Naji Boutros: Edge Capital Investing in Lebanon and MENA Region

Interview with Naji Boutros, CEO of Edge Capital

Please tell us a bit about Edge Capital, its history and its founding principles.
 
In 2010, after I left Colony Capital, I raised money from a group of investors who wanted to focus on this part of the world. We invested in emerging and frontier markets and in businesses focused on Turkey, where we had a very successful investment history.

We invested in what are probably the brightest minds in shopping centre management and development, Levent Eyuboğlu and Hans Otto Nagel, who are the founders of Turkmall. We provided them with backing and together, we built several shopping centres in Turkey. This investment now spans the Turkish Republic and the neighbouring countries, such as Kurdistan. We also invested in a very young and brilliant Lebanese entrepreneur and his company called Netlogistics. The company is a leader in freight forwarding, express mail and logistics. The company at that time was primarily based in Lebanon and Syria, but Mourad Aoun its CEO, quickly orientated the business to include Kurdistan and Iraq, meaning we have opened many offices in Kurdistan and Basra and we are currently exploring other attractive markets. We have also invested in a company called Ayyam Gallery, run by the most impressive duo, Khaled and Hisham Samawi, who are above all great art lovers as well as keen supporters of young Arab talent. I consider Ayyam to be a leader in modern and contemporary art. The company started in Damascus, Syria, where it helped nurture the talent of young Syrian artists such as Safwan Darhoul then moved to Lebanon where they assisted the famous artist Nadim Karam before moving into Jeddah and London on New Bond Street. The company is based in Dubai where we own a couple of galleries and an auction house.

What prompted you to invest in Turkey?

This is my fourth investment in Turkey. We have had a very successful track record in Turkey, investing in businesses that capitalise on the growing population, i.e. the young and dynamic population and their increasing purchasing power. We have typically chosen young leaders in their fields, normally the second or third leaders within a specific sector. With Turkmall, we were investing in the landlord of our cinema company, which was then called Mars Cinema and which we bought in 2007 and exited in 2010. In addition, they were our landlord for the health clubs and restaurants that we owned.

In my opinion, Turkey has been a wonderful place to invest in. Our Turkish CEOs and partners are incredible people to work with; dynamic, creative and able to manoeuvre all the political upheavals that such countries experience.

What is your investment strategy? How do you assess your financial performance?

You´re asking me to give you the secret elixir!
You need to be wanted. There needs to be room for your capital. Places that are awash with capital do not need us and so we do not tend to go to those places. There needs to be a reason for us to go and invest in a place. Such a reason could be mismanagement of the finances of a company for example. In all cases, we need to see compelling economic growth within that country. We like to be and we typically are, associated with CEOs who are our partners. That means that the people running the business have more of a vested interest in its success than we do.

What would you say are some of the most lucrative investment opportunities in Lebanon?

Until now I have spent most of my professional career outside of Lebanon. Putting aside all of the passion that drove me to come back to Lebanon and trying to be as rational as a Lebanese man who loves this country can be, I can say that personally I do’ want to invest in Lebanese real estate. This may seem very stupid because every other person is getting into Lebanese real estate now!

For me to invest in Lebanon, I need to find a transformative investment: an investment that is of a scale and nature that will improve people´s lives. At the same time, I would like my partners to benefit from what I bring to them. I hope to open more markets for my partners, which is what we have done with Netlogistics.

We are in Lebanon to identify sector leaders and help them to grow outside of Lebanon. They already know their business inside Lebanon; they do not need us to help on that level. We are in Lebanon because we can bring them business from outside and we can help them expand outside of Lebanon.

Lebanon is one of those places with plenty of capital and banks that can offer financing. Thus, it is not the money that we bring in that will help these companies. Instead, they can gain from being associated with us, and by making the most of our expertise and our global connections.

Investing in Lebanon is a risk, so how do you manage risk?

I like risk! I believe that there is no point investing in a place that has no risk, for me that means a boring place. Although I am turning 50, which would suggest that I am supposed to be entering an age where I should avoid risk!

Traditionally we have made money investing in markets where there is risk, but where the perception of risk is higher than the actual risk. In fact, it is the perception of risk that keeps the investors away, enabling us to achieve better valuations than if there was no perception of risk.

Therefore, does the increased perception of risk translate into higher returns on investment? Do you feel that the region offers significantly under-priced opportunities because of this?

It is not the perception of risk that offers the high yield because there will also be high perception of risk where there is high risk and in that scenario, you would end up losing all of your money. We need to work on that variable: the margin between the perceived risk and the actual risk. It is important to put together and control your variables i.e. the acquisition, financing, operating and exit variables etc. You need to find the right ones to fit the situation.

In what ways is the investment landscape different here in the Middle East and Lebanon to the United States?

It is like talking about the difference between the sun and the moon. First of all, the parameters of investment in the US are typically more efficient than in Lebanon because they have major liquidity going after investment opportunities be it in private equity or real estate. In terms of investment parameters, I find the differences between Lebanon and the US to be great. It is much more of a discipline in the US whilst in this part of the world it is much more of a hobby and an art.

I even think that there are differences in terms of the human relations; in the US, they have much more of a business-to-business relationship whereas here it is much more personal. We are not just in an emerging market here, let´s not fool ourselves; this is a sub-emerging market in many ways. However, that is what creates opportunities. The smart investors are those that can adapt to this environment and surround themselves with the right control mechanisms to mitigate all of the risk.

There are risks that you have to assess; you have to think about whether your information is correct, if the audit reports are correct etc. and you have to consider the consequences if they are not correct.

As you mentioned, Lebanon is an emerging market, what would you say is the outlook for real estate in Lebanon?

If I were to be asked what is a good store of value in Lebanon I would always say real estate.  I say this for many reasons: number one, they do not make more land in Lebanon! There is a limited supply of land here. Secondly the potential buyers of real estate range from successful Lebanese entrepreneurs working all over the world to our neighbours who believe Lebanon to be a beautiful place to invest in because it is a great place to have fun, to educate your children and so on. The beauty of Lebanese real estate is that it truly is a store of value because private ownership is highly respected in Lebanon. Not only that but the pressure of selling real estate in Lebanon is not the same as in other places because we rarely see sellers distressed due to pressure from bankers. I do not know what these distressed loans are like on the bankers balance sheets but I’m pretty sure it´s much less than what is was in the US during the crisis. Despite the economic slowdown in Lebanon over the last few years, you still won´t find distressed sellers who are willing to sell their land for half than what it used to be worth. I am actually bullish on Lebanese real estate; I think that in the long term it is a good store of value.

Having said that, I urge the Lebanese to pay more attention to the distinguishing factor that differentiates this state from neighbouring countries. The driver of value of Lebanese real estate has been the Lebanese expat and the Arab investor. For these people to come here, Lebanon needs to continue providing them with green, beautiful spaces. We do not need to build a city in a mountain. We need to build villages. I have just returned from a trip to Switzerland, where I visited top resorts and cities where, within a minute, you can be driving through green pastures and beautiful wildernesses. We need to bring this back to Lebanon. If we do not get this back, it will be a bad omen for Lebanese real estate. There will be no attraction for it. In the early part of the twentieth century, Lebanon used to be 70 to 80% green land forested; today it is less than 12%.

In your opinion, how can Lebanon develop a more sophisticated capital market?

When we think of capital markets, we think of equity and debt. You need to have two things; firstly, you need to have vehicles that are invested in growing sectors, outside of the banking sector. I think you need to have industrial vehicles in Lebanon, which are invested in regional growing markets in order for these vehicles to grow and attract equity investors. The liquidity is there.

Secondly, you need to change the culture in Lebanon that thinks that investing in the stock market is taboo. Investing in the stock market is regarded as equivalent to betting in the casino. If companies are well-run and are looking after their shareholders, then investing in the stock market, at the end of the day, is much like buying a company. You benefit from the growth of the company. Unfortunately, many Lebanese companies today are not very well run.

What Lebanon needs is the equivalent of a stock market ombudsman, a regulatory body that makes sure there are no conflicts of interest between directors, shareholders and the company.

You need to have the right corporate vehicles. Other than banks that have gone regional, we have also seen industrial conglomerates expanded regionally and are now leaders in Africa. We need to invite these conglomerates to come to Lebanon. We also need to develop institutional long-term ownership of shares. The stock market is not a casino, despite what most Lebanese think. The stock market can be a store of value here just as it is everywhere else.

The equivalent of pension fund and long- term fund managers need to be based in Lebanon, investing money for the long-term in the stocks of growing companies. Say for example, there are 100 billion dollars of deposits, these fund managers need to ask themselves where this money can be invested. They need to create a market for it. The Lebanese economy itself is too small; why not cater to Lebanese conglomerates operating all over the world and particularly in Africa? Invite these conglomerates to come and enlist in Lebanon, and in doing so, help them solve the family inheritance problems that most Lebanese large families are experiencing.
Therefore, you need the proper vehicles to list on the stock market and you need the development of long-term buyers of stock such as pension funds, endowments of universities, social security etc.

We need the future oil and gas trust fund of the Lebanese population, the equivalent of the Abu Dhabi investment authority, the Kuwait investment authority or the Norway Sovereign Wealth fund, which is worth 800 billion dollars today. Norway is the same size as Lebanon, so why do they have all this money? They have it because they have properly managed their oil fund. This is something we can look forward to.

Can you tell us a bit about your professional background and why you decided to come back to Lebanon after a long time working abroad?

In 1988 after graduating from the University of Notre Dame and then Stanford University in the US, I needed a job that would keep me close to my sweetheart who was studying in Columbia University and who is now my wife! I joined Merrill Lynch investment bank and worked with them until 1999, becoming the principal banker running real estate and lodging in Europe. One of our clients back then was Colony Capital, which is a leading private equity firm with its headquarters in Los Angeles. I joined Colony as a partner and I worked with them until 2010. Both experiences were truly amazing. I miss my Colony partners, in particular the chair Tom Barrack, who is also of Lebanese descent. I learnt a lot from these people about investing and about how to be a good judge of risk in various markets. Afterwards, I raised money and invested in the companies I mentioned earlier.

Why did I come back to Lebanon? I wanted to be closer to my mother and brother and I wanted to go back to my mother´s village, Bhamdoun, to help create jobs there. One of the projects we started from scratch is Chateau Belle-Vue vineyards and winery, built in memory of my grandfather’s Belle-Vue hotel and vineyards. We now have grown to include a boutique hotel and restaurant overlooking our vineyards up in the village. I came back to Lebanon to practice venture philanthropy, where you invest money and make people´s lives better at the same time.

Can you brief us on the investment projects you have in Kurdistan and Turkey?

In the emerging markets today, we have various investments, ranging from shopping centres that we currently own and manage in Turkey, Kurdistan, Kazakhstan etc. to logistics and freight forwarding operations that we currently have in Basra and Kurdistan. We are also currently working on the arts sector in Dubai, helping artists from Syria, Lebanon, and Palestine etc.

Is there anything else that you would like to add?

I think we have a responsibility to improve the environment in which we operate. This is the way that we can leave a lasting mark after we are gone. In Bhamdoun, we are lucky enough that we are only 25 minutes away from Beirut. We are trying to generate enough sales there to be able to put the local people in schools, give people healthcare, and give them their identity back. For me, this has always been a driving principle for investment. I always look at the impact I am going to have, starting with the impact on my partners. I look at whether I am able to change and improve their lives. Then I look at the impact on the employees and the company´s end users. Corporate social responsibility and venture philanthropy is a driving force for us.