Which way now?


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Daman Investment chief Shehab Gargash on errors and excess in the emirate, and why Dubai must evolve to survive.

Shehab Gargash's Sheikh Zayed Road office hasn't changed much since he last invited Arabian Business in to talk, two years ago. The tan leather sofas are as comfortable as ever, the overstuffed bookshelves still look fit to buckle, and Gargash's lifelong passion for art is reflected in the striking pieces that adorn his walls.

Outside, of course, everything is different. Gulf bourses are down an average of 50 percent since their 2008 peaks, and Dubai's bubble has burst to reveal a $25bn debt pile.

Months before the credit crunch hit the emirate Gargash warned Arabian Business that the good times could not last forever. "In a historic boom, you're always worried about a historic bust," he cautioned. But today he takes no pleasure in having been proved right.

"Even in everyday business, the ‘greed is good' mantra was prevalent," he recalls. "It was a mindset, a town on steroids; everyone was out to maximise what they could get.

"For a generation in Dubai, no-one had seen a negative turn in the cycle, and so people were convinced that the growth was sustainable," he adds. "It was overconfidence, and it meant we were unprepared for what happened."

Gargash is better placed than most to survey the wreckage of Dubai's era of excess. He is a director of the Dubai Chamber of Commerce and Industry, a founder of the Young Arab Leaders and board member at a string of regional financial firms - but a downturn is a downturn, whoever you are.

Daman Investments, launched by Gargash twelve years ago, is proof of that. The company has just under $1.4bn of assets under management, but its four funds are down an average of more than four percent year to date, and 29 percent since inception. Its latest fund, named the Fifth Fund and launched in April this year, is already showing a 2.53 percent loss.

It's a story repeated at companies across the emirate. Gargash's theory is that Dubai firms, whether government-aligned or private sector, made two basic errors which have since been laid bare by the credit crunch. Not only did they fail to adequately manage their liquidity, they also diversified wildly into sectors far removed from their core business lines.

"In the case of a lot of government companies they relied a lot on borrowings and thought those borrowings would be never-ending, which proved not to be the case," he explains. "The unseen factor was how quickly and how dramatically the tap closed on them.

"In Dubai we also saw a lot of companies doing what they shouldn't have been doing in terms of business activities, most notably real estate. Everybody did real estate, from mortgage finance companies like Amlak, to Gulf banks and even billboard sellers. If you pardon the pun, it was a towering mistake."
That "everybody" includes Gargash himself, with the 2005 launch of ‘Buildings by Daman', which includes a 20-storey office block, a 60-storey hotel and a 60-storey apartment building at the heart of Dubai's financial freezone, the Dubai International Financial Centre (DIFC).

At the time he told investors the project would be completed in "late 2008", but in January this year, with plenty of work still to do, he sacked contractor Oger Dubai due to alleged "poor performance". Gargash is reluctant to discuss the Oger fallout "on legal grounds", but work has recommenced under the hand of Al Habtoor Leighton, and handover of the first phase of the $435m project is scheduled for "next year".

Looking back, Gargash admits the business community began to believe its own hype - and, importantly, act on it.

"Sometimes when you sat privately with the same people who were declaring in public very positive outlooks, they did express worry over whether it was heating up too fast. Then in the end they took the actions that went along with the bullish sentiment.

"There's a lot of human psychology to be studied in what happened. We were overtaken by what happened around us; when the tide rose, we all went with it."

It might be argued that Gargash "went with it" on September 17, 2008, two days after the crash of Lehman Brothers. It was then that he announced the launch of a $180m venture capital fund, Buildan, which would target the aviation and logistics sectors. Nothing has since been heard of Buildan, and unsurprisingly, Gargash is now convinced that Dubai's business community will have to get used to similar ebbs and swells.

The emirate's economy, he says, is more akin to some of the unpredictable markets of Asia, than to its relatively steady-going European peers.

"I don't see Dubai becoming a very stable, consistent economy," he says. "Dubai by definition is a volatile economy and it succeeds in that volatility and thrives in that volatility. It's a matter of tapering out the extremes."

Gargash argues that volatility creates opportunity for arbitrage and for price differentials. And while he hopes the economy can soften some of the sharp edges of its "boom and bust" nature, he believes international institutional investors will return once the opportunities show themselves again.

"Next time I hope they'll be a less rowdy, more predictable bunch," he says with a smile. "But you'll always have your pirates coming in and out, and I don't think you need to vilify them. You just need to understand what they're here for, and try to manage that."

More difficult, Gargash believes, will be luring serious investors back to the market. Gargash contends that the government needs to "step back and look at the broader picture". And his first step would be to pump more liquidity into UAE stock markets paralysed by slumping volumes and muted investor activity.

UAE markets, which include the Dubai Financial Market (DFM) and the Abu Dhabi Financial Exchange, have been the worst affected among Gulf peers since the economic slowdown hit the region. They are down ten percent and five percent respectively year-to-date but since 2008 highs, they have dropped 74 percent and 49 percent respectively.

Ninety brokerages are currently licensed to trade on the two bourses, but as many as one in three faces closure in the coming months, according to executives concerned by low trading volume. Many of the brokerages that do remain open are expected to shed staff.
Even so, the prospect of using government funds as a solution is one you would not readily associate with an avowed free market man like Gargash. "We are living a very irregular life as an economy today. The banks are not actively operating in the market; they are very defensive and they are risk-averse to a fault.

"This is an economic emergency that needs to be addressed, and so the interventionist philosophy is one that is required today."

Governments elsewhere in the world have been reluctant to take this step. In the US, despite having pumped trillions into the economy to kickstart a recovery, president Obama has refused to throw any new cash into US stock markets, arguing it could skew stock prices and subsequent company valuations.

Faced with similar liquidity issues the Singapore Stock Exchange has drafted a plan which will allow banks to trade directly on the exchange, boosting
volumes considerably.

Gargash is also convinced that the DIFC needs to refocus, arguing that it was overregulated from the onset: "You're setting up what is supposed to be a link between the Middle East and the rest of the world, but your standards can only be met by global institutions. Guess what: one of those links isn't going to show up".

It's an observation that is reinforced by hard figures. The DIFX, later Nasdaq Dubai, never attracted the dealflow that was anticipated, and struggled to attract serious attention from outside the region.

It was forced to reduce trading hours and outsource operational functions, and by the time its integration with the DFM was announced there were just sixteen equity listings on the Nasdaq Dubai - only one of which, DP World, traded daily.

Gargash contends that the DIFC's management spent too long wooing international brand names, while ignoring regional firms that would actually bring deals to the table.

"Getting regional companies wasn't seen as important as getting brand names," he recalls. "The regionals are the parties that are going to bring in the dealflow, that are going to [allow the DIFC] to differentiate itself and offer value."

Despite his criticism, Gargash maintains that the DIFC still has a significant role to play in the rehabilitation of Dubai. Nasdaq Dubai might have been a "failed experiment", but the DIFC can still be a conduit between the region and the international financial community. Moreover, the integration of Nasdaq Dubai with the Dubai Financial Market was "the right thing to do".

If all goes well at the new bourse, Gargash intends to take Daman to market before the end of 2012. The company has "worked hard" to prepare itself for a listing, he says, although he declines to say whether or not the company will go to market before 2013.

"I think we are a more ready company to go public than we were a year ago, and two years from now I hope we will be completely ready to go public," he says with a diplomatic smile. And he can hardly be blamed for adopting a cautious tone. After all, he knows as well as anyone, two years is a long time in Dubai.

 

Shehab Gargash

Born in Dubai in 1966, Shehab Gargash is founder of financial services firm Daman Investments, as well as a director of the Dubai Chamber of Commerce and Industry. He is also a director at several regional funds and companies focused on financial services, real estate and aviation. These include Trans Iraq Bank, Dawood Islamic Bank of Pakistan, Buildan Development Ltd, Saraya Mena Fund and the Arabian Real Estate Investment Trust.

Gargash received his college education in the US, earning an MBA in international business and a BAA in marketing, both from George Washington University in Washington, DC. He joined Citibank in 1989 and then the Emirates Bank Group in 1993.

In 1998 Gargash founded Daman Securities, a brokerage and financial services company focused on developing capital market opportunities within the UAE and the Middle East.

Today Daman Investments is a private joint stock company incorporated under UAE law, with assets under management worth just under $1.4bn. It has interests in investments, asset management, mutual funds, brokerage, real estate and private equity.

Gargash is also a founding member of the Young Arab Leaders organisation and has launched Alf Yad, a $275m venture capital fund aimed at providing equity participation to Arab entrepreneurs. A lifelong patron of the arts, he launched the Daman Middle East Art Fund in 2008, a $14m fund aimed at encouraging the development of the primary art markets in the Middle East.

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