Private Equity in Iraq: A Once-in-a-Generation Opportunity

June 20, 2011

Private equity in Iraq: A once-in-a-generation opportunity

20 June 2011

Rapidly emerging as one of the world's fastest growing economies, Iraq is a place that few global private equity investors can afford to miss; writes Zaab Sethna.



Investor interest and activity are growing rapidly. The country is enjoying a rush of foreign direct investment in a broad range of sectors and the NGP Iraq20 Index, which tracks the 20 largest companies by market capitalization on the nascent Iraq Stock Exchange, is up 35% this year. Private equity investment is also starting to take off, offering rich pickings for early movers.
A number of fairly unique characteristics and trends are driving the increase in foreign participation through all Iraqi investment classes. First amongst these is Iraq's immense natural wealth. The country's oil reserves are potentially the world's largest, estimated by some industry insiders to be up to 300 billion barrels (bbl). In comparison, Saudi Arabia has the world's largest proven reserves at 264 bbl. Iraq's current proven reserves number, 143 bbl, is based on outdated data and will be revised as exploration resumes after 30 years hiatus.

In 2009, Iraq initiated one of the largest oil and gas development programs in world history. The technical service contracts signed by Baghdad to date commit the leading international oil companies to raising Iraq's production from the current 2.7 million barrels per day (bpd) to more than 12 million bpd by the end of this decade. These initial contracts have marked the start of "The Great Iraqi Oil Rush", and hundreds of billions of dollars of investment are being mobilized to this end.

Sixteen major international oil companies have begun investing and the work is progressing on or ahead of schedule, with production and exports increasing. On top of this extraordinary growth, natural gas, new exploration, and production from the autonomous Kurdistan Region will all add substantially to these numbers.

Farouk Soussa, Citigroup's chief economist for the Middle East, said in September last year: "We calculate that by the end of the decade, the increase in oil production could quadruple GDP per capita and leave Iraq with financial reserves in excess of USD350 billion, putting it on par with Saudi Arabia, Kuwait and the UAE today. Iraq, currently borrowing from the IMF to make ends meet, could become one of the world's main exporters of capital."

Iraqi politics have stabilized and security continues to improve. Four successful nationwide elections have been held since 2005 and all major factions are committed to a democratic future. Statistically, there is now greater violence in countries such as Mexico, South Africa, Russia and Brazil than there is in Iraq.

Iraq's economy is by far the most open of any major regional country, and its sound macroeconomic regime has started to pay dividends. The IMF forecasts GDP growth of 11% in 2011 and 12.6% in 2012. Inflation is down to 5%, the currency has been stable since mid-2008 and foreign currency reserves have increased to USD50 billion.

Iraq's society is another lure to investors. Iraqis are educated and enterprising, with a long history of international commerce, finance and industry. Demographics are also a draw; with a population of 32 million, Iraq is the most populous Arab country in the Gulf and Levant region and has one of the highest growth rates (2.5%) and median age of only 20.4 years.

After three decades of war, poor governance, and international sanctions, all sectors of the economy need to be rebuilt, including basic services, infrastructure, housing, industry, telecommunications and financial services, whilst existing assets are not only undervalued but also under-analyzed.

Given the abundant investment opportunities, the challenge from a private equity perspective lies in selecting the sectors and investment types that offer high returns and strategic potential, and in being able to mitigate the risks and avoid the obstacles faced in Iraq.

One of these is the paucity of companies with the appropriate level of governance and robust financial and management reporting that is required by financial institutions and professional investors. Other challenges include bureaucracy and the dilapidated condition of many existing enterprises and supporting infrastructure.

Some of the most attractive propositions are found in greenfield opportunities that provide a market entry for world-class strategic companies, or in young Iraqi companies with exceptional management that combine their local knowledge with international training and experience. Last year, we led the way in identifying one such company in the oilfield services sector that has now received more than USD100 million in international private equity investment.

Suitable, well-developed opportunities currently exist in the financial services, telecoms, infrastructure and property sectors, among others. The key is to use local knowledge, contacts, relationships and on-the-ground presence to identify the fastest growing companies in what is already one of the fastest growing economies in the world.

About the writer:
Zaab Sethna, managing Northern Gulf Partners' Baghdad office, has been based in Baghdad for the last eight years, where he worked for the Government of Iraq on `financial, trade, and energy policies from 2003 to 2007. He was an adviser to the Iraqi Governing Council, Oil Ministry, Finance Ministry and Office of the Prime Minister from 2003-2006. Mr. Sethna began his career with the United Nations in Brazil and also worked at the Sawyer/Miller Group in New York and the Rendon Group in Washington, D.C. and London. He received a BA from Georgetown University and has an MIA from Columbia University.