Going places

Many of the high profile acquisitions involving GCC money have involved trophy assets, but one investment bank is proving that the best returns do not necessarily come from the most glamorous deals.

Addax Bank, based in Bahrain, has made a commitment to finding opportunities in areas that many other investors overlook, and an 86% return on capital deployed last year suggests that this approach is paying off.

Yousef Al-Essa, CEO, Addax Bank, says: "Our whole philosophy is to avoid being part of the flock and doing whatever everyone else is doing.

"We try to choose, first of all, unique and interesting sectors where there are real fundamentals behind them."

So far, these sectors have included budget hotels - with the Express by Holiday Inn chain - serviced apartments, media production and education. Within each sector, Addax has made efforts to ensure that it invests in niche areas. "The company should be very focused on what it does - not just doing hotels, but doing budget hotels; we're not just doing education, we're doing K-12 schools in the Middle East of a certain size," says Al-Essa. "It's very well-defined so an investor knows where his money is going."

Education is a sector that looks likely to provide substantial, and sustained, returns, he says.

"It's a sector that we feel is widely recognised to be recession-proof," says Al-Essa. "It doesn't really respond to market cycles like a lot of other sectors, because education is such a fundamental thing for any parent.

"It's also a steady cash flow business: you enter school in kindergarten or first grade and you stay all the way through for 12 or 13 years, and you pay tuition at the beginning of the year. As a business, it's great."

He also points out that the demographic profile of the region, which has an extremely young population that is growing at an extremely fast rate, means that the demand will be there for many years to come.

"Government schools out here are not up to the standard, so there's a bigger and bigger demand for private education, and that's driving a lot of growth in that sector," Al-Essa adds.

"But really it came about because we decided to get into this sector, not just because we saw that there was money in it and potentially good returns. We found a team that we could back, and we really had strong confidence in their ability to deliver in that sector; a team of professional educators who know how to manage schools efficiently, who have a very successful track record and who know the region very well, and were able to find schools that could be bought in the region at the right price.

"The same would apply to the hospitality deals we've done, the media production company - really to every project we've done. The business plan was very clear and was defined before we got into it. It wasn't something that everyone and their mother is doing, it's something where we felt we could be pioneers."

Media has a reputation as a sector in which is extremely difficult to run a profitable business, but Addax wanted to show potential investors that its venture providing television content could be profitable. "We took the risk first," explains Al-Essa.

"We did the first production out of the bank's own capital without taking any money from our clients, just to confirm and validate the model. "Everyone's trying to create their own TV channel but we consciously stayed away from that. What we're doing is providing 200 TV channels with content. They need to fill the hours and so there's a huge shortage of quality content - I think anybody that watches TV can figure that out."

Addax Media backed a team of young entrepreneurs, made a healthy profit on its TV series, which was sold to six channels, and now plans to increase its capital in the second half of the year to enable it to take on larger projects, having shown that the business model is viable.

"As an investor, most investors have plenty of exposure to real estate, both in the region and outside the region, and the stock market and so on, but they probably don't have much exposure in media, so just for pure diversification, I think it makes sense for some of them to own a piece of such a company," says Al-Essa. "Beside the fact that there are strong fundamentals that support it, there is a lack of content, the industry on the production side is extremely fragmented, and there is no major production house that these channels can count on to give them some good quality productions."

Education and media production are very different sectors, he admits. "We try to practise what we preach," he says. "We tell our investors they need to diversify and we give them that diversification so they don't need to go to anybody else."

This diversification extends to markets outside the Gulf. Addax is setting up a satellite office in Turkey to source deals. "It's an interesting market with good growth and the fundamentals are very strong," says Al-Essa. "We've seen a lot of appetite from our clients in the region to get into markets like Turkey and Asia."

However, Al-Essa admits that the Gulf is the market that the bank knows best, and will only commit to deals beyond the region if he is confident that he can find local partners to deliver results.

"As a Bahraini Arab bank, clearly it's easier for me to do business in Dubai, Abu Dhabi or Kuwait than to do business in Mumbai, for example," he says. "I need to recognise that and not be overly confident or arrogant and think that because I did it well in Dubai now I can do it well anywhere.

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