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Middle EastMay 1 2006

A flying start

Morgan Stanley’s managing director in the UAE, Georges Makhoul, tells Richard Dean how the bank has thrived since it opened for business in Dubai last year.
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Georges Makhoul sits in the conference room of Morgan Stanley’s new office in Dubai enjoying a rare pause for breath. It is Monday, normally the middle of the Arab working week, but today marks the birthday of the Prophet Muhammad, so it is a national holiday across the Gulf. Mr Makhoul is still working but for once the phone is not ringing.

“I’ve never experienced this before – it’s amazing,” says the bank’s regional managing director.

Demand for Morgan Stanley’s investment banking team has been insatiable since it announced plans to open an office in the Dubai International Financial Centre (DIFC) late last year. Mr Makhoul has spent a long career in the world’s major financial centres: New York, Tokyo and most recently with Morgan Stanley in London. But nothing prepared him for the frenzied appetite for IPOs (initial public offerings) gripping oil-rich Arabia.

“The region has reached a tipping point in terms of maturity as a business market,” says Mr Makhoul. “You get to the point of being either sustainable or a bubble that crashes. We have passed that point, and not just because oil passed $70 a barrel. We have had three years of sustainable growth, of strong gross domestic product [GDP] growth. And not just in the Gulf, but also in places like Egypt, Jordan and Morocco.”

The oil boom is clearly a large part of the story that is fuelling massive demand for investment banking. Huge oil surpluses are finding their way into local stock markets – not markets in the US, Europe and Japan as happened in previous booms. Price/earnings ratios have soared past 30 in the UAE, and past 40 in Saudi Arabia, making equity a cheap way to raise capital.

Generational shift

But that does not explain everything. Just as important, says Mr Makhoul, is the change in boardrooms at the large family firms that dominate regional business life. The founders are retiring or dying, leaving a new generation to take control. And unlike their fathers, the new breed of men (and, for the first time, women) have MBAs from Harvard and INSEAD. Many cut their corporate teeth working in banks such as Morgan Stanley or the big four accounting firms. In short, they understand the language of Wall Street.

“You are going from the founding members of the family to the Western-educated and trained children taking over these companies,” says Mr Makhoul. “They have big ideas about going public, acquisitions, expanding into other markets. They have a good knowledge of sophisticated financing strategies to leverage the business.”

Mr Makhoul, who is Lebanese by birth but is working for the first time in the Arab world, has a team of 15 front-line investment bankers in Dubai working on deals across the region. In recent years, the bank has enjoyed a solid if unspectacular record in the region, advising on mainly debt-related deals. These include $1.55bn notes for Egyptian General Petroleum, a $500m floating rate note for Dubai-based Emirates Bank, as well as sovereign bonds for Qatar, Lebanon and Egypt among others. These were structured by teams working out of London and New York.

New ground

However, the new Dubai-based team broke new ground in early 2006 by acting as joint global co-ordinator and bookrunner on the $397m IPO for Kingdom Hotel Investments (KHI).

The firm, a hotel investment business founded by Saudi billionaire Prince Alwaleed bin Talal bin Abdulaziz, was the first to get a full listing on the Dubai International Financial Exchange (DIFX), a new stock exchange launched late last year. It promises regulation on a par with London, New York and Hong Kong, and no restrictions on foreign share ownership. This is in stark contrast to some national bourses in the Arab world, which are largely closed to foreign investors and have a reputation for lax policing of abuses such as manipulation and insider trading. Morgan Stanley is a member of the exchange.

“I am extremely bullish on DIFX,” says Mr Makhoul. “Some are negative about it, but I think DIFX is a big part of why people want to be in the DIFC.”

Mr Makhoul says Morgan Stanley has a healthy pipeline of potential listings on DIFX for 2006. He declined to give details, but said equity and debt would both be important parts of the business. He adds that Morgan Stanley’s Dubai team is looking at creating derivate products, which would be a first for the region.

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Read more about:  Middle East , United Arab Emirates