Bahrain’s sovereign wealth fund is back on track


Mumtalakat expects proper corporate governance and transparency processes, Al Kooheji says.

It has been almost five years to the day since Mahmood Hashim Al Kooheji took over as head of Bahrain’s sovereign wealth fund, Mumtalakat, restructuring several investment interests and making other changes to whip the fund into shape after years of losses.

It followed a term at Gulf Air in which he managed the national carrier’s controversial restructure that saw 15 percent of its staff, around 600 people, lose their jobs.

Today, he is less interested in orchestrating dramatic change and more intent on brokering safe, considered deals that yield long-term growth.

Rather than glitzy, high-profile stakes in iconic London hotels or European football clubs, à la Qatar Investment Authority (QIA), Mumtalakat is seeking “serious” investments, Al Kooheji tells Arabian Business in an exclusive interview in Manama.

“Football clubs. Are they commercially viable?” he asks, when questioned on whether Mumtalakat would ever consider such trophy investments. “I don’t think so. Football is football. I stopped watching football because you have all this happiness and then your team loses and you are sad.

“So, I made a strategy with my kids that I would always support the winner. I believe that as a sovereign wealth fund, we need to be a more serious investor. We need to add to the economy or the community, through investor protection, education or some kind of public service.”

Mumtalakat, along with US private equity firm Blackstone Group, are shareholders in GEMS Education.
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It is for this reason that Mumtalakat is taking an increased interest in the comparatively stable sectors of healthcare, education and industry when it comes to new investments.

“These things may not be [glamorous] or buzz with the young people, but they offer value-added product and as a sovereign wealth fund people expect us to do that. They expect us to be more formal in our activities,” he says, with his trademark gentle demeanour.

As evidence of this strategy, Mumtalakat last year took an undisclosed equity stake in Italian healthcare firm KOS Group, which provides long-term care and rehabilitation services, hospital equipment and diagnostics. During our interview, Al Kooheji reveals that the group, with Mumtalakat, has identified an opportunity to provide palliative and other long-term care services in the GCC for the first time, and expects a deal to be reached by the second half of 2017.

Meanwhile, in October 2015, Mumtalakat took a “significant majority stake” in UAE-based GEMS Education as part of an investment group that included US private equity firm Blackstone. Al Kooheji says he expects another deal to be reached next year to launch GEMS schools in Bahrain and, eventually, elsewhere in the GCC.

The Bahraini was appointed CEO of Mumtalakat on March 21, 2012, replacing Talal Al Zain who left to set up his own investment firm and has since been appointed as CEO of the new Abu Dhabi-based Islamic investment bank, ADCorp.

During Al Zain’s tenure, Mumtalakat suffered huge losses as a result of the global financial crisis and low aluminium prices that hit one of the jewels in its crown, Aluminium Bahrain (Alba). A particularly tough 2009 saw the wealth fund report losses of $485m as the recession hit revenues at Alba, leading to a comprehensive restructuring and public listing of the aluminium producer on the Bahrain Bourse and London Stock Exchange.

Aluminium Bahrain reported total sales of $1.78bn last year.

Under Al Kooheji’s stewardship, Mumtalakat began to recover and by 2013 it had narrowed its losses by 32.9 percent, mainly due to strong performances by its financial services and telecommunications portfolios.

Today, Mumtalakat, the smallest of the GCC sovereign wealth funds, established in 2006, has $10.6bn of assets under management, according to the latest estimates from the Sovereign Wealth Fund Institute. The fund is yet to publish its 2016 financial results but reported in its 2015 results last May that it had $10.3bn of assets as of December 2015. It holds stakes in more than 40 firms in the kingdom’s non-oil sector, including Bahrain Telecommunications Co (Batelco), Alba, Gulf Air, Kuwait-based gas manufacturer Gulf Cryo and UK car firm McLaren.

In the 2015 results, Mumtalakat announced a gross profit of $487.5m for 2015  —  a 1.1 percent rise from the previous year. However, net profit shrank by 68.7 percent to $76.3m against 2014’s $243.6m, attributed to “impairment losses recognised on goodwill”, Mumtalakat said at the time, without elaborating. Reuters quoted Al Kooheji as saying the decline was because of an adjustment on goodwill against Alba, totalling $583m, due to lower aluminium prices. Alba’s 2015 net profit was 38 percent lower than the previous year, at $159.6m.

However, the holding company’s operating income increased to $330.9m, particularly on the back of an improved performance by Gulf Air, and consolidated revenues were $3.1bn.

Al Kooheji declines to comment at length on Mumtalakat’s financial performance, saying he would prefer to wait until the 2016 figures have been announced. But he says the results have been “steady” over the past three years. “2016 has been a very challenging and surprising year, from Brexit to the Trump election.

National airline Gulf Air is 100 percent owned by Mumtalakat.

“Having said that, it was another good year for us. We have not slowed down and we have been actively pursuing investments. Some of our portfolio companies have had challenges, but overall gross profit has risen and we are pleased with the performance.”

Al Kooheji says he is particularly pleased with the investments made by Mumtalakat in the last three years since it returned to black. Such investments include the aforementioned GEMS and KOS Group stakes and the minority equity stake in Gulf Cryo.

“These have contributed to double-digit income growth for us,” he says. “I’ll be precise: investments we’ve taken since 2012 account for 25 percent of our dividend income, so they’ve been very positive and show we’re on the right track.”

He also points out that Mumtalakat announced six new deals in 2016, a significant number for a small fund. It was also a year in which Mumtalakat ramped up its global expansion — and it expects to continue this in 2017. It made a reported $250m investment in the state-owned Russian Direct Investment Fund (RDIF) in February 2016, $250m of investments in office buildings across Texas and Arizona, through a partnership with US-based Regent Properties, and acquired a significant equity stake in UK-based water treatment company, Envirogen Group. The latter deal, completed two months after the UK’s vote to leave the European Union, was “very important”, Al Kooheji says, adding that the UK presents lucrative opportunities due to the dollar currency peg.

“We are truly diversifed in the GCC, US, UK and Europe now, and this will continue,” he says, dismissing any global uncertainty caused by Donald Trump’s election. “What we are hearing from the team that works with President Trump is that they’d like to make it more attractive to do business in the US, with lower corporation tax and so on.

“We’ve always been bullish about America. It’s a steady, transparent, mature economy — and we are comfortable with the business regulations and do not expect any surprises. Should we see interesting opportunities there, we will always pursue them.”

Mumtalakat is proud to be associated with high-end British automaker McLaren.

In numerous media interviews since his appointment as CEO, Al Kooheji has stressed the importance of good corporate governance and transparency, and this interview is no different.

“Every investment we make is a marriage relationship,” he states. “We carefully study it and ensure it makes sense for us, and we do not shy away from saying ‘no’ to an investment we’re not convinced by.”

Every prospective deal goes through a due diligence process involving at least three committees, he says, claiming that, for years, lack of transparency was one of the biggest problems facing global sovereign wealth funds. Referring to the scandal-hit Malaysian fund 1MDB, Al Kooheji says: “The answer to all that is transparency and I encourage everyone to go out of their way to improve this. If a business is lucrative but doesn’t have good governance, it doesn’t register our interest.”

These are the criteria on which Mumtalakat will base future investment decisions, as it taps into new growth opportunities, such as the aforementioned healthcare and education sectors, he says. “In our region, healthcare is a very promising area, particularly acute care when people need to be treated for months or years. It’s cheaper for the government to use the private sector to take care of long-term ill patients than to keep them in hospitals.”

Industrial is another attractive area for Mumtalakat, as is the service sector, in which the fund has no investments as yet but “is looking”. Real estate, too, is a target sector and Al Kooheji says several Mumtalakat-backed tourism schemes in Bahrain are to be announced this year, including one coastal project worth “hundreds of millions of dinars”.

Mumtalakat, through its wholly-owned subsidiary Bahrain Real Estate Investment (Edamah), already has a deal in place with Fairmont Hotels & Resorts to build a 215-room luxury resort in the Al Jazayer area of Bahrain.

Mumtalakat holds investments in Batelco.

The fund’s existing investments will also keep the CEO busy this year. Gulf Air, which to date has been a ‘problem child’ in Mumtalakat’s portfolio, is yet to achieve its goal of returning to profitability following years of losses, but Al Kooheji says he is not worried. In its 2015 annual results published last June, the state airline reported what it claimed were its strongest results since 2004, including a “landmark” 62 percent reduction in annual losses from $166.2m in 2014 to $63.9m in 2015.

“I’ll tell you frankly, this is not what you’d call a ‘turning point’. We’ve reached ‘stability’,” Al Kooheji says. “We’ve done a lot of restructuring; we’ve cut routes, reduced headcount — all of that has finished now.

“So although we have losses, they are no longer huge, they have reached an acceptable level. Am I broadly satisfied? Yes. We have got to where we want to be. The airline is functioning and opening new routes and it is helping the national economy.

“The reason for the losses is because we need to serve a lot of destinations. Gulf Air is linking Bahrain to the rest of the world. It’s like building a bridge from Muharraq to Manama, it’s our bridge to the rest of the world.”

This is all very well, but is there a target timeframe by which Gulf Air will reduce its losses completely? Al Kooheji is indignant. “Look, even parliament is finding these losses acceptable. We are targeting betweeen BD30m-40m [$80m-106m] of annual losses, which for an airline serving its country, is a reasonable cost.”

He adds the company will not shy away from shutting down some unprofitable routes, though not all — “If it’s a major destination we need to be connected to, we will keep it” — and says the scheduled receipt of fuel-efficient Boeing 787 aircraft in 2018 will help to further reduce costs.

Meanwhile, Al Koheeji is excited by Alba’s Line 6 Expansion project, which recently secured a $1.5bn loan and has been touted to give Bahrain the largest smelter in the world, expected to produce at least 1.4 million tonnes per annum of aluminium against today’s 900,000 tonnes.

“That is a huge achievement for the company and throughout all this time they’ve been consistently paying dividends to shareholders.”

Mumtalakat holds investments in Gulf International Bank.

But the holding company faces challenges in the months ahead. This is not necessarily because of regional economic pressures - on the contrary, Al Kooheji says low oil prices have forced GCC governments to adopt a “more disciplined approach”, providing opportunities for the private sector - but because Mumtalakat is rubbing up against tough competition while market players seek similar safe investments.

“Because there has not been abundant cash available, people have been going after more secure investments and trying to think the way we think. We have been crowded, frankly,” he says.

Will Mumtalakat exit any investments to release cash for any more lucrative ones?

“We have no need to,” he says, caveating that by saying the fund is, first and foremost, a “commercial entity” and if an opportunity came up at the right price, the board would always consider it. He cites reports in 2014 that Mumtalakat was preparing to sell part of its 50 percent stake in McLaren. At the time, Honda was reported to be eyeing the stake as part of an agreement to supply engines to the Formula 1 racing team. But Al Kooheji says the price was not right.

“It’s public knowledge there was an offer and we were interested but we did not think it was a good price. That tells you we are not desperately selling anything; we believe in the longer term potential of the company. So we said, no.”

Managerial disputes over the future of McLaren were reported to be behind the resignation of the company’s long-standing chairman and CEO, Ron Dennis, last November. In a statement that month, Dennis said that he decided to stand down after two rival investors placed him on enforced leave. Al Kooheji says: “I don’t want to go over this... Last year I put a lot of praise to [Dennis] and still I say good things about him, because at the end of the day, he brought the company to where it is now.

“But the company has grown up. It’s gone from a small firm producing a very small number of cars, to a proper company producing almost 3,400 cars a year and with that sort of process you need to expand the management team and have more people running the show. It’s the same with any growing business.”

He concludes that McLaren is one of the companies with which Mumtalakat is most proud to be associated: “It’s a top-of-the-range carmarker with iconic products.” Its future could involve “anything at the right price”, he says, including a stake sale or acquisition of a higher stake by Mumtalakat.

In December, Fitch Ratings affirmed Mumtalakat’s credit rating as a secure ‘BB+’. With such a complex and diverse portfolio of holdings, Al Kooheji has his work cut out for him. But he also has a clear vision to secure steady, long-term growth for the fund and is likely to find plenty of new investments to achieve this.

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