Thursday, March 7, 2013

Qatar Investment Fund

This project where Qatar is interested in investing in a to-be-established Greek fund for investing/financing small and medium size businesses/projects sounds like a step in the very right direction!

The original idea was to put 2 BEUR into this fund, half coming from Qatar and the other half from Greece as a condition. Given the cash shortage of Greece, there now seems to be the option that Greece does not have to put up any money. Qatar would either fund the entire 2 BEUR on its own or invite other countries to co-invest with them. Greece always has the option to participate in the fund if it wants to.

Two aspects are critical to the success of such a fund. First, who will have the management responsibility/control and, secondly, what will the fund invest in?

The management responsibility/control must rest entirely with proven professionals in the field. Professionals who only concern themselves with the economic merits of an investment and who are free from any political interference.

It is easier to say what the fund should not invest in than to say what it should invest in. The fund SHOULD NOT invest in items like: reduction of bank debt; management buy-out's or buy-in's; general purposes like 'business expansion'; etc. The most important criteria for any fund investment should be the creation of new jobs. Obviously, no investment will be made without a convincing business plan. However, business plans tend to focus on the financials of an investment. The number of new jobs created should become a very important figurecriteria in the appraisal of any business plan.

Typically, the yardstick for an investment is the expected return on equity (ROE). In this case, one should introduce an additional yardstick like 'number of new jobs created for every 1 MEUR of new investment'.

It is good to read that 6 companies have already submitted business plans to the potential investors. They focus on the fields of tourism, real estate and energy.

Tourism is definitely a field where new investments should be made given its importance to the Greek economy and given Greece's attractiveness for tourism. Energy sounds good on the surface but that would depend on the specific projects. Much money can be made with energy projects but, also, much money can be lost; and job creation through energy projects would have to be examined very carefully (because many such projects are very capital intensive). Real estate could also be interesting from a job creation standpoint. I would only warn that Greece should not do in real estate what Spain has done before it.

I am reminded of the McKinsey 'Greece Ten Years Ahead' report which proposed over 100 new projects with a job creation potential of 500.000 jobs over the next ten years, and 50 BEUR in incremental GDP. The most logical approach would seem to be to take a very close look at this report to see what kinds of investments could be attractive to the new fund.


  1. I wonder if those 6 companies have applied for EIB loans, either directly or via the Greek banks to which the EIB has extended lines of credit for loans to Greek SMEs.

    Why is it that the Greek media and politicians never talk about these EIB facilities - maybe because it doesn't fit in with their spin. This is just one of several similar EIB facilties - €150M for Financing SMEs in industrial, tourism and service sectors - it was signed in December last year. Did anyone see anything in the Greek media, did anyone hear a Greek politician blowing his/her trumpet.

    I can't help wondering of this all just window dressing for the eventual handing over of Elliniko to the Qatari's - on their own terms. Just some sweeteners before the Mickey Finn is slipped into the ouzo and coke.

    I can't see whats wrong with management buyouts per se. Many public companies have boards who know nothing about the business and who are only interested in quarterly results, and bigger dividends. This often prevents the investment of profits in new plant, technologies and products. Boards sometimes prevent the closing down of failing business units because of the 'sympathy' board members have for them. Yes its often the case that following a buyout some parts of the business may be closed, sold off etc - but quite often they were lousy investments in the first instance - HP/Compaq, HP/EDS, HP/Autonomy, GM/Saab and GM/Opel spring to mind. Going private has saved many companies from going out of business entirely.

    The Qatar Investment Authority will put the interests of the Qatari people ahead of the Greek people. And so they should, the money they're investing belongs to the Qatari people, albeit indirectly via their absolute monarchy.

    I see the QIA just upped its stake in Tiffany's, maybe they will open a shop in Tsakalof St.


    1. Why no MBOs/MBIs? By definition, an MBO/MBI involves leverage. The buyers (i. e. management) must pay a price to the seller (previous owner) in order to get ownership of the company. I have never seen an MBO/MBI where the buyers financed that price exclusively with their equity. The general rule is that the buyers take up debt (i. e. leverage) to finance at least 50% (sometimes up to 80%) of the price. That is in and by itself not necessarily bad because who cares how indebted the new owners are at their personal level. Where it gets bad is when the acquisition debt of the new owners is put on the shoulders of the company they bought. Put differently, the new owners use the debt capacity of the company they bought to finance their acquisition of that company.

      The same applies when the new buyer is a financial investor. Without leverage, their acquisitions would not make sense financially. The idea is that they can optimize their acquisition to such an extent that the acquisition debt can be financed by the acquisition itself. Typically, that involves a major portion of cash flow being allocated to the service of the acquisition debt (instead of, perhaps, to build a new factory).

      Having dealt with many, many acquisitions of the above nature, I have become an adamant opponent to any acquisition of a middle market company which rests on using the acquisition target's debt capacity (and cash flows!) to finance the acquisition.


      You may ask 'what's the difference between that and what, for example, Qatar would be doing'? Or, for that matter, what happens in the privatization of a public sector company?

      Qatar may well finance part of their investments with debt. A multinational who buys a major public sector company will probably also use debt to finance a major portion of the price. Again, that is not the problem. The problem is when such debt is shouldered by the acquisition target.

      A qualified investor can use ITS OWN debt capacity to raise the acquisition financing and does not need to use the acquisition target's debt capacity. I am sure (at least I hope so!) that Greece will reject any privatization offer where the business plan shows that debt is shouldered by the acquisition target.

      Now, MBO/MBI people might say 'we don't encumber assets of the acquisition target as collateral for the acquistion debt; we only pledge the shares which we acquire to our lenders'.

      While that is a bit better, it is still bad. Pledging shares means giving up ownership control. If something were to go wrong with the acquisition, the pledged shares might end up in new, undesireable hands. The most important thing for Greece is that privatized companies and/or SME's don't end up, for whatever uncontrollable reasons, in the hands of 'undesireable owners'.

  2. Qatar Investments offer a large range of incentives, including subsidized or nominal rates for gas and electricity, no import duty on machinery, tax exemptions on corporate tax for pre-determined periods and no export duty with others, equipment and spare parts for business projects.