Sansar Capital: 'Just Showing Up' Gives You Edge In Iraq

Feb 22 2013 | 9:52am ET

The U.S. State Department says travel within Iraq “remains dangerous” and warns U.S. citizens against “all but essential” trips to that country.

But elsewhere in the warning (dated August 9, 2012 and posted on the State Department web site) is this:

“Increasingly, many U.S. and third-country business people travel throughout much of Iraq; however, they do so under restricted movement conditions and almost always with security advisors and teams.”

Sanjay Motwani, president and portfolio manager of Sansar Capital, which runs one of the largest equity funds in Iraq, is one of those business people:

“[L]et's not be dismissive, it is a dangerous place, if you go to Baghdad you do need a security detail,” Motwani told FINalternatives in a recent phone interview, “but...there are many other areas in Iraq, like Erbil, where I feel highly comfortable just walking around and it's very safe...”

Sanjay Motwani (center right) and Hassan Jaffar (center left)Sanjay Motwani (center right) and Hassan Jaffar (center left)

Violence, according to Motwani, is not even necessarily the first concern of Iraqi business people:

“[W]hen we talked to the companies on the ground, we asked them about the violence and what they would say was that, 'Yes, it's a nuisance and it's sad but this is not our biggest concern. Our biggest concern is corruption, getting land, electricity, those are all our concerns.' And by the way, those are the same concerns if you ask some Indian company or Pakistani company or you ask an Indonesian company...”

Motwani said the average Westerner's view of Iraq is shaped by the news networks, and news networks are more likely to focus on car bombs than on signs of life in the Iraqi business sector. Even stories focusing on positives—like the general decline in violence and the increase in oil production—are not illuminating the whole picture, according to Motwani.

“[W]hat really no one has written any stories about is the micro story in Iraq and that's what's happening at the company level...We have some banks in the portfolio where the last two years, between 2010 and 2012, their earnings have more than quintupled. Baghdad Soft Drinks, the Pepsi distribution company in Iraq, the biggest, their earnings last year were up 500%.”

Where Just Showing Up Is An Edge
Motwani worked at Kingdon Capital Management from 1997 to 2005, running the firm's Asia book for much of that time. In 2005, he left to establish Sansar which, initially, also focused primarily on the Asia Pacific region. As that region became increasingly crowded, however, Motwani began to look elsewhere:

“[W]hen I started at Kingdon in '97, you could count the number of hedge funds on your hand who were looking at Asia Pacific. Today there are probably about two or three thousand who are looking at Asia credit, equity, macro, whatever...But...there are very few funds looking at Iraq and that's kind of what attracted us. When I was in Baghdad last year and I met some of the (by Iraqi standards) large-cap stocks, they would tell me that, 'You know, you are the first foreigner that has ever come to our headquarters.' Think about the alpha opportunity, because when you think about the many companies and how many analysts look at GE? Trying to have an edge is obviously not that easy. In Iraq, the edge is just showing up because no one's been there.”

In 2011, when Sansar launched its Iraq equity fund (which now runs between $25 and $30 million), “we were nobody,” said Motwani, “nobody had even heard of us,” and yet they represented about 20-25% of all the foreign portfolio money that went into Iraq. “Your common household name is not there,” he said.

And while being one of the first on the ground is an advantage, it also has its challenges:

“[W]hen we first started trying to invest in Iraq, in the first six months we were hitting our heads against the wall trying to get conference calls because a lot of these companies were like, 'Who are you? Why should we talk to you?',” said Motwani.

“[W]e had to give our orders to our brokers and we wouldn't even know where the prices were intra- day,” said Motwani. “There was no web site, Bloomberg didn't have any quotes, and as a result we'd only know where the closing level prices were. Today Bloomberg has yesterday's price. It doesn't have intra-day activity but it has yesterday's closing price and on an Arabic web site called Mubasher, you can get intra-day quotes with a 5-minute delay...Things are progressing, they're not perfect by any means, but therein lies the opportunity.”

Motwani said his colleague Hassan Jaffar's fluency in Arabic has also proved helpful in completing due diligence for target investments:

“We have seen examples of companies where, in the Arabic accounts, the auditors might say they have issues with the company for a variety of reasons, but when those reports get translated into English a lot of the notes don't get translated. So if you're sitting on 5th Avenue, reading an English report, you're really don't have full disclosure.”  
Consumers Goods & Infrastructure

And where is Sansar doing its due diligence? Other than the obvious oil and gas plays, they see opportunity in a number of Iraqi sectors, including consumer goods.

“[I]f you look at GDP per capita,” said Jaffar, “it's quadrupled over the last  eight  years, and the implications of that have been fairly significant on all kinds of consumer goods...[F]or General Motors...Iraq is the second-largest market in the region, and that happened fairly quickly. If you look at hotels, there's a couple of new Sheratons that are opening up in Iraq...there's a number of new luxury brands that are opening up their branch offices there. So we're seeing the implications of this increasing GDP per capita across just a swath of consumer goods that's very promising.”

Motwani returns to the case of Baghdad soft drinks to explain the Iraqi appetite for Western goods:

“[A] couple of years ago, people were drinking Pepsi knock-offs....[A]s the incomes were growing so much, people started demanding the real thing, they didn't want to have Pepsi knock-offs, they wanted real Pepsi and that's why Baghdad Soft Drinks' earnings have been exploding.”

Infrastructure is another sector poised for growth. Residents of Baghdad can still count on only eight to 10 hours of electricity per day from the grid, said Motwani, and must supplement that with private generators, a situation which should be rectified by 2015.

The country's housing stock is in very bad shape, and Motwani said they've spoken to some local players who are “aggressively building brick factories,” and beginning to produce other construction materials (much of which is currently imported from Iran) in preparation for a wave of reconstruction.

Internet penetration in the country is only 10% and that is expected to grow “very significantly” in the coming years.

Telecoms are also driving growth, said Motwani, an in more ways than one.


In February, Asiacell, an Iraqi unit of Qatar Telecom, started trading on the Iraqi stock exchange after the largest IPO in the Middle East since 2008. The shares were fully subscribed and, according to Motwani, the sale doubled the market value of the exchange from roughly $4 billion to “$9 or $10 billion.”

That success story has motivated another telecom—Zain Iraq, the nation's biggest mobile-phone operator—to plot its own IPO. The firm has announced plans to offer 25% of its shares by the end of June 2013.

Zain is, by number of subscribers, an even bigger company than Asiacell and Motwani believes that, besides increasing the country's share capital, the IPO will “draw the custodians to start operating in Iraq,” thereby eliminating what has been one of the biggest impediments to the entry of the “big funds.”

Once the big funds do come in, the picture will obviously change, but for now, Motwani believes Sansar still enjoys that edge for “just showing up,” and their fund has the potential to generate real alpha—for the right sort of investor.

“Iraq...doesn't really fit, at least [from what] we've seen so far, the average institutional client,” said Motwani. “[I]t's more illiquid, it's long duration, it's contrarian—you see car bombs on CNN daily so it takes a certain kind of risk appetite which many allocators may not have.”

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