Two leading investment houses in the Gulf are Bahrain-headquartered Investcorp and Arcapita. Both have similar operational and financial strategies and have recorded excellent results up to June 2007 fiscal year-end.
The current global financial volatility due to the credit crisis is likely to restrict both companies’ performance for the fiscal year 2008, although not to any significant degree. However, they are unlikely to be at the record return performance levels of fiscal 2007.
Private equity valuations are likely to fall due to a shift in risk perception and lower market demand. Both institutions are also likely to see a slight increase in funding costs, reflecting global market conditions and the rise in spreads. Leverage deals going forward will be more expensive and more difficult to close.
Hedge fund alternative investment returns are also predicted to be lower in fiscal 2008. Finally, the real estate investment market in the US is undoubtedly weaker although the firms’ strategies are long-term and a weakening in prices may present opportunities. In a worse-case scenario, the sub-prime home loan crisis in the US could end, or at least affect, the investment boom in the region through a downturn in global economic growth and hence lower oil demand and a fall in prices. However, this possibility is some way off. In any case, both Investcorp and Arcapita have good financial profiles with diversified earnings and funding profiles.
Investcorp, driven forward by President and Chief Executive Nemir Kirdar, has led the way in investment for Gulf financial institutions. It was established in 1982 to facilitate the flow of capital from the Gulf into private equity investments in Western companies with high potential for growth and returns in excess of traditional asset classes. From its inception, Investcorp has focused on developing deep relationships with top-tier individuals and prime institutions in the GCC that have a particular demand for international alternative investment products.
The firm’s portfolio includes The Bravern, a mixed-use development in Milwaukee, the US, in which Microsoft has leased 740,000 square feet (68,750 sq m) of space.
Investcorp has helped Gulf institutions in developing a range of alternative investment opportunities, offered through five lines of business – private equity investment in North America and Western Europe; hedge funds principally on a fund-of-fund basis; realty investment in the US; technology investment in North America and Western Europe and Gulf growth capital investment in greenfield projects or buyout opportunities in the Gulf.
The recently established Arcapita acts as a principal and arranger in the acquisition of controlling interests in established companies in the US and Europe, focusing on growth-oriented corporate acquisitions with a total transaction value between $100m (Dh367m) and $1bn (Dh3.67bn). Arcapita looks for companies that have innovative products or services, leading market positions and strong management teams capable of building shareholder value. It counts among its investments Dubai-based Victory Heights Golf Residential and Development Company, which is building a lifestyle residential community in Dubai Sports City.
Corporate acquisitions are funded with a combination of equity and Islamically acceptable financing. Similar to Investcorp, Arcapita underwrites the equity portion of each acquisition using its own financial resources and, where the target company’s capital structure allows, arranges non-recourse financing from leading financial institutions. The equity in each investment is then placed with the bank’s investor base in the Gulf.
Both institutions aim to grow the investments through the holding period with strategic and financial support when necessary, and to exit at the right time and price in order to maximise returns for all stakeholders. Both work with management to monitor the performance of each and every corporate investment and position the company for sale to a financial or strategic buyer, or for an initial public offering. Investcorp differentiates itself from other private equity firms in that investments are normally offered individually to clients on a deal-by-deal basis – a model that reflects Gulf investor preferences for investment discretion, where many high net-worth investors are hands-on.
The long-term track record of Investcorp has been impressive. Shareholders have experienced a 15-fold increase in value, with total annual returns of 20 per cent, during the 25 years of operation. Its reputation has grown internationally with the success, in addition to some high-profile investments.
Investcorp has more than $9bn (Dh33bn) of client assets under management, with a further $4bn (Dh14.68bn) of proprietary co-investments in alternative investment products from its own balance sheet. The management believes it has built an infrastructure to grow its assets under management to $20bn (Dh73.44bn) in the medium-term. Its performance over the last few years placed it in the top quartile versus other alternative investment providers worldwide.
Recently, Investcorp completed the registration of its Gulf Opportunity Fund with the Central Bank of Bahrain. Gulf Opportunity Fund I is the private equity fund of Investcorp’s Gulf Growth Capital line of business.
The domiciling of the Fund in Bahrain offers Investcorp advantages for investing in private equity deals in the region in comparison with funds registered outside the region. It allows Investcorp to structure, more easily and rapidly, joint ventures in the Gulf, as well as to launch new businesses with reputable local and international investors.
Investcorp’s performance in the 12-month period until June-end was impressive. Net income of $302m (Dh1.1bn) was the firm’s highest and an increase of 131 per cent over the past year. Earnings per share, based on ordinary shares outstanding at fiscal year-end, grew by a greater percentage, 155 per cent year on year to $390 (Dh1,432).
Highlights included net fee income of $156m (Dh572.8m), up 21 per cent, client assets under management up 47 per cent year on year, a record $3.4bn (Dh12.48bn) raised from clients, double the previous year’s level of placement and fundraising, five private equity buyout acquisitions in the year with a record equity deployment of more than $1bn (Dh3.67bn), and $2.2bn (Dh8bn) realised from private equity buyout exits, hedge fund client assets under management up 60 per cent to $4.2bn (Dh15.4bn).
Arcapita has total assets of $3.8bn (Dh13.95bn) and an equity capital base in excess of $950m (Dh3.4bn) at June-end. Arcapita has investments with a total transaction value of more than $20bn (Dh73.44bn) in its four lines of business: corporate investment, real estate, asset-based investment and venture capital. For the 18-month period until June, net income was $285.7m (Dh1bn), equating to $190.5m (Dh699.5m) annually.
Investcorp’s and Arcapita’s returns are broadly similar. For fiscal year 2007, Investcorp’s average return on shareholders’ funds was 29.2 per cent and Arcapita’s 28.2 per cent. Return-on-average assets was a high 7.2 per cent for Investcorp and 6.7 per cent on an annual basis for Arcapita.
Rough ride ahead for Gulf's investment houses