Bridges To Babylon: New Fund Focuses On Iraq

Feb 9 2007 | 3:05pm ET

American soliders patrol the former United Nations building in Baghdad.It’s tempting to think that the only people making money in Iraq right now are the vice president’s buddies at Halliburton. But hedge fund manager Björn Englund is, as well, and not only for himself. His new Babylon Fund returned 2.4% in its first four months, and Englund hopes that is just the beginning, both for his investors and the future of the country.

Englund’s asset management firm, Godvig Capital, launched the now US$9 million fund in September with US$8 million in assets. Domiciled in the British Virgin Islands and managed from Englund’s headquarters in Luxembourg and—most interestingly—its Baghdad office, the fund is structured as an open-ended mutual fund, but in every other way acts as a hedge fund: it charges a performance fee, offers quarterly redemptions, has a hefty minimum investment and is open only to “qualified purchasers” and professional investors.

It’s also aiming for the sort of returns hedge funds used to make routinely. “Over a business cycle…let’s say five to seven years, I would be disappointed if I didn’t get a 30% return per year,” Englund says, adding that to do that, you have to be in Baghdad.

Foreign investors are not yet allowed to trade on the two-and-a-half-year-old Iraq Stock Exchange—“They have said, ‘within six months,’ for the last two-and-a-half-years,” Englund laments, though he adds optimistically, “there is a possibility it will happen by the end of the year, but nobody really knows”—so you need locals on the ground.

Englund’s colleagues in the war-torn country are directors Ismail al-Rashidi and Fouad Cheragwandi, the former an ex-vice chairman of the Iraqi Federation of Industries and one-time Iraqi delegate to the World Trade Organization. He’s also co-founded a number of banks in Iraq, including the Commercial Bank, Economic Bank of Iraq and Investment Bank of Iraq.

“[Al-Rashidi] is well known,” Englund says. “He’s been around for many years. He’s my local connection number one.”

A trader updates share prices at the Iraq Stock Exchange.For now, trading on the Iraq Stock Exchange is a decidedly small-scale affair. Its total market capitalization is just US$2 billion—half the size of Jordan’s—and it trades for only two-and-a-half hours a day, twice a week, on Mondays and Wednesdays. During those sessions, Englund says, only about a quarter of the roughly 80 securities listed on the exchange trade, with a total turnover of between US$2 million and US$4 million, at best, which is less than half the size of the fund.

“One of my worries,” Englund admits, “is that we might end up a strategic player, and that’s not our intention.” So, to blunt the force of his fund on the market, only about a quarter of its assets will be invested on the ISX. Another quarter will be invested directly in Iraq through a combination of internationally-traded Iraqi bonds, dinar-denominated six month Iraqi Treasury bills and some private equity investments. The rest will be invested in foreign companies that do business with Iraq.

Bjorn EnglundFor his part, the 38-year-old Englund is no stranger to war zones. He spent two years in United Nations forces, serving in Lebanon toward the end of that country’s brutal, 15-year civil war, and in Kuwait and Iraq during the Gulf War in 1991. He’s also done political battle against his native Sweden’s Social Democratic Party and served as an active member of the country’s center-right Liberal People’s Party.

Englund’s fearlessness extends to the financial arena, for it was in the wild, capitalist free-for-all of the post-Soviet world, in his early twenties, that England made his name and his fortune by investing in Russia, the Baltic states, Romania and Azerbaijan. What he says of the few high-net worth investors in the Babylon Fund—accounting for just 5% of its assets—he could just as easily say of himself: “They are emerging markets guys. They are tough. They know what risk is.” And, presumably, how remunerative it can be.

That said, Englund will not be making regular visits to the Babylon Fund’s Baghdad office, where he hopes will add several more members in the future, even though it “is located in a relatively secure area outside the Green Zone”—the heavily-fortified American citadel in the heart of the city—“but in a fairly stable area.” In a sad comment on what qualifies as fairly secure in present-day Baghdad, Englund notes that the office is located in the vicinity of the old U.N. building that was bombed in 2003.

The endemic sectarian and anti-American violence that plagues Iraq is a major concern for Englund, though in his latest commentary on the fund, he strikes a positive note: “We are more optimistic than last year. We believe the Iraqi financial markets will turn the corner,” he writes, adding that Saddam’s execution, which was very badly carried out, will neither have any market nor a political impact.” Still, Englund’s is likely to be the only prospectus with an appendix which details casualty figures.

And the continuing violence in Iraq is not the only difficulty the Babylon Fund faces. Englund lists as potential problem areas as fraud and corruption, illiquid markets, and the potential for a drop in oil prices. It is estimated that 75% of the country’s economy is based on oil, as is 95% of its revenue.

In spite of the risks of investing in Iraq, surprisingly the majority of the Babylon Fund’s money comes from institutional investors—95%, according to Englund. In fact, his flagship investor is a Scandinavian pension fund. And to such investors, he stresses his risk management measures—the fund will invest in only the most liquid Iraqi stocks, though Englund notes, “Everything is relative here right now.”

The one thing Englund doesn’t have in the fund is a single cent from an American investor, but not for lack of trying.

“For me, that’s fantastically disappointing,” he says of the lack of American involvement. “The Americans, with ease, enter with the military and with politicians, but when it comes down to real business possibilities, they haven’t done anything yet.” But he’s not giving up: “Hopefully, they will come. This should be a joint effort for the whole world.”

“For me, it’s half aid, to provide a setup where we build a pipeline from Wall Street to Baghdad, instead of the other way around,” Englund says. He adds that his fund can take in as much as another US$15 million. It charges a 2% management and 20% performance fee—with an 8% per annum performance hurdle—and qualified investors must put at least US$100,000 into the fund. He offers monthly subscriptions, net asset value calculations and quarterly redemptions.

Englund suspects that once the foreign investment restrictions are lifted, the floodgates will open. “There is a lot of interest from foreigners to enter the Iraq Stock Market,” he says. “But now you have to get around [the restriction], and many people don’t want to take that risk.” There are also concerns about a lack of transparency, but Englund argues that such risks are the nature of the emerging market—without them, there wouldn’t be the fantastic returns that investors often see in developing economies.

“Many people complain that you cannot find the stock price on the Iraq Stock Exchange on the Internet. You cannot find the data,” he says. “But when you have that, the market has already risen 100% or 200%. There are a lot of unknowns here.”

 By Jonathan Shazar

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