in the US, acknowledges. "Sometimes we make the right assumptions, sometimes we make the wrong assumptions," he says. "We got into UK printing presses in 1998. We thought we could consolidate Watmoughs Holding and the British Printing Company, and drive efficiency and be a major printing company; that proved not to be right. We combined them and changed the name to Polestar. We were able to do some integration, but we didn’t see the industry trend of people reading fewer newspapers.

"We lost money there; it was a big transaction, so that was painful for us. For me the lesson was to avoid the assumption that we can take two giant companies and integrate them. The other lesson for me was do not try to do big deals."

The company’s track record of making a profit in all but one year of its 30-year history points to the fact that the successes have generally outweighed the mistakes. The one time that was not true was in the wake of the 2008 economic crash, when Investcorp had to write down the value of its assets by $1.1 billion and book a $780.6 million loss in its results for the year to June 30, 2009.

The episode was a timely wake-up call for the company, according to Hazem Ben-Gacem, who heads the corporate investment teams for Europe and for technology investments. Like many others, Investcorp had allowed itself to be sucked into an unhealthy position with debts in the boom years that had preceded the bust.

"If you remember back to the period from 2005 to 2007, it was a time of complete optimism and very liquid markets," he says. "We got tempted in a handful of situations to be very aggressive on the financial leverage for our portfolio companies. In certain situations we overleveraged some of our investments. The availability of debt maybe lured us to go down that path.

"It was definitely a bit of a wake-up call, but you see cycles that will throw your business plan off and you live through them and you appreciate it is not the end of the world. Since 2008 a significant amount of our time has been spent working with our portfolio companies. Many of our businesses have, with patience and support and in some cases additional capital, turned the corner."

Even since then, Fitch Ratings has raised concerns about Investcorp, including its volatile profitability, its level of debt, and the amount of co-investments. One of these issues was at least partly addressed with a deal to renegotiate some debt maturities last year. That led Fitch to change the outlook on its double-B rating for Investcorp from negative to stable. There has also been a reduction in co-investments as a proportion of total assets under management. This fell from 30% in June 2007 to 10% by December 2012, with the drop in hedge fund co-investments being particularly notable.

Some of the more recent deals by Investcorp have been done without taking on any debt, such as the December 2012 purchase of Swedish luxury goods maker Georg Jensen for $140 million from another private equity group, Axcel Capital Partners.

Senior executives at the company say that Investcorp is a tough working environment and while some mistakes and failures are inevitable, it is interesting that Kirdar says that one of the biggest failures has been making the wrong hiring decisions, recruiting people who do not fit in with the culture of the organization he has built.

"A lot of the mistakes we’ve made have been my mistakes," he says. "I’ve chosen people who appeared on paper to have excellent skills but who were unable to fit into our culture. We were never shy of correcting those mistakes."

Even so, the fact that there are numerous senior executives that have been with the firm for decades suggests that it can be a rewarding experience for some. Michael Merritt, for example, was Kirdar’s first hire and is still at Investcorp, these days as chief administrative officer. Tung joined in 1984 and Ben-Gacem signed up in June 1994.

Investcorp has avoided other potential pitfalls too. Although it has started to make investments in the wider Middle East in recent years, such as vehicle leasing company Automak Automotive Company in Kuwait and menswear retailer Orka Group in Turkey, it has not done any deals in the countries directly affected by the Arab Spring.

The events of the Arab Spring are a delicate issue for a company like Investcorp, which is based in Bahrain, a country where there has been more unrest than in any other Gulf state. Some big financial institutions left the island nation in the wake of the turmoil two years ago while others reduced their staffing levels. That is probably not an option for Investcorp, which has Sheikh Mohammed Bin Isa Al Khalifa as one of its board members. As well as being chief executive of Bahrain Telecommunications Company (Batelco), he is also a member of the country’s ruling family.

Kirdar, who lives in London, says of the unrest in Bahrain only that: "It had no effect on our business. We are dealing with people who have excess money, and they want to invest. We deal with international banks; we have not been deprived of any financing."

When Investcorp was being set up in the early 1980s, Bahrain was the pre-eminent financial services hub in the Gulf and the obvious place to establish the business. Since then, however, a number of other financial centres have emerged, most notably Dubai but also to a lesser extent Doha and Riyadh. Kirdar says he might be tempted to opt for another location were he setting up the business today. "

At the time Bahrain was the only viable place," he says. "It was sophisticated, with a very competent central bank with high levels of scrutiny. We wanted to be regulated. We were building an institution and wanted to be completely transparent. Today, if we were to do it again, we might consider other locations. We might still choose Bahrain, but now there are other places that offer similar advantages. That was not the case at the time."

The company is at least hedging its bets a bit, by opening offices in several other regional cities. The first of these has already opened, in the Al Faisaliyah Tower in Riyadh. Abu Dhabi has also granted a licence to Investcorp, and the company is looking for an office location there. It has applied for a licence in Qatar. If the expansion continues, the next place will probably be Kuwait.

These moves make sense given that the company’s base of around 1,500 Gulf investors is heavily skewed towards the Saudi market. Around half of its investors are from there, with a further 20% from the UAE, 15% from Kuwait and the rest divided between Bahrain, Qatar and Oman. The new office network should give Investcorp the kind of on-the-ground contacts that will be useful as it looks to expand and potentially look for deals in the region.

"Being in the market will link us with the deal pipeline and we’ll see what’s going on in the market. Staying away from it works some of the time, but some of the time you miss some of the deals and transactions," says Mohammed Al-Shroogi, president of Gulf business at Investcorp. "The Gulf is the backbone for Investcorp. This is where the money is. There are deeply rooted relationships between Investcorp and its clients, especially in Saudi Arabia, and you need to be close to your clients. We have more than 1,500 individuals and institutions as clients in the Gulf. They have trusted us for the last 30 years, and we need to keep this relationship going forward with them so it requires a lot of visits and a lot of calls."

The new offices could also form the basis for a new line of business for Investcorp: offering advisory services for family businesses. It is an area that Kirdar is keen on exploring, although the nature of the business world in the Gulf means that is not something that is likely to happen quickly.

"The region has a lot of family conglomerates that are involved in manufacturing, travel, insurance and so on," Kirdar says. "Some day, when these assets are transferred to a younger generation, those businesses will require rationalization, so the region will need merchant banking services like those offered by the investment banks and merchant banks that played a similar role in the US and UK. I’m hoping Investcorp will evolve accordingly.

"If we see that the needs of family businesses are evolving, we should be evolving too in response to those needs. The Middle East is not an industrialized society. As yet, there are no grandchildren selling the businesses set up by their grandfathers. But some day there will be."

In the meantime, the focus for revenue generation and deal-making remains the US and Europe, with the US in the stronger position these days.

"In the last year we’ve been a lot more cautious about doing investments in Europe compared with the US," says Tung. "That will change with time and I’m sure Europe will rebound, but right now the US presents the best opportunity from a private equity and a real estate investment standpoint and even in terms of our hedge funds business. In the US it is a wonderful time for private equity. It’s certainly better than a few years ago and even better than before the crisis. Interest rates are low, US corporations are more efficient and the government is keen to support key sectors like construction and automotive."

It is not just as a source of deals that the US is important for Investcorp. It is also its favoured recruiting ground for new staff. The CVs of Investcorp staff are awash with references to time spent at such banks as Citigroup, Goldman Sachs, JPMorgan and other bulge-bracket firms.

"As the most successful economy in the world, the US has set the standards," explains Kirdar. "I would like to see people who’ve been educated there and who’ve succeeded there helping us to achieve our objectives. It’s not nationality that’s important – we have people from 37 nationalities in Investcorp – it’s exposure to US business and business standards."

It was its effort to bring western business practices to the world of Gulf investment that marked out Investcorp from the crowd when it was first set up and arguably helped to convince investors to entrust their money to Kirdar and his colleagues.

Having one foot in the west and one in the Gulf has paid off for the firm in more ways than one. In particular, at a time when many investment houses in the west have struggled since 2008, Investcorp has been able to rely on an investor base that has been buoyed up by high oil revenues.

"We are fortunate enough that our investor base has continued to have a strong liquidity position throughout the crisis and we have had a steady and very strong momentum of investment from our investors and our corporate investments. So we are trying to take advantage of that," says Ben-Gacem.

The company’s experience in recent years also offers an insight into the different dynamics across all three regions of the US, Europe and the Gulf.

"In north America, the timeframe for deals has shortened, driven by very robust debt markets and a quite active private equity market," adds Ben-Gacem. "Getting a deal signed from beginning to end in five weeks is not unheard of. In Europe it is taking a bit longer. The process is definitely longer than before the crisis. Investors are taking more time and there is more thorough scrutiny of business plans, particularly if they are based on assumptions to do with sales in Europe.

"In the Middle East it continues to take a long time to get transactions done, less because of the process itself but more because it takes longer for shareholders to get comfortable and make a final decision to go ahead with a sale or not. Many processes take six or 12 months, and even then the owning family may just decide to sell the shares between themselves and not involve an institutional investor. That is probably going to be one of the largest hindrances to the growth of private equity businesses in the Middle East."

Those dynamics mean that Investcorp is likely to remain an unusual case in the Middle East, where private equity has not developed in the same way as in other markets. The closely held nature of many family-owned businesses and the dominant role played by state-owned enterprises in other sectors of the economy mean that the opportunity to do deals will remain limited. On the other hand, the likelihood is that the region will continue to be a viable and valuable source of clients for Investcorp in the future, keen to diversify their investments beyond the region.

As such, Kirdar’s dreams of developing its advisory business in the region might take longer to be realized than he would like. And despite its strong track record, not everything that Investcorp had hoped to achieve when it set out has been realized. In Euromoney’s original profile of the company in September 1983, Investcorp’s Bahrain general manager, Yusef Abu Khadra, said that the company aimed to underwrite new equity issues, help companies go public and promote the region’s stock markets.

"We have not done that yet," says Kirdar. "Some of the forecasts made by Yusef at the time may still materialize in due course. So far we’ve concentrated on investment products in the western world for which there is demand from our investors."

Perhaps the biggest challenge the company will face in the coming years is not the vagaries of international markets or the details of specific deals or even trying to expand into corporate advisory work in the Middle East, but learning to live without its founder.

Senior executives talk in glowing terms about the role Nemir Kirdar has played in the company and describe him as a visionary while also saying that he has built an institution, not a personal empire. This seeming contradiction may not be easily fixed, but Kirdar himself already seems to have at least half an eye on a time when he will no longer be at the helm.

"Building an institution definitely implies there’s a time for people to move on and be replaced," he says. "My mission is to see that we have the right machine. I have high confidence that that machine is now in place. There will come a time when the company needs leadership at the top to replace me. My mission will not be complete until I’ve achieved that last part and let someone else take my place. I’d like to see a leadership change at the top in the next 10 years."

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