The State of the MENA Private Equity Market

The MENA region private equity sector is the subject of much discussion these days.  The Financial Times today published this article which makes mention of an increase in recent fundraising in MENA.  However, the article also states that large deals like those that were much more common in yesteryear are now fewer and far between.

What’s happened?  As with other regions in the world, many preferred private equity / venture capital asset classes in the MENA region (particularly the GCC) have taken a hit.  This can be illustrated just by looking at business news coming out of Dubai.  However, declining real estate prices in Dubai may not necessarily be the best metric for PE activity.

For one, not all private equity investments are or have to be in real estate.  There are many other emerging market sectors in the region that are worthy of investment.  These include clean energy, water desalination, transport infrastructure, and even areas such as education.  Even sectors like hospitality which have arguably reached saturation points in some parts of the GCC may still have notable potential in other less developed parts of the region (I remember trying to book a hotel for a weekend trip to Muscat in 2008 – hotels that would barely go for $70 a night in the Washington, DC area were approximately $200 a night in the Omani capital).

Second, not all private equity investments have to be or are in the GCC region.  Indeed, certain sectors in other jurisdictions such as Lebanon and Egypt appear to be experiencing significant growth, and this is not to mention increasing interest by GCC investors in emerging markets such as east Asia, Africa, and even some as far as Latin America.

Are there barriers to entry? Yes, both for startups seeking MENA/GCC venture capital and for GCC investors seeking to invest overseas.  Issues typical to joint ventures, project financings, and other private equity deals such as deal structuring, overseas dispute resolution, recourse, and risk exposure are not uncommon. Seeking VC funding from the GCC is not the same as doing so in northern California or Washington, DC.  The preferences of investors differ, the investment landscape can be vastly different – so parties should never discount the importance of seeking out expert advice.

The fact is that the GCC remains a small area with huge potential and an arguably tremendous amount of capital that can arguably not only satisfy its internal investment needs also much of those of many other emerging and established markets.

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Notes from the Islamic Finance Forum

The US-Qatar Business Council and the Arab Bankers Association of North America (ABANA) co-sponsored the Islamic Finance Forum at George Washington University Law School on Wednesday, July 28.  The talk featured a number of notable personalities in the industry, including Umar Moghul, partner at Murtha Colina, Sheikh Yusuf Talal de Lorenzo of Shariah Capital, and Aamir A. Rehman of Fajr Capital.  Topics covered Islamic investment structures as well as other timely Islamic finance issues, such as recent activities regarding Islamic finance in the US and the Gulf Cooperation Council (GCC) region.

Restructuring Nakheel’s Debt

Much has been said about Nakheel’s debt in the past year.  The large Dubai property developer known best for its creation of the man-made Palm Islands in Dubai has had its share of financial problems.  Much of this came in the aftermath of the Lehman Brothers’ collapse nearly two years ago, and the decline in property values in Dubai that soon followed.

This article in ArabianBusiness.com discusses a new proposal by Nakheel (owned by Dubai World) to reschedule some of its debt.  Companies reschedule debts all the time, so makes Nakheel’s debt interesting?  Nakheel’s debts touches on two major issues in international law – (1) Islamic Finance; and (2) sovereign guarantees and immunity in the commercial sphere.  Indeed, many do not even know that Nakheel has been a notable issuer of Sharia-compliant debt.

While Nakheel’s case may  have not been the best plug for Islamic finance, it is arguably an exercise in the feasibility of using Sharia-compliant finance in sophisticated transactions.  Nakheel in this case used an Ijara-based structure to create the basis of a Sukuk, often referred to as an “Islamic Bond” (notably, the Sharia does not permit bonds as most people know them; instead, Sukuk are generally supposed to be ownership certificates that are backed by tangible assets).  Good or bad, the publicity that has risen from this case could have a positive impact on the recognition of Islamic finance outside the Muslim world.

Click here for an interesting commentary in the UAE’s The National on Sukuk investments.

Interpreting the New US Sanctions on Iran

President Obama signed into effect the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 on July 1.  Just when you thought the United States had exhausted all its recourse against the Islamic Republic of Iran (due to very comprehensive, existing sanctions), a new legal framework has been implemented that makes full use of the U.S.’ economic prowess and influence over third countries.  I was quoted on this law in the Financial Times on July 14, 2010.  Click here for a link to the article.  The Los Angeles Times has also quoted me – click here.

How Does the Bill Affect Iran?

As mentioned above, the United States maintains comprehensive unilateral sanctions on Iran, preventing U.S. persons (as defined in the applicable regulations) from engaging in transactions for the provision of most goods and services to Iran.  As the United States has fewer levers to pull given the breadth of the current sanctions, Congress did the next best (and possibly better) thing – implementing sanctions on third country entities that assist or do business with Iran in key sectors, such as the country’s nuclear, finance, and energy sectors, not to mention the Islamic Revolutionary Guards Corps (IRGC) and related entities.

What’s Covered?

The new bill covers a range of entities and activities. Additionally, it requires that the administration periodically collect data on Iranian business done by G20 nations.  Notably, human rights play a key role as well – with the placement of sanctions on individuals responsible for human rights violations in Iran following that country’s June 2009 presidential elections.

A summary I wrote on the new law is available on the Iranian-American Bar Association (IABA) website.  Click here.

OFAC Targets More Iranian Entities

Following the trail of UN Security Council Resolution 1929 passed last week in response to Iran’s continued non-compliance with earlier UNSC resolutions, the United States today added numerous parties to its listed of sanctioned entities.

The U.S. government entity responsible for the country’s primary sanctions regime against Iran is the U.S. Treasury Department of Foreign Assets Control (OFAC).  In addition to promulgating regulations limiting trade with Iran and a number of other countries, OFAC also maintains the Specially Designated Nationals (SDN) list, a list of entities with whom any U.S. trade is prohibited.

Today’s listing, summarized in a Reuters article today, includes numerous entities related to Iran’s defense sector. This includes Defense Minister Ahmad Vahidi, Islamic Revolutionary Guards Corps (IRGC) Commander-in-Chief Ali Jafari, and head of the IRGC’s Basij paramilitary force, Brigadier General Mohammad Reza Naqdi.  Also included, among other entities, is the IRGC Air Force and IRGC Missile Command.

The sanctions also cover extensive shipping industry entities, including a number of ships and shipping companies.

Iran’s Post Bank has also been listed on the SDN.

Notably, as the previous post noted, the European Union is also contemplating similar types of sanctions against Iranian entities.  It should be stated that these sanctions do not appear to pose any particular pressure on Iranian civilians, rather they look to be crafted with an eye to pressure the IRGC and related entities, as well as entities deemed to be assisting Iran’s nuclear and missile programs.

New Sanctions Against Iran

A report in Tuesday’s Sydney Morning Herald states that the government of Australia has adopted sanctions against certain Iranian entities including Bank Mellat, Islamic Republic of Iran Shipping Line (IRISL) and General Rostam Qasemi head of the IRGC’s Khatam Al-Anbiya Construction Group.

The Australian decision follows a report in the New York Times detailing plans by the European Union to implement sanctions against Iran.  According to the report, these sanctions may eventually touch on Iran’s financial and energy sectors.  There appears to be a lack of consensus among EU states, and as such it will be interesting to see what the EU ultimately decides on.

Notably, the Financial Times has reported that there are certain legislative initiatives underway in the United States to sanction international banks engaging in business with Iran, in other words, third country institutions engaging in certain business with specific Iranian entities.

Given the very strong sanctions regime against Iran under current U.S. law, the U.S. government is arguably somewhat limited in using direct sanctions as leverage against Iran.  Conversely, the U.S.’ more recent strategy of dissuading third country financial institutions and other companies from doing business with Iran appears to be having a more direct impact on the Iranian economy.

Setting a Standard in Sharia Finance

The ArabianBusiness.com website featured an article on Friday stating that Gulf Cooperation Council (GCC) states may move towards a single Sharia-compliant standard for Islamic financings.  This follows another article earlier this month in the New York Times about the rising demand

Dubai International Financial Centre
DIFC - Dubai

and short supply of Sharia Finance Scholars.  This short supply has in some respects led to some consolidation in the Sharia finance sector – by having the same scholars sit on multiple boards, one group is having substantially large influence in determining the industry’s direction.  This helps in turn create a de facto standard for Sharia compliance.

The Sharia finance industry has two primary regulatory authorities at present – the Bahrain-based Accounting and Auditing Association for Islamic Financial Institutions (AAOIFI) and the Kuala Lumpur-based Islamic Financial Standards Board (IFSB) both of which have issued certain standards on Shariah finance.  IFSB is considered by some to be more the liberal standard-bearer and the two organizations have in some way helped bifurcate the industry into a MENA sector and a Southeast Asian Sector.  That said, both of these organizations’ rulings and policy guidelines are non-binding and voluntary.

The challenge of a broad set of Sharia standards becomes more problematic when taking into consideration the introduction of Sharia finance in non-Islamic jurisdictions such as the United States, the UK and France.  The UK Financial Services Authority (FSA) has taken certain initiatives, as have other governments. However, the legal structures in these nations mean that Sharia finance will need to conform to local laws – something that may cause deviation with a standard set in say, the GCC.

Taking the above into consideration, given the high concentration of capital in the GCC, the consolidation of GCC standards in Sharia finance can be a crucial step towards creating a global standard for the industry (a standard that can perhaps be modified slightly to comply with the laws of other jurisdictions as well).  This will help the industry grow in the region first, and that in turn will create competition – perhaps creating a situation where investment entities will have to come up with attractive, high-return Sharia-compliant vehicles to compete.

A review of MENA Region Legal and Business Affairs.