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Sun 8 Nov 2009 04:00 AM

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Art of success

ARTOC chairman Shafik Gabr on why the Middle East is at risk of a double dip recession

Art of success
Art of success
Gabr sees another drop in the world economy due to the lack of regulation in the global marketplace.
Art of success
Gabr studied at the American University of Cairo, mostly on scholarship; he later attended the University of London despite being accepted at Wharton.
Art of success

Dinner at Shafik Gabr’s house can be a little overwhelming. For a start, it’s a ‘house’ in the same way that Emirates Palace in Abu Dhabi is a ‘hotel’. Stately in style and palatial in scale, the Cairo residence’s walls are adorned with one of the world’s finest collections of Orientalist art. And my dinner companions are no less colourful.

In quick succession I am introduced to former UN secretary general, Boutros Boutros Ghali; US Ambassador to Cairo, Margaret Scobey; and former Egyptian Ambassador to the US, Nabil Fahmy.

Other guests include renowned poets, jewellers, and business figures. As might be expected, conversation is lively, and ranges from Iran’s nuclear ambitions, to Barack Obama’s Nobel Peace Prize, to my personal part in Dubai’s ‘downfall’.

Our host is on fine form, and after dinner he shows me into his private study, for a glimpse of some of his most treasured artworks. The collection is worth an estimated $40m, and includes more than 90 masterpieces by Western artists depicting nineteenth century Middle Eastern streetlife. Scantily clad women cavort with turbaned men, while snapshots of hookah-addled stoners rest alongside portraits of fierce palace guards.

“I’m fascinated by how Western painters went through the difficulties of coming to the Middle East,” Gabr tells me. “They travelled for weeks and months, learning the culture, some learning the language, some converting their religion, and some marrying into the community.

“I’m not really interested in the [painters] who were sitting in their studios back in Europe or the US, but I fell in love with the ones who came here,” he continues. “I see them as early globalists, who brought the Arab world to the West. They were bridge builders.”

It is no surprise that such a theme would fire Gabr’s imagination. After all, this is a man who has been building bridges all his life — in business, in politics, and beyond.

When Gabr joined ARTOC in 1980, the name stood for ‘Arab Trade & Oil Company’. Today it stands for success, and ARTOC Group for Investment and Development is a multi–disciplined investment holding company with assets under management of $1.1bn.

Meanwhile, the most recent Arabian Business Rich List put the chairman’s personal fortune at $2.2bn.

Gabr counts royalty and political leaders from around the globe as personal friends. Twice during our interview the next day, he is interrupted by personal calls — one from the crown prince of an oil-rich Gulf state, the other from the former prime minister of Pakistan, Shaukat Aziz.

“One thing I’m very proud of is over the years although I’ve had my challenges and difficulties, I have created a network of good friends all around the world,” says Gabr with a smile. “I have always been a bridge-builder, and been able to create an environment where people can have dialogue and form partnerships.”

As an entrepreneurial investment house focused primarily on emerging markets, ARTOC is all about partnerships. And with a reputation for bringing value through financing, resources, networking, engineering or technical assistance, the company isn’t short of potential suitors.“Every single week we receive proposals from companies locally, regionally, and from around the world,” he says. “Right now we’re looking at proposals from Argentina, Brazil, Albania, and Armenia, among others, but we only look at ten percent of what comes to us.

“That ten percent we really investigate, and then we make a decision and put together a framework of how we can develop that opportunity from an idea into a project or a company,” he continues. “Of the ten percent, ten percent is eventually actioned upon. In many cases we will decide that it’s a better thing to say no, than to say yes and make a mistake.”

Gabr anticipates this philosophy will see ARTOC safely through the current economic turbulence. In fact, while he expects profits to drop around fifteen percent in 2009 compared to 2008, he hopes revenues will rise significantly compared to the year earlier.

“The reason for the slowdown [in profits] is not because of any structural deficiencies, but a slowdown in markets generally,” he says. “And when we look around us and find ourselves about to do 85 percent of what we did in 2008, we count ourselves very lucky. I look at other competitors, and they are not in good shape.”

Gabr claims that late last year ARTOC made a strategic decision to maintain market share, even if that meant a reduction in profit margins. While he expects revenues to rise by up to twenty percent in 2009, he estimates profits between $75m and $85m this year — not bad going during the deepest recession in living memory.

“Some of the company managers were arguing against this because of course it hurts them,” he recalls. “But I still strongly believe that when you invest in keeping that market share growing, you can readjust down the road. Whereas if you accept a reduction in your market share and do nothing about it, then it becomes more difficult to regain.”

Gabr is a free market man, and rails strongly against the artificial support of institutions that have found themselves overexposed to the downturn — and gone cap in hand to their national governments for help.

“In my opinion as an economist, [government bailouts] truly mess up the supply and demand model, because they create survival for the unfit, and harm the institutions that keep fit during a crisis,” he argues.

“It was right to let Lehman Brothers go, and I think the US has in place very good laws where you get protected from your creditors, and at the same time you are able to manage the company,” he continues. “But what truly concerns me is the moral hazard — why you don’t save Lehman but you save others.”

He contends that while taxpayers’ money is being pumped into institutions, necessary corrections to the system have yet to be made, that would ensure there can be no repeat of the current economic crisis.

“I find it mind-boggling when I look at the margins and the leverage figures and see how commercial investment banking operations are intermingled,” he says.

“The dangerous part is that the real economy of the world is about $53 trillion, but the financial world, the nominal derivatives, options, and so on, is $900 trillion,” Gabr continues.

“You’re talking about a huge virtual economy in which people are making money, in many cases without any value added and without any assets.”It is this false economy that concerns Gabr, and the injection of hundreds of billions of dollars of government money into the world economy will only exacerbate the situation in the long term.

Gabr reveals that ARTOC had considered the acquisition of a number of UK properties “where owners were looking to offload quickly in order to raise cash quickly, but maintain face”. Among these motivated sellers was struggling British institution RBS, but when the UK government effectively nationalised the bank earlier this year, that window of opportunity slammed shut.

“There are institutions that have been able to benefit from the marketplace and that’s fine, so long as you don’t rely on government support,” he says. “I believe in what John Kenneth Galbraith said: that you can have a very strong economy built on government and no private sector, but you can’t have a very strong private sector without a very strong regulated economy.

“That’s where the mistake happened — the US has been encouraging governments around the world to deregulate and step back, step back, step back,” he continues. “I think we stepped back too far, and yet still nobody has structured a new regulatory environment.”

Gabr warns that the ongoing lack of regulation in the global marketplace could contribute to a “second drop” in the world economy.

“I look at the stock exchanges and I think that because there’s a lot of money, and because interest rates are so low, that people are putting this money into the market,” he explains. “Therefore the valuations are coming up at a pace that is too fast and is unrealistic, and so I think there will be some sort of crash.”

In the Middle East, we should prepare for a “difficult” 2010, Gabr cautions. He refers to a “second wave” of contraction in which FDI drops, markets tighten and consumer spending drops dramatically. And moreover, he warns that a dearth of cooperation among different Arab nations will hamper the region’s recovery from the downturn.

“In our part of the world we still have what I consider a very serious impediment, in that all the markets without exception are very small,” he says. “We have failed where Europe has succeeded: in creating one market, in the removal of barriers, and in having much better networks, practical transport links and infrastructure.

“Europe suffered two world wars and yet was still able to consolidate, to allow mobility,” he adds. “Then look at the Arab world, where we talked about it back in 1950, and yet have failed to initiate it even now.”

So does Gabr ever regret not having followed his father into politics? Might such a move have better enabled him to bring about the kind of change he desires?

“Many years ago I made the firm decision never to go into politics, and I’ve always been very pleased I made that decision,” he insists. “It’s in my genes, it’s my passion, but it’s not my business, and I find myself being more valuable in a private capacity than in a government capacity.

“In today’s world you don’t have to have a government capacity or be a politician to be able to build bridges,” Gabr continues. “I believe some people are able to be more candid with someone not in a government role. And at the same time, when you are working with counterparts that can’t speak the same language, by which I mean the same thought pattern, it’s very useful.”

Gabr has been connecting people as far back as he can remember, and it is a facet of his personality that inspired his first foray into the world of work.“As a young man I had an allowance, but when I turned sixteen my late father turned to me and said ‘if you want to continue, then you have to work’,” Gabr recalls. “We were at war with Israel then and we had a very bad telephone system, very bad infrastructure, so I started a message-passing system where we ran messages on a bicycle.

“After 1967 if you walked round Cairo every single doorway was painted dark red, every entrance to every building had sandbags in front of it, and Israeli planes were coming into Cairo airspace and turning supersonic to make the glass break,” he continues. “It was designed to put fear into the heart of Egypt, that they could come any time they wanted — this was the environment I was growing up in.”

Gabr’s father paid for his first year at the American University of Cairo on the proviso that Gabr earned a scholarship for the remaining years; the young man did so successfully and was accepted by Wharton, although he eventually attended the less expensive University of London.

He lived in a “one-room, bed-out-of-the-wall apartment in St Peter’s Square”, working two jobs and dreaming of a return to Cairo and his father’s side.

By now Gabr’s father had retired from the Ministry of Foreign Affairs and opened his own private sector firm in 1970. However, he was not about to go easy on the boy and Gabr admits he made his son “go through very significant difficulties”.

“I worked with him and then out of nowhere he let me go — that’s how I joined ARTOC and then started buying shares,” Gabr says. “I asked him ‘why are you taking this attitude with me?’, and he replied ‘I want to see if you will sink or swim while I am alive’.

“My father died of cancer in 1983; he was ill for the better part of two and a half years, and it was a very difficult period,” he recalls. “My father taught me the importance of values in a very clear and objective way. He gave me the tools for survival, and taught me the importance of three P’s: patience, perseverance, and partnerships.”

Later that day, I find myself on the road to Mokattam Hills, close to the firm’s headquarters. Hundreds of ARTOC posters flutter in the breeze, each bearing the firm’s slogan, ‘The Art of Investment’. More than half a century after Gabr’s desire to connect people — to build bridges — first inspired him to run messages through warn-torn Cairo, ARTOC is equally reflective of its chairman’s great passions.


The five-point plan

The ARTOC investment group is renowned for its rigorous approach to research and due diligence — a trait it is easy to imagine stems from the chairman himself.

“We’re very lucky, and that’s because of five rules that we didn’t establish at the start,” Gabr explains, holding his hands up in a mock admission of guilt. “When we succeeded we sat down and tried to look at what had made us succeed, so it worked in reverse.”

The first rule will be familiar to business leaders of all shapes and sizes, and is inspired by a firm belief in Murphy’s Law, which typically states ‘anything that can go wrong will go wrong’. ARTOC is big on backup plans, a necessary caution that is reinforced by the firm’s second adage: never assume. “We double check, triple check, and quadruple check — we’re very boring about that,” smiles Gabr.

“Third, we believe cash is king, profits are an opinion,” he continues. “You can have fantastic-looking balance sheets but if your bank account doesn’t have money in it, I don’t care how good you are. And many firms around the world have been guilty of that.”

Fourth is derived from an old Egyptian saying, loosely translated by Gabr as ‘keep your legs under your quilt’. “You can stick a toe out, or you can stick a foot out, but don’t stick your whole body out,” he cautions. “Then finally, never invest in something you don’t understand.

“Over our 38 years of business, we’ve succeeded using those five rules. They’ve worked for us in good times and bad times, and we truly cherish them.”

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