Putting A New ‘I’ In BRIC, Hedge Fund Sees Opportunity In Iran

Jan 12 2007 | 1:30pm ET

A charter member of President George W. Bush’s “axis of evil,” Iran has been in the news lately for all the wrong reasons, most notably its nuclear program and the increasingly anti-American rhetoric of its president, Mahmoud Ahmadinejad. But there is more to Iran than split atoms and ayatollahs.

Westerners aren’t the only ones spooked by the war of words between Washington and Tehran. Iranian investors recently sent the Tehran Stock Exchange index down by a third, according to French investor Farzad Aduli, leaving price-earnings ratio extremely low.

Hoping to capitalize on the opportunity in this untapped market, Aduli and a former co-worker, Emiel Elenbaas of the Netherlands, newcomers to the hedge fund world, are gearing up to launch an Iran-focused fund, the Kish Fund. Currently seeking investors, Aduli aims to raise between US$30 million and US$50 million.

“If you take a look at the economy and GDP of Iran, it’s a very strong country,” he says. “And they do have some very big companies.” Home to more than 70 million, Iran has the 20th-largest gross domestic product in the world, in terms of purchasing power parity, according to the International Monetary Fund.

Indeed, Goldman Sachs has dubbed Iran one of the N-11, a group of developing economies with the potential to be the next wave of BRIC countries. According to a recent report from Goldman, Iran posted one of the largest increases in “growth environment score,” which measures macroeconomic stability and conditions, technology, human capital and political conditions. Its GES score is now higher than three out of the four BRIC countries, after it surged ahead of Brazil last year.

Aduli says the Goldman report reassures him that he’s on the right track. “I’m not the only one who sees it this way,” he says. “They feel the same, that there is obviously some potential in it.”

Aduli, who holds dual French and Iranian citizenship, said Iran has several other important attractions. For one, there is no limit on transferring funds into and out of the country. There is also the recently-adopted Foreign Investment Protection Law, which, according to Aduli, “protects your investments even in case of any changes in government. It really goes quite far; in almost any event, your investment is guaranteed.”

But he is most drawn to the general economic environment, which Aduli expects to be favorable for at least the next three to five years. “The stock market is so low and there’s so much money lying around because of high oil prices,” he says, not to mention that Iran has Asia’s second-largest reserve of copper.

“No matter how you look at it, sooner or later this money will flow back into the stock market.” What’s more, with the Iranian rial essentially flat against the U.S. dollar over the last year, Aduli says the country’s banks have paid interest rates that would make most U.S. hedge funds blush: upwards of 15% per year.

“It sounds crazy,” Aduli admits. “I spoke with a top specialist in these markets, and he told me that these things would only last a couple of months. Five years down the road, it’s still the same. It really sounds too easy to believe, but the opportunity is just lying there, despite all of the political instability.”

All of which is not to say that investing in Iran is itself easy. Foreign ownership is capped at 10% of the entire $35 billion market, “and it’s basically first-come, first-served,” Aduli says.

“If a guy goes in there and says, I have the money, I’ll get the 10%,” he can effectively block all other foreign investments. But “access to the market is difficult,” says Aduli, who moved to France from Iran as a child and cut his teeth as an options trader for Timber Hill and Van der Moolen. Fluency in Farsi is important, as is an ability and willingness to travel to the country. Aduli estimates that there is currently less than US$1 billion in foreign investments on the Tehran bourse.

And, then, of course, there is the fact that one is dealing with the Islamic Republic of Iran—not exactly a popular place in the Western imagination since 1979.

“The politics is bothering everybody, even the Iranians,” Aduli says. “With such a country, there is, to a certain extent, risk.” But Aduli is reassured by the foreign investment law, and doesn’t believe Western sanctions will go so far as inhibiting all investment in Iran.

“I can understand sanctions on anything related to the military,” Aduli says. “But I don’t think sanctions will go so far as just stocks, on, say, a cement or mining company. It’s just not that significant.”

In fact, Aduli expects there will even be American interest in his hedge fund. “Basically, anybody can invest in the fund.” Given the international environment, he concedes that “it’s not the best time to be launched,” but argues that “there’s quite good potential in it. Bankers, investors and money managers I have spoken with agree that it really looks good. But it’s the same with any new market: You always want to see one guy go first, and then there are two, and then four, and so on.”

Aduli’s concerns and Ahmadinejad notwithstanding, now may be just the time to get in. Aduli says that the Iranian regime will list some of the largest publicly-owned utilities on the stock market in the coming year, including oil, gas and mining concerns. The privatization moves could sextuple the exchange’s overall market capitalization to about US$200 billion, and with it, potential foreign investment to US$20 billion.

“There is a possibility of some very high returns,” Aduli says.

By Jonathan Shazar


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