Asset management gets a foothold in Jordan, Lebanon and even Palestine

 Cerulli Associates, Global Edge, July 2008

Beirut today doesn’t seem the most likely place for a financial centre – and this year less than ever. It’s hard to recall that Beirut was at one time unquestionably the banking hub of the Middle East, before that role passed to Bahrain in the 1970s as hostilities broke out in Lebanon.

While those days are never coming back, the truth is there is a solid financial services industry in Lebanon, and a modest funds management industry too. And when one broadens the view to embrace Jordan and the Palestinian Territories, there is enough happening for some foreign institutions to consider taking a look.

BLOM bank, one of the two largest institutions in Lebanon, is growing in this area. In January it launched a US dollar denominated open-ended balanced fund, the BLOM Cedars Balanced Fund, with an investment focus on Lebanon. Specifically, it aims to put at least 75% of the fund into Lebanese debt instruments issued by the government, central bank and leading Lebanese corporations; and up to 25% into listed Lebanese companies. BLOM is also believed to be planning a real estate fund. An enterprising group, BLOM has this year gained a licence from Saudi Arabia’s Capital Markets Authority, to establish a corporation specialising in investment operations in Saudi; and also gained a licence to set up a subsidiary in Qatar. It’s already in Syria, Jordan, the UAE, France, the UK, Switzerland and several other places.

Lebanon is also home to a number of listed funds, among them Beirut Global Income and Beirut Preferred Fund; it also hosts several foreign banks, among them SG (in Lebanon called Societe Generale de Banque au Liban), HSBC Lebanon, Banca di Roma, Standard Chartered, BNP Paribas and National Bank of Kuwait, among other Gulf institutions.

But really it’s a market made for private equity, and at this stage this is the most likely route for foreign participation in the country. One of the biggest Lebanese banks, Byblos Bank, has a private equity fund called Byblos Ventures; it raised $20 million in funding and got half of it from the European Investment Bank. Other locally domiciled private equity funds have included Lebanon Holding and Building Block Equity Fund.

Pickings are easier in peaceful Jordan, often considered the calming influence that holds this part of the Middle East together. Its kings through the years have often been at the heart of peace negotiations between Israel and other states; it’s one of the very few Middle Eastern nations (Egypt being another) that allows direct flights with Israel, and it has a long land border with the country, as well as with Iraq, Syria, Saudi Arabia and the Palestinian Territories – a lively set of neighbours.

But the Jordanian markets are very active. By June this year, Amman’s stock exchange had had more IPOs (five) in 2008 than any other country in the region bar Saudi. There were 17 listings in 2007, which on average had almost doubled in value by mid-2008.

Local funds domiciled in Jordan include the Horizon Fund, launched in 2005 by Capital Bank of Jordan, and taking a balanced fund approach; and the Jordan Securities Fund, launched in 2001 by the Housing Bank for Trade and Finance, again with a balanced approach. Islamic banking is developing in Jordan too – Islamic banks include Islamic International Arab Bank and Jordan Islamic Bank for Finance and Investment – and a new open-ended Islamic fund was launched by JordInvest earlier this year, registered in Bahrain and investing in MENA (Middle East and North Africa) equities. JordInvest also has the First Trust Fund, a balanced fund, launched in 2000.

Jordan’s stability and prospects for growth have attracted interest from overseas too. Many foreign banks are either already active (HSBC, Citi and Standard Chartered, among others) or are starting to buy into local houses: Societe Generale, through its Lebanese business, took over Jordan’s failed Middle East Bank and rebuilt it as Societe Generale du Banque Jordanie, for example.

Fund managers see the potential too. Kuwait’s Global Investment House launched the Global Jordan Fund, a pure equity fund, last year; indeed, Global’s head of regional asset management bases himself in Jordan. New rules (the Jordan Securities Commission calls them instructions) are being developed for Jordan’s mutual fund industry along the principles of IOSCO and financial sector recommendations by the IMF.

Global also has a still more daring fund – the Palestine Dedicated Fund, launched in 2006. It comes as a surprise to some to learn that Palestine (which is not, officially, even a state) has a stock exchange; in fact it has operated without interruption since 1997, and returned 306% in 2005 alone (before predictably crashing the following year). It has 38 stocks listed on it and a market capitalisation of $3.1 billion.

This really is frontier investing, but for the hardy, it does present opportunity, and investment vehicles beyond direct investment in companies are starting to come along. A $100 million fund called Al-Quds is being raised for investment in East Jerusalem property and infrastructure at the moment, with the locally-run investment holding company Padico putting in a quarter and a number of local and regional banks committed for another quarter; the remainder is expected to come from overseas. The Aspen Institute, a US institution, says it is working closely with people who want to build a venture capital fund to invest in the ICT sector in Palestine.

And here’s the real surprise – if one looks purely at the regulatory infrastructure, Palestine is one of the easiest places to get going in the Middle East. According to the World Bank, the Palestinian Territories rank 22^nd in the world in terms of tax regimes for business, and 33^rd in terms of the legal framework for protecting investors. Income tax cuts came through this year and there are further exemptions for investment fund projects. The strength of the judiciary is a big question, though, and political risk will overshadow any investment decision for at least the next 10 years no matter what happens. But one can already see the really frontier-spirited starting to take a good look at the West Bank.