MerchantBridge invests US$2bn into Iraq

So far, few foreign financial investors have put much capital into projects in Iraq, but perhaps the stand-out exception is MerchantBridge, the London-based private equity company.

Founded in 1997 and bought by the management in 2003, the fund has been active in Iraq since 2004, and has since invested almost US$2bn into projects there, making it perhaps the biggest single foreign investor in the country.

It was set up by Basil Rahim, an Iraqi banker with 30 years’ experience in the region, including a period as a managing director at the Carlyle Group. He says: “Other financial houses and private equity funds were too busy in the last few years focusing on Dubai and other places, so they didn’t bother to look at Iraq. This might change.”

And why was MerchantBridge different? “We’re a bit contrarian, perhaps.”

He says: “Iraq is a very unusual story. It is high risk and high reward. Sophisticated institutional and high net worth investors will always have an allocation for that sort of investment. There’s actually a substantial amount of Gulf money waiting on the sidelines to get into Iraq.”

MerchantBridge has certainly been very successful in mobilising these resources, as well as backing from western funds. Its biggest investment so far, in 2007, was the US$1.25bn acquisition of a licence for Asiacell, the mobile phone company which Fleihan says has a 40% market share in Iraq.

Qatar Telecom came in as a minority investor on that deal, though most of the money was raised from western and GCC funds. Rahim says: “Most sophisticated investors understand that telcos are fairly resilient to civil strife”, and adds: “Since we bought the company it has doubled in size.”

MerchantBridge has also invested in two cement factories, to take advantage of the expected boom in reconstruction. It has a build-operate-transfer (BOT)-type contract with the government to rehabilitate one 2 million tonne plant, and is investing US$320mn to set up a new one. Both projects are in partnership with Lafarge.

It has also raised US$70mn for the MB Iraq Construction Materials Fund, a five-year fund which raised US$20mn in 2005 and a further US$50mn in 2008.

And the fund also set up a greenfield bank in Iraq, called Al Mansour Bank, together with Qatar National Bank in 2005. “At one point it was the best capitalised bank in the country, with capital of US$45mn. It was profitable from day one, and now has capital of US$70mn and double digit ROE.”

Rahim adds: “The country is dramatically underbanked. There are a few state banks who dominate commercial banking, like Trade Bank of Iraq, but they mainly deal with the government. Then there are 15 or so private banks, mainly owned by foreign banks.”

With big banks like HSBC and National Bank of Iraq moving into the country, MerchantBridge would be forgiven for looking for an exit strategy some years down the line, but Rahim insists: “Our strategy is to be one of the leading banks in the country.”

The bank also had a foothold in Middle Eastern private banking, via a strategic stake in bought in Bank Frey & Co in Zurich in 2005. Rahim says: “Our clients regularly need international banking services. It makes a great deal of sense for us to have a closer relationship with a trusted private banking partner in Switzerland.”

In recent months, it has strengthened its partnership with another Swiss bank, UBS – the two firms both put US$40mn each into a Middle Eastern infrastructure fund, and are also partners in UBS Saudi Arabia.

But it is Iraq where the firm seems to be busiest at the moment, and where Rahim says he sees the most opportunities.

Rahim concludes: “If you look at where Iraq’s GDP is now, at around US$90bn, and where it was many years ago, before all this adventurism, the potential for growth there is enormous. Its GDP should be US$400bn. The question is what period of time it will take to catch up all those lost years.”