The sage of Manama

“We are facing the worst global recession in living memory,” grimaces Investcorp founder Nemir Kirdar, as he settles into a comfortable chair in his elegant Manama office. “To put the situation into context, the past six months have seen an unprecedented downturn across virtually all asset classes.”

So quite a time, then, for Iraq-born Kirdar to be celebrating 40 years in the world of high finance. Fortunately the veteran financier, also executive chairman and CEO of the Bahrain-based alternative investment firm, is bringing his considerable experience to bear and refuses to be panicked by the guttering of the global economy.

“What started with a financial crisis has extended itself to economic recession, and that is now spilling into social problems and challenges,” he notes levelly. “For all the governments of the industrialised world, their number one priority is to be able to tackle these things, and they want to do it with fiscal policies and by spending money.”

Kirdar cautions that simply throwing money at the problem is not the solution: smart spending is required, such as investment in the development of human capital to build a skilled workforce, competent management and distinguished business leaders. In the US, meanwhile, the $800bn-plus pledged by the Obama administration to infrastructure projects, should also help.

“Confidence has disappeared, people are afraid and cash is king,” he says. “On the other hand, a huge infusion of fiscal spending will create new jobs, and when you have income coming in, you’re going to start to spend money.”

Another key requirement is that the banking system goes back to the healthy pumping of money into the economy.

Thus far, any infusion of capital into the banks has been used to keep those institutions afloat, rather than routed into the wider economy.

“The banks have got to do this because that’s their business,” says Kirdar. “Optimists say that by the end of 2009 we should start to be able to see some of the results, although there are many pessimists who are saying this will take two, three or four years. Where do we belong? We think it is likely to be somewhere in between.”

Headquartered in Bahrain but with offices in London and New York, Investcorp has not been immune from the slump — the firm had had total assets of $3.67bn as at end-December 2008, down $1.1bn from end-December 2007. In December it also announced that it would cut 90 staff, of which 60 would be laid off, as it started to feel the impact of the global financial turmoil.

Despite these setbacks, however, Investcorp still boasts more than $13bn invested assets under management in private equity, hedge funds and real estate. Almost 27 years on from its foundation, and with a private equity portfolio comprising 25 companies, Investcorp is a behemoth with around 330 staff. It is also a distinguished link between the petrodollar-rich Gulf states, and the financial capitals of the US and the UK.

It isn’t the only firm having to realign and reassess in the current climate, either. Fortunately, the thoroughly discredited theory of decoupling — that the Gulf was no longer dependent on the US thanks to Asia’s economic resurgence — is one that Kirdar long ago dismissed.

“Two years ago people were talking about decoupling, but it has proved to be a baseless statement,” he says. “This whole world is interconnected — we can’t enjoy globalisation in good times and think that there is a disconnect in bad times.”

Kirdar admits that the write-offs of Gulf Sovereign Wealth Funds (SWFs) will have left a mark on many GCC states’ balance sheets. Fortunately, he notes, the six countries have accumulated a fiscal cushion of around $850bn over the past five years, which should help the region weather the storm better than some others.

“Money is made to be invested, and these SWFs are taking the energy from under the ground, from oil and gas, pumping it up and turning it into dollars,” says Kirdar.

“Some of that has to be spent internally for the local economy in order for survival, and the other part has to be invested so that it generates income for the future, to replace depleting assets,” he continues. “Investments are needed and today the losses are there, but I don’t think these people are going to sell their equities. I think they will be cautious and I think they will learn something — that diversification is very important.”

Such thinking should play into the hands of alternative investment specialists such as Investcorp. As the bias towards traditional investments is eroded, firms such as Kirdar’s will be looking to fill clients’ portfolios with more diversified ventures.

“It’s true that market dislocations create opportunities across a variety of asset classes, sectors and geographies,” he says. “In fact, historically the best returns from private equity have been generated from investments made during economic downturns.

“We firmly believe that there will continue to be a place for alternative investments in our clients’ portfolios,” Kirdar continues. “Even during these difficult periods, alternative investments have protected capital better than traditional investments in, for example, global and regional stock markets.”

It is not just the Gulf’s SWFs that have suffered as the stock markets have tanked. The region’s High Net Worth Individuals (HNWIs) have been hit hard through losses on local markets, and on a global scale the damage is unprecedented. The world has seen around $25 trillion wiped off the value of its equities, and high-profile Gulf victims include Prince Alwaleed Bin Talal Al Saud, the world’s richest Arab.

The chairman of Saudi-based Kingdom Holding Company is valued at $13.3bn on the Forbes Billionaires list 2009, down from $21bn in 2008. Shares of his Saudi-listed investment vehicle Kingdom Holding fell 60% in the last year as shares of Citigroup — once its largest holding — lost 86% of their value in 12 months.

Such losses, Kirdar suspects, will prompt Gulf HNWIs to tread carefully through 2009. However, they are unlikely to be panicked into offloading assets while the market is going down.

“If the HNWIs have cash, they’re going to be far more cautious until the return of a more comfortable atmosphere, and confidence has been rebuilt,” he suggests. “This is not the time that we can expect a lot of placements to be done — people with cash are going to be much more cautious with what they pick up.

“At the same time, it seems to me that if they all sell their assets, then they will be pushing prices down so they will all be losers — and then where do you put your money?”

That Gulf SWFs and some HNWIs exist in the first place is in large part thanks to the petrodollars that have sprung from the region’s vast oil and gas reserves, and these precious commodities will shape the next decade in the Gulf, as much as they did the last.

“I really feel the Gulf countries are sitting on huge amounts of energy and that has to be extracted and sold,” says Kirdar. “If you look at the whole world as one market, while some products you can afford not to buy, like cars and refrigerators, you need to buy petroleum or gas.

“So I feel these countries are blessed with having an excess asset for which there is absolute high demand,” he continues. “The prices will change and therefore the revenues will be up and down, but the product is going to be sold. The region as a whole, so long as there is oil and gas to be pumped up, is going to have an income.”

There are caveats, however, and Kirdar insists it is vital the oil price — which last week stabilised at around $44 as OPEC announced it had decided not to cut production levels — rises soon. Without a price between $60 and $80, he argues, further exploration will be considered economically unviable by producers, leading to serious problems in the future.

“Much more than [$60 to $80] is going to be a little hard for the world to swallow, much less is going to discourage investors,” he says. “But I believe it is both to the advantage of the world at large in the future, and to the advantage of producing countries today, for those countries to conduct further exploration and further extraction.

“We have six billion people in this world and the expectation is that it will go to nine billion over the next few years,” he continues. “For good order’s sake in a world in which we want to be able to plan for the future, the earlier we get into the further exploration of oil, as well as alternative energy, the better.”

In the meantime, Gulf firms would do well to heed Kirdar’s warning that only those with strong balance sheets will survive the downturn intact. In the era of cheap credit it was possible to take the balance sheet for granted and place the emphasis on earnings — a short-termism that echoes the mentality of the subprime loan debacle.

“At least for the next 18 to 24 months financial institutions should worry about their own balance sheets and not how much income they will record,” suggests Kirdar. “On that balance sheet, if you have staggered liabilities over the longer term, and you have enough capital and enough liquidity, you’re going to make it through this dark tunnel.

“Earnings by themselves are not the driving force, as you have to do it with a responsible balance sheet and with responsible risk assessment,” he emphasises. “When you take the balance sheet for granted, a crisis like this will tell you that you cannot take it for granted.”

Kirdar cautions, too, that there is likely to be an enhanced focus on the quality of management of financial institutions. He is frustrated that firms with a relatively small staff have muscled their way into the market, charging less but then proving incapable of fulfilling their responsibilities.

“How can an organisation like Investcorp, with over 300 people, compete with another organisation which has just 15 people doing the same thing?” he asks. “In our asset management fund of hedge funds, 25 percent of the funds that are given to us are from sophisticated international financial institutions. These people come in and they don’t just ask you what you earn, they come in and study the whole platform.

“If you have established a proper platform and proper depth, then together with that comes heavy costs,” he continues. “People who want to go into this business should have all the equipment necessary — I think the investors will demand that, and I am hoping the regulators will be a bit more careful before they issue licences.”

The issue of regulation is one that is dominating boardroom discussions at financial institutions in New York, London, Bahrain and elsewhere.

“I think some qualitative aspects are going to be part of the criteria in the future; at least I am hoping that will be the case,” Kirdar says. “I am one of the advocates for [increased regulation], but if at a time like this they do not hear, then I don’t know when we can tell them. This is the best time, when everybody is soul searching, to ask what went wrong, and what we can learn.”

Or who is to blame. Fingers are being pointed across the financial world in the wake of the disintegration of Lehman Brothers, and then a string of scandals such as that which saw disgraced former financier Bernard Madoff plead guilty last week to an 11-count criminal complaint, admitting to defrauding many thousands of investors through a $50bn Ponzi scheme.

“Investcorp had no direct exposure to Lehman and the overall impact of the Lehman bankruptcy on us was minimal,” Kirdar clarifies, adding that his firm also did not have any exposure to investments related to Madoff. There are still lessons to be learned from the incident, however.

“The Madoff scandal is unfortunate, [but] it has highlighted once again the urgent need for adequate regulatory oversight and strong investment and operational risk monitoring,” he urges.

“The current economic crisis has exposed weaknesses across the entire financial system. Unfortunately, they have also exposed embezzlement in a few cases, although it is important to highlight that such issues have not been exclusive to the hedge fund industry.”

Embezzlement aside, it is an industry that has seen significant — some argue steroidal — growth since Investcorp first stepped into the ring in July 1982. Back then, as now, the firm’s goal was long term sustainability ahead of quick profits.

The former vice president of Chase Manhattan Bank, New York, Kirdar is adamant that he did not leave Chase in order to form a facsimile of his previous employer. Instead, when he sat down with Investcorp’s prospective backers in 1981, the aim was to innovate and introduce products and services which were otherwise not available at that time.

“For that to happen, for us to fulfill our promise, the whole idea was that the management structure of Investcorp be at international best-in-class level,” he recalls. “We wanted to be a world class organisation built to last, one that would be there for 100 years.”

Over a quarter of a century later, Kirdar is convinced that Investcorp has just such a workforce, boasting 39 nationalities and a multitude of creeds, colours, religions, and backgrounds. The executive chairman asserts proudly that his team is “on a par, if not better, than anybody else in New York, London or wherever”.

The diversity of the workforce and of the management team ensures that while Investcorp is owned by some of the Gulf’s leading business families, it can also be identified as a truly international firm.

“We’re both Gulf and international: internationally run, but then Gulf-owned,” smiles Kirdar. “For as long as there is oil and gas that can be turned into dollars, portions of that has to be invested, and we can be one of the channels that they come to.

“Investcorp is needed, respected, and trusted — and we’ve earned that throughout the years,” he continues. “In the final analysis when you have excess funds, you want to go to a place where you can trust the judgement of those people, and that’s what Investcorp is.”

As for Kirdar, his role has evolved as Investcorp has grown. He recalls fondly the early 80s, when he was heavily involved in every deal the firm made in the West, and would then return to the Gulf to place that deal with opportunity-hungry local groups. That, however, is impossible now.

“I am a dealmaker, I am a marketing man and I like to be up front, but what happens now in Investcorp is that there are far more qualified people than me behind the transactions, and there are far more qualified people who are based here in the Gulf,” he laughs, with disarming modesty. “Business gets done — it does not wait for me.”

And yet many of Investcorp’s key clients do still bank on Kirdar’s personal touch. His expertise and experience mark him as a highly-regarded figure within the Arab banking world, and thankfully the man himself isn’t about to take a step back.

“I like to sleep at night, and I don’t like to worry. However, my responsibility I take very seriously and the company’s future is very, very important,” says Kirdar.

“As CEO I should be able to give clients the big picture in terms of corporate direction and strategy, as well as what’s happening in the world. And it seems they like to hear it from me.”