Page 90 - Aamir Rehman Gulf Capital and Islamic Finance The Rise of the New Global Players

74 PART I Background and Context

financial return, these conglomerates often buy into assets and portfo-
lio companies that have some strategic fit with the conglomerate’s
existing businesses. In this regard, they differ significantly from
returns-focused principal investment vehicles and private equity
funds, which look solely for investments that are strong in their own
right, as they have no intention of coordinating the activities of their
portfolio companies.
Take, for example, the case of the Kharafi Group of Kuwait.
Established in 1976 as a mechanical and electrical works, it has
expanded into a conglomerate of industrial companies, including
construction, development, and infrastructure-related industries. The
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group also holds a major stake in the National Bank of Kuwait. One
strategic sector in which it has invested significantly is telecommuni-
cations. Kharafi, through its investment vehicle Al Khair, has taken a
30 percent stake in the Iraqi telecom provider Atheer and is also a sig-
nificant owner of Zain telecom. Zain has expanded significantly
beyond Kuwait, operating in Saudi Arabia and other Middle East
markets and potentially evolving into a pan-regional telecom opera-
tor. 39 Whereas an investor who was driven solely by absolute return
objectives might build a more scattered portfolio of holdings, Kharafi
has adopted a focus on key infrastructure sectors in which it has both
operational and investment expertise.

Increasing Institutionalization
A major trend among private-sector investors in the region is
increased institutionalization. Historically, portfolios and assets were
typically held in individual names and financed through personal
bank accounts. Family members and friends would invest together in
assets, but they generally did so informally and kept their holdings in
the personal names of consortium participants. This informal method
of investment suited the overall economic environment in which the
leaders of merchant families were establishing and growing fortunes.
At that stage of development, more attention was paid to building
business enterprises than to managing assets and investments.
Over the past decade, however, far greater focus has been placed
on developing institutional processes for managing wealth and mak-
ing investment decisions. One reason for this has been that the scale of
fortunes has increased to the point that professional management, cus-
tomarily made up of nonfamily members, is appropriate considering
the sums being invested. Another reason is that decades of interaction