Banking on growth

Investment bank Arcapita's CEO explains why Bahrain will maintain its position as region's chief financial hub
Banking on growth
Ripple effect: Hit hard by the economic downturn, Arcapita posted a loss of about $560m for 2010, following a net loss of $87.9m the previous year
By Elizabeth Broomhall
Mon 11 Jul 2011 02:44 PM

Another sunny day in Bahrain. The streets are quiet, the heat is dry, and the ultra-modern Arcapita headquarters, located in the heart of Bahrain Bay and designed by Burj Khalifa architects Skidmore, Owings and Merril (SOM), is as plush and swanky as expected.

From his office, which is a bit like a living room, CEO Atif Abdulmalik has a great view of Manama city, and in particular, the Bahrain World Trade Centre building - famous for its integrated wind turbines. Sat relaxed on his sofa, sipping a cappuccino, he seems proud of what he has achieved over the last fifteen years, despite a few hiccups.

“Anybody who tells you they weren’t affected by the recession is lying. Everybody was affected in one way or another,” he says. “As a financial institution we were greatly affected - the problem being primarily to do with banks and money. Having said that, we have navigated our way through the crisis very well, and this year, we hope to make a profit. We should record $50m net income by June end.”

Hit hard by the economic downturn, Arcapita posted a loss of about $560m for 2010, following a net loss of $87.9m the previous year. One of its biggest issues was exiting its investments in the context of global investor woes, not to mention the collapse of its fee income from raising fresh funds in the Gulf.

Other challenges have of course stemmed from the ongoing Arab Spring, which took hold of Bahrain in February, clashes between Shi’a protesters and government troops causing many businesses to evacuate staff from the capital city and leave Manama resembling a ghost town. Fortunately, Abdulmalik says it hasn’t affected business too much. “The business got impacted, you can’t say it didn’t, but in our case, 90 percent of our assets are offshore, throughout Europe, the US and Asia. So Arcapita didn’t get affected substantially, but it did delay some activities. Hopefully they’re catching up now.”

Of course, prior to the recession and the Arab Spring, the Bahrain-based firm had no problems making a profit. Starting as a small, mono-sector investment bank, based in and sourcing its assets from the US, the firm, whose unique selling point was its Sharia-compliant products for GCC investors, quickly morphed into a globally-competitive institution, buying and selling in three key areas: private equity, real estate and infrastructure. As the first Sharia-compliant investment firm to operate in the region, the bank quickly earned itself a good reputation.

“Islamic banking started here in the Gulf around 20 years ago to help people buy a car or a piece of land according to their own religious beliefs - to satisfy the man in the street,” Abdulmalik explains. “Then fifteen years ago, sophisticated high net worth individuals (HNWI) started demanding products which were structured to comply with Sharia law. That’s where we came in. We started structuring sophisticated banking products to offer to these individuals.”

To be Sharia-compliant, he says, the firm cannot buy into industries such as alcohol, adult material or gambling, and it must modify the way the financing documents are written. Today, he says, Sharia-compliant banking is a market which is growing rapidly, with many high street institutions opening up windows and subsidiaries to cater for it. HSBC, Standard Chartered and CitiBank (which has a subsidiary called Citi Islamic Bank) are among them.

“A lot of people mistake Islamic banking as just a GCC phenomenon, but it’s in Asia as well, places like Malaysia, Brunei and Indonesia, which are big Muslim countries,” he says. “It’s not the prime reason people invest with us, but it helps people sleep better at night, knowing that their investments are in accordance with their religious beliefs.”

Looking forward, Abdulmalik thinks Sharia-compliant products will continue to be important to GCC investors, particularly as the investments themselves move further afield. As it stands, the company already sources its investments from and has offices in four prominent regions, namely the US (an Atlanta office), Europe (a London office), Asia (Hong Kong and Singapore offices) and the Middle East (Bahrain). Having these offices has done much to help the firm’s expansion.

“Since we started we have done 70 transactions valued at $30bn - so that’s a lot of activity,” says Abdulmalik. “Each asset ranges from between $100m and $1bn, and for each we sell we keep a part of it on our books, the rest goes to investors. So on our books now we have $2.5bn worth of assets, and we manage nearly $8bn worth for our clients.” This business model, he says, is key in gaining investors’ trust, proving that the asset is worth investing in. “This is a very good alignment of interest between us and the investors. We don’t just buy something, dump it on them and run away.”

As for the investments/acquisitions themselves, some of the best examples are those such as property firm Mapletree Industrial Trust and a portfolio of senior living communities known as Sunrise — both of which Arcapita has made a large amount of money on. Naturally, Abdulmalik says, the amount of investment in each sector changes every year depending on demand. “In a given year we might be more into private equity or real estate, but at the moment we’re investing about a third of our funds in each. Certainly infrastructure is something investors are requiring more of these days, things like power and water.”

Asked whether the firm has any plans to add additional sectors to its portfolio, he says there isn’t. In reality, Arcapita is present in a lot more sectors than it seems. “Within each sector there are subsectors, so through private equity for example, we are also in healthcare, retail, manufacturing and technology.”

Indeed, one of the firm’s most recent acquisitions is US retail chain/women’s fashion label J. Jill - a company which Arcapita bought from San Francisco-based investment giant Golden Gate Capital.

On geographical expansion, Arcapita is also remaining fairly conservative, though Abdulmalik admits there are some plans to tap further into Asia. Over the next five years, he says the firm should have an office established in Shanghai, boosting its ability to source an increasing portion of its investments from the region. “We want to sustain what we do in the US and Europe but start to accelerate in Asia,” Abdulmalik says. He adds however, that the company will not expand any further in the short term.

“I think in terms of geography we are good where we are. Don’t forget we’re not a commercial bank, so we don’t need to be everywhere. And we can cover whole regions from one office. So from Bahrain, we cover the whole Gulf, and if we’re in Singapore, Hong Kong and China, that’s a good enough footprint in Asia.”

A footprint he says, which will be increasingly more important as more and more investors eye the US and Asia as key markets, not to mention yielding products.

“Over the next year, investors will be looking at the US and Asia, and at yielding products. This is because when they buy private equity, they have to wait three to five years before we sell it and give them something back. When they buy infrastructure and real estate on the other hand, which is yielding, they are buying assets which give them a return on a monthly or six month basis — an electricity company might produce six to eight percent per annum for example. At the moment, that kind of product is well sought after.”

How long this trend of buying low risk, low revenue will last, he says is impossible to tell - the phenomenon being subject to time and human nature. “The risk appetite of an investor is very hard to predict. It’s all about greed and fear. People get greedy in good times and want big returns like before the crisis, and then you get hit by recession and people’s appetites shift. But you never know — it is human nature to change all the time.”

Either way, this should not impact on Arcapita’s development over the next year, which Abdulmalik says will be focused on getting the company back to its pre-recession profits. Over the last twelve months, the company has sold over a billion dollars worth of assets, and is expecting to do the same amount in the twelve months to follow. “Our emphasis will be on replenishing our books, so we will be buying a lot of assets. Over the last two years because of the financial crisis we have been a little bit quiet, and have been strengthening our balance sheet. So we have two years of lost book building to do.”

Separately, albeit also very relevant to Arcapita in the coming years, is how the recent social unrest will impact on the Kingdom’s reputation as a financial centre and banking hub in the region. Abdulmalik, forever the optimist, says that in his opinion, it will take more than the recent protests to shatter Bahrain’s reputation.

“I think Bahrain will continue to hold the position,” he says. “The central bank has evolved into a strict regulator, which a lot of banks respect, that’s why they are based here. This and a strong banking talent will give Bahrain an edge.”

Asked whether Dubai had a chance of stealing the title, as many analysts have speculated, he responds: “I don’t see it very soon, it will take some time. Bahrain has something going for it. Dubai is good with tourism, real estate and a lot of things, but the thing that sets the financial sector in Bahrain apart is the reputation in banking. You earn this over time. Another thing is local talent, he adds, highlighting how around 90 percent of staff in Bahrain banks are locals, compared with just five percent in Dubai. “Does that mean Dubai will never have that? No, it might, but it takes time.”

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