Talal Al Zain interview: PineBridge Investments

Talal Al Zain — former CEO of Bahraini sovereign wealth fund Mumtalakat — has been chosen by Pinebridge Investments to take the firm into the Middle East. But is now the right time to invest?
Talal Al Zain is heading up Pinebridge Investments’ regional operations, and is also the co-head of the firm’s global alternative investments
By Ed Attwood
Sun 27 Jan 2013 11:35 AM

When PineBridge Investments were looking for the man to
lead their charge into Middle Eastern markets, there can’t have been many more
qualified individuals than Talal Al Zain. A familiar figure in Gulf financial
circles, Al Zain’s resume is impressive. Back in the 1990s,  he was a managing director at Investcorp, and
then he took on the top job at Bahraini sovereign wealth fund Mumtalakat,
managing over $10bn worth of investments, and chairing Gulf Air at the same time.

PineBridge finally got their man in March last year. Not only is Al Zain heading up the New York-based firm’s regional operations, but he’s also co-head of alternative investments globally at the same time. And while it’s only been three years since US insurance giant AIG hived off PineBridge to Hong Kong-based Pacific Century Group — headed up by Richard Li, son of Li Ka-shing, one of the planet’s wealthiest men — the Middle East stands out as one of the few emerging markets in which the firm does not have much of a presence.

This Sunday, with the launch of a new Middle East and North Africa headquarters in Bahrain, Al Zain is hoping to change all that. Relaxed and urbane, he seems pretty confident that PineBridge’s faith in him is well-placed.

“When I was approached by PineBridge, it had a presence in 33 countries, thirteen of which were emerging markets — including Latin America, Africa, Asia and Eastern and Central Europe — but the only region in which we didn’t have a strong presence was the Middle East,” he says. “The closest we had was an office in Istanbul for private equity, and a small office in Dubai that did distribution.”

The immediate plan, for Al Zain, is to build up the local workforce. He is planning to more than double the Bahrain headcount to roughly 40, while switching the Dubai office to Abu Dhabi. However, PineBridge’s aggressive expansion into the region comes at a time of confusion in the local finance industry, with Western investment banks appearing to be largely retrenching.

Two French banks, Societe Generale and BNP Paribas, have sold off their Egyptian businesses to Gulf lenders, while Citigroup, Credit Suisse and Nomura have all pared back their teams in the region as fees from traditional investment banking activities have slumped. Elsewhere, however, private banking is making a comeback, as lenders renew their focus on the Gulf’s many high net worth individuals.

Meanwhile, alternative investments — the activity on which PineBridge’s operations in the region will hinge — appear to be back on the march. According to McKinsey, global alternative assets under management more than doubled between the beginning of 2006 and the end of 2011 to more than $6.5 trillion. Private equity in the MENA region is also making a gradual return, although it is nowhere near back to its high point of $4.1bn worth of deals
in 2007.

In 2011, the figure only reached a miserable $237m, according to Dealogic, with the average deal size dropping from $172m to $30m. But in the first half of 2012 alone, that $237m figure had more than doubled.

More importantly, however, private equity exits in the region rose to 72 in 2011, from a pitiful seven in 2009. And equity funds — or dry powder, as they are known in the industry – have built up to roughly $5bn, according to the MENA Private Equity Association. So does Al Zain believe that the long private equity drought is now over?

“I believe that private equity is — first and foremost — a very important asset class,” he points out. “Of course, when you say that private equity has had a hard time, that’s purely because of the global economy, because there’s a direct impact on the performance of private equity because the underlying assets are companies that are operating within those economies.”

From a macro perspective, Al Zain is pretty bullish on the health of the global economy in 2013, which is perhaps unsurprising given that most economists are predicting a return to form in most markets. He says the US will “probably” end 2013 with around 1.7 percent growth in GDP (as opposed to a 1.3 percent rise in 2012, and an International Monetary Fund projection of 1.5 percent this year) while the slowdown in Asia’s growth will also turn around this year. Again, the IMF predicts that China’s economy will increase to 8.2 percent in 2013 (from 7.8 percent last year) while India will see a rise of six percent (4.9 percent last year).

Then, of course, there’s the Middle East and North Africa — in particular, the Gulf — which is seeing GDP growth that will easily outstrip the 1.4 percent average rise that is expected across the OECD nations.

“We’re seeing that because of lower interest rates, because of the improvement in economies globally, the implications are that you will have more demand for oil,” Al Zain says. “If the strong demand for oil continues… that will, of course, impact economies in the Middle East.

“When we look at the Arab Spring and its impact on businesses and economies, most of these Arab Spring countries should eventually develop better institutions, and that should reflect positively on private equity.”

So what sort of investment is PineBridge planning to plough into the Middle East? Al Zain is reluctant to give details or targets, but given that the asset manager has roughly $70bn of assets under management worldwide, one would assume he has plenty of scope to invest. However, there are, as yet, no plans to set up a local hedge fund.

“On the private equity side, we are going to be doing it deal by deal — so it all depends on the equity cheque that we will be writing,” he says. “It’s the same for hedge funds; we’re not looking to create hedge funds in the region but we will be making our global hedge fund products available to our institutional investors in the region.”

Al Zain also says that he is looking at setting up a fund “in a specific area… if we are successful… it will be something that will probably be interesting for our global investors”. One area of investment that is definitely not on the cards is full-out acquisitions; instead, the PineBridge strategy will be to focus on growth capital minority investments.

“All of the products that we generate here in the MENA region will also be available to our global investors,” Al Zain continues. “Of course, today, we see a lot of interest from Asian investors towards the Middle East, especially due to the energy connection and the importance of this region to Asia from the energy supply point of view. What we want to do is create vehicles where these investors can really come to our area and really benefit from the opportunities.”

That investment won’t be one-way traffic, of course. The PineBridge boss will also, no doubt, be hoping to tap into his local network of high net worth individuals, who he says are interested in tapping into emerging markets such as Africa.

So what’s the plan for 2013? While Al Zain says that the main focus this year will be on building up his team, when questioned as to whether the firm will be closing any deals in the next twelve months, he says: “I hope so”. When it comes to sectors, the executive also points out that those decisions will be largely toned towards the demographics of a region in which roughly 60 percent of the population are under the age of 25.

“A large percentage of this population, as they graduate from universities, enter the workforce and start to build their careers — there is a lot of demand that will come out of this,” he adds. “There will be demand for more and better education, more and better healthcare — and there will be demand for infrastructure in general.

“And, of course, looking at our region, especially the GCC, you cannot help but think of the hydrocarbons industry. There are so many supporting services that one can take advantage of, and make investments there.”

From the geographical perspective, the company will focus on the Gulf and Turkey, followed by North Africa in the medium term. It’s no surprise that Turkey has been earmarked; GDP rose by a compound annual growth rate of 8.5 percent between 2006 and 2010, and has the kind of well-implemented regulatory and structural reforms that have attracted Gulf investors in recent years.

While the outlook for private equity may be looking up, some challenges remain. For Al Zain, the biggest hurdles to the market are valuations, financing and exits. While the number of exits has risen to a trickle in the last year or so, the lack of IPOs in the region means that one exit door has been effectively locked.

“What regulators need to do is encourage and stimulate companies to list, to increase the number of listed companies,” he says. “Personally, I believe that creating a GCC market will help, because it will increase investments in all markets.”

However, convincing firms to go public has proved easier said than done. Markets, especially in the UAE, are crying out for a big name to list, but sentiment has stymied most firms’ interest in an IPO. Al Habtoor Group and Daman Investments are two of the names that have threatened to list, but then pulled back. And while a unified bourse or a secondary market at a local exchange have certainly been mooted, neither have so far got off the ground.

More positively, however, Al Zain expects local equities to continue to improve in 2013. Last year, the Dubai Financial Market topped the Gulf league, rising by 20 percent year-on-year, while the Abu Dhabi Exchange rose by 9.5 percent and the Saudi Tadawul increased by a slightly disappointing six percent.

“I believe that as we continue to have low interest-rate environments, global and regional improvement in the economies, as long as oil prices continue to stay where they are, and as GCC governments spend more money on infrastructure, all these figures should have a positive impact on GCC markets.”

If the region’s economy continues in line with the company’s optimistic projections, then PineBridge’s bet on the Middle East will certainly pay off.

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