Year: 2011

Among MENA investment banks, Jadwa Investment stands out for achieving strong growth despite challenging market conditions. Launched in 2007, Jadwa has been profitable for each of the last three years, and has grown assets under management by 13 times, from less than $150m in June 2007 to more than $1.9bn in October 2010, at a time when the MSCI Arabian Markets Index dropped by 25 percent. Capitalising on its strong management team and shareholder base, the firm forged ahead during the market turmoil, executing landmark private equity transactions and entering into strategic partnerships with leading players in the asset management industry, including Russell Investments, Investec and CIT UK. Over the same period, Jadwa’s flagship Saudi, GCC and MENA funds have consistently been among the leading performers.

Jadwa Investment is a full service investment bank based in Saudi Arabia’s capital, Riyadh. It offers asset management, advisory, brokerage and research services to institutional, ultra high net worth and high net worth clients in the MENA region. It relies on in-house expertise for managing public and private equities in the MENA region. For international investment products it has a strategic alliance with Russell Investments and also has a tie up with Investec Asset Management for investing in Africa. On the advisory and private equity side, Jadwa executed a first-of-its-kind single asset closed-end fund structure in Saudi Arabia in 2007 when it led a consortium to acquire Exxon Mobil’s 30 percent stake in Luberef, a lubricant refinery 70 percent owned by Saudi Aramco. Realising the potential of Jadwa, Khazanah Nasional, the sovereign wealth fund of Malaysia, bought a 10 percent stake in the company in 2009.

Asset management has been a significant contributor to Jadwa’s success, representing 42 percent of revenues in 2009. Within asset management, Jadwa focuses on equities, both public and private, and real estate. 65 percent of assets under management are invested in public equities, 24 percent in private equity, with the balance in real estate and fixed income.

The key to Jadwa’s success in growing the asset management business lies in the superior performance of its products, combined with superior service. Since their launch in June 2007 to the end of October 2010, Jadwa’s Saudi, GCC and Arab markets equity funds are up 41.3 percent, 24.1 percent and 23.5 percent respectively.

This compares handsomely to performance of the respective benchmarks of up 9.1 percent, down 18.5 percent and down 11.2 percent. Over 50 percent of Jadwa’s assets under management are in the form of discretionary portfolios that are managed in accordance with the risk-return specifications of the client. Fadi Tabbara, Jadwa’s Head of Asset Management and Chief Investment Officer, shares that Jadwa offers multiple strategies for discretionary portfolios ranging from ‘normal’, ‘semi aggressive’ and ‘aggressive’ for public equities to lower risk multi asset strategies. In the last two years, from the start of November 2008 to the end of October 2010, returns on Jadwa’s ‘normal’, ‘semi aggressive’ and ‘aggressive’ strategies have been 52.3 percent, 69.9 percent and 94.6 percent respectively. Over the same period the MSCI GCC Index was down 0.10 percent and the MSCI Arabian Markets Index was up 2.59 percent.

Clients are initially attracted to the performance of Jadwa’s asset management products, but it is the service standards that help in retaining them. According to Mr Tabbara, Jadwa’s aim has been to bring the highest level of professionalism, ethics and service standards to the investment industry in the region. “Our approach was first to hire a qualified team with strong understanding of regional markets and then to foster a culture of high quality service and impeccable professional ethics,” he says. “We keep close contact with our clients; update them regularly on the performance of markets and their portfolios. In difficult times, like Q408, we make it a point to be the first to meet our clients in person and share with them our view of markets. This reassures our clients that their capital is with people who are capable, who care, and who take stewardship very seriously.”

Commenting on the performance of Jadwa’s products, Mr Tabbara says that his aim is for Jadwa’s investment products to rank in the top three of their respective categories. “Consistent good performance is the key to attracting and retaining clients,” he says. “Our equity funds have been within the top three of their respective categories for 2008, 2009 and YTD 2010 periods. We strive to maintain this leadership.” Cornerstone of the investment performance is Jadwa’s robust investment process which derives its strength from an experienced and qualified team. Mr Tabbara takes pride in the fact that his is one of the largest Asset Management teams in the region and has experience of managing investments in the region since 1994. “We believe in investing in people. Even at the peak of the crisis, we didn’t lay off anyone. Currently we are 20 professionals in asset management and looking to expand. Six of us, including all members of the buy side research team, are either CFA charterholders or are awaiting award of charter having passed all three levels of the CFA programme.” On the investment process, he says that it is a dynamic process that takes into account both top-down and bottom-up approaches of investing. “Our portfolio management team is always on the look out for new investment themes and opportunities. Special emphasis is laid on the understanding of economies, markets, sectors and companies that we invest in.”

Jadwa’s investment process and performance of its products also received a nod of approval from Moody’s Investor Service recently, when Jadwa was assigned Investment Management Quality Rating of MQ2. This is the second highest rating on Moody’s scale which is used to evaluate asset management companies globally.

More importantly, this rating is the first of its kind by Moody’s in the Middle East region. Mr Tabbara is proud of this achievement and claims that it raises the bar for him and his team. “We need to continue to perform well to be able to maintain our rating. The rating is a validation of our commitment to employ international best practices in our business.”

Jadwa’s achievements in the first four years of its existence are commendable. Mr Tabbara attributes these to the quality of his team, the support of Jadwa’s senior management and its shareholders, and to the enabling environment provided by the regulator. However, there is still more to come, in his opinion: “I want Jadwa’s asset management to be recognised as the undisputed leader in this business in the MENA region. In order to achieve the status we need to continue to work hard in constantly improving our performance, developing new and innovative products and raising funds.” He also thinks that the region’s markets need to improve: “Our markets are still in the development phase. Investment decisions are generally taken without due analysis as quality research is lacking or limited in most cases. The way forward is to have more institutional participation in the markets and retail money channeled through the institutions. At the institutional level focus should be on further improving analytical skills of employees.”

Jadwa is optimistic regarding MENA region’s growth prospects in the backdrop of continued government spending and strong energy prices. Mr Tabbara also believes that public equities in the region are trading at attractive multiples as compared to historical levels and sees good investment opportunities. “In the medium term we expect some of the regional markets to be elevated from frontier to emerging markets status which would result in fresh flows and improved valuations,” he says. “On a country specific basis, we like Saudi Arabia, Qatar and Egypt. Companies listed on these markets are growing rapidly through aggressive yet calculated expansions. With the global economy turning a corner, we expect both regional and international investors to realise the attractiveness of these companies.” Regulators are also working hard to improve corporate governance, transparency and professional standards, he says.

In the private equity segment, he notices that a number of family owned businesses have re-organised themselves on professional lines. These family owned conglomerates have grown significantly over the last 10-15 years and are ready to move onto the next level. Such businesses offer attractive proposition for private equity investors.

The investment climate in the region appears to be improving and Jadwa looks well positioned to exploit it.  

Fadi Tabbara is Jadwa’s Head of Asset Management and Chief Investment Officer

Insolvency in Mexico has been seen like a maze, the seven-heads demon or the economy evil. Insolvency is an effect of financial distress situations, which, in turn, are the effect of economic mistakes or diseases, abuse or greed, whether from the government or private sector or both. At the end, insolvency, most of the time, is a result of human action, rather than an act of God.

Under financial distress situations, it is of essence to be equipped with a modern, orderly, predictable, accountable, efficient and effective legal insolvency system to protect debtors’ and creditors’ rights, to optimise assets and as long as possible preserve jobs and businesses. Mexico through its history has lacked such a system. The current insolvency systems – concurso mercantil for merchants, enacted in 2000, and concurso civil for consumers, enacted in 1932 – have without a doubt failed.

In the systemic financial distress situations of the 20th and 21st centuries, Mexico has been forced to overcome distressed economies through vehicles outside insolvency proceedings. It was the case of the FICORCA in the mid 1980s, and the UCABE, the FOBAPROA and the IPAB in the high 1990s which were, in fact, official rescue programmes, wherein the government assumed the risks. Risks which, in the end, are paid by federal treasury with taxpayer funds. Most individuals, consumers, holding high debts, banking debts, mortgages, credit card debts, and other debts were forced to participate in ruinous restructuring programmes, recognising and acknowledging the full debt, principal plus interest, payable in a longer period. In other instances, financial systemic crises have been faced with the support of the international finance institutions, foreign indebtedness and other countries’ financial support.

21st century upgrade
In the insolvency context, financial distress entrepreneurs and consumers look for reorganisation rather than liquidation or at least a fresh start. Debtors seek bankruptcy protection when available, whether in reorganisation, liquidation or out of court settlement. Insolvency systems should provide for predictable, timely, orderly, efficient and effective bankruptcy protection. Bankruptcy protection benefits the economy and trading chain, even with a fresh start. Major bankruptcy systems in the UK, US, Canada and Japan regulate and provide bankruptcy protection to prevent insolvency not only while under actual economical crisis.

Mexico’s insolvency system lacks effective bankruptcy protection. Mexico has a double insolvency system. Firstly, it is for merchants, namely concurso mercantil, and secondly it is for non-merchants, concurso civil – consumers (both for individuals and legal entities). Concurso mercantil is governed by a federal law, Ley de Concursos Mercantiles (LCM), enacted in May 2000. Concurso civil is an estate regulation, governed by each estate’s civil code, modelled on the Civil Code for the Federal District, enacted 1932. Insolvency petition is not mandatory. In case there is no plan of reorganisation, estate assets shall be liquidated. No concurso mercantil or concurso civil provide for discharge, except with the creditors’ approval. Neither of them provide for dischargeable debts. Under concurso mercantil and concurso civil, the debtor remains liable after liquidation of any deficiency owed to creditors after liquidation and/or distribution. Thus, any creditor may enforce and execute thereafter its rights in the case of a debtor gathering new assets, inheritance or lottery. There is no discharge.

Notice that, surprisingly, there is no record of concurso civil filings in history. There are no official statistics whatsoever of concurso civil. Regarding concurso mercantil, the situation is similar. From 2000 to May 2010, there have been only 444 proceedings in concurso mercantil in total, involuntary and voluntary. Of these 208 (46 percent) have been terminated by settlement, of which only very few were terminated by the plan of reorganisation. This data shows that only a few cases arrive at such a status. These statistics show that debtors and merchants, under financial distress and within an economic crisis like the current one, do not file for concurso mercantil.

Bankruptcy protection as well as time and cost are important for both debtors and creditors. There is an immediate need for an insolvency culture and system in Mexico to eradicate the evident phobia surrounding insolvency.

For the time being, debtors are seeking out-of court reorganisations and settlements. As the financial situation becomes worse and with rescue programmes being insufficient, in 2011 it is expected that there will be an increase in insolvencies and eventual liquidations. In some cases there may be a plan of reorganisation settled by debtors and creditors to overcome a financial distress situation as a transitory vehicle. On the other hand, distressed financial entities may just close their business and runaway by fact (factual liquidation). It is also expected creditor’s foreclosures and judicial executions since concurso mercantil (insolvency) is not mandatory.

In Mexico we have already seen that the concurso mercantil law is not effective. Ley de Concursos Mercantiles strongly needs to be amended. Its structure was modelled in the old Spanish bankruptcy laws of the 18th century.

There is an urgent need for an insolvency system that will effectively provide for the 21st century legal regime and that will help debtors and creditors overcome the financial stress situation, including labour, tax, suppliers of goods, services and finance, merchants and non-merchants, whether large, medium or small. For instance in Mexico, small business (PYMES) and non-merchant (consumer) insolvencies lack all bankruptcy protection.

Another feature of the Mexican insolvency system is that labour creditors and tax creditors (federal, state and municipal) are super priority creditors. Labour and tax creditors do not enter into insolvency. They are enforced, recognised and paid in their special courts, outside of insolvency. When it happens, generally, there is nothing left for other creditors.

Likewise, only post-petition actions, including arbitration, enter insolvency proceedings under the concurso mercantil. Thus, pre-petition action and arbitration do not join the concurso mercantil.

On the other perspective, Sistema de Administracion Tributaria (SAT) data shows that Mexican IRS records 26.3 million active taxpayers – 16.3 million employed, nine million individuals and 831,000 legal entities. Informal sector – not under IMSS (Social Welfare) government control and non-taxpayers – 12,612,617 in April 2009 accounting for 28.3 percent of total employed people.

New approach
21st century insolvency systems encompassing and protecting all debtors and creditors, whether merchants or consumers as well as all creditors, including labour and tax, may help importantly to overcome and reduce significantly the informal sector and non tax payers, based upon the fact that all of them would prefer the insolvency benefits (such as the automatic stay, discharge and tax benefits) under the formal insolvency proceedings.

The new insolvency system shall, inter alia, provide for reorganisation and liquidation in bankruptcy in separate independent proceedings upon petition of creditors or debtor. It should incentivise discharge for a fresh start, when viable. Otherwise it should provide for timely, orderly, efficient and effective liquidation.

Oscos Abogados is drafting a new bill featuring issues for a 21st century insolvency system.

For more information tel +52 (55) 12 53 01 00; email: doscos@oscosabogados.com.mx; www.oscosabogados.com.mx

If any proof were needed that the world economy has not yet fully emerged from recession, then the harsh austerity measures currently being imposed in many countries – and the often less than enthusiastic reaction to these measures of many of the citizens of those countries – clearly signal that the voyage to full recovery will be a stormy one.

Several countries – notably those known by the unfortunate acronym ‘PIIGS’ (Portugal, Ireland, Italy, Greece and Spain) together with the UK and the USA – have attracted much publicity as victims of the recession.

Many of their current fiscal problems can be traced back directly to an over extension of credit and investment in the housing market and a consequent bailing out of the financial sector. But the panic that ensued and the loss of both business and consumer confidence has led to contagion in many other sectors – particularly those that require the financing of expensive purchases, such as autos and consumer durables. Moreover, overseas banks, including those in France and Germany, have incurred a particularly high exposure to both public and private company debts in struggling countries such as Greece.

But it doesn’t end there. A sharp drop in demand in one country has an immediate impact on those other countries reliant on exports to that market. While the German economy appears to be rebounding faster than many of its European neighbours, the massive decline in world demand for its products, especially from the USA and China, and the increased volatility of financial markets resulting from public debt problems in the EU countries already mentioned, threaten to derail Germany’s recovery.

Across the water, the fate of the Mexican economy is so inextricably bound to the fluctuating performance of the US economy that projections for its recovery have been revised downward for the fourth time this year.

The Summer 2010 Atradius Payment Practices Barometer, published by Atradius Credit Insurance N.V., an extensive survey of the domestic and international accounts receivable experiences of around 4,000 businesses in 22 countries found that even those countries that escaped recession, such as China and Poland, have not escaped the impact of the global recession. These along with most other countries have experienced a severe blow to their international trade, as their exports to recession-hit countries have been affected by, at best, late payment, but in many cases, payment default. Though Days Sales Outstanding (DSO) is by no means the only measure of the health of a business’s receivables portfolio, the Payment Practices Barometer found that approximately 19 percent of the businesses surveyed had witnessed a rise in DSO, with Italy averaging the highest DSO at 83 days.

Possibly more important was confirmation of the domino effect that late payments have on businesses further up the supply chain. Many of those surveyed by Atradius had to delay payments to their suppliers as a consequence of their own late receipt of payments.  More than half of the respondents to the Payment Practices Barometer reported that they had experienced late payments without prior agreement, while a similar percentage had been asked to extend their payment terms.

Not surprisingly, the survey found a substantial increase in the use of credit management techniques by many businesses, especially the use of ‘dunning’ – the process of methodically communicating with customers to ensure payment – and of regular credit checks on customers.

In fact, it is clear from the overall findings of the Payment Practices Barometer that, while no one credit management tool can guarantee that credit risks will be mitigated, the intelligent and strategic use of a combination of such measures, including the protection afforded by credit insurance, can greatly improve the chances of successful and profitable trade. And, while suppliers should always employ safeguards when offering credit terms, on the evidence of the survey, credit terms remain an essential element of national and international trade.

Simon Groves is a senior manager of corporate communications and marketing at Atradius Credit Insurance NV. The Atradius Payment Practices Barometer can be downloaded from www.atradius.com