Four pillars of wisdom

28 November 2004
There was a certain poetry underlying the 20 November announcement that Investcorp had completed its $350 million acquisition of Thomson Media. Here was a top-tier investment bank buying up the publisher of American Banker, Investment Dealers Digest and Accounting Today. As these journals might have themselves reported, the deal reinforces the message that the private equity market is coming back.

'Recessions are not good for private equity but we are now in the recovery part of the cycle,' says Gary Long, Investcorp's chief operating officer. 'Plus the industry has changed. The focus of private equity practitioners on using leverage and financial engineering to make their returns has passed. Investcorp is focused on the post-acquisition period - we believe the best way to make money in this industry now is by fundamentally improving the companies you've invested in. Half our private equity team are not investment bankers, they are specialists at running companies and fixing problems: they are for the post-acquisition period.'

The model has served Investcorp well: its clients have enjoyed annualised internal rates of returns on realised investments of about 23 per cent. The other half of the Investcorp model - the use of deal-by-deal marketing to its 2,000-strong client base in the Gulf - has also served the bank well. 'One of the reasons we don't do private equity funds is because we want to maintain constant interaction with our client base,' says Long. 'With funds, you talk to your clients when raising capital and then you don't see them again. We have invested heavily in our customer-facing processes and have 20 full-time senior marketing executives constantly interacting with our client base. When they are not offering corporate investment transactions or talking about the existing portfolio, they are talking to them about other Investcorp products: the fund of hedge funds, the real estate portfolio or the technology funds.'

Following a recent review conducted by McKinsey & Company, Investcorp has redesigned its marketing operations, dividing its client base between private and institutional investors. 'We have emphasised the need for segmentation,' says Long. 'And with greater attention paid to prospecting we are now looking to add 50-100 new clients a year.'

All four of Investcorp's legs are being strengthened and developed at a time when there is growing regional appetite. 'GCC investors are rethinking their asset allocation models,' says Long. 'Historically, allocations to alternative assets averaged 1-2 per cent, but the region is catching up and heading towards the 5-10 per cent allocations we are seeing in the Western markets. There is a growing realisation in the region of the important role alternatives have to play, particularly with the greater focus on absolute returns.'

The private equity model is largely unaltered: Investcorp will continue to look to close four or five acquisitions a year in the US and Europe - there are no plans to look for deals in the Middle East or other regions to increase the number of deals it does each year. The significant difference is the scale. 'Our sweet spot in terms of equity investment is in the $100 million-150 million range,' says Long. 'It will move up as our client base expands.'

The other main development is a move to target the Islamic market. 'We have taken the decision to look at launching a sharia-compliant private equity fund, which could include investments in our existing deals after screening by a sharia board,' says Long. 'There is a huge pool of assets - maybe $400,000 million - that will only invest in sharia-acceptable products. We will create opportunities for these assets.'

The real estate division - which operates exclusively in the US - is expanding rapidly. 'We are looking to extend our product range. We are strong in the coreplus market, are just star

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