A subsidiary of Iran's largest bank, Bank Melli Iran, plans to launch a fund of up to 300 million euros to invest in Tehran's Stock Exchange, providing the first chance for foreigners to take a high-risk gamble on Iran's bourse.
Flying in the face of tightening economic sanctions amid international pressure over the Islamic republic's nuclear programme, the First Persian Equities Fund already has verbal commitments of around 100 million euros with strong interest from European hedge funds and emerging markets funds, said Stephen Austen, managing director of Mehr, a subsidiary of the Tehran-listed Bank Melli Iran Investment Company.
Austen argued that the Tehran Stock Exchange is highly undervalued, with a diversified pool of companies returning strong dividends, but he conceded that the three-year, closed-ended fund provoked an emotional response from potential investors.
"It's black or white - they either think it's great or mad," he told the Financial Times in an interview.
Tehran's market index has fallen about 25 per cent since Mahmoud Ahmadi-nejad won the presidency in 2005.
Capital flight from the country has also increased. The UN has imposed sanctions on areas of Iran's financial system, including the country's fourth largest bank, Bank Sepah, but not Bank Melli.
Washington has pressured Standard Chartered Bank and Credit Suisse, leading foreign institutions in Iran's financial system, to stop clearing US dollars for Iranians, staunching access to capital, Austen said.
Regional bankers say the fund could prompt further US concerns, following recent US calls for gulf states to limit business ties to Tehran.
The Cayman Islands-registered fund, managed in Tehran, has a contingency plan to move the fund into a private sector bank in what Austen describes as the unlikely event that the UN broadens the sanctions regime to Bank Melli. Mehr, which also has offices in the Dubai International Financial Centre, has a solid commitment of 15 million euros from its parent and plans in August to start investing in blue-chip stocks such as car manufacturer Iran Khodro and Arak Petrochemical Company.
Two previous attempts to launch Iranian equities funds failed in 2002 and 2003 amid the last Tehran bull run.
Strong European interest in the offshore fund ahead of its July 31 close highlights the growing appetite for high-risk, high-return investments, Austen said.
The market, with a capitalisation of $37 billion, is trading at a fraction of the earnings multiples enjoyed by Iran's neighbours, while average earnings continue to grow at about 25 per cent a year.