March 25, 2023

DealBook: In the Persian Gulf, Struggling to Adapt as Deals Dry Up

 Sheik Maktoum al-Hasher Maktoum, 35, is the executive chairman of Shuaa Capital,  one of the largest investment companies in Dubai.Shuaa Capital Sheik Maktoum al-Hasher Maktoum, 35, is the executive chairman of Shuaa Capital, one of the largest investment companies in Dubai.

DUBAI — As a new wave of austerity has left many financial firms around the world struggling, their counterparts in the Persian Gulf region have too been forced to hunker down.

In an environment of dwindling trading volume on domestic markets and a disappointing pace of deals, some of the region’s most prominent investment banks are undergoing drastic changes. It is a stark contrast to the mood in the last decade, when both international and regional investment banks were bulking up to pursue deals in the Middle East.

Trading on the Dubai Financial Market slumped to average daily volume of $48.5 million in 2011, an 89 percent drop compared with 2007, according to data from Coldwell Banker. That sharp drop in volume decimates revenue for brokerage firms. Average trading volume on the Abu Dhabi Securities Exchange is also down.

“When markets are this volatile, it can be difficult to persuade retail investors to stay in the long run, even though opportunities are there,” said Nick Tolchard, managing director here for the asset management firm Invesco.

In light of the new reality, Shuaa Capital, an investment company with a 30-year history, is one of several regional firms making sweeping changes to cut costs. “Everything that could possibly go wrong has already happened to us, and we’re still here,” said Sheik Maktoum al-Hasher Maktoum, 35, who recently took on the role of executive chairman of Shuaa, one of the largest investment companies here. He is also the nephew of Sheik Mohammed bin Rashid al-Maktoum, the ruler of Dubai.

“Now that the entire industry is facing changes, we knew we had to act fast, and we didn’t hesitate with where and when to cut costs in the company,” he said.

Dubai’s ruler, through the Dubai Group, spent heavily on large stakes in several investment companies here, including acquiring a 48.4 percent stake in Shuaa at what turned out to be near the top of the market.

After the pullback in market trading, Shuaa is aiming to cut costs 71 percent by the middle of this year. It has closed its operations in Jordan and Egypt, and reduced the work force in its Saudi Arabia office, Sheik Maktoum said.

It has also cut its global staff to 232 employees at the end of the first quarter of 2012, from 390 at the beginning of 2011.

Difficulties remain despite reorganization efforts. Shuaa’s shares are stuck near an eight-year low. The firm has not reported a profit since 2007. Last year, it reported a net loss of 294 million dirhams, or $80 million. And Moody’s Investors Service downgraded its rating on Shuaa last month.

EFG Hermes, a leading regional investment bank, is bringing in a smaller but wealthier firm, Qinvest of Qatar, which is putting in $250 million in exchange for a 60 percent stake in the company’s brokerage, advisory and wealth management units.

Turmoil in the Arab world put pressure on the EFG Hermes’s brokerage and investment banking business, which led the firm to report to an 81 percent drop in profit last year, to 133 million Egyptian pounds, or $22 million.

Qatar, by contrast, is on an upswing as a regional power broker, thriving on oil and natural gas income.

The new institution formed from the deal, to be called EFG Hermes Qatar, will be able to grow on advisory fees from Qatar’s aggressive acquisition spree, fueled by an estimated $20 billion to $30 billion in annual cash set aside for investments. And Qatar will obtain what it has been seeking: a prestigious regional investment bank.

“Their valuation is different from us,” said a person close to the transaction, speaking of the Qataris, who added that the bank would become “a platform for Qatar Inc.” The person asked to be anonymous so as not to jeopardize business relationships.

Still, the deal shows how far EFG Hermes had to retrench. The market cap of the firm is now $884 million, less than the $1.1 billion that Dubai’s ruler paid in 2007 for a 25 percent stake.

Some financial institutions, including Bank Alkhair in Bahrain, are battling corruption charges in court. Others have not been fortunate enough to find a buyer and have shut operations. In March, the Bahraini investment firm Arcapita filed for bankruptcy protection in the United States, where it had offices, after failing to refinance its $1.1 billion credit facility.

Senior management shuffles have become commonplace to appease shareholders as new strategies are adopted for a leaner environment. Citadel Capital in Cairo reshuffled its board this week, while Rasmala Investments in Dubai changed its chief executive in November 2010.

Last month, Shuaa Capital appointed its fourth chief executive in three years, Colin Macdonald, and brought in Sheik Maktoum as executive chairman in April.

“In commercial banks like Emirates NBD, there’s been relative stability at senior levels, but where there’s been the greatest turnover is in classic investment companies like Shuaa,” said Peter Vayanos, a partner in Abu Dhabi for the international consulting firm Booz Company. “The business model that helped these companies succeed in the past is no longer there.”

Shuaa, which has five core business lines including investment banking, asset management, finance, private equity and the brokerage house, has abandoned its consumer brokerage business.

“The brokerage business is linked to the performance of regional stock exchanges, reflecting the value of stocks held, and as soon as volume trickles away, brokerage businesses suffer,” Mr. Vayanos said.

Rasmala Investments reduced its brokerage arm in the United Arab Emirates, according to the firm’s founder and a former chairman, Ali al-Shihabi. It is now focused on revenue-generating units, including asset management and corporate finance. The firm also heavily reduced operations in Saudi Arabia, cutting its payroll to three people this year from 35.

Similarly, Rasmala Investments reduced costs by 50 percent in 2011 and has scrapped its investment research department. “As a private company, we were able to ruthlessly cut costs,” said Mr. Shihabi.

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