Business | Investment
Standing up to a downturn and crowded field
When Investcorp was set up back in Bahrain in 1982, few in the Middle East had heard of private equity.
- By Roula Khalaf, Financial Times
- Published: 00:04 August 2, 2008
When Investcorp was set up back in Bahrain in 1982, few in the Middle East had heard of private equity. But Nemir Kirdar, the company's Iraqi-born founder, knew he was on to a winning formula as he started tapping into the oil-fuelled wealth of the Gulf to finance buy-outs in the US and Europe.
More than 25 years later, however, the field Investcorp has operated in has become crowded. Private equity companies in the region have proliferated. And a vast group of both regional and foreign companies have rushed to raise capital from the Gulf and capitalise on the latest oil boom.
At the same time, global markets have been in turmoil, afflicting private equity as well as hedge funds and real estate, other lines of business that Investcorp had developed over the years.
The downturn was evident in the company results released late last month. They showed that net income for the year to June dropped to $151.1 million - about half what it was the year before.
Yet Kirdar, chairman of Investcorp, is unperturbed. Times are tough, he says, but he has lived through similar trouble before.
Nor does he see the need to make any radical shift in strategy.
"After 25 years we are still ambitious. Are we still unique? I say yes. We have many competitors but . . . we have a triple A name that we work hard to keep."
His team at Investcorp says the liquidity in the Gulf is expanding so rapidly that there are plenty of opportunities for established groups as well as newcomers. "The Gulf has always been incredibly wealthy and there's always been competition," says Gary Long, the company's president.
"Five years ago business was out of London or New York. Now a number of banks and investment providers are relocating to the Gulf. But it's such a huge pool of money - some $3 trillion, half of it institutional and the other half high net worth individuals. So there is room for a lot of people."
True, some regional private equity groups are offering phenomenal returns to investors. But Kirdar says he is unwilling to take too much risk. If someone had invested in equal amounts in Investcorp's private equity deals since the company started, he says, he or she would have made a 19 per cent yearly return.
"We balance between risk and return and our message to the client is: diversify please," says Kirdar.
The past year could have been much worse for Investcorp. The company was still able to finance some mid-sized buy-outs. Although amounting to less than half last year's total, Investcorp's acquisitions over the past year were worth more than $400 million, including the purchase of a Finnish business information group and CEME, an Italian fluid control component maker.
Meanwhile, in the hedge fund business, which has grown from $200 million in 1996 to $8 billion under management, the company avoided managers who had invested in the US subprime mortgage market, and put money instead with those who had developed ways of shorting the subprime index.
Assets under management have continued to grow - reaching $12.8 billion at the end of June compared with $9 billion the previous year. Although Kirdar says the US and European markets will remain the company's main targets and its areas of expertise, Investcorp has heeded its clients' calls for greater attention to the region.
Over the past year it has raised a $1 billion Gulf growth fund to invest in the Middle East. To diversify its client base, it has also opened its private equity deals to western investors through a fund structure.
Company officials also say that Investcorp could benefit from the controversy over sovereign wealth funds, some of which are now weary of investing directly in the US and Europe because of the risk of a political backlash.
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