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The view from the top
Sunday, 16 August 2009

Gulf Finance House founder and chairman Esam Janahi’s understanding of the Gulf’s economy is second to none. He sits down with Arabian Business to talk strategy, recovery and oil prices.

It is not stretching the truth to say the story of Esam Janahi and the Bahrain-based investment bank of which he was founder, CEO and now chairman, Gulf Finance House (GFH), is a metaphor for the story of the Gulf over the last decade.

Since 1999, when it was created, GFH has grown and prospered at an astonishing rate.

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In a nutshell, the bank raises capital from wealthy institutions and investors across the MENA region, and invests the money in a variety of infrastructure projects or traditional Sharia-compliant venture capital or private equity opportunities.

During the good times, when the world was watching as emerging markets went about doing exactly that, emerging from years of stasis, GFH was there with the means and the capital to invest in growth and reap the rewards. The company’s own literature talks proudly of involvement in commerical infrastructure projects from Kazakhstan to Mumbai, from Libya to Tunis, to Jordan to Bahrain, and everywhere in between, with an aggregate value, when completed, of more than $20bn.

These projects have titles like ‘Caspian Energy Hub’, ‘Bahrain Financial Harbour’, ‘Energy City Qatar’ and ‘GFH Mumbai Economic Development Zone’. Reading through them, you can almost hear the whoosh of progress.

Likewise, off-shoot companies such as First Energy Bank and a cement firm called Cemena were set up — themselves no small concerns — to serve directly the industry players at the sharp end of economic development in emerging economies.

For nine straight years, Janahi tells me in his opulent office on the top floor of a skyscraper in the Bahrain Financial Harbour, GFH turned superb profits. By the middle of last year, when the global economic crisis announced itself in the Gulf, investors had become used to returns of “more than 45 percent.”

No wonder so many of them, more than a quarter, were then choosing to roll those returns, and their original investment, straight back into the funds when the opportunity to exit came about.

But the good times, as they always will, ended. Spectacularly so in the case of the last quarter, 2008, in the Gulf. And now, as anyone familiar with this part of the world will attest, every businessman in the MENA region — if he has finished picking up the pieces — is scratching his head as to what the future holds.

Like the region, GFH is now at a crossroads: after the years of growth and plenty, is the rest of 2009 and 2010 the time for consolidation and damage limitation? Or should opportunities and bargains presented by the economic crisis be looked upon as opportunities for the fittest to prosper?

Talking to Janahi, who was recently placed number five on Arabian Business' list of the world’s most powerful Arabs, is instructive. Down here, on the ground, it can be hard to see the bigger picture. From up there, though, where Janahi is perched, perspective is not a problem.

“You have to see the correlation of what is happening,” he explains. “If you take the oil price, whenever it is in a correction phase, peoples’ confidence lessens.

“Another layer is the international situation. Globally [when the downturn hit] the oil price was coming down, the dollar was depreciating, major currencies were coming down, equity markets were depressed, not a single asset class was positive and everything was negative. So diversification wasn’t working for any single investor who had international investments.

“Now, looking at oil prices currently, everyone was suggesting $50-55 was a good price to close the second quarter,” he continues. “But it has jumped to over $70. People were only expecting it to reach $60-70 by the end of the year. Of course, by moving up fast, it could correct quickly.”

Still, he muses, $60-70 oil is considered a good value. “If it reaches there, then the level of confidence is high. There would be positive budgets in the region, nice levels of expenditure from the governments, big governmental projects — and all of that will circulate into a cycle of the economy.”

So it is all only about the oil price, then? With high oil prices the good times will come swinging back in through the door as if they had never been away?

Well, yes and no. Without high oil prices there will certainly be no economic good times for the region, Janahi implies, but there is also the region’s traditional summer lull in business to be factored in.

“When will it all happen? Everyone knows the summer is a depressed market. Then there is Ramadan, so the market might still go down, but we can see it picking up at the end of September or October.

“By the end of the year, you will see a lot of positive moves in the equity market,” he predicts. “The expectation is that the good mood returns in the middle of the fourth quarter, 2009. But when will the real thing happen? The real thing will happen, I think, in the middle of 2010. And we must be careful not to miss the boat.”

Last year was a notable year for GFH, a watershed year, marking the company’s move to the top of the tree in Bahrain. After nine years of success, the company was listed on four international exchanges; Kuwait, Bahrain, Dubai and London.


Janahi is visibly proud as he lists GFH’s achievements in 2008: “Last year was an excellent year. We were listed on the four exchanges, and we were in the top list of market cap in Bahrain,” he says.

“We have been returning on equity at a level of 45 percent plus. Our bottom line over nine years was $1.2bn. We had reached a different calibre to the rest of the market. In order to move to a higher level, we needed to become more international.”

The job of moving GFH on will fall to the new CEO, Ahmed Fahour, who took up residency in an office directly opposite Janahi’s on August 1. No sooner had he taken in the panoramic views, then he would have noticed the challenges in his in-tray were considerable. How do you kick on a company like GFH in an economic climate like today’s? And, for that matter, how hard was GFH hit by the downturn?

“We finished last year up $290m,” Janahi says. “In the first quarter this year, we had a loss of $37m, but we had made provision for $44m. We have been focusing recently on building more provision versus achievement, cleaning up the house ahead of the new CEO arriving, so that he has a good place and can take it forward.

“Our business model depends on the network of investors we have,” he continues. “Right now, they are twitchy. The mood of investors is so important. Most of them, for the first and second quarter, they have been watching on the sidelines, not coming into the market aggressively. This reduces the engine power of the way we operate.”

In 2007, GFH raised some $1.8bn from investors. This year, Janahi says, a realistic target is somewhere between $500m-800m. Investors no longer have the surplus liquidity to push GFH’s way.

Over the course of our conversation, Janahi talks about the potential of Iran for the Islamic banking industry (“if it opens up, yes, it is a good target”), and the relative good economic health of countries like Syria and Lebanon, when compared to two years ago.

He mentions GFH’s market cap is down from last year’s high of $3.2bn to “less than $1bn,” but he doesn’t seem gloomy about it. He says the company is eyeing new opportunities in southeast Asia and Asia Pacific, and that he would like to “put more effort into North Africa.”

As for investment closer to home, Janahi seems frustrated by banks’ caution on giving credit, a caution he says is taking the shine off potential bargains in the market.

“Last year, when we were looking at opportunities in each sector, because the oil prices were up, the valuations were extraordinary,” he says. “The same valuations we were getting in the first quarter of this year, when the oil prices were beneath $40, it was almost a 50 percent discount.

“The problem is, there may have been a 50 percent discount, but in any acquisition, you want equity and you want debt. Nobody was prepared to give you any debt because the banks were all on the sidelines.”

He continues: “All in all, is this a good time for opportunities to be captured? Yes. Is it the cheapest time to capture those opportunities? Almost towards that zone. But whereas last year liquidity was there in the first quarter but opportunities were too expensive, this year similar liquidity means the opportunities are cheap, but if you structure it, it doesn’t really work.

“You cannot go 100 percent equity, you want 30/70 percent [equity/debt] or 50/50, to enhance your rate of return.”

Janahi pauses; “But timeliness always has its own difficulty.”

Feeling the pinch

Turmoil in the region’s financial markets hit Gulf Finance House (GFH) in the second quarter, as a loss in investment placements kept the company in the red for the third consecutive quarter.

GFH posted a second quarter net loss of $54m, compared with a profit of $104m in the corresponding period last year.

“Given prevailing global economic conditions, raising funds for any financial institution has remained extremely challenging in recent months. Caution amongst the investment community has carried through to the second quarter and this trend has dictated our activity,” said chairman Esam Janahi.

GFH said it had focused on the management and oversight of existing projects to prepare the company for future growth.

“Naturally we continue to pay close attention to emerging high value investment opportunities across a changing marketplace and we’re optimistic about the future,” Janahi said.

GFH plans to raise up to $300m to strengthen its balance sheet, support its long-term expansion plans, and take advantage of investment opportunities amid the global economic downturn.

“In one of the toughest trading years on record, GFH has continued to absorb the harshest effects of the downturn,” said new chief executive Ahmed Fahour.

Fahour noted the need to strengthen the firm’s balance sheet, but added that the recession would create some “excellent investment opportunities in the near horizon”.


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