Private equity turns to Iraq

Dominic O’Neill
Published on:

Government seeks foreign investors; Opportunities in real estate, cement and power

mln dollars: Trade Bank of Iraq’s private equity fund

For some, Iraq is one of the world’s few markets where prospects seem brighter than a year ago. With violence having subsided somewhat, lower oil revenue has encouraged the government to seek foreign investment more actively.

Private equity practitioners in particular seem to think they have a better chance to assist in the reconstruction requirements of the country, with its young and relatively well-educated population, and the Middle East’s third-largest oil reserves. A number of western fund managers are setting up new private equity funds focusing on Iraq. London-based private equity firm Merchant Bridge already derives about a third of its revenue from Iraq. Chief executive Basil Al Rahim says it is getting easier to gather funds for projects in his home country from his predominantly Gulf financial backers.

"Two years ago no one wanted to talk about Iraq. Today people will listen. There’s an appetite," says Al Rahim. Given that there is only about $2 billion in Iraq-listed public stock, the focus on private equity is understandable. Merchant Bridge is setting up an open-ended mutual fund with a seed capital of $10 million to invest in Iraq’s equity market, where banking is the most important sector.

In terms of private equity, however, the firm is finalizing arrangements for the acquisition and rehabilitation of a cement plant in Iraq after two years of negotiations. Furthermore, out of more than 20 firms to have acquired licences to build cement plants in Iraq in 2007, Merchant Bridge is one of the few not to have had their licences retracted – partly thanks to a collaboration with French cement firm Lafarge. "To win in Iraq you have to have a genuine desire to stay the course and navigate the obstacles," says Al Rahim.

Al Rahim, who used to run the international division of US private equity group Carlyle, says other opportunities lie in real estate and power. Indeed, the national grid only supplies about a quarter of Iraq’s needs.

Merchant Bridge established an oil and gas services company in Iraq in the spring. The firm has a stake in Asiacell, the second-largest mobile phone operator in Iraq. It also owns part of Al Mansour Bank, which is adding three branches this year to its network of four.

Al Mansour Bank gains most of its revenues from trade finance – as does government-owned Trade Bank of Iraq, the highest-capitalized lender in the country. Trade Bank of Iraq’s revenues grew 40% last year, partly helped by project finance, an activity it wants to grow, especially in the energy and power sectors. The bank is setting up a private equity fund of around $250 million for infrastructure, industry and housing. It is doubling its branch network to 16 this year.

Iraq’s biggest financial institution by assets is Rafidain Bank. Speaking at an Iraq investment conference in London last month, Mahmood Alwash, one of Rafidain’s board members, told Euromoney that the bank is adding 10 new branches this year to its network of around 150. He said new branches would be opened in Syria, Turkey, Paris and London.

Both Rafidain and Rasheed, another Iraqi bank with about 150 branches, have been unable to operate outside Iraq since defaulting on foreign trade debt during the Saddam Hussein era. There is a government plan to recapitalize the banks and clear the debt.