My co-author this week is Brooke Coburn, managing director and co-head of Carlyle Growth Partners and Carlyle Equity Opportunity Fund.
The Carlyle Group is one of the largest and most successful alternative asset managers in the world. With nearly US$200 billion in assets managed across 130 funds and 156 fund of funds, it is daunting just trying to figure out where to start in learning from their best in class experience. I decided to approach the middle market team and highlight their story as, I believe, investors in the Middle East can learn the most from their approach and experience.
Carlyle's middle market team is currently investing two funds: Carlyle US Equity Opportunity Fund, LP I & II. Recent investments include Service King, one of the largest automotive collision repair centres in the US; ECi Software Solutions, a provider of industry-specific technology; Traxys Group, a financial and logistical provider in the mining industry; AxleTech International Holdings, a manufacturer of automotive supplies; and PrimeSport, a global sports travel and events-management company. Carlyle defines the US middle market as companies that have revenues in the region of $100 million to $600m, which comprises more than 100,000 companies and is the largest segment, and most fragmented, of the US economy. Although the revenue numbers are much lower in the UAE, the SME segment remains equally as important.
Carlyle’s value creation for its investors, which necessarily comes from creating value for its portfolio companies, begins with deal origination. In a small or cohesive market there are middlemen, investment banks and brokers who simply market potential investee companies to the highest bidders. But in a fragmented market, and one in which partial sellers are selective in their partners, Carlyle has a massive advantage.
Carlyle’s deal origination advantage is developing a trusted network of partners, investors and clients who act as a proprietary information network that matches Carlyle with suitable portfolio companies.
For example, Carlyle today owns more than 200 portfolio companies worldwide. Add to that the alumni network of more than 400 former CEOs of Carlyle companies and it becomes clear how powerful Carlyle’s proprietary information network is.
This advantage took years to develop and is impossible for competitors to match without investing years as well. In effect, Carlyle, by deciding not to take any reputational shortcuts, gave up short-term gains for a long-term sustainable advantage. This corporate personality trait matches the Middle East investor’s emphasis on personal trust and prioritising a relationship over a transaction.
After origination comes post-investment value creation. Again, Carlyle brings a sustainable advantage here with its large global portfolio of companies, deep industry insights and access to best in class experience. A live example will help to highlight Carlyle’s strategy.
A potential target company was introduced to Carlyle by one of its investors. The owner of the target company was looking to sell a majority stake, but had not hired bankers yet to advise him. The combination of Carlyle’s reputation and a mutual known third party persuaded the owner to bypass the bankers and speak to Carlyle directly.
The next step for Carlyle was to map the target business into the portfolio of businesses that Carlyle currently owns, in effect, find synergies. The word “synergy” has lost a lot of its lustre in the investment world, as it was continually misused by financiers looking to sell a story. Carlyle firmly brings the idea of synergy back to where it belongs: a proactive, operational approach to managing portfolio businesses.
In this case Carlyle brought a lot to the table. Automotive is a core sector for Carlyle, having invested in it for decades. Carlyle’s industry expertise includes the likes of Dan Ackerson, formerly chief executive of General Motors. Potential synergies came from Carlyle portfolio companies Hertz and Axalta.
Carlyle’s post-acquisition value creation comes from internal assets and stakeholders as well as external ones. Key to the acquisition of the target was bringing on board co-investors with automotive sector experience. At the executive level, Carlyle introduced a seasoned chief financial officer who had previously worked with Carlyle and knew how to work closely with the firm as a shareholder, as well as help manage the surge in growth that Carlyle’s investment signalled. In addition, Carlyle maintains a network of retired executives who mentor and coach the target’s executive team when needed.
Creating such a value proposition is of course quite resource-intensive and this requires strict discipline on the part of the Carlyle team. They therefore aim to make only two or three investments per year.
What does all of this mean for the Middle East? Those with the closest parallels are the family groups with large portfolios of companies. The aim is not to emulate Carlyle, as they have different objectives overall, but there is certainly a lot that one can learn from a world-class business.
Probably the greatest difference in operating strategy is deal origination. Carlyle is looking for successful operating businesses that it can help to grow. The average family business in the Middle East is looking for new agencies or new concepts to deploy as a business using internal resources.
Carlyle’s success certainly makes a case for buying successful businesses. The points that regional businesses would have to consider are whether the risk reduction of buying an operating business is worth the price premium over investing from scratch. Equally important is whether the family business is capable of adding value post acquisition.
This brings us to the second fundamental lesson and that is Carlyle’s extensive and frequent use of its networks of external resources. Indeed, Carlyle finds these networks so valuable that it invests in them, maintains them and grows them on a constant basis. In contrast, however, in the Middle East such networks are maintained but solely as a form of lobbying with the government and other businesses. It is rare to see a family business in the Middle East investing in operating networks as Carlyle does. This needs to change.
A simple but powerful example is the creation of portfolio company boards. The protocol in the region is to solely appoint executives of the parent to the boards of subsidiaries. A key takeaway from Carlyle’s success is to maintain a network or a pool of external experienced directors who could be appointed to the boards of subsidiaries as appropriate.
More importantly, given the current environment, is maintaining a network of seasoned executives. In the aftermath of the global financial collapse, many good executives found themselves out of a job. Pioneering businesses would be well served to place such executives under an option contract.
The final lesson that I will discuss out of the many that one can learn from Carlyle is the idea that an investor can create massive operational value post acquisition. The prevailing idea that an investor is simply creating liquidity for the current owners by providing a form of growth financing leaves a lot of value on the table. Taking a more proactive approach of providing operational support without taking full ownership is novel for the Middle East but remains a key business concept in developed markets and forms part of the foundation for a strong economy.
As you can see, there is much that the Middle East can learn from the remarkable achievements of Carlyle’s middle market team. At the core of their success is harnessing the resources of the global firm and the network of industry veterans on their team. It’s a powerful combination that can help Middle East investors to create even more value.
Sabah Al Binali is an active investor and entrepreneurial leader. You can read more of his thoughts at al-binali.com.
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A Cat, A Man, and Two Women
Junichiro Tamizaki
Translated by Paul McCarthy
Daunt Books
Generational responses to the pandemic
Devesh Mamtani from Century Financial believes the cash-hoarding tendency of each generation is influenced by what stage of the employment cycle they are in. He offers the following insights:
Baby boomers (those born before 1964): Owing to market uncertainty and the need to survive amid competition, many in this generation are looking for options to hoard more cash and increase their overall savings/investments towards risk-free assets.
Generation X (born between 1965 and 1980): Gen X is currently in its prime working years. With their personal and family finances taking a hit, Generation X is looking at multiple options, including taking out short-term loan facilities with competitive interest rates instead of dipping into their savings account.
Millennials (born between 1981 and 1996): This market situation is giving them a valuable lesson about investing early. Many millennials who had previously not saved or invested are looking to start doing so now.
Real estate tokenisation project
Dubai launched the pilot phase of its real estate tokenisation project last month.
The initiative focuses on converting real estate assets into digital tokens recorded on blockchain technology and helps in streamlining the process of buying, selling and investing, the Dubai Land Department said.
Dubai’s real estate tokenisation market is projected to reach Dh60 billion ($16.33 billion) by 2033, representing 7 per cent of the emirate’s total property transactions, according to the DLD.
The specs
Engine: 6.2-litre supercharged V8
Power: 712hp at 6,100rpm
Torque: 881Nm at 4,800rpm
Transmission: 8-speed auto
Fuel consumption: 19.6 l/100km
Price: Dh380,000
On sale: now
Ten10 Cricket League
Venue and schedule Sharjah Cricket Stadium, December 14 to 17
Teams
Maratha Arabians Leading player: Virender Sehwag; Top picks: Mohammed Amir, Imad Wasim; UAE players: Shaiman Anwar, Zahoor Khan
Bengal Lions Leading player: Sarfraz Ahmed; Top picks: Sunil Narine, Mustafizur Rahman; UAE players: Mohammed Naveed, Rameez Shahzad
Kerala Kings Leading player: Eoin Morgan; Top picks: Kieron Pollard, Sohail Tanvir; UAE players: Rohan Mustafa, Imran Haider
Pakhtoons Leading player: Shahid Afridi; Top picks: Fakhar Zaman, Tamim Iqbal; UAE players: Amjad Javed, Saqlain Haider
Punjabi Legends Leading player: Shoaib Malik; Top picks: Hasan Ali, Chris Jordan; UAE players: Ghulam Shabber, Shareef Asadullah
Team Sri Lanka Cricket Will be made up of Colombo players who won island’s domestic limited-overs competition
Ruwais timeline
1971 Abu Dhabi National Oil Company established
1980 Ruwais Housing Complex built, located 10 kilometres away from industrial plants
1982 120,000 bpd capacity Ruwais refinery complex officially inaugurated by the founder of the UAE Sheikh Zayed
1984 Second phase of Ruwais Housing Complex built. Today the 7,000-unit complex houses some 24,000 people.
1985 The refinery is expanded with the commissioning of a 27,000 b/d hydro cracker complex
2009 Plans announced to build $1.2 billion fertilizer plant in Ruwais, producing urea
2010 Adnoc awards $10bn contracts for expansion of Ruwais refinery, to double capacity from 415,000 bpd
2014 Ruwais 261-outlet shopping mall opens
2014 Production starts at newly expanded Ruwais refinery, providing jet fuel and diesel and allowing the UAE to be self-sufficient for petrol supplies
2014 Etihad Rail begins transportation of sulphur from Shah and Habshan to Ruwais for export
2017 Aldar Academies to operate Adnoc’s schools including in Ruwais from September. Eight schools operate in total within the housing complex.
2018 Adnoc announces plans to invest $3.1 billion on upgrading its Ruwais refinery
2018 NMC Healthcare selected to manage operations of Ruwais Hospital
2018 Adnoc announces new downstream strategy at event in Abu Dhabi on May 13
Source: The National
Killing of Qassem Suleimani
CONFIRMED%20LINE-UP
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The biog
Favourite colour: Brown
Favourite Movie: Resident Evil
Hobbies: Painting, Cooking, Imitating Voices
Favourite food: Pizza
Trivia: Was the voice of three characters in the Emirati animation, Shaabiyat Al Cartoon
The specs
Engine: 4.0-litre flat-six
Torque: 450Nm at 6,100rpm
Transmission: 7-speed PDK auto or 6-speed manual
Fuel economy, combined: 13.8L/100km
On sale: Available to order now
ILT20%20UAE%20stars
%3Cp%3E%3Cstrong%3ELEADING%20RUN%20SCORERS%3C%2Fstrong%3E%3Cbr%3E1%20Nicholas%20Pooran%2C%20261%3Cbr%3E%3Cstrong%3E2%20Muhammad%20Waseem%20(UAE)%2C%20248%3C%2Fstrong%3E%3Cbr%3E3%20Chris%20Lynn%2C%20244%3Cbr%3E4%20Johnson%20Charles%2C%20232%3Cbr%3E5%20Kusal%20Perera%2C%20230%3Cbr%3E%3Cbr%3E%3Cstrong%3EBEST%20BOWLING%20AVERAGE%3C%2Fstrong%3E%3Cbr%3E(minimum%2010%20overs%20bowled)%3Cbr%3E%3Cstrong%3E1%20Zuhaib%20Zubair%20(UAE)%2C%209%20wickets%20at%2012.44%3Cbr%3E2%20Mohammed%20Rohid%20(UAE)%2C%207%20at%2013.00%3C%2Fstrong%3E%3Cbr%3E3%20Fazalhaq%20Farooqi%2C%2017%20at%2013.05%3Cbr%3E4%20Waqar%20Salamkheil%2C%2010%20at%2014.08%3Cbr%3E%3Cstrong%3E5%20Aayan%20Khan%20(UAE)%2C%204%20at%2015.50%3C%2Fstrong%3E%3Cbr%3E6%20Wanindu%20Hasaranga%2C%2012%20at%2016.25%3Cbr%3E%3Cstrong%3E7%20Mohammed%20Jawadullah%20(UAE)%2C%2010%20at%2017.00%3C%2Fstrong%3E%3C%2Fp%3E%0A
Election pledges on migration
CDU: "Now is the time to control the German borders and enforce strict border rejections"
SPD: "Border closures and blanket rejections at internal borders contradict the spirit of a common area of freedom"
NO OTHER LAND
Director: Basel Adra, Yuval Abraham, Rachel Szor, Hamdan Ballal
Stars: Basel Adra, Yuval Abraham
Rating: 3.5/5
What should do investors do now?
What does the S&P 500's new all-time high mean for the average investor?
Should I be euphoric?
No. It's fine to be pleased about hearty returns on your investments. But it's not a good idea to tie your emotions closely to the ups and downs of the stock market. You'll get tired fast. This market moment comes on the heels of last year's nosedive. And it's not the first or last time the stock market will make a dramatic move.
So what happened?
It's more about what happened last year. Many of the concerns that triggered that plunge towards the end of last have largely been quelled. The US and China are slowly moving toward a trade agreement. The Federal Reserve has indicated it likely will not raise rates at all in 2019 after seven recent increases. And those changes, along with some strong earnings reports and broader healthy economic indicators, have fueled some optimism in stock markets.
"The panic in the fourth quarter was based mostly on fears," says Brent Schutte, chief investment strategist for Northwestern Mutual Wealth Management Company. "The fundamentals have mostly held up, while the fears have gone away and the fears were based mostly on emotion."
Should I buy? Should I sell?
Maybe. It depends on what your long-term investment plan is. The best advice is usually the same no matter the day — determine your financial goals, make a plan to reach them and stick to it.
"I would encourage (investors) not to overreact to highs, just as I would encourage them not to overreact to the lows of December," Mr Schutte says.
All the same, there are some situations in which you should consider taking action. If you think you can't live through another low like last year, the time to get out is now. If the balance of assets in your portfolio is out of whack thanks to the rise of the stock market, make adjustments. And if you need your money in the next five to 10 years, it shouldn't be in stocks anyhow. But for most people, it's also a good time to just leave things be.
Resist the urge to abandon the diversification of your portfolio, Mr Schutte cautions. It may be tempting to shed other investments that aren't performing as well, such as some international stocks, but diversification is designed to help steady your performance over time.
Will the rally last?
No one knows for sure. But David Bailin, chief investment officer at Citi Private Bank, expects the US market could move up 5 per cent to 7 per cent more over the next nine to 12 months, provided the Fed doesn't raise rates and earnings growth exceeds current expectations. We are in a late cycle market, a period when US equities have historically done very well, but volatility also rises, he says.
"This phase can last six months to several years, but it's important clients remain invested and not try to prematurely position for a contraction of the market," Mr Bailin says. "Doing so would risk missing out on important portfolio returns."
Tailors and retailers miss out on back-to-school rush
Tailors and retailers across the city said it was an ominous start to what is usually a busy season for sales.
With many parents opting to continue home learning for their children, the usual rush to buy school uniforms was muted this year.
“So far we have taken about 70 to 80 orders for items like shirts and trousers,” said Vikram Attrai, manager at Stallion Bespoke Tailors in Dubai.
“Last year in the same period we had about 200 orders and lots of demand.
“We custom fit uniform pieces and use materials such as cotton, wool and cashmere.
“Depending on size, a white shirt with logo is priced at about Dh100 to Dh150 and shorts, trousers, skirts and dresses cost between Dh150 to Dh250 a piece.”
A spokesman for Threads, a uniform shop based in Times Square Centre Dubai, said customer footfall had slowed down dramatically over the past few months.
“Now parents have the option to keep children doing online learning they don’t need uniforms so it has quietened down.”
Results
5pm: Maiden (PA) Dh80,000 (Turf) 1,200m. Winner: Majd Al Megirat, Sam Hitchcott (jockey), Ahmed Al Shehhi (trainer)
5.30pm: Handicap (PA) Dh80,000 (T) 1,600m. Winner: Dassan Da, Patrick Cosgrave, Helal Al Alawi
6pm: Abu Dhabi Fillies Classic Prestige (PA) Dh110,000 (T) 1,400m. Winner: Heba Al Wathba, Richard Mullen, Jean de Roualle
6.30pm: Abu Dhabi Colts Classic Prestige (PA) Dh110,000 (T) 1,400m. Winner: Hameem, Adrie de Vries, Abdallah Al Hammadi
7pm: Wathba Stallions Cup Handicap (PA) Dh70,000 (T) 2,200m. Winner: Jawal Al Reef, Richard Mullen, Ahmed Al Mehairbi
Handicap (TB) Dh100,000 (T) 2,200m. Winner: Harbour Spirit, Adrie de Vries, Jaber Ramadhan.
The specs: Volvo XC40
Price: base / as tested: Dh185,000
Engine: 2.0-litre, turbocharged in-line four-cylinder
Gearbox: Eight-speed automatic
Power: 250hp @ 5,500rpm
Torque: 350Nm @ 1,500rpm
Fuel economy, combined: 10.4L / 100km
