Iraq is no longer a no-go zone for investors.
Northern Gulf Partners, an eight-month-old investment bank with offices in New York, London and Baghdad, launched a hedge fund in August that will invest two thirds of its $5 million portfolio in equities of Iraqi companies, as well as those listed abroad but active in the war-torn country. The rest of the fund, which it hopes to grow to $50 million within a year, will be invested in Iraqi debt and bank deposits.
“Violence is down, economic figures are showing an uptick in investment, inflation is down, and Iraq’s revenues have hugely increased because of oil prices,” says Zaab Sethna, the firm’s London-born, U.S.-educated co-founder, who is heading its Baghdad office. Indeed, Iraq’s credit rating has shot up sharply in the past six months, according to Institutional Investor’s semiannual Country Credit survey (see page 191). Sethna, who became an adviser to the Iraqi government and to international companies seeking to invest in Iraq following the U.S.-led invasion in 2003, says investors sense that the war is winding down. “When I sit down with businessmen and bankers, there is a general mood of optimism in the air.”
Northern Gulf’s fund, Iraq Investment Partners I, will take long positions in Iraq and short other international securities opportunistically to try to achieve an annual return on investment of at least 25 percent over the next five years, says Bartle Bull, a former hedge fund manager with Jupiter Asset Management in London and Hong Kong who will co-manage the fund with Sethna.
Northern Gulf, whose shareholders include Ergo Advisors, a New York–based provider of emerging-markets research to hedge funds and private equity investors, is the latest fund to enter Iraq, but it’s not the first. Godvig Capital Management, a Luxembourg-based alternative investment firm, has managed the $23 million Babylon Fund since 2006, the only open-ended fund focused on Iraq. Babylon will double its share of Baghdad-listed stocks to 80 percent by year-end amid expectations that improved security and rising oil exports will lead to higher corporate earnings, says fund manager Björn Englund, a Swedish-born former U.N. soldier in Iraq. The fund has posted a return of about 22 percent since inception.
Most investors are still steering clear of Iraq because of concerns over violence, corruption, complex bureaucracy, an uncertain regulatory framework and a shortage of skilled workers, but others can’t resist the potential payoff. “This is the time to grab some investments at relatively low prices,” says Farid Abolfathi, a Washington-based economist at consulting firm Global Insight. “It’s dangerous, it’s risky, but it’s a country whose growth potential is tremendous and which will probably grow more rapidly than most Middle Eastern countries in the next decade.”
The U.S. State Department’s most recent data shows that foreign direct investment into Iraq hit $300 million in 2006; observers estimate that figure may have topped $5 billion for 2007, when the government awarded three telecommunications licenses worth a total of $3.75 billion. The optimism also trickled into Iraq’s stock exchange, where prices rose by an average of 27 percent last year.
