Author:

Rein: EU should follow Germany’s lead on reforms

Posted on by

European countries must implement the structural reforms that Germany has already carried out over the last couple of decades to ramp up competitiveness, the European Union’s top economic official said recently.

Economics and Monetary Affairs Commissioner Olli Rehn said Germany’s economy entered the crisis on a stronger footing than others within the EU because it had adjusted to the new world order by carrying out broad structural reforms since the 1990s.

“It is important for everyone that other countries now manage to do what Germany and a few other member states have already managed in past years,” Rehn wrote in a guest column in German daily Handelsblatt.

“Several member states, for example Greece, Ireland, Portugal and Spain, have already entered on an ambitious course of reform and are making progress,” he added.

Germany sees its economy recovering fast from the worst crisis in decades, while peripheral European economies, such as Greece or Spain, continue to be dogged by the debt crisis, financial woes or growing unemployment.

Economists and policymakers have mostly come to the consensus that other EU states should also boost their competitiveness by wage restraint, an overhaul of their labour markets and more structural reforms.

To the dismay of some, German reforms look set to become the boilerplate for the rest of the EU under a new regime of closer economic coordination.

“There is indeed no doubt that the EU’s entire economy benefits from the strength and resilience of the Germany economy,” Rehn said. “Therefore the continuation of structural reforms in Germany that promote growth is important for the whole of Europe.”

Last year, however, Berlin was often criticised for exacerbating economic imbalances within the EU and urged to do more to reduce its big trade surplus with other member states, for example, by spending more.

Egypt has limited war chest to avert financial crisis

Posted on by

Egypt has substantial reserves to avoid an external payments crisis but these could be seriously depleted within weeks if political protests continue, while its banks may struggle to cope with a rush of withdrawals.

In the days after the protests erupted, Egyptians and foreign investors transferred hundreds of millions of dollars out of Egypt, currency traders estimated.

The government had $36bn in foreign reserves at end-December, central bank figures showed. According to a January 27 note by Citigroup, it also had $21bn of additional assets with commercial banks at end-October – its so-called “unofficial reserves”.

These numbers suggest there is no immediate danger of a balance of payments crisis. But scenes of chaos at Cairo’s main airport on Sunday, as both foreigners and Egyptians tried to get flights out of the country, indicated outflows of money could reach damaging levels over the medium term.

Egypt has a financial war chest, “but the war chest is going to be depleted if this situation continues for several weeks rather than a few days,” said John Sfakianakis, chief economist at Banque Saudi Fransi.

“When markets begin to make bets against (the Egyptian pound), it will have a severe impact. The whole fiscal position of the Egyptian economy is going to be put to a very hard test if the violence, rioting continues for several weeks.”

Reversal of flows
Egypt is vulnerable to a reversal of large flows of foreign portfolio investment that have been attracted by high yields on domestic government debt. Barclays Capital estimated foreign holdings of Egyptian assets before the protests were close to $25bn, with roughly half held in Treasury bills and bonds.

Foreign direct investment is based on long-term planning and is less likely to be influenced by the political unrest. Egypt drew $6.76 billion of such investment in the last fiscal year to June 30, of which $3.6bn went to the petroleum sector.

But the damage from any extended disruption to tourism could be considerable; Egypt earned $11.59bn from tourism last fiscal year. It ran a current account deficit of $802m in the July-September quarter of 2010, and because of tourism the deficit is likely to be much higher in the current quarter.

Equally worrying is the risk that middle-class and wealthy Egyptians will send more of their savings abroad. These outflows might match or over the long term, even exceed money pulled out by foreign portfolio investors.

Official figures are not available but a dealer at a medium-sized bank based in Cairo, who declined to be named, said clients at his medium-sized bank alone had transferred $150m out of the country in two days. Some bankers said total outflows of funds from Egypt might have been at least $500m per day during the first week of the campaigns.

If outflows continued at that speed without accelerating, Egypt could lose over a quarter of its official reserves within a month.

M&A is back as CEOs start to put cash to work

Posted on by

Dealmaking is back on the agenda as CEOs step up the hunt for ways to put a multitrillion-dollar cash pile to work, triggering the busiest January for M&A in 11 years.

There is still plenty to worry about at this year’s meeting of the global elite in Davos, from fiscal deficits in the developed world to inflationary risks in emerging markets to new political risks like Egypt.

But with economic recovery taking root in the United States and Germany, while China and India continue to barrel along, company bosses and dealmakers are no longer willing to sit pat.

“We’re seeing our clients beginning to invest,” said Jim Quigley, CEO of Deloitte Touche Tohmatsu. “There is significant capital still on the sidelines, but my M&A team is certainly no longer on the sidelines.”

Overall, multinational companies in developed countries are holding a record $4-5trn in cash, according to a report last week by the United Nations Conference on Trade and Development.

That money was built up as a buffer against a potential double-dip recession, or other systemic shocks, and it is beginning to look like a wasted opportunity.

The mood of confidence – as measured by surveys and conversations with business leaders – is palpably better at this year’s annual meeting of the World Economic Forum.

Fair conversations
“Equity valuations are coming back. There are more fair conversations between buyers and sellers,” said one European dealmaker.

Some companies have already plunged into M&A, like US health insurer Humana, which last month completed the $790m acquisition of Concentra, a Texas-based care provider.

“Clearly, cash has to be put to work. It can’t just sit on the balance sheet,” said Humana Chief Executive Mike McCallister. “We will continue to look for more opportunities.” He is not alone.

Global M&A activity so far this year has already reached $243bn, making it the most active January since 2000 and 47 percent ahead of the $165bn for all of January 2010, according to Thomson Reuters data.

“M&A is back and the volume of deals in the last few months has certainly picked up. But our survey also points (out) that the whole area of innovation is also back, which I think gives the best of all worlds,” said Denis Nally, chairman of PricewaterhouseCoopers (PwC).

PwC’s annual CEO confidence survey, released on Tuesday, showed optimism among CEOs had returned to almost the same level as before the financial crisis, with 48 percent of those questioned very confident about 2011 revenue growth.

Kissing frogs
“This is a good moment for M&A deals,” said Feike Sijbesma, CEO of Dutch group DSM, the world’s largest vitamins maker.

DSM last month agreed to buy US baby food ingredients maker Martek Biosciences for $1.1bn and, with more than $2.5bn available for acquisitions, Sijbesma hasn’t finished shopping yet.

A string of other companies also flagged their interest in acquiring rivals to drive their growth to the next level this week in Davos, including German software maker SAP, French outdoor advertising group JCDecaux, Russia’s largest steel producer Severstal, India’s No. 2 software exporter Infosys Technologies and Swiss drugmaker Novartis.

“The tectonic plates are moving and good companies need to be in the game, engaging in global M&A activity,” said Mark Foster, Accenture’s global head of management consulting.

Finding the right deal, however, remains as tricky as ever, according to Chris Viehbacher, CEO of French drugmaker Sanofi-Aventis, who is locked in a closely watched takeover battle for US biotech group Genzyme but is also open to other smaller deals.

“You’ve got to kiss an awful lot of frogs to buy a prince,” he said.

UK inflation leaps to eight month high, pressure on BoE

Posted on by

A record monthly jump in prices drove British inflation to an eight-month high in December, piling pressure on the Bank of England to raise interest rates and show it is not letting inflation get out of control.

The Office for National Statistics said the annual rate of consumer price inflation rose to 3.7 percent from 3.3 in November – much higher than analysts’ forecasts for a steady reading, after prices rose a record one percent between November and December.

The pound shot up more than half a cent against the dollar to an eight week high, gilt futures dropped to a contract low and interest rate futures fell sharply as investors ramped up bets on when the BoE will start tightening policy.

Inflation has been at least a percentage point above the BoE’s two percent target throughout 2010, and rising inflation expectations among the general public and bond investors have caused markets to price in a first rate hike by mid-year.

Inflation is likely to climb yet higher in January, as an increase in value-add tax to 20 percent from 17.5 takes effect.

“The numbers are obviously a lot worse than expected. I think it does raise the risk that the Bank of England will have to move interest rates in the first half of this year,” said George Buckley, economist at Deutsche Bank.

The BoE forecast in November that inflation would average around 3.2 percent in the fourth quarter of 2010. More recently policymakers have said it could hit four percent early in 2011, due to January’s VAT rise.

The ONS said the biggest drivers of inflation at the end of the year were air transport, fuel, utility and food bills. Fuel costs rose at their fastest annual rate since July, and food prices showed their biggest annual rise since May 2009.

Oil prices are fast approaching $100 a barrel, far higher than the BoE assumed in its November Inflation Report.

But policymakers argue that the factors driving prices at the moment are temporary, and that raising interest rates in response risks derailing a fragile economic recovery.

The BoE had an estimate of the data when it made its decision to leave interest rates at their record low 0.5 percent in early January.

Credibility
Concern the Bank of England has lost its grip on inflation has risen to such a level that markets are increasingly pricing in an interest rate rise by the summer to prevent a full-blown credibility crisis.

“This raise is becoming much more difficult for the Bank of England; certainly there’s going to be a market expectation that they move much sooner rather than later,” said Ross Walker at RBS Financial Markets. “So I think you’ll start to see a May hike getting priced in quite soon.”

But Monetary Policy Committee member Paul Fisher said in an interview that although inflation was “very uncomfortable”, the BoE had made the right decisions on policy.

“We have to look through those short-term things, despite whatever unpopularity comes our way, to try and set the best policy rates for the medium term,” he told the Yorkshire Post.

The retail price inflation gauge, which includes more housing costs and is the benchmark for many wage deals picked up to 4.8 percent from 4.7 percent, in line with expectations, and the highest since July 2010.

With harsh public spending cuts about to bite, the government would probably be content for interest rates to remain at rock bottom levels.

But Prime Minister David Cameron did say he was concerned about price pressures “well outside what the Bank of England is meant to deliver.”

Henderson bags Gartmore, makes $122bn funds firm

Posted on by

Anglo-Australian funds house Henderson is buying troubled British rival Gartmore, to create one of Britain’s largest retail asset managers with £78bn ($122bn) under management.

“By bringing across fund managers and integrating the (Gartmore) business onto our own platform we will be able to enhance margins significantly,” Henderson chief executive Andrew Formica said.

“Its recent travails should not overshadow the fact that Gartmore is one of the best known managers in UK fund management and its assets are performing well,” he said.

Gartmore, which listed at 220 pence per share in December 2009, suffered a litany of woes in its year as a public company, including the departure of star manager Guillaume Rambourg following a regulatory probe and the retirement of so-called “key man” Roger Guy in November.

Both exits spooked clients and sparked heavy outflows of assets. The Henderson deal will crystallise a 58 percent loss for investors who bought shares when Gartmore floated.

Staying on board
Henderson said Gartmore fund managers with collective responsibility for 84 percent of Gartmore’s assets under management had endorsed the deal, easing fears many could walk out under new management.

John Bennett, Gartmore’s star European equities manager, is among those who have committed to stay.

However, the marriage of the two companies may lead to departures. “Clearly there are overlaps and it is likely people will be affected. But it is too early to comment on the details,” a Henderson spokesman told Reuters.

Cannacord analysts said the transaction comfortably offered at least 10 percent earnings enhancement in Henderson’s 2011 fiscal year on an annualised basis.

Gartmore shareholders will hold around 22.5 percent of the enlarged group. Henderson has received irrevocable undertakings to support the bid representing 60 percent of Gartmore’s shares.

Institutional shareholders in Gartmore had advocated a quick sale, following the departure of fund manager Roger Guy, responsible for about 17 percent of its assets.

Competition: You can have too much of a good thing

Posted on by

Competition makes capitalism work. By forcing firms to improve on service and price lest they be undercut by rivals, and by discouraging firms from abusing workers lest they leave, it makes the price mechanism work for the people. Neoclassical economists take these facts to their logical conclusion and see competition as practically a panacea for the world’s ills.

Reality is rarely so simple. The limitations of competition as a force for good are well-known. Consumers can be inadequately informed, making it possible for firms to take advantage of them, and they exhibit a range of behavioural patterns that can be exploited by the marketing industry. Likewise, the intrinsic difficulty of matching skills to positions and the costs associated with moving job may cause workers to stay with abusive bosses.

What is less well-known is that there are cases where competition can do outright harm. Most basically, it is unlikely that firms will respond to competitive pressures purely by improving service and cutting costs and prices. In a world where people have imperfect information and workers can’t always leave their employer, firms may be able to respond by cutting corners and abusing consumers and workers.

Companies may also respond to competition by reducing rates of investment so as to cut costs and boost profits in the short term, at the expense of consumer and public interests in the long term. This may not be rational even from the perspective of the firm, but people are not perfectly rational – especially when they are managers of a company under pressure from short-termist stockmarket investors.

Such short-termist behaviour is evident in the differential economic performance of Australia and New Zealand since the early 1980s. Until then, the two countries had near-identical GDP per capita. But New Zealand liberalised its markets – giving competition a freer hand to a greater extent – than its neighbour. The result was lower rates of investment by companies in New Zealand and a GDP per capita that was twenty-five percent lower than Australia two decades later. (The benefits to Australia of exporting primary commodities to China were an additional boost that largely came after.)

Excessive competition can be especially dangerous in financial services. Banks under tight competitive pressures can cut borrowing costs to the point where it fuels speculation and they may make unwise lending decisions in pursuit of yield. Asset managers in a strongly rising market, meanwhile, face only limited competitive pressures and can charge fees that consume much of the additional return generated for investors. Such fees create proprietary capital to further fuel speculation. And, after a market bust, many financial firms will be dead or hobbled; reducing competitive pressures on the survivors and leaving them free to take excessive profits once more.

How should regulators respond to these observations? Firstly, they should recognise that intense competition is to be desired only where it is accompanied by a strong regulatory framework to constrain unacceptable behaviour. Second, any measures taken to boost competition should always be accompanied by targeted incentives to boost real investment. Finally, in the financial services industry, since competition is of limited use here anyway, regulatory measures to ensure stability and orderly function should take priority over maintaining competitive markets.

Renault spy case shows rising economic conflict

Posted on by

From what France calls “economic warfare” as it probes a Chinese link to industrial espionage at Renault to currency confrontation and commodity rivalry, economic conflict is increasingly impacting businesses. President Nicolas Sarkozy’s office has asked French intelligence to probe suspected industrial espionage at the car giant.

Renault suspended three executives at the start of January including a member of its management committee, with a source telling reporters the firm was worried its flagship electric vehicle programme – in which Renault together with Nissan is investing €4bn – might be threatened.

French industry minister Eric Besson told journalists the expression “economic warfare” was appropriate.

“What you’re seeing is a change in the nature of what war itself means,” Ian Bremmer, president of political risk consultancy Eurasia Group, told Reuters. “It’s not going to be so much a matter of bombs and missiles as deniable cyberwarfare, corporate espionage, economic struggles. That’s going to be a particularly difficult environment for Western corporates.”

Ultimately, he believes it will drive Western firms to build closer relationships with governments for protection to survive the rise of “state capitalist” powers like China and Russia.

Renault is far from the only suspected case. US cables released by WikiLeaks show diplomats blaming China for hacking into Google systems that prompted the internet giant to briefly quit mainland China.

Some analysts also suspect information theft may be helping China close the gap faster than expected as it builds a “stealth fighter” to rival Lockheed Martin’s F-22. Images posted on a number of websites showed what appeared to be a working Chinese prototype, although the US says China may still be years away from a truly working model.

Currency, commodity rivalry
Government-backed corporate espionage is nothing new. France itself has often been accused of doing much the same thing, including allegations of bugging business class seats on Air France jets in the 1970s and 80s. But the rise of emerging powers is seen quickening that trend.

It comes as the world’s emerging and developed nations continue to face off over relative currency strength and as growing demand for natural resources pushes food prices to record levels and oil back towards $100 a barrel.

Major powers are seen in increasing competition for resources. China – 4and to a lesser extent other emerging powers such as Russia, India, Malaysia, Brazil – have been expanding particularly in Africa. Beijing also says it will cut export quotas for its rare earth minerals vital to the production of much electronic technology, sparking a worldwide hunt for new sources. China produces some 97 percent of the world’s rarest elements, and the cut sent shares of producers elsewhere rising sharply.

While in state capitalist countries such as China and Russia the private sector, governments and intelligence agencies may be so close as to practically overlap, in western states they are much more divided.

“There is more attention being paid to the economic damage to national security but there is something of a disconnect between the US government and the private sector,” said Nikolas Gvosdev, professor of national security at the Naval War College in Rhode Island.

“The perception is (still) that the government handles ‘defence’ and the private sector handles ‘economy’.”

Corporate espionage “easy” for spies
Others say that while the rise of new economic powers will mean intelligence agencies shift some focus towards them, the main effort will remain preventing militant attacks rather than on corporate matters.

“I doubt this will become a priority for UK agencies other than defensively,” said a former senior British intelligence official on condition of anonymity.

“The UK is not by tradition state corporatist and there is likely to be little inclination to do the private sector’s work for it. Hard to say for other Western states as it is more a matter of political philosophy than capabilities – corporate espionage lies at the easy end of the spectrum.”

The WikiLeaks saga in which it is alleged one youthful US Army private managed to download the entire war logs for Iraq and Afghanistan as well as more than 250,000 diplomatic cables shows how the information age makes secret data easier to steal in vast quantities – particularly if one has an inside source.

Emergent Asset Management – one of the first funds to start buying up farmland in Africa to tap rising food prices – believes rising tensions will ultimately lead to war. It is launching a new fund later this year to track political strains.

Demand grows for African assets

Posted on by

The most important fact for any investment in any country within the African space is that they have someone on the ground 352 days a year monitoring and mentoring investment companies. At Wentworth International we have made two recent investments, the first being a natural resources company in Sierra Leone and the second in a UK registered company which has a 100 percent focus on Africa, with operations in both the east and west of the continent. We aspire to mobilise funds from international and African investors for deployment in the fast growing economies of Africa with an estimated GDP of $2trn. Investors realise that Africa is underpenetrated with untapped potential and provides interesting opportunities for investment growth returns for any investor willing to take the time to understand and pursue opportunities within this continent. To unlock this potential, FDI must be attracted to augment the low local investment and thus far, the private equity model has been used to satisfy these needs for capital.

Opportunity knocks for PE
We all hear about the BRIC countries but the smart investors are already moving on. These are the people who always drink ‘up river,’ the investment community who get in earlier than anyone else and those who make the greatest returns. We are seeing a whole range of new businesses to develop, focused on Sub-Sahara and North Africa. Those in the know are seeing exciting opportunities with Wentworth International. It is this new perspective that makes our business of so much interest. So the world’s leading investors are turning to Africa, the only major area of the world left to develop. Africa presents very strong fundamentals that underpin its growth prospects over the coming decades and by all standards is the prime investment area especially for those who would like to tap into its vast resources. Land as a resource is easily available for serious investors either through private purchase or through allocation by governments, some of whom are ready to attract potential investors by offering free or subsidised land in addition to giving tax breaks and holidays especially for investors whose proposals indicate they can generate employment and raise income for the country. Apart from land, Africa is emerging with a strong base of well trained human capital not only in technical areas but also in management and supervisory tasks and jobs. Most African countries have adequate skilled and semi-skilled human power at their disposal and the majority of these are yearning for employment. The continent has a population of 800m people (half of whom are under the age of 16) who have comparatively little infrastructure or telecommunications access. On the back of this, it is undergoing unprecedented economic growth with the World Bank forecasting a real GDP growth rate of 5.1 percent for Sub-Saharan Africa in 2011, versus 1.3 percent for the eurozone. This combination is leading to increased urbanisation giving rise to a growing aspirational middle class with improved levels of disposable income that are driving the demand for products and innovations. As a result, we can record a rise in the demand for consumer goods and services; this is enhancing the necessity for investment across traditional products and services. The sectors that are benefiting from this move include telecommunications, agribusiness, the financial and business services, real estate and basic industrial production.

Natural resources
In addition to land and human capital, many countries in Africa boast significant natural resources, which can be developed in a sustainable manner. These include wildlife and related tourist attractions, fresh water lakes, rivers, seas and coastal areas with marine and aquatic resources. Some countries have vast mineral resources waiting to be explored and developed such as oil and precious metals – Africa has 21 percent of the world’s gold and  46 percent of the world’s diamond deposits, as well as copper and iron ore).

Land investments excite Wentworth International, especially in terms of agriculture. Indeed this is a dilemma that a continent with such high potential for agricultural yields has high food insecurity and frequent food shortages and famine, necessitating importation of food items from outside the continent at high costs. There is therefore a  need to invest in the agricultural sector and those who venture into this will not only reap good returns but help Africa solve its chronic food problem.

Industrial investment in Africa is still very low compared to other regions of the world and yet with the growing economy of this region and the growing population, coupled with a fast urbanisation process, puts Africa ahead of other regions of the world in terms of prospects for future industrial investment, growth and in terms of potential for industrial goods market expansion.

In conclusion, there are many prospects for investment in Africa and it is in this regard that Wentworth International Partners was established. Wentworth’s objective is to focus on early stage companies that attribute more than 75 percent of their revenues from Africa within growth sectors exhibiting a clear upside potential.

We invest opportunistically, using a disciplined approach for selecting investments generated from a proprietary pipeline through long-standing relationships with key players in the region. Our mission is to be the leading premier Pan-African Investment Company with the vision to target investments in high-quality early stage enterprises with potential for regional growth. We seek to create successful partnerships with companies’ management in a variety of sectors; in order to create value for our shareholders while generating positive returns.

Wentworth International Partners is a company driven to find strong investments in Africa and support those with a positive vision for the country and her people.

Joyce Ollunga is CEO of Wentworth International Partners, the Nigeria-based investment company. For more information www.wentworthinternational.com

Mobilising impact finance

Posted on by

World population is estimated at 6.8 billion people, of which close to two billion live in poverty, 925 million are undernourished, 2.6 billion lack basic sanitation, about one billion can’t read a book or sign their name and 443 million school days are lost each year due to water-related illnesses. Yes, the percentage of population living in poverty has been substantially reduced in recent decades, but China alone accounts for most (close to 90 percent) of the world’s poverty reduction since 1981. What’s more, staple food prices are increasing, while income inequality is rising: the poorest 40 percent of world population account for five percent of the world’s income, and 80 percent of the world’s population live in countries where income differentials are widening.

On the environmental front, global CO2 emissions have risen by 20 percent since 1997, with no post-Kyoto agreement in sight and the 2012 deadline fast approaching. To ensure global temperatures don’t rise by more than 2°C above pre-industrial levels, G8 countries would need to cut their emissions by 80 percent by 2050, which translates into investments of $1trn a year, of which $475bn is transfers to the developing world to help it adapt to climate change. Furthermore, the Kyoto framework does not cover deforestation, which is responsible for some 13 percent of CO2 emissions.

Impact finance seeks to address these imbalances by providing an expanding universe of profitable investment opportunities to investors, yielding double or triple bottom line returns.

Public sector needs the private sector
The world is progressively recovering from the financial crisis and a two percent contraction of the global economy in 2009. But the rising debt and need for budgetary cuts faced by most OECD governments has effectively shifted much of the burden of sustainable development funding to the private sector.

Total net official development assistance (ODA) from the OECD amounted to $122bn in 2008, representing 0.3 percent of the combined Gross National Income (GNI) of OECD donor countries. It fell short of the 2010 target of 0.36 percent of GNI to stay on track with the Millenium Development Goals (MDGs), let alone the 0.7 percent of GNI required in order to achieve the MDGs by 2015.

Private sector mobilisation is therefore essential to complement the development efforts of the public sector. According to 2008 data published by the Hudson Institute, private giving to developing countries reached $34bn from the US and $15bn from 13 other countries including most of Western Europe. That same year, remittances to developing countries totalled $325bn (World Bank), and foreign direct investments to developing and transition countries amounted to $735bn (UNCTAD 2009). In fact in 2008, says the Hudson Institute, “Global philanthropy, remittances, and private capital investment accounted for 75 percent of the developed world’s economic dealings with developing countries.”

Investment industry reengineering
With $111trn in global assets under management worldwide as of December 2008 (BCG 2010), the capital market pool is too large a resource to be ignored by sustainable development proponents. Some 6.3 percent of these global financial assets are invested in socially responsible investments (SRI), while more than 800 signatories managing $22trn subscribe to the concept of sustainability, broadly endorsing the United Nations Principles for Responsible Investment. Yet most of the actual practice focuses on doing little or no harm, and rarely provides the opportunity to measure the precise social and environmental impact of investments. Impact finance may be a good response to this quandary. It presents financially appealing investment solutions across asset classes, and funds viable and often scalable solutions for microfinance, affordable healthcare, education, alternative energy, and sustainable agriculture. As Bridges Ventures noted in 2009, “the sector stands poised both to address significant social and environmental issues and to chart a new course for the financial services industry to reclaim its stature as an engine of social and economic upliftment.”

Impact finance market
Impact finance was valued at $50bn in April 2010 by the Global Impact Investing Network (GIIN), which expects it to grow to $500bn by 2014. According to another forecast, “Over the next five to 10 years, impact investing could grow to represent about one percent of global assets under management” (Monitor Group 2009). But more recent data indicates impact finance may encompass financial assets worth up to $297.2bn already.

In December 2009, CGAP numbered 91 active Microfinance Investment Vehicles managing $6.2bn, a 25 percent growth over 2008, predominantly composed of mostly de-correlated and low-volatility Fixed Income, with an average return of USD Libor +250 bps in 2009. The ranks of microfinance borrowers have increased by 91 percent per year from 2004 to 2009 (Intellecap 2010), reaching $40bn in gross loan portfolios, and 2.5bn adults still don’t have access to financial services (McKinsey 2010).

Community investing in the US was valued at $41bn at the outset of 2010. As for sustainable agriculture, fair trade sales were valued at $4.2bn worldwide in 2009, a 15 percent growth over 2009 (Fairtrade Labelling Organisation 2010).

As for sustainable agriculture, fair trade sales were valued at $4.2bn worldwide in 2009, a 15 percent growth over 2009 (Fairtrade Labelling Organisation 2010). Regarding carbon finance, another impact investment segment, CDC identified 96 carbon funds with a total capitalisation of $16.2bn, in Equity and Private Equity vehicles mostly, while UNCTAD estimated FDI flows into renewables, recycling and low-carbon technology manufacturing amounted to $90bn in 2009. The global carbon market is worth $122bn, mostly thanks to the EU Emissions Trading Scheme (The Economist 2009), with an additional $163bn from green subsidies (New Energy Finance 2009).

Impact investing is attracting all types of investors: 19 European pension funds have disclosed microfinance investments of $555m (OnValues 2009), and Toniic, the US impact investment club, will launch its European chapter in 2011. Toniic was co-founded by RSF Social Finance, which since 1984 has provided social enterprises with $200m in loans, and the KL Felicitas Foundation, which has pledged its entire endowment to impact investing.

Impact finance hurdles
According to a recent survey by AlphaMundi Group, this new investment approach still faces a number of hurdles: a short history, a lack of standardisation and access to information, insufficient investor awareness and product benchmarking, liquidity constraints, and a more comprehensive regulatory support are all challenges being progressively resolved by the industry.

Further findings reveal that most impact finance asset managers specialise exclusively in this new type of investment, using debt and PE/VC instruments to fund deals of $1m on average (AlphaMundi 2010). They can broadly be assigned to two categories, the first composed of impact finance pioneers with at least six years of track record and $100m or more in assets, the second made up of new market entrants with less than five years of experience and under $20m in assets. Only half of the interviewees disclosed their financial performance, which on average was superior to five percent per annum for debt instruments and 10 percent per annum for PE in 2009. Half of the managers charge at least two percent management fees, and additional performance fees of 20 percent on average with a hurdle rate of six percent or more, to cover the costs of due diligence which typically takes three months from deal identification to disbursement, and of monitoring and reporting thereafter. Leveraging resources through co-investment could be a solution to reduce transaction costs, but only a small minority had ongoing co-investments at the time of the survey. All the interviewees invest directly into projects or impact enterprises, while half also invest through funds. The regions of greatest interest for the foreseeable future include Asia ex-Japan, Africa and Latin America. Interestingly, most impact finance managers expect microfinance to be supplanted by sustainable agriculture and alternative energy as the primary sectors of impact investment.

With regards to impact measurement, less than half of the interviewees used systematic measurement processes, and in most cases they do so in-house with a customised methodology. About half impact finance asset managers believe it would be useful to establish industry-wide label for impact investing, to catalyse market growth and facilitate fundraising, and 75 percent of them would be willing to contribute data to enable such a label should it exist. Fundraising is the second largest driver of cost for impact finance managers, after the expenses of investment screening and monitoring. Like any new industry, a majority of interviewees think it necessary to broaden investor awareness and appeal through special tax incentives, and AlphaMundi is now working with leading stakeholders across countries to secure sufficient regulatory support and crowd in the private sector.

Regulator support
Regulator response to this emerging investment approach is eclectic. According to the Council of Europe, 40 percent of its Member States have initiatives related to ethical finance, but only 20 percent have created a legislation supporting this type of activity. At the European Union level, three initiatives related to ethical finance are still pending approval, related to the need for companies to publish social and environmental assessments in their annual reports, and to the need of pension funds to disclose their ethical investment policies. More specifically, in the Netherlands, a 1995 directive on green investments paved the way for both revenue and capital gain tax rebates for sustainable, cultural, social, microfinance or developing country investments. In the UK, pension funds must integrate sustainable investment principles in their investment charter since 2000, and in March 2010 the government pledged $120m (£75m) to create a Social Investment Wholesale Bank in 2011. In the future, the bank may channel dormant assets to social enterprises in the UK and abroad. In Norway, the leviathan Government “Petroleum” Pension Fund was established in 1990 and currently manages $450bn and holds one percent of global equity. The Petroleum Fund has adopted new ethical guidelines and a green investment program in 2010. Belgium incorporated a private investment company in 2001, BIO, to channel €346m to date to SMEs and microfinance institutions (MFIs) in developing countries. BIO also provides grants and guarantees. Similarly in Switzerland, the government established the Swiss Investment Fund for Emerging Markets in 2005, which has channelled more than $400m to SMEs in 30 developing and transition countries to date. In Italy, the Central Bank supported the establishment of Banca Popolare Etica, which today manages a sustainable finance portfolio of €645m in savings and €601m in loans.

In turn, Banca Popolare Etica co-founded the European Federation of Ethical and Alternative Banks association. More recently in the US, the Obama administration announced the launch of a new funding facility for MFIs with an initial capitalisation of $150m in 2009, and gave a strong endorsement to the establishment of a Global Impact Investing Rating System (GIIRS). Last but not least, in Luxembourg a consortium of institutions, including the European Investment Fund, Banque de Luxembourg and Ernst and Young, presented a series of policy recommendations for the government to adopt supportive measures for the growth of impact finance in Europe as of 2011.

Impact finance outlook
The outlook for the growth of impact finance seems to hold much promise. The public sector needs private sector funding to co-finance the sustainable development solutions the world requires. It is imperative that we as a global human society adapt before certain tipping points are reached, be it in environmental degradation, hunger and illness or loss of human life, or inequality, poverty and failed states.

Impact finance complements the array of ODA, philanthropy and FDI instruments for development, and unlocks new sources of capital by blending financial returns and social incentives. As the numbers attest, both institutional and private HNWI investors have already begun including impact finance products in their investment portfolios, across private equity, equity and debt, and thereby contribute to the sector’s growth and emerging standardisation.

Tim Radjy is CEO of AlphaMundi Group. For more information www.alphamundi.ch

World Bank: Agriculture leads poverty reduction

Posted on by

There is enormous agricultural potential in many parts of Africa. All the necessary natural conditions – good soils and climate, plenty of land and water – are present in many countries. There is no reason why Africa cannot be a major producer of agricultural products on a scale equal to that of South America. But it will take heavy investment by the private sector to realise this potential, and the reality is that there has not been nearly enough of it. As a result the potential remains largely unrealised.

Rapid growth of agriculture is the most effective means of reducing poverty in Africa. According to the World Bank the poverty reduction impact of growth in agriculture is three times greater than comparable growth in any other sector. But since there has not been rapid growth in agriculture the opportunity to reduce poverty has not been grasped. Rural Africa remains extremely poor.

Why has there been so little private investment in agriculture? It is certainly not a lack of finance per se. There is more international interest in investing in Africa now than ever before. New private equity funds focused on agriculture in Africa are searching for viable investment opportunities. The development finance institutions have under-utilised their capital allocations for agriculture in Africa for many years.

The real problem is not lack of finance – it is lack of sufficient profitable opportunities in which to invest. The reason is straightforward: agriculture in Africa is an infant industry. It lacks the infrastructure required for commercial agriculture – such as water supply for irrigation, electricity supply to the farm gate and feeder roads to access markets.  It has to incur start-up costs such as land clearing and trial planting, costs which do not have to be borne by its competitors. It lacks experienced managers and a trained workforce resulting in lower productivity and higher labour costs.

Above all infant industry by its very nature operates on a small scale and therefore does not benefit from the economies of scale available to international competitors. As a result in many cases unit costs are high and expected returns are low. Furthermore early stage agriculture is very risky. This raises the minimum return required by private investors. With low expected returns and a high risk-adjusted cost of capital it is not surprising that many early stage opportunities are not attractive to private investors.

But if the infant industry can ‘grow up’ there is no reason why it cannot be internationally competitive. As the infrastructure platform is strengthened and the benefits of scale economies and ‘learning by doing’ drive down costs, as the industry grows in size and matures over time, the returns on new investment will be attractive to private investors.

The challenge for the international community is how to get things started: how to deploy development assistance resources in ways that will overcome the barriers to entry, resulting in rapid growth of profitable commercial agriculture and thereby a rapid reduction in poverty.

Successful interventions should: be targeted at the market failures which create the barriers to entry; be catalytic, levering-into African agriculture new private investment in amounts many times greater than the amount of donor funding; and be time limited so that over the medium term public funds can be withdrawn, replaced with private capital and the proceeds re-invested in new early stage ventures.

The key to success is patient capital. Patient capital is long-term, low-cost, subordinated capital provided by donors and invested in the early stages of private sector agricultural ventures. It would be used to finance start-up costs, to part-fund the cost of infrastructure (such as irrigation assets) and to part-fund working capital required by small and medium-size enterprises (SMEs) and smallholder farmer organisations (SFOs), these being sponsors who would not otherwise be able to secure sufficient working capital from banks.

The long tenor and low cost of patient capital reduce unit production and delivery costs in the early years. This increases the incremental return on private investment in the venture. Subordination of patient capital reduces the risks faced by private investors. The result is to shift the opportunity ‘above’ the line in figure 1 making it attractive to private investors.

Patient capital should have ‘upside’ sharing to ensure that funders share in any unanticipated upside; and should be secured on the assets in the business to ensure that there are consequences for sponsors if they fail to comply with the conditions on which the funding was made. Conditions should always include undertakings to help integrate smallholder farmers into agricultural value chains and provide them with access to infrastructure on affordable terms.

Patient capital deployed in this way would be catalytic, levering-in large amounts of new private investment, and it would also bring transformational benefits for smallholder farmers, taking them out of poverty ‘at a stroke’.

How can patient capital best be deployed? The best approach is to create a public/private equity fund in which public sector donors (and private sector foundations and social impact investors) fund a tranche of patient capital and private investors fund a tranche of private equity expected to generate commercial returns. The low cost of the patient capital would lever-up private equity returns and the subordination would reduce the risks. The fund would invest both patient capital and private equity into a portfolio of early-stage agricultural ventures.

The fund would differ from a standard private equity fund in several respects. First the governance: the fund would have dual objectives. To invest in early-stage agricultural ventures that are expected to be socially and environmentally sustainable and generate commercial returns on the private equity tranche; and to deliver explicit poverty reduction objectives framed in terms that are quantifiable and can be monitored. The investment committee, made up of nominees of the funders of patient capital and private equity, would be responsible for ensuring that both of the fund’s objectives were met. Second, the incentives: the fund manager would be remunerated for achieving success which in this case means delivering the outcomes sought by both the patient capital and private equity funders. Remuneration should be linked to both the financial performance of the fund and the delivery of specific targets relating to development impact and poverty reduction.

As well as patient capital there is a need for two additional development assistance instruments. The first is social venture capital (sometimes called catalytic funding). This is concessional funding from donors used to co-invest alongside SME and SFO sponsors to make a greater number of very early stage opportunities ‘investment ready.’ The experience of InfraCo and AgDevCo shows that small amounts of social venture capital invested pre-financial close can not only be highly effective in catalysing additional private investment but also in structuring investments so that they achieve high development impact and strongly pro-poor outcomes.

The second is partial risk loan guarantees. Sponsors must have access to committed credit lines to fund working capital as well as equity if they are to grow their businesses rapidly. Debt providers are extremely nervous about extending credit to early-stage agricultural ventures when the sponsor has limited track record and collateral. The solution is partial risk loan guarantees which are instruments that transfer some of the credit risks from the lender to the guarantor for a fee. There are a number of credit guarantee facilities operated by donor agencies which perform this role including the USAID DCA programme and Guarantco, a public private partnership facility funded by European governments. However, if credit to support rapid growth of early stage agriculture is to be sufficient there is a need for more loan guarantee capacity, greater willingness to take risk positions on early-stage agricultural ventures with SME/SFO sponsors and pricing that recognises the need to keep the cost of capital as low as possible in the early years.

Social venture capital invested in the very earliest stages creates a larger number of investment ready opportunities. It is withdrawn as soon as possible after financial close and reinvested to create more investment ready opportunities elsewhere. The patient capital fund invests a blend of patient capital and private equity at financial close. Over time the patient capital is withdrawn and replaced with private equity. Loans made at financial close benefit from partial risk loan guarantees but over time as the guarantees lapse and lenders become more comfortable with the sponsors they extend new credit lines without loan guarantees. Once the infant industry has grown into a mature, profitable industry, all the finance required to continue to grow will come from the private sector.

In conclusion, there is a real opportunity for the international community to catalyse large-scale private investment and realise the great agricultural potential of Africa. In doing so, it will meet its primary objective of reducing poverty. It will also contribute to addressing the global food security agenda and to increasing the resilience of Africa to the consequences of climate change.  That really would be effective aid!

Keith Palmer is Chairman of AgDevCo and InfraCo. For more information www.agdevco.com

Lontohcoal set for IPO

Posted on by

With some of the best engineers and geologists at its disposal and guided by a clear long-term business strategy, Lontohcoal is gearing up to become a major coal producer in Southern Africa. Add to this the acquisition of some of the mouth-watering assets in South Africa and Zimbabwe, Lontohcoal is on course to become a significant player in the coal industry in the next few years.

Established only three years ago, this South African coal mining company is going places. With flotation on the Hong Kong stock exchange planned for next year, this young company is destined for great things. Interviewed by South China Morning Post in October, Lontohcoal chief executive Tshepo Kgadima explained that “we are planning an IPO on the Hong Kong stock exchange in the first half of 2011. We are looking to raise $300m-$500m. Our advisors say the company is worth up to $1.5bn.” Samsung Securities (Asia) is advising Lontohcoal on its fundraising options and IPO plans.

Lontohcoal has three main assets in South Africa and one in Zimbabwe. The first is the Kwasa Anthracite Colliery, located on the north east of the town of Piet Retief in the province of Mpumalanga, South Africa. The mine is operational and is being developed to produce 70-80,000 tonnes per month. The second is Hlobane Colliery, situated in the small town of Vryheid in the KwaZulu Natal province of South Africa. This mine will be developed to produce 1.2m tonnes of anthracite per year, making it potentially the largest producer of anthracite in South Africa. The last of the South African assets is Lephalale, situated in the mineral-rich province of Limpopo, South Africa.

The asset in Zimbabwe is in Lubimbi, in Northern Matabeleland. The Lubimbi deposits are particularly important for the South African mining company. Over and above the cost effective methods demanded by open cast mining in this area, the lifetime of the Lubimbi mine is estimated at around 200 years, causing the company to look at long-term operational options. Engineers are currently engaged in scoping studies examining the feasibility of constructing a power plant and a coal-to-liquids plant at the site. When these plans are successfully implemented, not only will this make the company a significant player in the industry, it will mean a lot in terms of infrastructure development and job creation for communities living in the vicinity of the mine.

With a great sense of urgency and a stubborn determination to succeed in a sometimes hostile environment, Lontohcoal has been very busy in Lubimbi. Led by the soft-spoken former investment banker Tshepo Kgadima, the company has accomplished a lot in the past year. “We went on an aggressive drilling and exploration programme in Lubimbi, Zimbabwe, doing more drilling in just three months than had been done on the site in the last 30 years. As a result of this work, we have been able to add over 7.2bn tonnes of coal onto our reserves and resources. Of this, 1.3bn tonnes can be mined by open cast methods, and 35-40 percent of that will be coking coal,” explained Kgadima.

Aware that the biggest challenge facing any new mine is how to get the coal to the end user, Lontohcoal is currently engaged in feasibility studies to quantify the investment that will be required to create a suitable transport infrastructure. The company is budgeting on this work taking around three years. Meanwhile, the company is finalising a transaction to acquire a 51 percent stake in a port concession in Maputo, Mozambique, which will provide storage capacity for 800,000 tonnes of coal. All that is required is to increase the loading capacity on-site. This is the measure of the level of planning done by this emerging miner to become a serious player in the mining industry in the region.

With meticulous planning, Mr Kgadima explains that “in the short term, the plan is to bring the Lubimbi mine into operation and make the first shipment of coal in May 2011. Using the rail link as it is today, the company should be able to transport around 1.5m tonnes a year by truck to the local railway siding at Dete and then by rail to the port at Maputo. By the time we have developed and expanded the mines to produce something in the region of 10m tonnes of coal a year, the railway line should be ready to handle such volumes.”

Lontohcoal’s recent strategy has been to look to the east in response to the economic realities of the 21st century that global future growth lies in Asia. In this regard, the company has established solid partnerships with companies in China and Hong Kong. This is extremely important as the commercialisation of Lontohcoal resources requires partnerships with established companies with requisite financial resources and worldwide networks.

Despite the fact that Lontohcoal is a relatively small emerging miner, it has already accomplished a lot in a short time. It has invested considerable sums of money to develop its assets in South Africa and Zimbabwe.

The company is thinking big and is planning to become a continental player. Mr Kgadima emphasises that since the company’s launch, a number of South African private investors have come on board and that from the beginning of 2010 the focus has moved to wooing Africans to take ownership of the company. “At the moment we have 173 shareholders and their shares are unencumbered, which is a big plus for us as the South African black empowerment experience has been an unpalatable one where shareholders find themselves in a lock-in situation that makes a mockery of empowerment.”

The success of Lontohcoal will not only benefit its shareholders in South Africa, it is turning out to be a vehicle to change the lives of thousands of people in, inter alia, Zimbabwe, South Africa, Mozambique, Zambia and the DRC. The infrastructure that the company is going to help develop in Southern Africa will have a positive impact on the fortunes of many Africans seeking a better life. Lontohcoal will definitely make a worthwhile contribution to the economies of other African countries where it does business.

Although Lontohcoal is a South African company, its vision is to become a major player in  Africa in a quest for global conquest. The mission is to create a truly successful African energy company with the motto ‘Energy Supermarket to the World.’ The listing in Hong Kong in 2011 is a crucial milestone in the development of the company. “This is a very important move for us,” says Mr Kgadima. “It will give us access to the Asian investment markets and enable us to raise the $500m funding that we will need to develop large scale anthracite, coking and thermal coal mines. With all the actions we have taken, we believe we have positioned ourselves to become a large-scale mining company in the next few years.”

Project finance success for NCB

Posted on by

Compared to the relatively “mixed” experience of global markets, Saudi Arabia has enjoyed stability and growth in economic performance during 2010. The economy and stock market has outperformed other countries in the region which reflects customer and business index confidence in both the regulatory handling of the economy and the general financial health of business across The Kingdom. The Government’s $400bn injection into the economy over the course of  five years has resulted in a number of major infrastructure projects being financed and the effects of this is already working through the system. Indeed, NCB has secured a number of leading project finance mandates in 2010 and this has helped establish us as the number one project finance institution across the Gulf region.

More lending is also working its way through the economy and banks are being encouraged and are responding to the need to support businesses, large and small, with their growth plans. Indeed, 2010 has been a record year for NCB’s Corporate Banking Sector in terms of lending to our customer base. This reflects both our appetite to support Saudi business and our robust financial capital and liquidity position.

Indeed the relative strength of The Saudi Economy has seen many customers adopt a “Flight to Quality and Safety” in their financial approach and planning with significant growth in loans and deposits being experienced.

This is certainly the case at NCB and we put this customer “vote of confidence” down to our ownership, the strength of our financial performance and the resilience of our core franchise.
 
Economic challenges
There still remain risks in the system both internationally and domestically. Abroad, the fundamental core issues of unemployment, budget deficits, sovereign debt, political compromises and the constant media speculation on double-dip scenarios in economic indicators all combine to ensure that challenging times lie ahead and no country or region can be complacent about the future. Domestically, the key challenges for the banks are a low interest rate environment and a less than vibrant capital markets backdrop. These factors ensure that revenues will continue to be under pressure in 2011.

At NCB, we believe we are a portfolio of businesses and that being pro-active – we have the ability to quickly move on opportunities that present themselves and leverage our financial performance. We have done this in 2010 and will do so again next year.
 
International expansion
The Saudi banking sector is still very profitable and competitive. NCB has a market leading position in a number of key business lines but we never take our position for granted and treat all competition with the utmost respect.
We concentrate on our own performance and how we can make things better and that is why we place a great deal of importance on the customer experience, service quality and our investment in people. We believe that allied to our brand franchise – these areas differentiate our performance and continue to make NCB the leading Bank in Saudi Arabia.

Internationally, our majority shareholding in Turkiye Finans (acquired in 2008) continues to perform well. Turkey continues to be an emerging economic success story and our presence in the country can only be mutually beneficial moving forward.

NCB continues to assess potential future geographic expansion opportunities but they have to be right for our franchise, bring value to our shareholders and fit with our strategy of becoming the premier financial services group in the region.
 
NCB in 2010
NCB has performed well in 2010 and we have grown market share, attracted more customers to our business and enhanced the health of our core business.

Our balance sheet continues to be strong, service quality indicators are positive and key business relationships have deepened thus generating increasing revenues and better understanding of customer needs.

Retail distribution has grown, consumer finance has benefitted from the new mortgage product and treasury services in volatile international market conditions have been well sought and valued by customers. Corporate banking has enjoyed an impressive year and will be a key component of our 2011 growth plans.
 
Islamic banking performance
2010 has been about reinforcing NCB’s strong leadership and commitment to Islamic Banking. A leader in the provision of Islamic Investment Products, NCB launched the world’s first Shari’ah Compliant Real Estate Fund and was the first Saudi bank to provide its clients with a wide range of Shari’ah compliant funds. As a result, NCB is today still the kingdom’s largest Shari’ah compliant fund business and the world’s largest Shari’ah compliant asset manager.  In addition, NCB developed and offers the first and largest listed Shariah equity fund in the world and the capital preserve fund is used by many leading financial institution worldwide.

Our ongoing drive in retail distribution growth means that we are still one of the leading providers of Shari’ah compliant products to customers. In the corporate sector, our project finance support of key infrastructure projects in 2010 has overwhelmingly been done via Shari’ah Compliant product and this has been a source of great pride and achievement to us.   
 
Electronic distribution channels
Providing customers with new ways to do business with us has seen a rapid increase in our “e” capability across the NCB Group. In retail, corporate, investment banking and consumer finance we have invested in new technology and systems that now mean that over 80 per cent of transactions are now conducted by our two million plus customers through alternative delivery channels. At the same time, our 282 branches across the kingdom continue to provide quality service and access to banking for many of our customers both in main centres and remote locations.
 
Sustainability
Our strategy on sustainability focuses on people, profit and planet. As the first company in Saudi Arabia to produce an internationally accredited sustainability report in 2008 and the winner of The King Khaled Award for Sustainability and Business Excellence in 2008 and 2009 – NCB firmly believes that building a sustainable company that supports its economy, society, people and environment is of paramount importance.

As a financial services company our carbon footprint is relatively small but we believe that we can and should endeavour to act on what we can influence within our own organisation such as re-cycling, printing, water consumption and energy usage. We also can help raise awareness through our leadership position on the issue and we shall continue to pursue this across our diverse range of stakeholders.

Our objectives for 2011 are to continue to be financially resilient, prudent in decision-making, grow our core franchise, develop our people and at all times manage risk in an appropriate and responsible manner.

Abdulkareem Abu Al-Nasr is CEO of National Commercial Bank of Saudi Arabia

BESI targets securities takeover

Posted on by

Part of a 140-year-old banking group, BESI believes that it is vital to develop and maintain long-term relationships with its clients. As such, BESI has developed a multi-product approach which includes sector, industry and geographic specialisation.

BESI’s core product areas are: M&A, Project Finance and Securitisation, Acquisition Finance, Capital Markets and Private Equity products.

BESI, over the few years, has developed a significant international franchise, building its presence in the UK, Spain, Poland, the US, Brazil and Angola. BESI, like its parent, is committed to expanding its international activities, based on selective opportunities.

The Bank’s international strategy is focused on markets with either cultural, trade or historical links with Portugal.

BESI’s feels confident of the success of its overall product and market strategy, having achieved its highest ever consolidated income of €229m in 2009, a 20 percent increase on 2008.

Capital markets
Over the past few years, the Bank has built a sizeable capital markets business, leveraging its extensive experience as Portugal’s leader in privatisations and capital market placements generally.  

In 2009, over 60 percent of BESI’s banking income was generated outside Portugal, of which 35 percent from capital markets. Given the resurgence of capital markets activity globally, the Bank believes this will be one of its key areas of growth.

The Bank recently acted as a lead manager for the Portuguese Government’s 10-year €3bn benchmark bond, which generated a total demand of €13bn. The Bank’s participation in this successful transaction helped secure confidence in the European bond market and also re-emphasised investors’ long-term belief in the strength of the Portuguese economy.

Critical to the expansion of the business was the access to an international distribution platform.  In 2010, ESIB announced the acquisition of 50.1 percent in Execution Noble Holdings Ltd (EN) to provide a Tier 1 capability distribution in equities, derivatives and expanding into fixed income in London, New York and Hong Kong.

BESI will therefore have access to an established large and mid-cap pan European secondary equities and research business. In addition, Execution Noble includes a highly rated Indian research product which will combine neatly with ESIB’s differentiated emerging market offering, built around Brazil, Poland, Angola (expanding into Africa) and now adding India and Hong-Kong.

M&A growth and development
M&A has also been a vital part of BESI’s product offering. BESI once again was nominated for Euromoney magazine’s ‘Best Bank in Portugal’ award for excellence, in addition to the ‘Best Bank for M&A Advisory in Portugal’ Real Estate Award this year.

As global economic recovery gathers pace and as cross-border activity between Iberia, the US and Latin America increases, M&A opportunities will continue to emerge and BESI is well placed to position itself competitively in this space.

Given the globalisation of the Portuguese economy, the Bank is also building an international network to ensure that capital-exporting markets can be made available to all its clients.

In the same way that BES, its parent retail bank, has adopted the South Atlantic triangle of Iberia-Brazil-Africa as a focus for its operations, BESI has followed suit, expecting this region to be a significant area of growth for the Bank.

Project and acquisition finance
BESI is a global player in project and acquisition finance in the renewable energy, infrastructure and transportation finance sectors. There are a growing number of financing opportunities, related to public-private partnerships, for key infrastructure projects that are less dependent on global growth. BESI’s powerful presence in emerging markets then gives bank full access to what they believe will be a strong deal flow.

BESI cites their successful commercial banking operation in Angola as a perfect example, as the country has experienced an economic renaissance since the end of the war in 2002.

Following BES’s success in the area, BESI is also supporting a new direct presence for its investment banking operations in Luanda, which is currently underway.

Geographic strengths
Over the last ten years, BESI has invested in international expansion, leveraging a long-standing leadership position in all key investment banking product areas in its domestic Iberian market, with its depth of knowledge of certain emerging markets.

The Bank now offers innovative financial solutions across three continents: Europe, the Americas and Africa.

The Group has had a presence in Brazil for over 30 years, and BESI now has nearly 200 professionals based in its São Paulo office, offering a full range of investment banking services, complemented by asset management, private banking and private equity activities.

BESI has over time leveraged on the close relationship it has with its Iberian clients that started to expand to Brazil, among which we find several of the major Portuguese companies: Portugal Telecom, EDP, Brisa. We highlight the M&A advisory to Portugal Telecom on the sale of its Brazilian subsidiary Vivo – the largest M&A transaction in Brazil in 2010 to date. BESI has also been growing its local footprint, with an increasing involvement with Brazilian companies.

BESI’s focus on Brazilian players that have business relationships and/or are expanding into Europe and Africa, enables the bank to leverage on the BES Group’s presence in these continents, as through the latter BESI also has access to a differentiated African network including Angola, Mozambique, Libya, Morocco, Cape Verde and Algeria.

After the success of the Banco Espirito Santo Angola operation, BESI has applied and is waiting for approval to open its own branch in the country.

The North American operation have also been expanded with the opening of a representative office in Mexico, a joint project with BES, which will support business development efforts for the banks’ Advisory, Global Trade Finance, Project Finance, Corporate Finance, Treasury and Capital Markets services.

This expansion will strengthen the Bank’s ties to Latin America, enabling it to more effectively provide its clients with access to the growth prospects of the region.

The opening of this new office is integral to the development of global banking operations for both BESI and BES, serving as a hub for business development in Central America and the Caribbean Basin.

‘One stop shop’ Polish operations
The flow of Portuguese companies into Poland and BESI’s established experience in infrastructure and renewable energy project finance, led BESI to set up operations, originally through a joint venture in 2005, and from 2008 through its own branch, in Warsaw.

In 2008, BESI launched its own local brokerage activity, which has given the branch the chance to develop a local ‘one-stop shop’ strategy.

In terms of M&A, in 2010, BESI supported the purchase of a Polish construction company by a Lithuanian buyer. BESI also participated in the financing a motorway construction company, and was part of the Project Finance consortium for the production of a 120 MW Margonin windfarm, in the north west of the country, for EDP Renewables.

In terms of Acquisition Finance, BESI advised on the financing of the purchase of a school books’ company and is advising a consortium in the privatisation of a major Polish utility.

With the help and backing of a strong international investment bank, present in the major international finance centres, BESI is taking advantage of the current Polish economic momentum and offering a ‘one stop shop’ service to local businesses.

An award-winning New York branch
With New York being the gateway to the world’s financial markets, BESI felt the importance of having a branch in this city. The New York branch concentrates on wholesale banking, mainly in the US and Brazil.
Less than two years since its doors opened, the New York branch has already accumulated a number of significant achievements, including ranking as number one Bookrunner for Syndicated Loans in 2010.

Also, despite the current adverse market conditions, in 2008 the Branch achieved a 223 percent YoY in results, reinforcing its role in the development of the BES Group’s international strategy as a whole.

The launch of the New York office was in fact split into two, with the first half of the year focussing on identifying strategic clients and transactions in North America. The bank concentrated on renewable energy sector and made social infrastructures the priority in Canada.

During the latter half of the year, New York widened its focus of activity, including transport and more typically traditional energy sectors, and also expanded its geographical reach to the Spanish-speaking countries of Latin America.

BESI’s recent expansion moves
In February, BESI announced an offer to acquire 50.1 percent of Execution Noble, a London-based pan-European securities distribution platform. For BESI, Execution Noble provides a top quality international distribution platform and investment banking team, allowing it to operate through the key financial markets of London, New York and Hong Kong.

It also enables it to establish an enlarged international securities business, leverage its primary and secondary fixed income and equities presence in Iberia and its primary origination capabilities in Europe and Emerging Markets, in particular Brazil and, increasingly, Africa.

The combination of BESI’s Iberian and emerging market banking expertise and Execution Noble’s distribution capabilities should allow the Bank to become an international reference player in investment banking. With offices across the world in Lisbon, London, Madrid, Edinburgh, Dublin, Paris, New York, Mumbai, Hong Kong, Sao Paulo and Warsaw, the joint headcount will be close to 1,000.

We expect continued recovery of leading economies in 2010, albeit at different paces, and with varying risk factors. Within this context, BESI is confident of its growth strategy – developed on a mix of ambition and prudence.

For more information contact Tara Jones, Head of International Capital Markets
Tel: +351 21 21 330 2175|; E-mail: tjones@besinv.pt

Qatar to soften oil and gas dependency

Posted on by

While several countries in Europe and the Americas struggle to leave recession behind, many of the resource-rich economies in the Middle East are enjoying unprecedented growth rates. Contained within only 11,500 sq. km of land, for example, the small peninsular nation of Qatar has the world’s second highest per-capita income and the second fastest growing economy.

With oil and gas accounting for over 50 percent of the country’s GDP, 85 percent of exports and 70 percent of government income, Qatar’s economy did feel the pinch of the latest global economic meltdown — when growth in GDP slowed from an estimated 11.7 percent in 2008 to 9.5 percent in 2009.

That trend is expected to be reversed in the current financial year as global demand for hydrocarbons increases. Yet despite having sufficient proven oil reserves to meet current output levels for at least another 37 years, the Qatari government has embarked on an ambitious plan to diversify the country’s future economy away from its dependence on oil and gas.

“There are many different opportunities for investment in Qatar,” explains Shahzad Shahbaz, CEO of QInvest. “Clearly, energy and energy-related industries will remain a significant opportunity, but there will also be huge investments in infrastructure to build airports, roads, power, sewage and water facilities. The government is also promoting Qatar as a financial centre, particularly in asset management and insurance, and a longer term objective is to diversity the economy into education, health, science and technology, sports and culture; and to create a knowledge economy through strong research and development capabilities. There is a lot happening in this country.”

QInvest, Qatar’s largest investment bank, was licensed by the Qatar Financial Centre Authority in April 2007 with authorised capital of $1 bn. In three short years it has grown to employ over 130 employees with investments in the region and also internationally.  

Timing is everything. Although the world’s economy was looking bleak for investors, the turmoil in financial markets in 2008/9 meant that many talented individuals in the finance sector were displaced. With his ambitious strategy backed by a high growth economy, Shahbaz had a competing proposition and was able to attract many top quality individuals to the firm. “I think we have a good mix of international and regional experience on our team,” he says.

“We see that as one of our key strengths.”

His enthusiasm for doing business in the region, which QInvest defines as the Middle East, Africa, Turkey, South Asia and parts of South East Asia, is well founded. With a relatively young population, the region has a growing workforce and limited pension liabilities. Governments in the region are turning their attention to the huge capital resource available to them for the development of infrastructure, creating investment opportunities on a large scale.

Within this environment, the development of sophisticated regional investment banking services has been relatively slow, so Shahbaz sees opportunities for growth in his sector being disproportionately high even against the high growth rates enjoyed by the rest of the economy.

This prosperity and the investment opportunities in the region are naturally attracting the major global banks but, according to Shahbaz, these are mainly interested in the top end of the market. Beneath that top tier there is a large sub-market of regional suppliers and investors that is hungry for business.  “The global banks will always be here and doing business in this region,” he notes, “but there is also room for a well sponsored, well capitalised regional bank with good quality people and strong governance.”

But while QInvest is clearly focussed on developing its business and being relevant to clients and investors within its defined geography, the bank also has part of its sights firmly pointing outwards. Believing that linkages into international markets will enable them to provide better investment opportunities and services to their regional clients, QInvest has already acquired a significant holding in two financial services businesses outside its region.

The acquisition in 2009 of 44 percent of Panmure Gordon, a London based investment banking firm with offices and subsidiaries in the US and Europe, gives QInvest important linkages into the major capital centres of London and New York. The company’s longer term vision, which anticipates huge opportunities in the emerging markets of Asia, is behind its second major investment in early 2010 of a share in Ambit, a leading investment bank based in India.

“Our vision is to develop an emerging market strategy which we can then link into the major financial centres in Europe and the US,” explains Shahbaz. “Other than the major global investment banks, there are not many others who are doing this successfully or effectively.”

In addition to geographic reach, each of the two investments brings good strategic fit in specific business areas. Panmure Gordon has a strong brokerage business which complements the evolving brokerage activity of QInvest, and it provides a network of distribution centres in the European and American markets. The investment in Ambit not only provides QInvest clients with access to opportunities in the high growth Indian market, it enables QInvest to benefit  from that growth by gaining access at an early stage.

Solid foundations
Being an Islamic investment bank, QInvest operates within the investment guidelines set out in Sharia’a law which proved robust through the crisis.

Islamic finance does not, however, prohibit an investor from realising a return. There are many Sharia’a compliant ways to construct a transaction which will be able to extract a return, including profit and loss sharing or the sale and buy-back of assets. “What you can’t do is finance something for purely speculative purposes or something where there is no underlying asset,” Shahbaz observes. “That is the strength of Islamic finance. If you look at some of the problems that caused the recent international financial crisis, they were caused by speculative lending where there were no underlying assets.”

Increasing numbers of non-Islamic companies are accessing the benefits of Sharia’a compliant investments. As more people come to understand instruments like the Sukuk, a bond structured in the Islamic manner, organisations raising capital through Islamic structures gain access to a broader pool of investment capital, since both Islamic and non-Islamic investors can participate.

QInvest provides a full range of investment banking, investment management, brokerage and wealth management services to its clients. In addition, the firm has its own private equity strategy which sees it building the beginnings of an investment fund. Initially the investments are being made directly from QInvest resources but Shahbaz expects to get other investors to participate.

The first two investments for the fund were made in 2010. In April, the company acquired a 40.8 percent stake in Intercat Hospitality and Butlers Dry Cleaning and Laundry Services (the “Group”), one of the UAE’s leading outsourced business services companies. “These sectors are developing rapidly and Intercat and Butlers are the leaders,” comments Shahbaz. “We invested in them because the company has very good management and a business in this sector will grow in this region as infrastructure grows.”

More recently, QInvest acquired a 28 percent stake in Asian Business Exhibition & Conferences Ltd (ABECL), India’s leading exhibitions and conferences organiser. “We see India as a high growth market and this company is the market leader in this sector,” says Shahbaz. “This investment fits well with our strategy of supporting well-managed companies with strong growth potential in the MENASA region, and demonstrates our confidence in the Indian economy and our appetite to deploy capital in the country.”

With its wealth of talent and international reach, QInvest is ideally placed to take a leading role in the development of the communities in which it operates. As part of the company’s corporate social responsibility commitment, QInvest has developed a programme of activities that includes funding for a range of charitable, educational, social, cultural and sporting organisations and events. Among these is the annual Qatar Global Investment Forum, the second of which was recently held in Doha. The event attracted over 350 delegates from 30 countries keen to share some of their latest thinking on investment strategies in Qatar, the region, and more internationally. Closer to home, QInvest has set up the QTalent programme; that consists of Qatari Development Programme (QDP), Graduate Development Programme (GDP) and Internship Development Program me (IDP); for spotting and developing high potential talent who will form the future of the growing finance industry in Qatar. 

With all of this activity taking place in less than three years of starting business, some might consider it a bit premature to be thinking of realising the firm’s value in the market, but the QInvest team have that on the cards as well. “It is very much in line with our initial investment proposition that we offered to all those who backed the bank,” Shahbaz points out. “An IPO is very much on the agenda but the timing is still undefined. Definitely not before the end of 2011; probably sometime in early 2012, but it all depends on how we are progressing with the implementation of our strategy, and the market conditions at the time.”

Export credit guarantees

Posted on by

At issue is a little known agreement between the US and the EU dating back to the 1980s determining which airlines can access export credit guarantees – in essence a cheaper form of financing than commercial bank loans.

While originally designed to encourage plane makers Boeing and Airbus to create manufacturing jobs – by supporting sales to airlines in countries where political risk meant commercial bank loans were unavailable – its scope has widened in recent years, and western airlines are claiming the market has become distorted.

Central to this has been the so-called ‘home country rule’ – a verbal understanding between the US Ex-Im Bank (the US government’s official export credit agency) and its UK, French and German counterparts – that prevents support for purchases of Boeing and Airbus aircraft by companies based in any of the four countries concerned, as well as Spain.

US and European airlines have recently been crying foul, arguing the cheaper financing available to their (principally) foreign competitors has been exacerbated by the recent downturn in the business cycle and enabled the latter to build-up their fleets more efficiently. Complicating matters further has been the growth in the number of open skies agreements giving foreign airlines ever greater access to US and European markets.

So seriously is this issue being taken that in August James May, President and CEO of the Air Transport Association (ATA), wrote to US Treasury Secretary Tim Geithner, noting that over the decade 2000-09, the US Ex-Im Bank provided guarantees backing $45.7bn in financing for more than 800 large civil aircraft – more than the mainline fleets of every individual US airline. In financial year 2009 alone it made $8.6bn available to support sales of 143 aircraft to 17 foreign airlines and five leasing companies.

The level of US Ex-Im Bank support has been roughly matched by credit supplied by the export credit agencies (ECAs) of the UK, France and Germany – all nations where Boeing’s competitor Airbus has a presence. UK credit agency ECDG alone announced financing for Airbus aircraft amounting to £6.32bn from 2000-08, or over $9.6bn at the then exchange rate.

Unintended consequences
The ATA estimates that subsidised aircraft financing by the Ex-Im Bank has added approximately 17 percent to the capacity of Ex-Im financed carriers on US international routes compared to the level these carriers would fly in the absence of such guarantees. As a result, foreign carriers with Ex-Im subsidised financing have taken market share from US airlines, reduced employment at US carriers by more than 6,000 jobs and caused income losses of over $500m annually, it claims.

As Mr May puts it: “The damage caused by subsidised financing is exacerbated during declines in the business cycle because ECA credits and guarantees immunise borrowers from market conditions.’’

He added that during the recent downturn, US airlines cut capacity by eight percent and were forced to lay off thousands of employees; yet large aircraft production remained at record highs and the large aircraft market grew by over 10 percent.

In addition he noted that in 2009, when Delta Airlines and Dubai-based Emirates Air were each seeking financing for three Boeing 777 aircraft, Emirates, through Ex-Im Bank support, was able to obtain its financing at an interest rate of 3.47 percent, compared with 8.11 percent for Delta.

Figures show the top five largest airline beneficiaries of US Ex-Im guarantees from 2000-09 were: Air India ($3.94bn), Ryanair ($3.81bn), Emirates Airlines ($2.87bn), Korean Air ($2.51bn) and Thai Air Asia ($1.68bn).

China Airlines ($1.50bn) was ranked seventh. The top 20 beneficiaries received a total of $30.0bn of guarantees; total US Ex-Im came to $44.4bn, while total European Ex-Im was $44.0bn.

The data, compiled from information available in the annual reports of US Ex-Im, assumes European export credit financing was approximately equal to US Ex-Im financing over the same period.

Meanwhile, in its document “Request for Level Playing Field in Aircraft Financing,” the Group of Airbus Home Country Airlines estimated the annual financing advantage provided by export credit guaranteed financing at $4.2m per annum on the purchase of an Airbus A380 financed over 12 years.

Responding to more general criticism about airline subsidies, Emirates, which has raised $22bn to date for aircraft financing purposes, counters it has always obtained funds on a commercial asset-backed basis and that no financing has been obtained from Investment Corporation of Dubai (ICD) or the Government of Dubai, at concessional rates.

“Export Credit Agencies are a legitimate and internationally accepted support mechanism to boost manufacturing sectors and exporters in Europe and the US,” Emirates said in a statement. “Emirates, like many other airlines, uses ECAs as part of its broad financing structure. EU/US export credit agencies have supported just over 20 percent Emirates aircraft financing to date and are likely to remain in this range in the future.”

Yet just as Boeing and Airbus unsurprisingly seek to protect their existing turf, so they face a commercial threat in the single-aisle jets market, with Canada’s Bombardier hoping to promote its CSeries plane as a modern, more fuel efficient alternative to the ancient Boeing 737 and Airbus A320.

While there are more restrictions in place for large planes, when it comes to government backed loan guarantees to aid aircraft sales, there is greater flexibility for smaller sized regional jets.

Bombardier last year sought to have the CSeries designated as a regional jet. Boeing and Airbus in turn have claimed it encroaches on the large aircraft category. And for good reason as the Montreal-based firm is not bound by the same rules as Boeing and Airbus, giving it an unfair edge since CSeries planes could in theory be offered to a US carrier or an airline based in a country that’s home to Airbus production.

As debate rages in this particular segment of the market there is little doubt the CSeries will pose a commercial threat.

Decision time in Europe
Meanwhile, British Airways CEO Willy Walsh used a recent speech at the European Aviation Club in Brussels to hammer home the export credit finance point, claiming, like his American counterparts, that his airline’s ability – and those of some other European airlines – to fund the acquisition of new aircraft is handicapped by the more generous financing rates available to carriers from other countries, both inside and outside of the EU.

“We believe these guarantees are not operating in the way they were intended – and therefore urge the EU to amend the rules to remove the competitive distortions that have developed.”

Mr Walsh, who is also the current chair of the Association of European Airlines, said it was especially worrying to see Europe “funding the expansion of Emirates,” which is growing so rapidly some say it could change long haul aviation in the way Ryanair and other no-frills carriers have transformed short haul flying.

“It’s about time Europe makes up its mind what it wants from its airline industry,” he said. “The liberalisation of the market has brought about huge efficiency benefits, a stream of product innovations, lower prices and consumer choice. Yet all along the line these benefits are being eroded by heavy-handed and inappropriate regulation in some areas, and a reluctance to tackle structural deficiencies in others.”

US and European airlines finally seem to be waking up to addressing the issue after 24 carriers, including Air France, EasyJet, Lufthansa, Virgin Atlantic, American Airlines, Delta Air Lines, United Airlines, JetBlue and Southwest Airlines, recently forged an alliance and called for a 20 percent cap on aircraft deliveries financed with ECA-backed loans, higher export credit premiums and fees to neutralise any interest rate advantage they yield, lower maximum loan-to-value ratios and restrictions on ECA-backed loans to airlines or lessors based in high-risk countries. Boeing for its part has gone on record as supporting the 20 percent cap as ‘reasonable.’

European carriers, at least, also have EU Regulation 868 as a potential fall back, given it allows for the imposition of protective duties on foreign carriers using subsidies or other forms of “non-commercial advantage” to undercut prices.

The big question though is whether US and European governments have the stomach to change the status quo – the lucrative Gulf market being a case in point. Here, Airbus has total orders of 191 planes from Emirates, 133 from Qatar Airways and 59 from Etihad Airways.

Longer term though, it will become more difficult for European carriers to have enough customers to maintain existing flight schedules to destinations such as Hong Kong, as the balance of power gradually shifts and stopover traffic increases in the Gulf at the expense of traditional cities such as London, Paris and Milan.