The Investcorp Newsletter
Investcorp acquires POC
Corporate Investments Investcorp acquires POC and NDTCCS Real Estate The acquisition of Multifamily Residential Portfolio Investcorp and BDI The third Chairman Summit New Joiners New CFO & Head of Corporate Investment in North America Guest Feature Dr. Hani Khalil Findakly
The Review | November 2015 2
Welcome and retaining star talent. revolutionary manufacturer of skiing and cycling helmets, gear and accessories, Over the course of our fiscal year 2015, to our portfolio. POC is a deal I am we deployed $1 billion in Corporate particularly excited about and one that Investment and Real Estate deals across continues our long history of involvement all our key markets in the Middle East with consumer sporting businesses, which and North Africa, Europe and the started with Riva Boats in 1984, followed United States. Meanwhile, the Firm by Helly Hansen, Dainese, AGV and now generating $1.5 billion in total proceeds POC. from successful realizations in 2015 demonstrated our ability to maximize While we have no plans to slow down value through exits and complemented and are actively monitoring a number our buy-side activity. Taking a step back of situations across a range our markets, and looking at the six-year period to we will always analyse every detail of a FY15, total realization proceeds totalled deal in order to ensure maximum value $7.5 billion with total capital deployed creation. in new and add-on investments over this Away from investment activity, we have period hitting $4.3 billion. further strengthened the backbone of When you consider the global economic Investcorp by moving one step closer backdrop we have been operating in over to opening our office in Doha, having nvestcorp has begun its new fiscal the past few years, Investcorp’s ability received approval from the regulator. year the same way we ended 2015, to deliver consistently strong returns is This builds on our existing presence with us remaining focused on I a testament to our commitment to our in Bahrain, Riyadh and Abu Dhabi, executing deals where we see significant investors and shareholders. and allows us to provide an even better value creation potential for our investors service to our investors and shareholders and shareholders. While Investcorp is Since the start of FY16, we have in Qatar. going through a period of transition in acquired a portfolio of eight residential order to better position the Firm for the properties in the metropolitan areas of These are exciting times for Investcorp future, some things will never change. Las Vegas, Denver, Chicago, Atlanta and and while we are sure to see some Investcorp has its foundations in the Dallas for approximately $400 million. changes, the Firm’s unwavering complete alignment of our interests with All eight properties are well-occupied commitment and dedication to its clients that of our shareholders and investors, a rental properties situated in major and will forever remain. commitment to always delivering the very growing U.S. markets, offering solid rent highest possible level of client service via growth potential. On the Corporate Mohammed Al-Shroogi a high-touch model and always attracting Investment side, we have added POC, a Co-Chief Executive Officer
Contents
Corporate Investments Real Estate Farewell Page 4-8 Page 10-11 Page 14 Summary of Investcorp’s The acquisition of Multifamily A farewell to Mike Merritt acquisitions Residential Portfolio New Joiners Oxford University’s Middle Page 15 East Centre Guest Feature Page 12-13 Page 16-18 Dr. Hani Khalil Findakly Board Directors Institute Global Macro Outlook Page 9 Page 19 The third Chairman Summit by Rebecca Hellerstein
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Letter from Mohammed Al Ardhi The way forward
s I began to write this letter, it the medium term, helping our clients exciting investment opportunities in dawned upon me just how fast to grow their wealth in a disciplined international markets. my first few months as Executive way whilst effectively managing their A • We will strive to innovate our product Chairman of Investcorp have passed and risk. set to enable our investors to access I can honestly say that I have thoroughly • To always maintain and build very alternative investment opportunities enjoyed every moment. close relationships with our investors allowing them to create diversified Without the foresight of Nemir Kirdar and shareholders. We will always portfolios across multiple markets more than three decades ago to create a provide them with the very highest delivering attractive returns. Firm that would bridge the Gulf and the possible level of service. I am truly excited about the road West, Investcorp would not be where it is • To keep on carrying out the most ahead for Investcorp. We have a today. It is with the deepest respect that thorough due diligence and delivering strong platform, an incredibly talented I thank Nemir for leading this company the best possible return on investment team and a clear vision - but there is since 1982, and we owe a great deal for our investors and shareholders. no question about the level of hard to his years of dedicated service to the work required. I can assure you, my Firm. • We will continue to invest in our commitment to this Firm is unwavering people and attract international Investcorp is an institution that has and I am confident we can achieve our star talent, growing our headcount ambitions. It wants to grow and add goals. capability across our business lines more services on offer for its investors. around the world. All without losing its focus on client Mohammed Al Ardhi service. • We will seek to leverage and maximise Executive Chairman the huge depth of skills, relationships, We have set ambitious goals for the Firm resources and market knowledge that and have developed a clear strategy to already exist around the Firm and help us achieve them: that give us edge over our competitors • We want to grow our Assets under to reinforce our role as the region’s Management by more than 100% over bridge between the Gulf and
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Corporate Investments
Acquisition of POC Investcorp adds revolutionary specialist gear and protection maker POC to its portfolio
The Review | November 2015 5
Corporate Investments
n 8 October 2015, POC, a growing road bike market. revolutionary manufacturer This acquisition came almost a year of skiing and cycling helmets, O after Investcorp acquired the specialist gear and accessories, was added to the gear and protection maker Dainese, the Investcorp portfolio. POC was acquired most recognized and respected brand for a total consideration of $65 million for safety and quality in motorcycle and from outdoor equipment maker Black other dynamic sports markets. There are Diamond, Inc. synergies between the two businesses that Investcorp has continued its long history will be explored in the future. of involvement with consumer sporting Mohammed Al-Shroogi, Investcorp’s businesses in Europe, both apparel and Co-CEO, said: “POC is one of the gear, with Riva Boats, its first European fastest growing, dynamic and innovative investment in 1984, followed by Helly companies in the sports gear and Hansen, Dainese, AGV and most protection sectors. Its cross generational recently, POC. reach, intrinsic focus on technical Established in 2004 and headquartered innovation and commitment to safety, in Sweden, POC’s quest is to provide make it the perfect fit for our portfolio. athletes and consumers with the highest Leveraging our sector expertise, standard of personal protection. POC’s experience of working with high quality line of products includes helmets, body brands and industry connections, we armour, goggles, eyewear, gloves and believe Investcorp is well placed to other gear, which are currently sold further support POC’s already impressive across 27 countries worldwide. Through growth trajectory.” technical collaboration with partners Stefan Ytterborn, POC’s founder, said, such as Volvo and Ericsson, POC is “We are delighted to be partnering pioneering innovative safety concepts. with Investcorp in the next stage of The company also collaborates with our development. I am confident that leading sportsmen and women as it with their support we will continue strives to be at the forefront of technical to grow sales, increase penetration advancements including the American into new markets and drive forward World Cup alpine ski-racer and Olympic innovation, while not deviating from gold medallist, Julia Mancuso, who our ultimate mission of doing the best collaborated with POC to develop a we can to possibly save lives and reduce signature collection. Collaborations consequences of accidents for gravity with leading road bike teams, such as sports athletes and cyclists.” Team Cannondale-Garmin and Team Stolting, ensure POC is at the vanguard of developing products famed for safety, comfort and aerodynamics for the rapidly
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Corporate Investments
NDT Corrosion Control Services joins Investcorp’s Saudi portfolio
n July, Investcorp completed the in Kuwait and Qatar, provides non- Saudi Arabia’s acquisition of a majority stake in destructive testing (“NDT”) services for largest industrial I NDT Corrosion Control Services a range of industrial sectors including oil Co, the largest testing services company and gas, petrochemicals, mining, nuclear testing services for the industrial sector in Saudi Arabia. and utilities. NDT involves the evaluation Investcorp acquired the stake in NDT and testing of pipes, valves, oil platforms company CCS from the Al Shuwayer Group, which and other key industrial components founded the company in 1975 and retains and identifying faults, cracks or defects a minority stake alongside Investcorp. without causing damage. NDT CCS provides a broad range of NDT services NDT CCS, which also has operations to a large blue chip customer base, which in the UAE and licences to operate
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Corporate Investments Investcorp’s fifth acquisition in Saudi Arabia and the second in the Testing Inspection and Certification sector includes Saudi ARAMCO, SABIC, well positioned to unlock the company’s Ma’aden, Saipem and Hyundai Heavy potential, optimize its operations and Industries. drive its next phase of growth.” Mohammed Al-Shroogi, Investcorp’s James Tanner, Head of Corporate Co-CEO, said: “NDT CCS has firmly Investment – MENA and Managing established itself as Saudi Arabia’s Director at Investcorp, commented: market leader in the NDT industry. “NDT CCS benefits from having the We believe that the company is well- largest number of skilled technicians positioned to solidify its leading position together with a broad service offering. and gain a greater market share in a The company has been successful in sizable, growing and fragmented industry. securing a healthy mix of projects growth of NDT CCS. It has an extensive Investcorp will support the company to and maintenance contracts, which we track-record of successfully investing grow its existing business in the UAE as believe positions it favourably to help in the GCC and has specific industry well as expand into Kuwait and Qatar. achieve sustainable and profitable experience through its investment in Investcorp will seek to leverage its long-term growth. We are excited about Moody International. I am looking previously successful experience with partnering with the Al Shuwayer Group forward to working closely with our new Moody International, a global provider and capitalizing on the strong demand partners to bring NDT CCS to new of inspection services and international fundamentals that are supported by an markets as well as broaden our service certifications. Investcorp acquired Moody aging infrastructure base and high safety offerings.” International in 2007 and successfully requirements by asset owners.” sold it in 2011. As is the case with other Mishal S. Al-Ardi, CEO of Al Shuwayer corporate investments across the Gulf, Group and shareholder, said: “Investcorp Investcorp is the first institutional owner is the ideal partner to help support the of NDT CCS and we believe we are
Georg Jensen continues to extend its reach
flagship outlet in London’s Mount Street, exhibitions. During the event, Georg ahead of the official VIP opening that Jensen introduced the latest holloware is taking place later this month. The set designed by world-renowned Apple opening of the flagship store in Mount iPhone and Apple Watch designer Marc Street comes as Georg Jensen decided Neusson. to relocate its flagship store from Bond In May, Georg Jensen’s CEO David Street, its home for 80 years. Chu was honored to welcome Frederik, ver the past few months, In September, Georg Jensen opened its Crown Prince of Denmark, and Mary, Georg Jensen has continued much-anticipated House of Georg Jensen Crown Princess of Denmark, to the O its expansion in key markets in the heart of Beijing, China. The opening of Georg Jensen’s first flagship around the world. In October, the House includes a Georg Jensen museum, Store in Munich. Danish design and luxury brand held a retail outlet, lounge, a restaurant a private pre-opening event for its new and a hall for dinners, art events and
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Corporate Investments Fitness Time partners with FC Barcelona
Barcelona Football School, FCB Escola, Fahad Al Haqbani attended on behalf of in both countries, under the supervision Fitness Time. of Spanish trainers accredited by FC The signing of this partnership comes Barcelona. The agreement also allows as Fitness Times opened its first gym in for a yearly delegation of children to visit Dubai at Al Mamzar. The state-of-the- Barcelona and train in its facilities. art facility, spreading across 4,828 square A signing ceremony was held at the Rafal meters, encompasses the latest fitness Kempinski Hotel in Riyadh. Javier Faus, equipment, classes and amenities. Vice President of FC Barcelona, and Laurent Colette, Chief Marketing and itness Time has become the official Commercial Officer of FC Barcelona, partner of FC Barcelona in the represented the football club. Fitness F Kingdom of Saudi Arabia and Time’s Chairman of the Board and the UAE. It has the exclusive rights to Managing Director Abdul Mohsen Al launch the Kids Football Academy and Haqbani and Chief Operations Officer
The Review | November 2015 9
Board Directors Institute Investcorp and BDI held the third GCC Board Directors Institute Chairman Summit
nvestcorp and the GCC Board listed company and an investor in growing Directors Institute (‘BDI’) held the economies across the region and around I third Chairman Summit in Riyadh the world. Our objective revolves around on 14 September 2015. Featuring three maximising value creation, and ensuring a panel discussions, the Summit hosted over strong board of directors is in place is an 60 Chairpersons and CEOs of regional important part of this process.” leading organisations. The Summit focused on three topics; In his opening remarks, Mohammed (1) the importance of public trust to a Al Shroogi, Co-CEO of Investcorp company’s success, (2) the chairman’s and Chairman of BDI, emphasised the role in enhancing board effectiveness and importance of instilling world-class (3) the board’s role in leading companies standards of corporate governance and through change. In his welcoming Mohammed board effectiveness in the GCC in order speech, Mr. Al Shroogi talked about Al Shroogi: to make a strong impact on economies the significance of these three issues in and societies in the region. the context of the current regional and “Professional international economic conditions and Mr. Al Shroogi talked about the growing the challenges companies face as they seek role BDI has been playing in promoting directorship and investment and avenues for growth. professional directorship and effective effective Boards boards across the region. He explained He continued to say that, “In light of the that, “these two areas are key components uncertainty we are currently seeing in the are significant of good corporate governance, which, markets, regionally and internationally, once achieved, translates into strong being a chairman is increasingly requiring components of market confidence and better access a lot of commitment and hard work, in to capital, both domestic and foreign, addition to both formal and informal good corporate allowing companies to invest and create engagement with management. Most jobs, and in turn stimulate the growth of importantly, the chairman’s role should governance” the wider economy.” complement the board’s part in leading companies through change and providing On Investcorp’s involvement in BDI, he guidance in the development and commented that, “BDI’s vision and role execution of a strategic plan.” in the GCC aligns very closely with what we aim to do at Investcorp, as both a
The Review | November 2015 10
Real Estate Investcorp Adds $400 Million Multifamily Residential Portfolio
American Communities Portfolio, Texas
The Review | November 2015 11
Real Estate
nvestcorp announced the acquisition • The Reserve at Hoffman Estates, of multifamily properties in Houston of a portfolio of eight residential Chicago, Illinois: This property, and Dallas, an industrial property in I properties in the metropolitan areas located within the upscale Hoffman Connecticut, office buildings in Northern of Las Vegas, Denver, Chicago, Atlanta Estates/Schaumberg suburb, is a California and hotels in Pittsburgh and and Dallas for approximately $400 desirable community in the Chicago Boston. million in October. The transactions took Metro area. This area is known the Firm’s total real estate acquisitions for its numerous retail centres and past $1 billion over the last 12 months, corporate and industrial companies, in the continuation of a highly active representing the largest concentration period of investment for the company’s of business outside of the city of real estate group. Chicago. The properties were acquired through • Rosemont Vinings Ridge, Atlanta, joint ventures with several local and Georgia: This for-rent apartment regional operating partners. They total complex is located in the growing more than 3.2 million square feet with Cumberland/Galleria submarket approximately 3,400 multifamily units. in Atlanta, the business capital Solis at Flamingo, Las Vegas Currently, the average occupancy rate of the Southeastern region of the is approximately 96 percent. All eight U.S. and a global business hub. properties are well-occupied rental The area has benefited from over properties situated in major and growing 250 recent corporate locations and U.S. markets, demonstrating solid rent over $2 billion in public and private growth potential. Investcorp intends revitalization projects, including a to add value to the portfolio through new baseball stadium for the Atlanta renovation and capital expenditure, a Braves. It is also in close proximity strategy that the Firm has successfully to major retail centres, public parks, executed in previous multifamily quality schools as well as major investments. thoroughfares, providing connectivity throughout Atlanta. The Reserve at Hoffman Estates, Illinois “In an environment in which the U.S. homeownership rate has dropped to a • American Communities Portfolio, 50-year low, these acquisitions affirm Irving and Plano, Texas: These our confidence in the attractiveness of garden style multifamily apartment investing in high-quality multifamily properties are located in Irving and rental properties in major U.S. markets. Plano, two dynamic and growing We believe this fact, combined with the Dallas submarkets. Since 2005, the solid demographic and employment area has seen significant employment fundamentals in these areas should growth of over 20 percent, well above assist in driving the upside potential the national average, and enjoys a of these investments,” said Herb diversified economy in technology, Myers, Managing Director, Real Estate communications, healthcare and Rosemont Vinings Ridge, Georgia Investment at Investcorp. manufacturing. The acquired properties are: • Cherry Creek Club, Denver, Colorado: A for-rent multifamily • Solis at Flamingo, Las Vegas, property located within Denver’s Nevada: This garden style, for- thriving and diverse Glendale/ rent multifamily property is located Cherry Creek submarket and in close in close proximity to three major proximity to Denver’s two major employment drivers that have spurred office areas, Downtown Denver and population growth in the area: the Southeast Denver, which are home Las Vegas Strip, the University of to several high growth employment Nevada, Las Vegas, and McCarran sectors such as healthcare, IT and International Airport. Additionally, Cherry Creek Club, Colorado energy. there are various major construction projects underway in the surrounding In addition to strong momentum behind area, totalling approximately $8 acquisitions, significant realizations billion. have also been made, such as: the sale
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Oxford University’s Middle East Centre
region. The Investcorp Building’s lecture theatre will allow the Middle East Centre New building by Zaha to expand its popular programme of seminars, lectures and debates - much of which is open to both the University and Hadid unveiled at Oxford the public. Dame Zaha Hadid said, “The work University’s Middle East of the Middle East Centre contributes to the global discourse and greater understanding of the region. The new Centre Investcorp Building connects disparate buildings within the college, defining a he Oxford University building broader than effecting mere financial series of generous spaces for the centre’s created by Zaha Hadid was transactions. We have also made it our renowned archive, library and seminar T unveiled and named the goal to promote higher education and programmes; allowing the Middle East Investcorp Building. St Antony’s College cross-cultural understanding. Oxford’s Centre to expand its commitment as a commissioned the building to expand Middle East Centre was established to forum of research, understanding and and make space for its Middle East become a bridge between the West and open debate.” Centre. The Investcorp Building spans the Middle East, and Investcorp could two Victorian buildings on Woodstock not be more proud to do our part to Road in the grounds of the college. further this worthy cause.” Her Highness Sheikha Moza bint Nasser The new building doubles the space of Qatar was the keynote speaker for the available for the Middle East Centre’s unveiling of the new building. Sheikha expanding library and archive, providing Moza is chair of the Qatar Foundation, almost 1,200 square metres of additional an education development and scientific floor space and a new 118-seat lecture research organisation, as well as the theatre. The Middle East Centre holds UNESCO Special Envoy for Basic and Oxford University’s primary collection Higher Education since 2003. on the modern Middle East, an excellent collection of private papers and Nemir Kirdar, Chairman of historic photographs used by scholars Investcorp, commented, “From the and researchers with an interest in the outset, Investcorp’s mission has been
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Oxford University’s Middle East Centre Nemir Kirdar appointed Founding Chairman of the Advisory Board of the Middle East Centre at Oxford University
emir Kirdar was appointed the Middle East and the West, we have Appointment as Founding Chairman of the long held the view that providing a coincided with N Advisory Board of the Middle conduit for cross-cultural understanding East Centre at St Antony’s College at is core to our mission. The Middle the unveiling of Oxford University on 7 June 2015. East Centre at St Antony’s College will provide an educational bridge of this The principal remit of the Advisory kind, and we are immensely proud to the Investcorp Board is to enable the Middle East serve this cause.” Centre to fulfil its mission to serve as a Building at Oxford bridge between the Middle East and the Mr. Kirdar’s appointment coincided University’s Middle West and to preserve its position as the with the unveiling and naming of Western world’s pre-eminent centre for the Investcorp Building at Oxford East Centre the study of the modern Middle East. University’s Middle East Centre. The Middle East Centre’s bold new Mr. Kirdar said, “I am deeply honoured headquarters spans two Victorian by the opportunity to serve the Middle buildings on Woodstock Road in the East Centre in this capacity and to help grounds of St Antony’s College, and was advance its mission of fostering dialogue designed by world-renowned architect, and understanding of the Middle East Zaha Hadid. region. In addition to the financial bridge Investcorp creates for our clients between
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Farewell A farewell to Mike Merritt Ramzi AbdelJaber steps up as Chief Administrative Officer Leadership team strengthened with appointment of Timothy Mattar as head of PRM
Mike Merritt
ast month, one of Investcorp’s the corporate review and improvements longest serving professionals, in Human Resources, Compensation, L Mike Merritt, retired from his Corporate Communications, Information leadership position at the Firm. Mike, Technology and Administration. He who co-founded Investcorp in 1982, has has also played an important role in agreed to remain in an advisory capacity guiding the PRM fundraising strategy, going forward. Ramzi AbdelJaber, who recruitment efforts and office expansion. has had a long and distinguished career Mike helped reinforce the original at Investcorp for over 11 years, succeeds Investcorp culture within the Firm. Mike as Chief Administrative Officer, Investcorp is in Mike’s DNA. subject to Central Bank of Bahrain Ramzi AbdelJaber We wish Mike, who will always be part of approval. Ramzi has over two decades the Investcorp family, the best of luck in of business building, strategy consulting, his retirement. and senior management experience, with a particular focus on the financial In other news, the Investcorp leadership services sector. team has been further strengthened by the appointment of Timothy Mattar as Investcorp bids a warm farewell to Mike, head of Placement and Relationship whose expertise and dedication to the Management (PRM). Timothy has been Firm and its culture are equal to none. with Investcorp for 20 years and has held This is not the first time Mike has retired a number of country head positions for but he tells us it will be the last. Mike the PRM team across the GCC and has Timothy Mattar returned to Investcorp five years ago after worked in every Gulf market where we his first retirement in 1996 and has led operate.
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New Joiners Tony Robinson appointed as new CFO
ony Robinson became decision to rejoin Investcorp as Chief Investcorp’s Chief Financial Financial Officer. His deep knowledge of T Officer on 1 July 2015. He took the Firm will ensure a smooth transition over from Rishi Kapoor, who recently of leadership. At the same time, Tony became Co-Chief Executive Officer will bring a fresh perspective based on alongside Mohammed Al-Shroogi. the experience he gained from working with a large sovereign investment Mr Robinson was with Investcorp for institution.” 14 years until 2008. He rejoined the Firm from Bahrain Mumtalakat Holding Mr. Kapoor remarked, “This is an Co., where he was responsible for the exciting time for Investcorp as we Tony Robinson finance and treasury functions as Chief position the Firm to continue on its Financial Officer. He has over 25 years of growth trajectory and its journey that noted that, “Investcorp has been growing experience across Australia, the UK and started in 1982. Having Tony, who from strength to strength, adapting Bahrain. He holds a Master of Taxation knows the Firm well, as CFO will help to the changing business environment and a Master of Finance from Curtin us move forward smoothly and ensure and evolving its business model while University of Technology in Australia. that Investcorp continues to uphold maintaining its vision to be the bridge He also holds a Bachelor of Business its standards of best-in-class financial between GCC investors and investment (Accounting) from the Western Australia management and reporting. With his opportunities in the west. I am honoured Institute of Technology University. He is diversified experience, expertise and to be re-joining Investcorp, and I look a Chartered Accountant. commitment, I know he will be a valuable forward to working with the leadership asset to our team.” team as we steer the Firm through its Investcorp’s Chairman, Nemir Kirdar, next phase of growth.” said, “We are pleased with Tony’s On his new appointment, Mr. Robinson
David Tayeh joins Investcorp as Head of Corporate Investment in North America
n 1 September 2015, David America. David has extensive experience Tayeh joined Investcorp as and will provide real depth in the market. O the head of its Corporate I look forward to working with him and I Investment business in North America. am confident he will bring energy, value Mr. Tayeh joined from CVC Capital and leadership to the team.” Partners, where he was a Partner and Mr. Tayeh said, “I’m excited to re- led private equity deals that focused on join Investcorp, an established leader collaborating with management to create with a long track record in the middle long-term value. He is responsible for market. Investcorp is poised for growth, the strategy and management of the and I look forward to building on that David Tayeh Corporate Investment team focused momentum and the opportunity to work on investment opportunities for North with a strong and motivated team of American-headquartered companies with Officer of Jostens, Inc., a former partners and colleagues.” leading positions in their industry and Investcorp portfolio company. He holds strong records of accomplishment. Mr. Tayeh joined Investcorp with a BA degree in Politics, Economics, 20-plus years of industry experience. Rhetoric and Law from the University of Mohammed Al-Shroogi, Investcorp’s David was previously a member of the Chicago and an MBA from the Wharton Co-CEO, said, “I am pleased to welcome Investcorp Corporate Investment team School of Business at the University of David back to Investcorp as we grow our for over 10 years, and was the Senior Pennsylvania. Corporate Investment business in North Vice President and Chief Financial
The Review | November 2015 16
Guest Feature CHINA: Is It Time to De-Risk?
so slower income growth slows the highest level in 5 years. consumption; and growth in services 6. The Federal Reserve decision to delay (e.g., education, healthcare) is lagging. raising interest rates may have bought While consumption is robust at 46.9% China (and other emerging markets) of GDP, growth will be sluggish. time to stabilize their markets. But 3. Central bank policy is as confused as the window may be short. If indeed that of the US Federal Reserve. Zhou the Fed decides to raise rates later Xiaochuan, Governor of the People’s this year, it is doubtful that China Bank of China gets high marks for his will opt to continue hemorrhaging Dr. Hani Khalil Findakly management of monetary policy, but reserves by keeping the Yuan stable. the missteps on August 11 that caused Against a 25% devaluation of the I made a brief visit to China in late an effective devaluation of about 3% Euro and 50% devaluation of the September and found the economic jolted global markets and more can be Yen, China is unlikely to let its situation far more serious than expected at risk if China’s exchange rate policy competitiveness stagnate. China’s from reading the press and the punditry. remains uncertain. problem is compounded by a U.S. Here are my summary observations: Dollar that lifts the effective exchange 4. Best guess for the mini-devaluation rate of the Yuan. That China needs 1. Economic growth for the coming two in August is the desire of China to to devalue its currency is not in years is closer to 3-4% than the 7% internationalize its currency, by first question as it may have been a year market consensus. Important measures, having the RmB added to the IMF ago. Instead, debate may center on such as electricity consumption, freight basket of Special Drawing Rights, the timing, pace, and amount of and bank loans (the three constituents which now appears likely. China devaluation. It is reasonable to expect of the “Li Keqiang Index” are flat. A has a broader agenda to address a series of gradual devaluations that contributing factor to slower growth the imbalance in China’s role in could amount to 20% over two years, is public sector investments, which international organizations, where reversing part of its 35% appreciation contributed to 45% of GDP past China has a disproportionately in the past several years. growth, is slowing down considerably. smaller share than indicated by its The reason is that when the economy economic role, ultimately aiming to 7. Debt is a problem for China, as it grows in double digits, public internationalize the RmB. is globally. Overall domestic debt in investment is effective; but not when China, at about $28 trillion, is over 5. In responding to recent market the economy is growing at 3%-4%. 280% of GDP (two-thirds of which turmoil, China’s arguably clumsy are household and non-financial 2. China’s revised national accounting moves to support the market and to debt), having nearly quadrupled since method. China’s GDP may actually stabilize the RmB resulted in a massive 2007, far outpacing GDP growth be 18% higher, or $1.5 trillion, than loss of an estimated $240 billion of during the period. Part of the Central is currently reported, from revisions foreign exchange reserves China’s Government reforms is to streamline from the transition from the Soviet- control over the domestic exchnage both financial and non-financial era Materials Production System rate markets (CNY) is almost total as it state-owned enterprises (SOEs) that in 1992. Meanwhile, the process of can print or withdraw close to infinite add up to a mind-boggling 155,000 transforming China’s economy from amounts of RmB. But their control companies. Of these, only about 100 investment-led to consumption-led over the off-shore market (CNH) is are of strategic national interest and focus is much slower than expected. more limited and indirect (through the will be fully protected. During my The reasons are complex, but two state-woned banks). As a result, the visit, a number of high profile entities primary factors hamper the pace spread between the two markets tend were raided and senior members were of transition: consumption is more to widen on speculative moves, as it arrested on charges of corruption and income-elastic than price-elastic, has been recently as spread widened to
The Review | November 2015 17
Guest Feature
World trade and GDP growth % per annum change in GDP/trade Dr. Hani Khalil Findakly World trade* World GDP Dr. Hani Khalil Findakly is a Director of Saudi Economic and Development Holding Co. and SEDCO Capital. Dr. Findakly served as President and Chief Executive Officer of Potomac Babson Inc. from 1990 to 1999 and Potomac Capital. From 1986 to 1990, Dr. Findakly held senior management positions on Wall Street including Director and Chairman of Dillon Read Capital Souce: World Bank (GDP) and Delta Economics (Trade data) Management and Vice-Chairman of the Clinton Group.
malfeasance. An increasing number particularly vulnerable. Emerging He was the Managing Director of global of “shadow market” financial entities countries will also feel more pain. risk management at PaineWebber, Inc are coming under strain and some and Head of the International Division at 10. Financial deleveraging can become are flooding outright. Drexel Burnham Lambert, where he had painful for China, but may spread overall responsibility for managing the 8. Beyond the pressures on SOEs, a across globally: U.S. non-financial Drexel’s international subsidiaries in the growing number of private factories debt has grown by about 130% since US, Europe, and Asia. are shuttering down or consolidating. 2007 while GDP grew by only 23%. Anecdotal evidence of an onset of At over $200 trillion, global debt Dr. Findakly served as Director of the reverse migration of workers from now exceeds 300% of Global GDP, Investment Department and Chief big cities back to smaller towns and is well over the levels preceding Investment Officer at the World Bank, suggests that 10 million workers the two most recent market crises where he worked from 1975 to 1986. have already made such moves, in 2000 and 2007. The chart below From 1972 to 1975, he served on the reversing a three-decade long trend. illustrrates the degree of exposure MIT’s School of Engineering and the Demographics caused by the one- of highly indebted countries, such as Center for Policy Alternatives faculty, child policy was beginning to bite Brazil, Russia, Nigeria, Indonesia, where he did research and teaching in into China’s labor market creating Turkey, etc. the field of decision theory and systems shortages and wage increases. analysis. In 1973, Dr. Findakly was 12. Finally, some thoughtful scholars an OAS Visiting Associate Professor 9. China’s slowdown is bad news for are becoming wary of potential at the Catholic University in Rio de Europe, Japan, South Korea, and for for conflicts in Asia that may be Janeiro, Brazil. He has advised many commodity and energy producers. aggravated by the slow-down in trade governments, central banks, and Germany’s heavy export-dependency, and growth. Already, nationalism is international institutions in the fields of especially in capital goods, is high in Japan, China and S. Korea, portfolio management, capital markets, and risk management. Dr. Findakly was the Vice Chairman of The Family Office Slowing growth; rising debt: this can’t end well! Co. BSC. Developed markets Emerging markets He served as a Director of TAIB Bank B.S.C. (c) since November 8, 2007 and had been a Non- Executive Director of SEDCO since 2003. He obtained a Doctor of Science on Decision Theory in 1972 and Master of Science in 1971 in Computer Simulation from the Massachusetts Institute of Technology (MIT). Dr. Findakly graduated from the Baghdad University with B. Sc. Magna Cum Laude, in Civil Engineering in 1966.
The Review | November 2015 18
Guest Feature
all of which have unusually strong considerable leeway for lowering interest and rebuild it on more solid ground leadership. The issues of the South rates; a healthy central government in the same manner it embarked on China Sea (engulfing Vietnam, the balance sheet that gives it options for its path-breaking economy over the Philippines, Malaysia, Indonesia and fiscal stimulus; flexibility on foreign past three decades. Given the risks, Taiwan) in territorial claims, and the exchange policy; and, importantly, both social and political and Chinese East China Sea (Japan and S. Korea) political latitude for quick decision- Confucian proclivity to social harmony, have dragged the US into the conflict, making, unlike the case in the West. China may opt for incremental change. as demonstrated by the relatively cool Nonetheless, it is evident that the Meanwhile, the risk for markets is that reception in Washington for President transformation process will be more China’s slowdown and slowing global Xi Jinping on his first state visit as protracted than generally assumed, with trade will be transmitted through the President of China. potential consequences for the global financial markets. economy. Over the medium-to-long term, Message: I am reminded that the Time to “De-Risk”? China faces two fundamental choices: a Mandarin character for crisis is the same gradual, but bumpy transition and reform as opportunity. China has enormous of its economy; or a Schumpetrian- resources to deal with its transition. style “creative destruction” that would These include over $3 trillion of foreign transform its economy more effectively reserves; a monetary buffer that gives
Where is the locomotive? Next at risk: the market view
Real GDP Emerging and frontier markets
Manufacturing EMCs Nigeria
Brazil Russia
S. Africa Turkey Croatia Serbia Colombia Developed Countries Peru Indonesia Malaysia Thailand Hungary Portugal Chile Mexico Philippines China Czech Romania Rep S Korea Poland Spain Commodity-producing EMCs Austria UK France Germany Slovakia Ireland US Belgium Japan
AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB-
Average rating
Emerging market companies are over leveraged
and will soon be in trouble! Leverage ratio
Emerging Market Companies Developed Economy Companies
Souce: BIS
The Review | November 2015 19
Global Macro Outlook by Rebecca Hellerstein Global macro outlook trend downward, dipping below Regionally, the US is poised to do $40/bbl in late August, a 6 ½-year well over the next few months with low. Falling commodity prices are its strengthening labor market, creating negative feedback loops, improved spending data, and strong generating additional pressure on EM investment numbers. In Europe, economies. good fundamentals should continue to drive a healthy pace of growth. The Fed, convinced that China’s Although downside risks to Euro- economic slowdown would keep area growth have grown moderately inflation low, ultimately decided to in Q3 over the uncertainty in China, not raise rates at its much-anticipated Rebecca Hellerstein as a result of low commodity prices September FOMC meeting. While and a tumble in EM FX, the recovery the decision may have relieved the Q3 2015 has been marked by elevated in Europe should continue to be markets of some short-term volatility, levels of market volatility. The steady in Q4. Exposure to final it has raised long-term concerns slowdown in the Chinese economy demand in Asia is not incredibly high regarding the strength of the global and uncertainty regarding a Fed for the Euro-area; domestic demand economy and the Fed’s ability to “Lift-off” kept investors’ anxiety is the crucial economic engine in react to global weakness. elevated. These past few months the region. With easing financial have also further reinforced Q4 2015 may not prove any better for conditions and an accommodating perceptions of a global slowdown. EM markets, particularly due to weak fiscal policy combined with low The evidence of a contraction can commodity prices. An overabundant energy prices and steady corporate be seen in the global PMI numbers, supply— especially from growing performance, the Euro-area is which uniformly diminished across production in the Middle East not likely to suffer a pronounced both EM and DM economies. , slowing demand growth, a slowdown due to contagion from strengthening dollar, and volatility China’s economic problems. Global equity markets saw periods of in Asian FX markets should continue sharp market sell-offs. Chinese equity to be headwinds to commodity prices markets in particular have been Global manufacturing PMI aggregate down in and EM growth over the upcoming August unstable despite the government’s months. The markets are also pricing August PMIs inch lower across the board ongoing policy measures—neither in a December rate hike and such a halt to short-selling and IPOs nor July PMI Manufacturing August PMI Manufacturing a prospect will heavily weigh on increased government spending, investors’ minds, making us bearish bench-mark rate cuts, or a currency on commodities. devaluation— have been able to completely restore investors’ Equities may bounce back in Q4, confidence. recovering from the market-sell off, Global Global ex US EM Aggregate DM Aggregate China US especially in Europe and Japan. It Aggregate Aggregate The issues with China have is too early to call a definitive end negatively affected EM markets with Source: Haver Analytics, Goldman Sachs Global Investment to the global bull market, although Research credit spreads widening relative downside risk is substantive. to DM credit over the past quarter. Oil Prices Have Plummeted Globally, financials appear to be on Oil Prices HavePrice Plummeted per barrel of crude oil As Chinese equities tumbled, EM Price per barrel of crude oil an upswing. While Q3 was the hiccup equities in general followed suit. EM with equity markets overreacting to FX also did not fare well, especially China›s problems, Q4 should be the with the additional pressures from recovery and rebound. In FX, the a robust US labor market and US USD is the clear winner with the US Dollar. With China being one of Brent labor markets beginning to look more West Texas the largest commodity importers, Intermediation healthy and robust. Rates and Credit its slowdown has had a marked Jan. Feb. March April May June July Aug. prospects still look unattractive, impact on commodity-driven Source: Bloomberg suffering from the slowing global Source: Bloomberg currencies and energy producers. growth and a likely year-end Fed rate Specifically, oil prices continued to hike.
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