I was prompted to write this article by a friend after a long discussion concerning the future of the financial services industry in the GCC. More specifically about all the new investment firms that have been popping up over the last few years faster than Starbucks outlets.
Over the past few years there has been an unprecedented growth in the number of investment firms in the GCC. It seemed as if every Abdullah, Youssef, or Nabeel were setting up their own private investment firmswith institutional and/or individual equity capital. Three things were in common between most of these firms: a) Most had no real strategic focus (i.e. they occupied no niche in the market), b) they were run by inexperienced management, and c) they were all called something or other Capital (let's call it the Shawarma Capital Syndrome).
Even a slight cursory look at their brochures or web sites tells you that they have nothing differentiated about them, not products, not pricing , and not sector of expertise. Many are doing exactly the opposite of what they said they would do. One institution was to manage funds in the public equity markets specializing in smaller cap stocks where they had " strong management ties " , but their biggest positions were Sabic, Samba, and Saudi Electricity. Another was supposed to provide equity and debt capital to start-ups and early stage firms, but all its deals were real estate. Either they don't know what Strategy means, or they were willing to say anything to receive funding.
Many have inexperienced management. After all, how experienced can you be if you were still in school during the 1997 financial crisis, let alone the crash of 1987. Who are these people? Who actually knows them? What have they done in their lives? How much money have they ever managed? How many products have they structured? What training have they received? Which banks were they mentored in?
As I asked around, I couldn't find much about their pasts. Some seemed to be the cousin of an equally unknown but now rich CEO or Shareholder. Others worked in clothes retail stores while others were in fact hospital orderlies. Very few it seemed were Bankers. What I mean is that someone who worked as a Cashier in a bank is not a Banker. I know someone who was barely 30 years old and has only ever worked for his family restaurant business before launching his so called Hedge Fund.
Didn't anyone ask them any questions? Like what is wrong with using an IRR as a return measurement? Apparently they were all CFAs but didn't know this basic problem. One CEO I talked to couldn't tell me how much a portfolio has to gain to go back to its original value if it has lost 50% of its value. Many were pronouncing Investments with an " F ".
All of a sudden we were seeing all these previously unknown CEOs on our televisions talking about the markets with the confidence of someone who actually has been in the markets. They didn't know the difference between Investment Banking and Investment Management. They were occupying all the conferences talking their own books. One firm said that its differentiation factor was that it was the only firm to use International Standards of Corporate Governance, Compliance, and Due Diligence. Which standards are these? The ones that led to the demise of Lehman's and Merrill's or the schemes of Madoff.
And what I mean by experience is not only the length of time, but also quality and variety. In one firm I worked in, one senior officer took slight at me and a colleague for asking him too many questions about his approval process for lending, so he yelled back that he had 20 years experience, to which my colleague replied calmly: " You don't have 20 years experience, you have one year's experience repeated 20 times."
I kid you not.
So who are these people and how did so many investors fall for them. The reasons are many: Unsophisticated shareholders, investors who wanted a seat on a board to satisfy their own ego, the dream of a very quick profit when the company IPOs, sweet talking CEO, etc.
I think many investors should have read one of the most important financial books ever: " Extraordinary Popular Delusions and the Madness of Crowds " by Charles Mackay, a very old book, one of the first in fact as it was first published in 1841. I can't explain it any other way.
Given the financial crisis our markets are going through today, what will happen to all these firms over the next few years. Well many will simply not be able to resist gravity and go under. Others will simply fade slowly into oblivion. Some will even burn very brightly over months in a very public way. Many managements will simply commit suicide by jumping from the top of their own egos.
Some CEOs will end up in prison accused of financial shenanigans, some are there already. Shareholders will blame management and vice versa. Everyone will blame the markets. Many investors will lose their money, and sue companies, even the shareholders will sue their own firm and other shareholders. Many will lose their licenses, and so many innocent employees will be left out of work.
It's interesting how so many of them today no longer appear on our screens on CNBC or AL Arabiya anymore. No one wants difficult questions.
Right now many investors as a colleague pointed out don't care about Return ON Capital, they just want Return OF Capital.
Just as in War, Truth is always the first victim. But this is the Middle East and everyone wants to save face so you will not hear the whole story. Many of these firms are private and only direct communication with someone in there will give you the story.
Can anything be done about it? Well things usually don't get as bad as people imagine, then again, the light at the end of the tunnel is sometimes a train coming at you.
Shareholders can get to learn about their companies instead of simply believing what management says. Ask questions and demand answers. Use advisors if you have to but get to the truth of the financial shape of the company before it's too late, and for God's sake get the facts before you inject anymore capital. And if needed change the management and hire experienced practical managers who have good ideas of how to weather this storm.
Managements are in an unenviable position between investors and shareholders. My advice is leave your ego at the door, admit even if it's just to yourself that you have bit more than you can chew and get help quickly. Admit the problems and look for real solutions, and not waste time on setting up Crisis Management Teams.
It may seem counter intuitive but Regulators can help in ending the misery of some companies by shutting them down. They can insist on a realistic plan of action that deals with how firms will cover their expenses and meet their obligations within a specific span of time or they will be shut down. This way, at least the survivors can begin perhaps to return to profitability by receiving the slack and the supply of liquidity and deals and can grow again.
The Media can help too by putting pressure on companies and asking tough questions. By not simply allowing anybody to appear on our screens without themselves being screened first.
Don't get me wrong, I'm a big supporter of entrepreneurial spirit and I admire people who do something. I might set up a company myself, why not, everybody's got one. But I believe in discipline. The financial industry affects all of us and is too important to be left to children to play with it.
It's been a big party with no discipline. Everyone will wake up with a hangover, while many will sustain permanent brain damage. Many tried to fly too high and they will crash to the ground.
Which brings me to the end, and the title of this article:When God wants to Destroy the Ant, He first gives it Wings.
