Many aspects of the business model – and, indeed, some of the key figures involved – are reassuringly familiar. ‘Five years ago there were a number of British merchant banks operating in the region – Flemings, Schroders, Morgan Grenfell, Barings and the like – but since the wave of consolidation many of their new owners are not interested in the Middle East,’ says Colin Craig, MerchantBridge’s co-founder and joint managing director. ‘Why? Because the deal size is too small for them. The likes of Merrill Lynch and JP Morgan Chase & Company have a model that directs them towards billion dollar-plus transactions, where they can earn major fees. They are simply not interested in the small or medium-sized deals.’
The transformation of London’s financial landscape has not only opened a gap in the market for MerchantBridge, it has also provided some of the bank’s key staff. They include Tim Holder, who has migrated through Schroders and Close Brothers International to MerchantBridge. The now-closed Safron Advisors has also provided a number of personnel. Basil al-Rahim, previously Safron’s managing director and before that managing director of Carlysle International, co-founded MerchantBridge and is its joint managing director. With him have come former colleagues Rashad Faraj and Abdullah Lahoud. Other senior recruits include Samir Arab, previously a private banker with Chase, Eric Le Blan, from Saudi International Bank, and Kheiry Amr, a long-serving capital markets specialist from Arab Bank.
‘All the staff have extensive experience in regional merchant banking,’ says Craig. ‘And we offer the full range of services: corporate and project finance advisory; capital markets; asset management; private banking, private equity and direct investment.’
The bank’s staff is divided between its three offices. London serves as the main presence, where it is licensed by the Financial Services Authority. MerchantBridge also has a management consultancy licence in Bahrain – a licence it is seeking to upgrade – and it has opened a one-man office in Baghdad. This last move has been enthusiastically encouraged by Al-Rahim. He is the scion of a long-established Iraqi merchant family that used to hold a substantial stake in Rafidain Bank, and his sister, Rend, has just been appointed Iraqi ambassador to the US.
Perhaps as important as the bank’s staff is its shareholder base and the composition of its board. More than $10 million of capital has been raised – the latest round was completed in October – and regional shareholders from Jeddah, Riyadh, Saudi Arabia’s Eastern Province, Bahrain and Oman own the majority of the bank’s equity. The board of directors is chaired by Fayez bin Fahad Algosaibi and other members alongside Craig and Al-Rahim include Sheikh Mohammed bin Abdullah al-Khalifa and Salah al-Qahtani.
‘The bank is a bridge not only in terms of its business, but also in terms of its ownership. We took the view that for the business plan to work, we had to be close to the region and this meant having regional shareholders and a presence in the region,’ says Craig. ‘This way we will be able to support the flow of investment into and out of the region.’
He adds that, to date, about 60 per cent of the bank’s business has been concerned with investment coming out of the region – most of it headed for Europe. ‘Some $100 billion of regional money has been pulled out of US markets and it is sitting around looking for a home,’ he says. ‘We think much of it will head to Europe.’
With this in mind, MerchantBridge has established a formal alliance with Frankfurt-based Mellenthin, a medium-sized merger and acquisition house that also has an office in Paris. A second alliance – with Ernst & Young (E&Y) – will support the bank’s corporate finance activities in Europe and in the Middle East. MerchantBridge’s regional mandates have varied from advising companies on how to establish operations in Iraq to bringing international and regional investors into Saudi Arabian projects. It has recently helped complete a regional equity raising for a private sector petrochemicals project in the Eastern Province. Craig and Holder have brought to the bank a long-standing mandate to advise the UK’s Ministry of Defence on its Saudi offsets programme.
The bank’s expansion is likely to be supported by two more alliances that are in advanced stages of negotiation. ‘One of them is with a major investment bank which will support our involvement in major project finance advisories,’ says Craig. MerchantBridge is already active in this area. Alongside E&Y and Sumitomo Mitsui Banking Corporation it was shortlisted for the advisory mandate for Saudi Railways Organisation.
Supplementing the bank’s corporate and project finance advisory capabilities is the development of capital market products. ‘This is a third leg,’ says Craig. ‘We have established relationships with three best-of-breed international managers and we already have two tailored products – one capital-guaranteed and another high-income – in the market.’ A further innovative product, the Iraq Real Estate & Construction Opportunities Fund, which aims to raise $100 million, is due to be launched by the end of 2004.
MerchantBridge’s approach has been adopted by few institutions. One possible competitor in the same niche is Jasper Capital, the London-based bank set up by Jason Peers. The main difference is that Jasper has yet to establish a presence in the Middle East. For the time being, the competition is likely to come – in the main – from regional banks. ‘Some of them can see the gap in the market but they are finding it hard to recruit the right staff and develop their capabilities,’ says Craig. ‘They are not making much progress.’
For the international competition, he has simple advice. ‘You must have a presence in the region and in London for this business to work – the old Flemings model was built on this and was quick to establish a presence in Bahrain, Beirut and Cairo. No one else looking at our segment of the market is in London and the region. Our advantage lies in having this bridge.’