Cashing in assets
As more local financial services companies go regional, Sherine Abdel-Razek
speaks to the head of Naeem Holding on the changes, and challenges, in Middle East capital markets
EFG-Hermes, Prime Securities and HC Securities, Egypt's three largest investment houses, tapped the Gulf markets in 2006 by acquiring licenses to pursue investment banking activities in Saudi Arabia, Abu Dhabi and Dubai. Such moves are just the start as these companies change the outlook on investing in the region. Thanks to the oil boom of the last few years, much liquidity is pouring into and out of oil-rich Gulf markets, presenting many good opportunities.
For Naeem Holdings, an investment bank which opened in Egypt less than a year ago, the decision to go regional was on the agenda even before they launched. Shareholders, including high net worth Gulf investors, chose to set up a joint stock holding company according to the free zone system to take advantage of tax exemption on revenues realised at offshore affiliates .
"The cash is in the Gulf, assets are in Egypt," asserted Ahmed Naim Badr, CEO and Managing Director of Naeem Holding. "Investment banks have to make use of this and cater for both." Badr explained that while the increase in oil prices created an influx in liquidity, there is a scarcity of good assets in the Gulf since all the companies are run as closed family businesses. "The situation in Egypt is different, with the privatisation programme providing the market with a variety of assets," he noted.Moreover, Family businesses are opening up more and willing to list their shares in the market . El-Seweedy Cables and Al-Arafa Investments and Consultancies are just two examples.
"Investors think: when I have a partner I add value, as does he, and at the end of the day we both reap the benefits of this new trend," stated Badr. These changes, in turn, guarantee a continuous supply of valuable assets, give room to form partnerships and secure good investment opportunities for our cash-rich clients, he added.
While this will increase the correlation between the local and Gulf markets, a fact that was blamed for the decline in the local stock market through 2006, Badr sees it as inevitable. "The correlation between the Gulf markets and Egypt is normal," he believes. "We all became one regional market. The movement of capital became very fast and the regional expansion of brokerages changed things. Today, the investor does not ask the broker to reinvest in a certain company, but rather asks him to pull out from one market in the region and enter another."
Having a broader outlook, from an international perspective, the region as a whole is to become an investment hub soon. Some 20 years ago, Europe had the technical know- how so it took energy resources from the region and used it to produce final goods and export them to the Middle East, China and India. "This model is totally reversed now," explained Badr. Today, the know-how is provided by China and India which import energy from the Middle East, produce and export the final goods to Europe and the Middle East.
The highest cost component in the production process is the transportation of energy from Gulf states to India and China, and the transportation of the final goods back to those markets and Europe. By moving their plants to the region, cost is cut by at least 30- 40 per cent which means that flocks of investors will be tapping the region soon. "At the end of the day, we have to be present in the region as a whole to tell our clients where the potential lies," stated Badr.
All investment bank activities are benefiting from the expected boom, whether brokerage, private equity, corporate finance or asset management. The competition will be fierce, but Naeem Holding's CEO believes there is room for everyone. "The cake is very, very big and the players are still very few," he asserted, although at the end of the day survival will be for the fittest.
Badr's company began a year ago by buying Nile Investments Brokerage and changing it to Naeem Brokerages, as well as acquiring the Arab International Company for Financial Investments and renaming it Naeem Portfolio Management Company. Naeem Holding also bought another brokerage arm in the UAE, Naeem Shares and Bonds, in addition to Naeem Global Asset Management in charge of two hedge funds targeting the energy market and the Russian market. "All you need to have a larger slice of the cake is the right product; package it and offer it to investors in Gulf or international markets," according to Badr.
Trading Lounge is Naeem Holding's newest product targeting Class A investors. The luxurious lounge is located on the 23rd floor in the Sawiris Tower Buildings overlooking the Nile. It accommodates up to 90 people, who can monitor movements in regional market shares on plasma screens and give buying and selling orders to brokers located on the same floor. "While this targets Class A clients who enjoy being in this environment to take decisions, we are planning to extend this experience to different categories, such as youth and small investors," noted Badr.
New ideas in the sector are endless, and Naeem Holding is never short of them. "We are considering merging both investment bank and commercial bank activities in one entity," said Badr. This way, the client would find financial services, credit card, mortgage, brokerage, portfolio management, insurance and retail banking under one roof. "This has already been applied in several countries, but we still have to convince the regulator to apply it here," he explained.
Regional capital markets, Egypt included, still have much potential to grow and the reforms in Egypt over the past few years have made a big difference. When deciding where to start operations, Naeem Holding studied different markets with no particular bias to Egypt. But it appeared to offer the best incentives, the fastest procedures -- compared to Saudi Arabia and Dubai, for example -- and the Egyptian regulator was the most receptive to the company's ideas.
"The market is still very cheap, no relapses are expected," according Badr. The expected flourishing of the mortgage finance market will add more available assets. Over the past four decades, Egyptians mostly invested their wealth in real estate which became dead money, he asserted. "This is a sector with exceptionally good potential, seeing that 66 per cent of the GDP of the US comes from real estate and the mortgage business," he pointed out. Hence, Naeem Holding is in the process of setting up a mortgage finance company, in collaboration with international partners in the field.