Olivia Albrecht ’11Journal #1
I am interning this summer at Northern Gulf Partners — the leading Iraq-focused investment firm. Today I am advising the Iraq Government on a draft piece of legislation sitting on the docket for review by a Parliament still in flux after elections earlier this year. This draft piece of legislation will leapfrog Iraq’s capital market structure, encourage foreign investment, and generate consistent local access to capital.
Iraq is a strategically located nation with vast natural wealth and an educated and enterprising population. With potentially the largest oil reserves in the world, the country is poised to reemerge as a global economic player and a regional political powerhouse.
But Iraq, despite its substantial progress and unparalleled opportunity, remains an extraordinarily difficult operating environment. Iraq still ranks 153 out of 183 countries in ease of doing business, according to the 2010 World Bank Ease of Doing Business Survey. Any successful venture in Iraq will require deep on-the-ground experience, broad local relationships, and an ability to navigate extraordinary logistical, legal, security, operational, and bureaucratic challenges.
And three and a half months ago, the Iraq people conducted another democratic election; yet today, no resolution has been made. The failure to forge a new legitimate government fuels public frustration and investor concern. How can you help build a business without a sound, trusted, and functional government? How can companies gain access to capital for their businesses without a Prime Minister or functioning Parliament? How can you navigate an environment of such substantial uncertainty?
Yet, with a deep Iraq history and unique on-the-ground presence Northern Gulf Partners believes in the revitalization of this country. A new balanced, legitimate government will be formed sooner rather than later.
On a daily basis I wear many hats including: financial analyst, business development manager, investor relations professional, and legal expert.
Every day I take a moment to speak directly to either a US government official operating in Iraq or an Iraqi person to garner their perspectives on the country, the people and their needs. Undoubtedly, investing in the establishment of Iraqi businesses to facilitate the anticipated economic growth of the country necessitates strong relationships with the US government, local businessmen, Iraq government officials, and pioneering investors who understand the value of principled capitalism in a post-conflict country. Maintaining these relationships is a critical component to economic development in this country.
In addition to the legal advisory work on the Iraqi capital markets, I am working on a number of live deals with the investment thesis of providing supplies and services to contractors working to expand the Iraq economy. I am also attempting to create an Iraq Exchange Traded Fund (ETF) to help bring a greater number of investors onto the Iraq Stock Exchange — currently $1 – $1.5 million of daily volume traded and $1.2B market capitalization.
Journal #2
Investing in a Frontier Market: It’s All About Politics.
Iraq’s political environment continues on the stabilizing trend that began in early 2008. The Parliamentary elections of March 2010 provided yet again — for the fifth time in five nationwide polls since the 2003 liberation from Saddam Hussein — an impressive exercise in Iraqi democracy. The March elections have been thoroughly legitimated by international observers, and a massive hand recount in Baghdad led to no adjustments in the results.
Yet, there was no outright winner in the March elections, and the past quarter was typified by complex coalition-building to determine the composition of the next government. Four electoral blocs emerged as leaders in March. Former Prime Minister Iyad Allawi’s Iraqi National Movement, a coalition mostly representing Sunni factions, won the most seats (91), while Prime Minster Nouri al-Maliki’s State of Law party, a breakaway from the larger Shi’a alliance that brought him to power in 2005, garnered 89 seats. The Iraqi National Alliance (INA), the rump of the original Shia coalition, won 70 seats, while the Kurdistan Alliance won 43 seats. Despite disagreement on many policy issues, and poor relations among some of their leaders, State of Law and the INA have indicated their intention to combine forces in a unified Shia bloc against Allawi’s Sunni-dominated coalition.
Political violence continued its long-term decline, averaging 200 deaths a month, down from 3000 in 2006 – 2007 and modestly less than 2009, according to the Brookings Institute Iraq Index. The leadership hiatus has nonetheless emboldened Iraq’s few remaining extremist elements to execute several high profile and symbolic attacks on Iraqi political and financial institutions, like the June 20 attack on the Trade Bank of Iraq, which killed 26.
Meanwhile, uncertainty about the leadership of individual ministries has left much investment and business activity in a holding pattern as entrepreneurs and investors wait to see who — which party, which individual — is in charge of which government portfolio. Notable exceptions to this pattern have been in the oil & gas and construction sectors.
Public Markets in the Frontier
While at NGP I am working closely with the public market investments. The NGP-managed index of Iraq’s 20 largest (Iraq20) public companies by market capitalization (Bloomberg: NGPIIraq), advanced last quarter by 2.8 percent. From the two years worth of electronic data available, analysis of the stock movement is challenging — and stock movements often contradict well-established developed market stock movements.
As with many newly minted securities market, the Iraq Stock Exchange has very low trading volumes and few foreign investors. Part of the reason for these light indicators is the securities market legal framework, which was established in 2004 under the Coalition Provisional Authority.
The good news is that there is a new securities law, written in 2008, that is currently awaiting a vote following the seating of the new Parliament. The law, establishing a framework for IPOs, empowering a more modern and robust Securities Commission, and providing for third-party custody in the stock market, is expected to have a substantial effect in bringing international equities investors off the sidelines — and helping to grow the Iraq capital markets substantially.
Journal #3
Experts agree that no certainty surrounding the government of Iraq will be achieved until the middle of fall 2010. While the uncertainty is problematic for the investment climate, Northern Gulf Partners is well positioned with the OPIC financing with “political insurance” to continue investing in the country. Two deals will close this summer: Northern Gulf Rentals, a construction equipment rental company in partnership with a Spanish firm; and an oilfield service company. With these transactions completed and a track record of success, NGP hopes to raise a dedicated fund for Iraq investments.
Not only must NGP focus on new investments in Iraq, but also on managing their current investments — always a challenge in private equity and a very serious challenge in frontier markets. For example, an Iraq Internet company for which NGP helped raise capital is falling behind on its principal and interest payments, despite conservative business projections. In communicating with the executives of the company, it is clear that there is a “glitch” in the model or the company — either natural (decreased product demand, higher costs, etc.) or artificial (corruption or extortion within the company). NGP must now investigate on behalf of the creditor. Next month a vice president of NGP will travel to Iraq for a few weeks to uncover the glitch in the system — why isn’t this company hitting their numbers? Is it a business issue or a corruption problem?
After three months of working with NGP, I realize the significant impact that private capital can play in a developing country — and the obstacles investors face. I hope to utilize this knowledge to devise investment strategies in other developing countries and support economic development efforts around the world. The private investor has a strong role to play in emerging market developments, particularly as the formal international community’s (UN, NATO, EU, etc.) investment appetite wanes.
