Talal Al Zain is a man on a mission. The chief executive of Mumtalakat Holding, Bahrain’s state investment vehicle, is busy drumming up global investor interest for a planned half-a-billion-dollar listing of one of his portfolio companies. That in itself would be enough of a task for most CEOs, but in the rarefied world of the Gulf sovereign wealth funds, it’s comparatively small fry. In short, Al Zain’s job is to manage a mammoth portfolio worth $10bn and bring it back to profit in 2010 after two years of net losses.
It’s no easy task, but under Al Zain’s leadership, Mumtalakat is now being seen in some quarters as a bellwether for activity on the Gulf’s markets. Earlier this year, when Bahrain went to the markets in search of a $1bn bond, Mumtalakat was quick to follow, with a $750m bond issue in June. Then, in an announcement that brought renewed vigour to troubled Gulf indices, the firm also announced that one of its trophy assets, Aluminium Bahrain (Alba) was launching a maiden IPO in October. Alba has joined Omani telco Nawras and the UAE’s Axiom Telecom in the new vanguard for public offerings, after a significant hiatus had left most firms wary of testing the battered GCC markets.
There’s no doubt that the Alba IPO is a pretty big moment for Bahrain. The firm was the first in the Gulf to work its way into the lucrative aluminium sector, and despite tough results last year, Alba posted an impressive $200m in profits in the first half of 2010. When questioned as to why now is a good time to IPO, Al Zain smiles: “For us, and with an asset like Alba — it’s always the right time.”
“It’s among the very few assets that is real business that is coming into the market,” he adds. “Today, the aluminium market is strong and there’s a positive outlook — people are calling it the metal of the future. We believe that if we IPO, we want to have investors looking forward to the future.”
While the headline figures for Alba reported a loss for 2009, Al Zain says those figures were due to company restructuring, undertaken during a weak point in the aluminium market. Secondly, while Alba’s entire production was sold, low global prices for the commodity hurt the hedging instruments in place for the firm. Thus far, reaction to the IPO, which is expected to raise up to $571m, has been strong both from Gulf players and international institutional investors.
“The local investors have been going through a quiet period in the equity markets so people are hungry for opportunities, and commercial banks in Bahrain are extremely liquid,” says Al Zain. “On the international side, investors have huge interest in our region because of the wealth creation, but because they don’t understand our market they constantly look at vehicles to get into these markets. A company like Alba is a global player; around 40 percent of the production goes to downstream manufacturers in Bahrain, and the balance gets exported to Asia, Europe and the US. It is a fantastic vehicle that these institutional investors can use to tap into our markets.”
Needless to say, however, Alba only plays a relatively small, if important, role in the Mumtalakat story. Among the other companies that the fund holds hefty interests in are Bahrain Airport Company, Edamah (Bahrain Real Estate Investment Company), National Bank of Bahrain and Durrat. The firm is also the 100 percent owner of flag-carrier Gulf Air. But in many respects, the Bahraini sovereign wealth fund differs from its peers. Perhaps the most obvious difference is that of financial firepower; by comparison with entities like Qatar Holding and the Abu Dhabi Investment Authority, Mumtalakat’s resources are relatively meagre.
Yet another major distinction comes in the form of diversification. Whereas many Gulf sovereign wealth funds tend to park their vast cashpiles outside the GCC, Mumtalakat has kept its focus mainly on Bahrain. The group’s one landmark international asset is in the British McLaren Group, in which Mumtalakat holds a 30 percent stake. However, Al Zain says that this is a situation that needs to change.
“Our existing portfolio shows a strong concentration on the asset class, which is the private equity side, and there is strong concentration on geography,” he adds. “We are very well diversified from a sector point of view — so in telecommunications, transportation, hospitality, real estate. But we’re concentrated in terms of geography and asset class, so in order for us to strengthen our portfolio…we need to diversify our portfolio.”
The big question, of course, is where Mumtalakat will be opening its sizeable wallet. Elsewhere in the region, Qatar has been making headlines buying up vast tracts of London real estate, matched by Abu Dhabi, which has also has extensive stakes in Europe, North America and what it refers to as Developed Asia. But Al Zain is, perhaps understandably, coy as to where the money will be spent.
“The proceeds will go into investing, for the time being, into more of a liquid portfolio. And when I say liquid, it will be both MENA and global,” he explains. “We have our strategic asset allocation, and our risk management and both of these will guide our decisions on where and what we’re going to invest.”
The CEO says that some of those investments will take place this year, and that Mumtalakat has already been in discussions with portfolio managers around the world. When pressed on exactly where the entity will be investing, Al Zain smiles. “Globally. Everywhere, and we’re looking at opportunities,” he says. “For us, we are an investment company. We have zero prejudice for or against any specific country or region.”
Overseas investment needs to be funded, however. In what may come as a surprise, not one dollar of the $750m bond issue in June will be spent on new investments or even on Mumtalakat’s existing portfolio. That sum has been set aside to shore up the firm’s tenor of liabilities. Instead, the money gained from the Alba IPO will used, as well as any cash accrued from divestments. Al Zain says that he will be looking closely at those firms that are regarded as non-core. An example of that is Mumtalakat’s sale of its 12.5 percent stake in Bahrain Family Leisure Company in August.
“It’s not that they [non-core assets] not important, but it could be because we have a very small ownership in them and no control whatsoever, or they are investments that do not necessarily produce current income for us,” the CEO says. “So for us, it’s a matter of allocating resources to maximise my return. But also, if you look at our strategy, we’re saying that on average we should not own a majority in any one investment. We should have controlled ownership but not necessarily 100 percent ownership.”
Some may ask why the sovereign wealth fund is being so cautious with the $750m bond largesse, but an answer may lie in Mumtalakat’s full-year results last year. The headlines showed that the firm more than doubled its losses from $183m in 2008 to $485m in 2009, with revenues falling by 28 percent. However, these results should not be seen in isolation. Other Gulf investment vehicles have also suffered from the downturn. Abu Dhabi’s Mubadala, which has stakes in Ferrari, GE and Carlyle, recently announced that its first-half loss alone amounted to $1.23bn due to a fall in the value of its investments. But Al Zain is reasonably phlegmatic about the reasons behind those ominous-sounding figures.
“Last year, yes, we reported a loss figure — but really, last year again was one of the most successful years for Mumtalakat. The loss really came because our accounting follows the IFRS accounting standards,” the CEO says. “And because of the IFRS standards, we have to consolidate our investments; for those investments that are 50 percent and above, we have to consolidate our financials.”
So for Alba, for example — in which Mumtalakat owns a 78.5 percent stake — the firm needed to consolidate figures on a pro rata basis on its balance sheet. By taking the hit on the one-time restructuring in a difficult year, as well as the mark to market on derivatives, the loss made by Alba was considerable. Elsewhere, the performance of Gulf Air also played its part by posting a loss of just over half a billion dollars in 2009.
“So if you take these two combinations, that’s what caused the loss. But if I add back the reform charge and adjust the mark to market to the derivatives and remove Gulf Air, I’m definitely in the black,” points out Al Zain. “Last year was successful because we have positioned Mumtalakat in a way that enabled us to obtain an A investment rating. Today, our balance sheet is the strongest ever. This year, we’re expecting, on a Mumtalakat level, that we will be reporting profits.”
A profit would represent a remarkable turnaround from the results of the last two years. Further down the line, even healthier growth can be expected, if Gulf Air breaks even.
That is expected to come in the next two or three years, and Mumtalakat has injected an extra $1bn into the flag-carrier as it seeks to redefine itself in the Gulf’s ultra-competitive aviation market. Al Zain describes Gulf Air as the biggest challenge in the Mumtalakat portfolio, but says the best is yet to come from the company.
“It is an exciting challenge. The problems of Gulf Air are really behind us,” he says. “We have put together a strategy with one of the leaders in the industry [CEO Samer Majali] and he is doing a great job on the execution side. As a representative of Mumtalakat and the government, I’m very excited. The leadership of Bahrain is supporting this company 100 percent because it’s a major part of our infrastructure.”
Al Zain is clearly proud of Bahrain’s move to open up the global bond markets for the Gulf earlier this year, but the CEO is also comfortable that levels of borrowing will not affect Mumtalakat’s investment horizons, and that progress will be as calm and studied as he is.
“From a Mumtalakat point of view, we are not leveraged much, and that will continue to be the case,” Al Zain adds. “Long term, on a holding company level, we will have minimum debt, so we are prudent in our approach.”
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