The Financial Times published an article a few days ago about investment companies in Kuwait. In that article Mr. Jassim Al Sadoun of Al Shall Research and Consulting was quoted saying that in 2011 we won’t see half of the more than 100 investment firms in Kuwait. He basis his conclusion on the fact that most of the investment firms are highly leveraged and lack sufficient assets.
In my opinion, the crisis sent a wake-up call to us here in Kuwait, and it revealed some “dirty laundry”. It separated the men from the boys. What will happen is a healthy dose of survival of the fittest, and apparently according to Mr. Al Sadoun, the fittest are a lowly bunch of less than 50% of investment firms in Kuwait. I hope that what has happened will teach people that there is no such thing as easy money, and leverage is coupled with high risks. People should learn to always manage their risk, and never get too overly exposed.
For your reference, the link of the article discussed:
http://www.ft.com/cms/s/0/87f5a690-1f19-11df-9584-00144feab49a.html
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Loading ...Tags: Al Shall, Bankruptcy, Investment Companies, Jassem Al Sadoun, Kuwait, Kuwaiti Investment Companies
[...] Originally posted here: The Survival of the Fittest « Alpha Dinar- talking GCC finance [...]
It’s sad that we never asked questions in the good old days and its even worse that we’re the ones paying for the mistakes of others.
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Laocowboy2 Reply:
February 24th, 2010 at 1:48 pm
Believe me – the questions were asked but too many people believed “this time it is different”. Even if the recession had been less severe, many of the business models (think Global and TID) were obviously very vulnerable to even a flat market where IPOs or trade sales would not be possible.
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That it was invitable is not much of a consolation – too much money lost by too many people. The “inevitable” bit came from visiting a number of Kuwaiti companies before the crash and noting that even in non-financial sector companies, there was always a TV tuned to the business channel while balance sheets often had investment portfolios that represented figures equivalent to a sizeable pportion of the equity base. If the problems were limited to the investment company sector it would be more manageable but too many non-investment company sector companies strayed into being “investment companies with a brick factory”. Final comment – I rather wish that those quoted in the FT article had not spoken – Kuwait is getting a bad enough press as it is.
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few points:
1) how bad these ppl can be mis matching thier long (an many times iliquid) assets along w/ their short term liabilities?
that should ve been very obvious to Global the most!
2) Most of these investment companies have no benifit in the economy. I feel really bad for the ppl working their, but I have no sympathy for the top managements nor the major shareholders
3) FT is just now waking up to this problem that has plagued Kuwait all throughout 2009! why now?
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Laocowboy2 Reply:
February 25th, 2010 at 1:07 pm
To take your points in order: -
(1)It was obvious – and was something that their rating agencies repeatedly pointed out. However although they made efforts to adhere to a proper maturity ladder that would minmise mis-matches, greed (and pride) eventually got the good of them. In most cases the original business model shifted towards areas that generated much higher (initial) rewards but which had much higher risks. Thus TID moved from consumer finance to being a leveraged private equity house while A’Ayaan moved from consumer finance into leveraged real estate. Global moved away from being a fee earning fund manager to being a leveraged venture capital hatchery.
(2) Agree 100%.
(3) Although I read the paper daily, the FT is pretty poor on MENA coverage. Lack of interst plus mediocre correspondents I would guess. When they do cover GCC stories, they often either get facts wrong (or, to be generous – “incomplete”) or draw conclusions that in themselves are unlikely to be accurate.
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[...] Go here to see the original: Kuwaiti Investment Companies: Survival of the Fittest « Alpha … [...]
The problem with Kuwait was the following.
You have X billion dollars per year of hydrocarbon revenue flowing into government/fiefdom coffer over 12 years of a crude oil bull market.
Every year you take out money from local and international banks and bond markets, basically getting leveraged and “investing” everywhere in the world and in everything.
Every year for 12 years that leverage ratio increased. The number of money “invested” by the time crude oil price collapsed was very very, yes, very large. After crude oil at 144, so go get even more money out of everyone, because, you know, you are a major commodity producer, untouchable and immune to any crisis.
Kuwait just became one very big investment bank. That was the problem.
THe professional investment banks made fatal errors. I don’t think Kuwait and its investment banking industry were any smarter or better than the Bear Stearns of the world.
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Bo6air Reply:
February 27th, 2010 at 11:46 am
am not sure I follow the “leveraging” part.
Kuwait’s banking (including KFH & Bubyan Bank) industry was not over-leveraged. Nor are they really investment banks in any sense of the word.
their fatal mistake was lending to companies w/ questionable investment guidelines, and based on too rosy of projections.
as for the bull market, it was going for everything really, not only oil.
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re leverage
i think you’re being caught up in the semantics of it all. We mean the same thing.
“as for the bull market, it was going for everything really, not only oil. ”
Oh, yes risk in general was in a bull market. but well i am talking about KW specifically as regards Kuwait the bull market that mattered most was oil, and with the longterm rise in price over 10-13 years in oil, plus using the bulk of whatever of those hydrocarbon revenues, increasing every year, the leverage figures were monstrous.
Not much goes on in Kuwait, so a crunch or serious bust in the financial sector, or crisis can be recovered from fairly quickly. Small population, etc. little investment in infrastructure so people and banks can get recapitalised quicker than other places.
But a crash in oil will be a serious problem.
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Oh, and imagine how much more you can get leveraged when everything (land, nominal value of stocks around the world, US treasuries, nondollar currencies) was appreciating.
You can leverage the assets you bought using leverage against oil to buy even more stuff.
Kuwait is undergoing your run of the mill classic debt deflation. A few people will not survive this. But the good news is they will deflate faster and recover faster, should oil maintain above 40-ish.
I think my point is that Kuwait as a whole was so leveraged that is no different from Wall Street.
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Heard and read all the worrisome news and lossers.
Let’s ask which company/s you think will emerge out as winners, from the 50% survival ones?
This is an opportune time to take advantage of potential winners! Forget about the lossers!
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