Dubai International Capital (DIC) looks to spread its investment wings

Dubai International Capital and Istithmar: Dubai flexes its buying muscle
Dubai World’s Istithmar: The new kid on the block

Dubai Holding contains a number of financial and investment groups that seem to overlap. Capita Investment Group, Dubai Investment Group (DIG) and Dubai International Capital (DIC) all seem to focus at least partly on alternatives, financial assets, industrial stakes, private equity, asset management and Islamic financing (which the group also targets through its Noor Investment Group). How do these companies fit together – in particular DIG and DIC?

SA DIC was created just over two years ago [in October 2004] with a view to using some of the excess cashflow of Dubai Holding, to help them diversify and to create a long-term return on their investments by investing in different asset classes, primarily private equity and, to some extent, large cap listed equities.

DIG – or one of the two investment offices for Dubai Holding – was founded a year-and-a-half earlier and at the time focused more on funds, funds of funds, hedge funds and trading equities, regionally and internationally. It also did some US real estate and it also tends to work on projects with Jumeirah [the hotels and construction arm of Dubai Holdings], where the asset is held by DIG and managed by Jumeirah via a management contract. We don’t do pure real estate.

“We are here to create above-average risk-adjusted returns. The team always understands that there is a minimum expected internal rate of return of 15% across the board, private and public” Sameer Al Ansari

Another difference is that DIG has built a portfolio in financial services. It has a majority stake in a Greek bank, Marfin. It has bought Bank Islam and it is developing its own Islamic bank. By contrast, we don’t have any financial services investments in our portfolio. DIG has started looking at some things that are closer to what we do. So, for example, in real estate we may end up looking at the same transaction. Take Raffles – a hotel business with a lot of real estate. We looked at it as a private equity asset; they looked at it as a real estate asset. If that happens, we simply pick up the phone and decide which one of us will continue. On Raffles, we decided that we would continue and they pulled out, and three months into it we pulled out because valuations became too high.

So the two companies have separate, differentiated mandates?

SA I would say 80% to 90% of what we do and what DIG does is different. But we certainly don’t sit around this table and try to figure out how to differentiate ourselves from DIG. We are all competing with the money that is coming to this region in search of investment opportunities.

So in private equity, our competition is the Carlyles and the Blackstones and the mid-cap private equity houses, because our focus is usually mid-cap – the $1 billion to $2 billion deals. Yes, we do compete with regional players like Abraaj, but we’re trying to differentiate ourselves through a pipeline of deals and proprietary and relationships that we think nobody else has.

In listed equity, I don’t see anybody competing with us, because these are huge markets with huge liquidity. In the large stocks I can be there with thousands of other shareholders.

And DIC is purely His Highness Sheikh Mohammed’s vehicle? It is not a vehicle of the government of Dubai?

SA That’s correct.

With assets under management of how much?

SA Approximately $6 billion.

And how many people do you have here now?

SA We’re over 40 and growing. In the short term we really need another 15 to 20 investment professionals across the board. Hiring is one of the big challenges. You’ve got huge growth in private equity globally, and getting people to move when they’ve got good carry where they are is hard. And in this region in particular.

There have been a number of private equity funds set up, all the investment banks are moving to the Dubai International Financial Centre and they need to hire. So hiring people and retaining staff is a challenge.

What’s the ultimate aim of DIC? Is it wealth preservation for the shareholder? Or is the very long-term aim more of a Temasek or GIC – to create a fund for Dubai Inc, if you like?

SA It’s more the former. But certainly if you put DIG and Istithmar [another investment agency, but part of Dubai World] and us together, then you could say that we are a mini-Temasek equivalent in Dubai, but actually with other skills too.

Who sets the overall framework and the strategy and the target returns?

SA The board and our shareholder sets it, and the board and the shareholder are very closely allied.

And what are the strategic objectives and the return objectives?

SA We are here to manage some of the excess cash of Dubai Holding and to create above-average risk-adjusted returns. The team, when we look at deals, always understands that there is a minimum expected internal rate of return of 15%, and that’s across the board, private and public. However, clearly for deals we regard as carrying higher risks that IRR must be higher.

You have four ‘asset classes’ or asset class teams. Can you outline their responsibilities and explain how they work together?

SA The buy-out team does the private equity deals. That is the team that did the Tussauds [£800-million acquisition of the UK entertainment group], Doncaster Group [£700-million acquisition of the UK engineering firm] and Travelodge [£675-million acquisition of the UK budget hotel group] deals.

Then you’ve got the listed equities team, which did the Daimler transaction [2% stake in DaimlerChrysler bought for $1 billion], that has now evolved into our Global Strategic Equities Fund (GSEF) and will do the public equity deals.

Then there is a private equity funds team, which makes investments in the private equity funds. The background here is that in the early days we decided to invest in the likes of Carlyle, KKR, 3i, and half a dozen others, as a way for us to get into private equity, understand the market and deal structuring, and to get co-investment opportunities.

We do not invest in funds of funds. We see ourselves potentially as being a fund of funds. So right now we are investing in funds, but at some stage I would consider – and it’s not a final decision – but I would consider taking some of these investments and creating a fund of funds, creating the vehicle for other people to invest with us into these funds and continue to grow that portfolio of funds.

And fourth, you have the team that Rabih leads, which is everything that we do in the Middle East and north Africa region, and which is a mixture of almost everything: buy-outs; creating companies from zero; rolling out funds that are either country-specific or sector-specific, such as Jordan Dubai Capital, which is an investment company investing just in Jordan. We have created Ishraq Gulf Real Estate Holding to roll out Express by Holiday Inn hotels across the region. We have a $500-million MENA Infrastructure Fund in which we are a partner with HSBC and Oasis Leasing, one of Abu Dhabi’s largest companies – we have both invested $50 million in the fund and both act as fund managers and advisers to it.

How did that fund come about?

RK We initiated it. We have always felt that infrastructure in the region represents a huge opportunity. HSBC are number one in project finance and, given the deal flow likely to come out of Abu Dhabi, it was also obvious that a strong Abu Dhabi partner would be attractive. So we have three very powerful global partners, plus our relationships here with people such as GE and are very well placed to do well in the sector.

That fund, some of your other MENA activities and also GSEF (Global Strategic Equities Fund) suggest that you are looking to becoming more of a third-party asset manager?

SA Yes. DIC started as an investor investing in private securities. It then evolved into investing in listed securities, but using the same framework. Now we have created DIC Asset Management (DICAM), which is the asset management arm that will oversee, market and run several funds in which we will be managing not just Dubai Holding and His Highness’s money, but other investors’ money. GSEF is the first example of us doing that.

Can you explain GSEF in more detail?

SA In October we launched GSEF, which has just [in late February] held its first closing at $1 billion. The fund, in which we are the anchor investor, has nine other investors, and will invest about $5 billion. It should grow to being $2 billion of equity, with investment capacity therefore of about $10 billion. And so what we see in two to three years’ time is that DIC Asset Management will be managing between $10 billion and $20 billion. Not all of that will be Dubai Holding money and not all of that is His Highness’s.

And GSEF will invest in listed equities?

SA Yes. It will invest in the global 500, which means that it will not invest in any companies in our region, because few if any of those companies are from this region. But the way we invest is the same way we invest in private companies. There has to be a value-added and our investment is made through structured products that cap our upside but give us down-side protection.

The first investment – the stake in DaimlerChrysler – shows that this will be an unusual fund. How it is benchmarked?

SA We asked an investment bank for help with that and they said that it was hard to find comparable funds with which to compare performance. Although GSEF invests in listed equities, it actually blends skills that you would typically find in private equity, listed equities and hedge funds.

Take the Daimler investment. How did that come about? We could take a billion dollars and create a diversified portfolio of 100 listed companies in different sectors, and get a professional investment manager to run the fund for us for a small management fee.

That’s not how we do it. We wanted to take significant stakes – on average about $1 billion per investment – and spend a significant amount of time understanding the companies, getting very close to management, and understanding the issues that they face. We are also looking for opportunities for doing additional transactions with them – spin-offs, joint ventures – and so on, and to build a strategic relationship with management.

At the time we announced Daimler, lots of people came out and said, “What are they doing? Why put a billion dollars in that sector, and particularly DaimlerChrysler?” And almost everybody said, “They’re going to lose money on this.”

In fact we’d spent about five months in detailed meetings with the management of Daimler from the top down. And we’d applied private equity-style analysis to the company. At the time, if you remember, Mercedes was the problem. And we spent all that time trying to understand from management whether they really understood the issues, how they were dealing with them, how long it would take them to address those issues, how much it would cost them to deal with those issues and, therefore, how quickly could they turn it around. There were other issues too.

Once we were comfortable with management – and the stock was in the low 30s and we did not believe it could go any lower – then we made the decision to invest.

At that point, having used the private equity skills, we then used our hedge fund skills in the sense of structuring those investments.

So our investment in Daimler was a sophisticated five-year structure that included a cap and floor on performance. We endeavoured to create the most cost-effective structure to achieve the stake and the return we wanted.

But the key thing is that we viewed the stake as strategic and we viewed the asset as in some way distressed – and so with value there to be unlocked both in terms of the company itself, as well as spin-off transactions to, say, our private equity arm.

How did the original idea come about? Through your screening process?

SA For this fund, ideas come through a mixture of our deal flow and research. The investment banks obviously are very keen to work with us and they do continuously come up with ideas. They now understand the kind of companies we want to invest in, what our target profile is, so the deal flow is very interesting.

Coming back to your point about becoming an asset manager, how many investors are there in GSEF and to what extent do you want to expand that number?

SA We went to about 20 investors to show this, of which 10 have come on board, so we had a 50% hit rate. Effectively it’s our first fund, we have no track record as a fund manager, so that was a very good hit rate. These are all institutional investors, very high net-worth individuals in the region and so on. We only went to a list that was approved at the highest level in Dubai, because it’s the first time that we have invited other shareholders in. As we grow the fund from $1 billion of equity to $2 billion, then we will invite other shareholders.

Your private equity deals are in diverse sectors but are concentrated in other ways. Is that deliberate? Or do you build a portfolio more opportunistically on a transaction-by-transaction basis?

SA It’s the latter. We basically insisted on day one that we didn’t want to be handcuffed, so we are opportunistic in our approach. You’ve seen that all three buy-outs have been UK-based, and that’s really not by design, nor is it a complete accident. We get tremendous deal flow out of the UK. The investment banks there certainly have us on their radar screen and they understand the kind of transactions we want to do.

“In normal private equity transactions we tend to want control. In infrastructure, it’s difficult because you need to bring in other partners to add value – an operator, maybe an equipment supplier. In a good consortium we can get comfortable not having a majority stake” Rabih Khoury

All three are secondaries and that’s by design. Although we are growing, our team is still small and so we are not in a position to do the most structurally difficult transactions. We understand that secondaries won’t be home runs, because they’ve already been owned by private equity houses. But the upside is that they are very well managed, properly structured and have management who understand what it’s like to be owned by private equity and whose interests are aligned with the shareholders. We always look for companies that are top three or four in whatever field they’re in. Tussauds was a market leader in Europe. Doncaster is one, two or three in each of the divisions in which it operates. Travelodge is number two in the UK, but it’s the fastest-growing.

Given your small team, you must also look for management you can work with?

SA The first thing we look for is a very strong, qualified management team, because these are the guys who are going to make it or break it, these are the guys who are living with this asset and have to deliver on the business plans. And if we’re comfortable with the management team, we’re likely to do the transaction. We then make sure that there is a very strong board that oversees the operations of the company and the management.

In private equity deals, what are your expectations for board representation or control?

RK In normal private equity transactions we tend to want control. In infrastructure – where some of the larger transactions occur – it’s difficult to get control because you need to bring in other partners to add value, such as an operator, maybe an equipment supplier. In a good consortium we can get comfortable not having a majority stake.

And what about exit strategies and investment horizons?

SA Probably similar to any other private equity fund, three to seven years. Some transactions, when you go into them you know you have to be in there slightly longer, some not necessarily so.

With so much capital available in the region, surely the problem is finding the right deals at sensible prices. What does DIC bring to the table that others cannot?

SA Our edge is our experience of the region and our relationships. People know that our team and our board can help them build consortia with the best companies and people here.

Finally, do you worry that your strategy of taking large stakes in high-profile businesses exposes you to problems other investment strategies would avoid? I’m thinking perhaps of Dubai Ports, but I don’t simply mean in sensitive sectors.

SA I think the opposite. There are several very large investors in the region who have been investing for 20-plus years, but they do it very low profile. Although there’s nothing wrong with that, I do think you lose opportunities if you do not use your stakes to build close relationships with management. Just like other large investors, I think being a strategic shareholder in a series of global companies is a very powerful thing that perhaps has not been properly leveraged.

Where we’re taking a large position and becoming one of the biggest shareholders in those companies, typically you don’t need more than 1%, 2%, maybe 5%, to become one of the biggest shareholders in those companies. You’re not taking control of those companies, you’re not taking control of the board, you’re not taking control of the decision-making process of those companies, so that shouldn’t be an issue at all.

With the private equity deals, of course, you’re taking over the company. And we’ve seen recently that people can be concerned about that. But as long as the private equity industry puts its case forward properly, I think people will realize these concerns have been overstated.