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Thu 31 Aug 2006 08:00 PM

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Capital idea

The speed of growth in the region has attracted attention from foreign shores for many years, but a regional business investing in regional talent has yet to come make it big – until now. James Bennett meets Dr Karim El Solh, CEO of Gulf Capital, and uncovers how the Middle East has at last produced a homegrown champion

It has taken time to get here but the young doctor knows it has all been worth it. This may sound like the opening line to a classic drama but is, in fact, far from it.

Ever since he started in the investment banking, private equity and asset management fields 14 years ago, Dr Karim El Solh, CEO of Gulf Capital, has dreamt of creating, launching and moulding his own “homegrown regional private equity champion”. And 2006 appears to be his time. Markets are surpassing expectations and never-ending growth is spreading across multiple vertical sectors faster than you can say Initial Public Offering (IPO). As Dr El Solh and the company’s motto states, it is well overdue that regional businesses had a ‘partner in growth’. Gulf Capital has arrived.

Blockbuster IPOIncorporated in May this year as a private joint stock company and headquartered in Abu Dhabi and with an office in Dubai, Gulf Capital is one of the most significant financial success stories of the year after raising an unexpected and unsurpassed capital of AED 1.225 billion (US $330 million) from 300 of some of the region’s most prominent and prestigious Middle Eastern business figureheads. Dr El Solh’s baby was born, but after years of working behind the scenes at companies such as Citigroup and The National Investor (TNI), where he led and executed some of the region’s most record breaking IPOs including those for ALDAR Properties and Aabra Petroleum Investments, why did the young doctor not simply choose a lucrative, high-profile position at a major Gulf bank?

After all he has the talent, the expertise and experience and is just the man many top-level businesses are clamouring for. Gulf Capital, he says despite securing its first deal a few weeks ago (investing AED 150 million in Itsalat International, or i2, the Arab world’s largest mobile phone distributor), is already a major Middle Eastern institution.

“It’s interesting you say that,” he says, as if perhaps he has been approached to head up a large financial institution in the near past, “but when you look at our size, we’re already the largest in the region, so it’s not as if I’ve decided to be a big fish in a small pond, or join a small shop. We are a large enterprise with a large amount of capital and a huge shareholder base,” he says.

“What I wanted to do was create a regional champion from the region, for the region. I’ve done the big international work at multinationals but it’s time we brought something to the region and launched a homegrown champion that everyone can be proud of.”Regional ClamourThe fact that the company gained the support of a massive 300 investors, and raised five times more than expected was a clear sign, says the doctor, that the region needed a business of this ilk – but he adds that Gulf Capital could have even gone a step further if he had allowed it to.

“It was much more than we expected, but we decided to stay disciplined and only take one and a quarter billion Dirhams. It’s a balance because you have to raise enough equity to be a sizeable and powerful player, but not so much that you are sitting in cash and searching for a return on your equity,” he says sensibly.

“If we want to increase our capital we can do it in subsequent years as we deploy our cash, there’s no need to take it all up front. With the amount we have we are by far the largest investment company in the Emirates by capital.”

The prospect of a regional investment company backing regional businesses, however, is by far the only carrot Gulf Capital is offering. Dr El Solh has carefully taken the time to build the business’s infrastructure, hiring a highly experienced team, including the region’s first industry advisory board, to found a distinctive proposition to his shareholders.

“Our business model is novel, exciting and a very sophisticated offering. As individuals and directors we have a very strong track record and the opportunity is obvious and huge in the region. When you combine all of this investors realise this is a company well worth backing.

“So far we’ve been taking our time and building up. We’ve been busy building the infrastructure of the firm, hiring the team and putting the foundations in place. We’ve closed one transaction and have two others about to close – one in oil and gas and another in the energy sector.”

July’s i2 deal is set to be the first of many alongside three “mega-transactions” towards the end of the year, says the doctor. However, the Middle Eastern business world is going to have to learn to be unusually patient as the closure of private equity deals can often take between three to six months. As El Solh again astutely explains, regional investors were “clamouring” for an investment vehicle based on best in class practices in the West and applied in the Middle East. Therefore, from identifying and negotiating the deal, to carrying out full due diligence, to structuring the client’s business, to implementing processes and to closing, every move the business makes is based along those “best in class” lines – an area, alongside transparency, the regional business world has sorely lacked for decades and needs to rapidly adopt if it is to catch up with its US and European counterparts.East meets westThrough his experience in the world’s financial capitals and his careful hiring of Western influenced investment experts and analysts from Morgan Stanley, InvestCorp, and JP Morgan to name a few, Dr El Solh insists that companies in which Gulf Capital invests must, without fail, implement certain core elements to strengthen their infrastructures and enhance their growth potential.

“We tell them about the need for financial reporting and for monthly reports to ensure transparency. From the companies we invest in we need corporate governance, monthly reports, we need to restructure the board, have an internal audit committee and we need to have inter- company dealings. We really clean up.

“What we tell portfolio companies is that if they want to go public in two years you have to start acting and behaving like a public company two years in advance, which means operating at those very high, exacting high standards.” Gulf Capital’s “clean up model”, as Dr El Solh labels it, instigated when the private equity firm assess their clients over the first 100 days, is unique to the business’s gameplan. And he stresses this is what sets it apart from “the others”.

“Whenever there is a big transaction we’re always one of the top three to be invited, but it’s not just about capital because money is a commodity. “Whenever we look at a portfolio company and buy a stake during the first 100 days we clean and restructure the business. We improve it, review the strategy and give it all our backing to make sure it’s ready for the next level.

“We become an integral part of the senior management team. Entrepreneurs really appreciate that, that finally someone can sit side by side with their business and tell them how they should be shaped and how to achieve all their goals.”Top changesFrom a concept idea to negotiating and securing major deals, the firm has come “very far, very rapidly,” says doctor El Solh. ‘So, what if it all goes wrong,’ I ask, assessing how much risk the young CEO is prepared to take. He laughs repeatedly suggesting that I should come back and repeat the same question in six to 12 months time. But I quickly discover it is not risk that bothers him. As our conversation progresses into its latter stages it is obvious that he enjoys being an ambassador to his business, but that his major work conflict is that he badly misses the hands on excitement of being in the thick of the deal striking process.

“I look at my investment bankers working on transactions, getting deals together and I do miss that action, being on the frontline negotiating and closing transactions. But on the other hand, as CEO I have to put the whole team together, from the employees and the shareholders with capital, to the opportunities and assembling and running a business model that will carry us for years to come.

“Launching a new company there is a lot of administration work, hiring, policies and procedure, infrastructure, IT and its painful. People think being a CEO is exciting but in the early years our work, 80% to 90% is admin and 10% is fun.”

The chief executive admits that his role has changed from being on the deal floor to an ambassadorial one; however, he accepts that to be a top CEO in the region you have to build solid relationships and continually maintain a positive profile.

“My role is managerial, managing people, processes and entities,” he says “but a lot of my time is spent meeting shareholders and raising our profile because reputation is key here. To get transactions you have to be known in the market.Making it to meetings“I’ve realised it’s [meetings] an essential part of my role. I always say that a CEO is a glorified salesman and that his job is to sell the company and the mission, and bring in business to the firm so it can execute. My job is to make sure that we are well positioned, people think of us and send us transactions.”

If he is as successful with Gulf Capital as he was with The National Investor; his stakeholders continue to “send him transactions”; and his plan to take the firm public in two to three years materialises Dr El Solh’s decision to follow his dream instead of heading for a ready-made CEO’s position could be the wisest move of his career.

Then the young doctor will definitely know it has all been worth it.

"I always say that a CEO is a glorified salesman and that his job is to sell the company and the mission."

Straight talking: Dr. Karim El Solh's opinions on:GULF CAPITAL: Our goal is whenever somebody needs an extension of capital or wants to sell down his equity, he thinks Gulf Capital first. That should be the first thing that comes to his mind – that we are his preferred partners. That’s how we want to position ourselves and for that to happen I need to be on the road and spread the message.

CLUB INVESTING: Sometimes deals are too big for us to go after on our own. For example, you look at the telecoms licences in Egypt, every consortium has six or seven players so size is an issue. The competition as well, instead of ruining it for and outbidding each other and going through an auction process and sending the price skyrocketing, we say look we’ll partner together on this one, good for you and good for me. It’s called ‘cooptition’, where you co-operate and compete at the same time. There’s a book on that.

FAMILY BUSINESSES: They are coming to us realising they cannot fix their internal problems on their own. They use us to push the company to higher levels. You have to educate them on the merits of how we can help them grow their business. A lot of the time owners have been in business for 30 or 40 years and they want to monetise their investment and have something to show for it. Sometimes they want to list their shares so that they can have liquidity and spread it among their inheritance – succession planning. They welcome third parties to come and do that.

MODERNISATION OF THE GCC MARKETPLACE: There is a definite trend of modernisation taking place. Traditional businesses are becoming educated, they realise they have internal problems that, for example, they could run it as three brothers but when each brother has five children, 15 managers in the business is not going to work out.
They need to institutionalise and incorporate and are realising that what worked last decade doesn’t work today and that they have to do something about it sooner rather than later.”

INITIAL PUBLIC OFFERINGS: In 2004 and 2005 very few IPOs hit the market and IPOs were massively oversubscribed. By our last count there are 199 IPOs coming to the market in the next two years. Investors are being spoilt for choice and will gravitate towards the most attractive companies be it in terms of business, strength or valuation, so they will be picky and choosy. The strong IPOs will succeed and pass, the weak ones will have to be pulled off because of lack of demand.
It’s almost a nice trend because it’s the market that’s regulating which companies succeed and make it through and which ones don’t. Investors are finally waking up, being educated, and saying we should be looking at the strength of the business, the financials, the management, the growth story, and the valuation, they’re being selective which is what they should have been from the beginning.