Investcorp expects shallow recession in US, robust growth in Middle East

The US, the world’s largest economy, and Europe are headed for a shallow recession while the Middle East and the rest of Asia will continue to grow, a top executive at Bahrain-based alternative asset manager Investcorp has said.

“The Western Hemisphere, US and Europe, we can certainly anticipate an economic growth slowdown, maybe a shallow recession, during the second half of 2023, maybe even into early 2024 resulting from tightening of monetary policy and high inflation,” Rishi Kapoor, co-chief executive of Investcorp told The National in an exclusive interview.

However, economies in the Middle East as well as China, the world's second-largest economy, India and South-East Asian countries will continue to grow amid a “pretty robust environment”, Mr Kapoor said.

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“The Middle East and Asia, a very different narrative. Those economies are booming. They don't have as acute an inflation problem as the interest rate issue. Global growth trends over there and those economies are pretty supportive.”

In April, the International Monetary Fund said that advanced economies would drag on the global economy this year, with growth expected to fall to 1.3 per cent before rebounding to 1.4 per cent in 2024, after expanding 2.7 per cent in 2022.

The US, the biggest of the group, is forecast to expand by 1.6 per cent in 2023, instead of 1.4 per cent as previously projected and lower than the 2.1 per cent growth recorded last year, according to the IMF.

Its economy is projected to expand 1.1 per cent in 2024.

The US is continuing to raise interest rates to tame inflation, which hit a peak of 9.1 per cent in June last year.

In contrast, emerging market and developing economies are expected to grow 3.9 per cent in 2023, the IMF said.

China, which reopened its economy in January after lifting zero-Covid restrictions, is projected to grow at 5.2 per cent, while India is expected to outpace the world's economies with a 5.9 per cent expansion in 2023, the IMF report added.

According to the IMF, real GDP growth in the Middle East and Central Asia are forecast to grow by 2.9 per cent this year following a 5.3 per cent expansion in 2022, before improving to 3.5 per cent in 2024.

Saudi Arabia, the Arab world’s largest economy, is forecast to grow 3.1 per cent this year and the next following an 8.7 per cent expansion in 2022, it added.

Investcorp, which counts Mubadala Investment Company as its biggest shareholder, will continue to boost investments in India as economic growth picks up.

Mr Kapoor believes that “basic drivers” for long-term growth such as young demographics, political stability and regulatory structure are robust in markets like India, South-East Asia and China.

Currently, the company manages about $1 billion worth of assets in Asia’s third-largest economy, which it aims to grow to $5 billion in the next three to five years with investments across six core sectors: health care, logistics, social infrastructure, IT and IT services, consumer tech and financial services.

The Indian economy is “growing and is one of the fastest-growing large economies in the world and it is likely to continue to grow. The regulatory and political landscape has become much more stable and dependable over the last several years, including the legal institutional architecture”, Mr Kapoor said.

“The most attractive bit about India today is the demographic … it is a young population that is quite educated and, most importantly, it is digitally native. They access goods and services on their mobile phones seamlessly and are aspiring to have access to affordable, high-quality goods and services through a digital channel.”

This trend allows businesses to leverage technology to scale up rapidly in an organised manner, given the size of the population, he added.

The company aims to finance new deals through a $400 million India-focused fund, as well as a new fund that it plans to launch in the future.

Investcorp has completed 15 deals in India in the past four years. Last year, it led an investment totalling 5.45 billion Indian rupees ($66.3 million) in Global Dental Services, Asia’s largest dental chain and one of the top 15 dental services organisations globally.

Its other investments in India include V-Ensure, NDR Warehousing, Intergrow Brands, Freshtohome, Bewakoof.com, Zolo and Unilog, among others.

The company also aims to grow its assets in the US to about $50 billion in the next five years from about $23 billion currently.

In April, Investcorp acquired a majority stake in Shearer Supply, a distributor of heating, ventilation and air-conditioning equipment for residential and commercial properties in the US.

“The company will continue to invest in private equity, real estate and credit in the US,” said Mr Kapoor.

“We announced the $1.2 billion fund that we just closed, that's the primary vehicle for our private equity business and similarly we have funds for real estate and for our credit business.”

The company closed its inaugural North American Private Equity Fund I in March with the participation of blue-chip institutional investors such as pension plans, family offices, private wealth funds and an insurance company.

It is targeting family and founder-owned businesses across six sub-sectors as part of its investment strategy. These are: technology-enabled, knowledge and professional, data and information, supply chain, industry and consumer services.

“From an asset class perspective, private credit is very attractive right now because the demand for credit is high and interest rates are high,” said Mr Kapoor.

“The return that we are getting is very attractive, we are able to get low double-digit return on credit, which in the last 20 years, we haven't seen.”

Last year, Investcorp agreed to buy US-based Marble Point Credit Management, a specialist asset manager focused exclusively on managing CLOs (collateralised loan obligation) and portfolios of broadly syndicated leveraged loans.

In real estate, it continues to see opportunities in logistics warehouses, as well as in multifamily and student housing assets amid a supply shortage.

In private equity “we see continued opportunity in three areas, specifically white-collar business services, including service providers that aid the journey towards digitalisation and specialist consulting; blue-collar business services that are relatively immune to the cycle, and more recession-resilient sectors, such as essential maintenance and repair infrastructure”, said Mr Kapoor.

The company also recently opened an office in Japan and will look to invest in different asset classes.

Japan is one of “the top five global economies in terms of its size, very mature, very developed, but somewhat underpenetrated when it comes to asset classes such as private equity, private real estate, private credit”, Mr Kapoor said.

“Since it's somewhat underpenetrated, we see it as an interesting, attractive market to enter into and deploy capital for our investors.”

Set up in 1982, Investcorp has grown to become one of the leading alternative asset management companies in the region.

It has 14 offices in the US, Europe, the GCC and Asia, including in India, China, Japan and Singapore. It oversees $50 billion in assets, including assets managed by third parties.

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