$19 billion and counting

That’s the value of transactions conducted so far by Bahrain-listed investcorp. Now, the investment banking giant is turning its attention to the new economy

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By  Massoud Derhally Published  July 3, 2001

Corporate Identity|~||~||~|Would you envisage an investment bank with three offices worldwide as global? How about a bank that is 19 years old, and has concluded over 80 transactions with an aggregate value of $19 billion? Conceived of just 19 years ago as a global bank, Nemir Kirdar set up Bahrain-listed Investcorp in 1982 with $50 million raised from a strategic ownership group of 50 prominent individuals from the Gulf. They added another $50 million in 1986. By the end of 2000 their equity stake had grown to over $1 billion, of which $315 million has been paid back in dividends, and the remainder allocated to the shareholders’ funds, representing an average return on investment of 26% per annum. In total, Investcorp’s clients have invested approximately $5 billion.

The firm from the very start envisioned itself as a global player, acting as an investment bridge that leveraged the wealth in the Gulf region, and invested it in ventures in North America and Europe. In fact, 3-4 years ago, Investcorp was selected as one of three companies at Davos to be looked at as a model for global companies. The track record is indeed impressive, the fundamentals have been predominantly right and Investcorp has warranted the respect not only of financial institutions in the Middle East but those in Wall Street and the rest of the world.

So who is Investcorp and what exactly does the firm do? “We deal with high net worth individuals, merchant families, social security and pension funds, ministers of finance and all kinds of hierarchy,” says Salman Abbasi, member of the management committee and general manager of the Bahrain office.

Apart from the 50 strategic owners, some of whom are board members, Investcorp has 9000 shareholders in total from the GCC countries. The firm is publicly traded on the Bahrain Stock Exchange and is subject to the scrutiny and supervision of Bahrain Monetary Authority. Investcorp’s employees own 37.5% and 21.5% is owned by a group of the firm’s clients, allocating 59% of the firm to the management and founders.

Investcorp does not really play a role in the placement of Middle East money regionally. The reasons seem compelling given the lack of liquidity, transparency and a fragmented banking industry in the Middle East. The firm has four competencies in its business: corporate investment, real estate, asset management and technology investment.
||**||Lines of Business|~||~||~|
Corporate investment is the largest of the four, with two thirds of the firm’s acquisitions in North America and the remaining portion in Europe. “The reason we go to the US and Europe is because we have firm criteria agreed upon from the very beginning and endorsed by our shareholders,” explains Abbasi. Investcorp’s approach to seeking out investments is meticulous. The firm wanted to be in an environment that is conducive to, and complementary with, its strategy for organic growth, manageable risk and a promise to realise the potential of its investments.

“We realised that investors wanted to invest in a place where we have those investments readily available and have market opportunities,” says Abbasi. Having the right management is equally important. According to Abbasi, the firm wanted to be in a place where the right management is available in the event that any of the acquired businesses’ management needed to be replaced at short notice.

Liquidity and access to capital markets also play an essential element in the international operations of the firm. “We want to be able to finance whatever we buy and have readily available financing at all levels, including senior debt, high yield financing and subordinated debt,” says Abbasi. An equally important reason for going abroad is the need for a sound and comprehensive legal system, to advise and protect the firm in its day-to-day operations and the businesses it undertakes.

Perhaps, one of the most important factors though, is the stability of the investment environment and market conditions to the firm’s corporate investment transaction cycle, from acquisition, financing, placement and growth to realising profit. “We want to invest in a place where we can exit the way we enter. We want to be able to exit as smooth as we were to enter. If you look at the five criteria (available investments, right management, liquidity, legal infrastructure, stability) none of them are present in the Middle East,” Abbasi says.

Over the past 19 years, the publicity shy firm has made some high profile acquisitions, most famous of which were Tiffany & Co., Saks Fifth Avenue, Chaumet, Breguet, Ebel, Mondi and Gucci. Investcorp purchased Tiffany & Co. in 1984, which is considered one the best deals it has made to date. The acquisition had a return of 160% per annum, and when Investcorp took the company public, it made more than six times its purchase price of $191 million. “Gucci was another very successful deal but then we held it for a longer period and therefore the return was a little bit less,” says Abbasi.

The company bought Gucci, the Italian fashion house, for approximately $300 million and realised close to $1.7 billion when it floated the company. Investcorp also acquired Saks Fifth Avenue, the famous fashion retailer, for $1.6 billion. Following the IPO in 1996, about 1/3 of the investment was realised through a secondary offering. Later on, some of the investors sold their shares and currently about one third remains unrealised, awaiting the right circumstances and business environment. The firm has also had other successful deals that had nothing to do with luxury. Mueller which dealt with fire hydrants, had an 80% internal rate of return (IRR), Prime Equipment close to 100% IRR, and Simmons also performed well.
||**||Past and Present Acquisitions|~||~||~|
However, not all of the deals have been a success story. Investcorp ran into trouble when it purchased the transportation and trucking company Burnham. When Investcorp converted the company to logistical services, with IBM as its biggest customer, followed by Xerox, it essentially became an outsourcing business. “Business started fine when we changed the nature of the business, but then a few things happened. Burnham lost a few contracts and the straw that broke the camel’s back was the loss of IBM business,” explains Abbasi. Burnham needed more money to grow the business, and outpace competition, but that was not available. It had been with Investcorp since 1988.

Burnham filed for bankruptcy and Investcorp had to write off an investment worth $304 million, of which $191 million was against risk reserves, according to Elisabeth Jackson-Moore, managing director of Moody’s Investor Services in the Middle East. Investcorp’s bottom line suffered as a result. The firm’s net profit fell 44% in 2000 to $70 million, a return on equity of 9%.

Commenting on the Burnham episode, Abbasi says, “We were actually in the process of selling it but with the loss of the contract of IBM it became less valuable for us. That was the main reason for the decline in our profits. Otherwise, 2000 would have been a record year had the financial environment and markets been better and the high yield funding not disappeared. We were not able to sell companies that were ready for sale just because the buyers were not able to finance them, either through high yield or any other means. Had we been able to sell them we could have had a record year.”

The perception in the investment arena is that Investcorp carries out leveraged buyouts, revives companies and when they improve either sells them or takes them public. Abbasi does not feel that paints an entirely accurate picture of the firm. “Sometimes we do buy firms that are struggling: one time we bought a company out of Chapter 11, but that is not the criteria we work with. Most of the companies we buy are very good and healthy companies. Every opportunity has some potential that needs to be unlocked either through financial engineering or other strategies.”

The firm has in place steps to recapitalise acquisitions. It involves securing financing from international financial institutions and the placement of equity. Investcorp underwrites the placement of equity until the process is complete. A portion is placed with clients and the firm retains a small percentage for its own account. The remaining portion is reserved for the acquired businesses’ management.

Once the holding period, which is approximately 5 years, is over, Investcorp’s exit strategy is either to sell the acquired entity privately or conduct an initial public offering (IPO). The bank debt is then repaid and the increased equity value is returned to the respective clients. According to Abbasi, “80% of equity is offered to our investors in the GCC at a minimum of $200,000 through our investment placement marketing team.” Any investor who entered each investment on an equal basis would have received a return of 26% per annum.

“Sometimes management has great ideas and they see where the business can go if they only could have additional funds, investments or a freehand to do certain things. That is where they find it so useful when we come and do a management buy- out together with them and support them; conduct due diligence; endorse their plan and work together to achieve the objectives,” says Abbasi.
Investcorp does not like to interfere or micromanage its acquisitions. “We always find challenges, and at times if the management misses the plan here or there, we work with them and support them as long as we don’t lose confidence in them. We sit on the board and if we find that there are problems and surgery is needed we don’t hesitate to do surgery. If we have to replace management we will do that, but you cannot afford to do that more than once because you lose time,” he says.
||**||Investment Strategy|~||~||~|
To date, the financial structure of transactions has been extremely important and Investcorp builds on its own understanding and criteria to determine what suits the acquired company without burdening it with debt servicing or leveraging it very highly.

Investcorp’s mandate from the start was to provide investors with the kind of investments that would suit their portfolio at a reasonable level of risk in areas where it would be difficult for clients to reach such investments. According to Abbasi, “Someone may want to go and buy a business somewhere in the US and may probably do it, but the most difficult thing is what to do after that, to manage it in the post acquisition. This is what we do ourselves and where we add value by conducting our due diligence in the post acquisition.” There is no absent owner; Investcorp is present all the time. Its people are on the board and look after the business and company details. When the target value is attained, and the multiples and profitability are right, Investcorp executes the sale.

Investcorp competes with international firms, like Clayton, Dubilier, Hicks, Muse, KKR, and at times competitors have bid over the same deals it has competed for. However, the firm has partnered with some of the competition, given the upside for a productive and supportive relationship with its European and American counterparts. “We do not really compete with regional players in the Middle East. Many times we find some of the big players like Goldman Sachs, Merrill Lynch, CSFB and Morgan Stanley either working with competitors, competing directly with us, or working with us as our advisors/partners, and eventually participating in some of our deals. At times they make it a condition that they would like to take 5-10 % of a deal. We welcome that as it is constructive,” says Abbasi.

Investcorp concludes 5-7 deals a year, ranging from $100 million to $2 billion in value. According to Abbasi, the number of deals is determined simply by the constraints of time necessary to carry out due diligence, become familiar with the company and management, and examine the strategy and placement of equity. “This year, until now, we have not completed any deals because the markets are tight. We hope to conclude 3 to 4 deals by year end,” says Abbasi.

Certainly, there is pressure on profitability. However, Investcorp is not a typical venture capital firm attracted to any prospect with the customary return of 34%. A return of that level is viewed as high risk and certainly not easy to come by given the current volatility and market conditions. In any given year, the firm receives between 200 and 250 proposals to review, of which 20-30 are short-listed. “We have to be realistic, we do not target more than 20% return on investment (ROI). Tiffany was 22-23%. Prime equipment was 21%, but we have achieved 80% and another one was 160%. The upside potential is great but we remain realistic,” says Abbasi. The firm shies away from hostile take-overs. Most of its deals were completed alone, but some financing from banks has taken place.

Investcorp’s real estate division was set up in 1997, and enables investors to participate in long-term real estate developments. The firm’s New York office generates and manages property investments, including retail properties like the Somerset Shopping Center and the Catalina Centre in Florida, and hotels like the Pacifica Real Estate Group of Santa Barbara, which includes Shelter Pointe, and US residential properties, like Magnolia Vinings. To date, the division has completed 22 acquisitions worth approximately $400 million.

Some in the industry may question Investcorp’s venture into asset management. Abbasi downplays doubts. “We look at what investors want, and what they expect from us. We also look at what our core competencies are, and what we can do without going outside our territory. Now we find ourselves in all the segments of our portfolio,” says Abbasi.

The firm’s asset management competency was started in 1996, with an objective to realise in the medium term, risk-adjusted returns with a low correlation to traditional asset classes. Investcorp manages its liquid assets through six funds, each with its own risk return profile; the Relative Value Fund, Directional Strategies Fund, Diversified Strategies Fund, US Hedge Equities Fund, Technology Hedge Equities Fund and the European Hedge Equities Fund. The business has been profitable with close to $2 billion in assets under management. “In asset management, we are doing very well and have been meeting both industry targets as well as our own. We were yielding returns of about 14-15% last year and we are taking advantage of the volatility and are making money from the markets,” says Abbasi.

Those in the financial industry, who characterise Investcorp as one of the largest venture capital firms in the world, would probably consider the firm’s new technology segment as a natural evolution of the firm’s proactive yet conservative approach to investing. Technology targets investments in the new economy that provide products and services made possible by digital technology, telecommunications and the Internet. Market volatility has not really affected Investcorp’s technology investment business.

Abbasi attributes this to the fact that, “we came in late into technology and were not engaged at the peak when things were expensive. We were still at a stage of studying and trying to understand the business and the vision. Overall, we were not caught off guard and we were extremely conservative. We are a very conservative firm.” The firm’s technology investments include Belenos, a network solutions consultancy; DotCast, a high-speed broadband digital network; httprint, Inc., an online B2B marketplace serving the North American and European printing sectors; and i-Hatch, a New York based venture capital fund, focused on the Northeast corridor.
||**||Corporate Culture and the Future|~||~||~|
Recently, Investcorp has been in the process of raising $300 million in the syndications market. The syndicated bank loan is now close to $450 million and it has received in excess of $600 million in commitments from major financial institutions. The new facility will be used to refinance maturing debt. The firm has also issued 200,000 Series A Preference Shares at a nominal value of $1,000 per share with a total issue of $200 million. The two recent developments will enhance the firm’s ability to undertake and finance new initiatives while sustaining customary levels of growth.

So how does Investcorp measure its success? What are the metrics applied to assess its performance to date? Integrity, professionalism, and teamwork are the underlying principles and according to Abbasi, “clarity of strategy and vision is the most important driver of our success. From day one we knew what we wanted to do. We stuck to that and we never changed our strategy or vision—much like a train going in one direction from one stop to the next.”

Investcorp has been compared with and referred to by many as the Goldman Sachs of the Middle East. However, Investcorp has worked very hard over the years at building its own brand name. Although the firm is public, its corporate culture is very much about partnership. “Team work is part of our culture. In this firm we do not have room for individualism. It is partnership driven and a culture where we take decisions together, debate and consult with each other,” says Abbasi. Indeed, the firm’s offices are designed in such a way to allow executives to see each other. Offices have large windows, allowing those inside to observe what goes on outside and vice versa. All of Investcorp’s offices, in Bahrain, London and New York, have the same signature mahogany wood design, indicative of the firm’s strong franchise.

Nemir Kirdar, the CEO, co-ordinates Investcorp’s activities. “He is the vision of the company—he drives it and draws the strategy of the firm along with the board,” says Abbasi. With $19 billion in transactions so far, Investcorp is arguably a jewel in the crown of Middle Eastern banks. ||**||

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