Despite escalating violence in Lebanon and Israel, money is continuing to flow into the Middle East as investors focus on potential growth rather than strife. After an initial shudder when the war broke out, stock markets have bounced back, with the benchmark Hermes Financial Index in Cairo, a key regional exchange, up by 17% since June 30. The draw? Fast-growing economies, tens of billions of dollars in oil money, and initial public offerings on the horizon. "After this madness, there will be an enormous amount of infrastructure [spending] as well as privatization," says Arif M. Naqvi, CEO of Dubai private-equity firm Abraaj Capital.
Naqvi himself is making one of the biggest bets. In late July, Abraaj offered $500 million for a 25% stake in EFG-Hermes, a Cairo investment bank. Abraaj, owned by Gulf investors and Deutsche Bank (DB), says EFG has the reach and savvy to become a dominant regional player. Another plus: In January, EFG itself bought 25% of Lebanon's Bank Audi for $500 million.
New York private-equity shop Ripplewood Holdings is also getting into the act. In February, the company led a group that laid out some $230 million for about 20% of Cairo's Commercial International Bank, and now it aims to expand further. CIB is "a perfect foundation for a much broader financial services business in the region," Ripplewood CEO Timothy C. Collins said on Aug. 4. He and former Citigroup (C) Chief Operating Officer Robert Willumstad are joining CIB's board, and former U.S. Federal Reserve Chairman Paul A. Volcker will act as an adviser.
A SENSE OF OPPORTUNITY
Of course, there are plenty of risks. While the wars in Lebanon and Iraq look containable, they might spread. The standoff with Iran could blow up; oil flows could be disrupted. Moreover, some Arab exchanges look pretty dismal after skyrocketing in 2005. The Dubai Financial Market is down 61% this year, and the Saudi Tadawul Index has dropped by 35%. Cairo has held up far better, though it, too, is off -- by 9% for the year.
Still, plenty of investors sense an opportunity. The market for investment banking services in the Arab world, including asset management and stock trading, is growing at nearly 40% per year from its current level of more than $5 billion, says Hassan Heikal, EFG's co-CEO. And Saudi Prince Alwaleed Bin Talal's Kingdom Holdings, Dubai-based media company Showtime Arabia, and Dubai Ports World (the outfit that stirred up controversy when it got a contract to run U.S. ports), are all contemplating IPOs. "This is a great business opportunity," says Georges Makhoul, Morgan Stanley's (MS) new Dubai-based president for the Middle East and North Africa. Makhoul expects to have 28 professionals in place by fall, while both Citigroup and Merrill Lynch are members of the new Dubai International Financial Exchange. Says Makhoul: "It feels just like when we went into China in 1994."
By Stanley Reed, with Nichola Saminather in New York