Tehran opens for business

With the global embargo lifted, firms in Iran are starting to raise capital from international LPs with a taste for frontier markets.

The lifting of international trade and financial sanctions on Iran announced in mid-January has opened the door for private equity investors to an entirely untapped market.

At least two Tehran-based asset managers, Turquoise Partners and Griffon Capital, are poised to exploit what they say is a huge opportunity provided by Iran’s population of 78 million people, $425 billion GDP in 2014, and pent up consumer demand.

A third Tehran-based firm, Canton Hermidas, is about to launch a technology investment platform targeting Iranian start-ups, but it is waiting for things to settle, keeping its eye on other frontier markets across the Middle East and CIS should the economic conditions not improve as expected.

The World Bank estimates the hydrocarbon-based economy will grow by 5.8 percent this year on increased oil exports now the UN, EU and US have removed most of the trade and banking embargoes.

Griffon Capital, which has a six-strong private equity team in Tehran, has been building a proprietary database of consumer-related companies in Iran over the past year, meeting with 10-20 companies every week. The firm is preparing a soft launch of its $130 million fund and will meet with investors in London and other European cities in February.

Following earlier discussions with investors in Europe, the GCC and Iran, the target size for the fund has increased from $75 million when Private Equity International spoke with its CEO Homan Harandian in July, just as the US, UK, China, France and Russia agreed with Iran that it would limit its nuclear programme in return for lifting sanctions. The firm is now targeting $75 million for its first close, Harandian told PEI this week. It has collected soft commitments for a large proportion of the fund.

Turquoise Partners, working with a Swiss financial institution, is raising a fund targeting $150 million. The Swiss firm held a roadshow with European high net worth individuals (HNWIs) and family offices at the end of last year in anticipation of the sanctions news, drawing soft commitments of $30-40 million, as reported by PEI.

For Turquoise, long-established in the domestic public equity market, it is early days for private equity and it is still working out which companies to engage, but it sees opportunities in fast moving consumer goods, healthcare and real estate.

In terms of strategy, the Griffon fund will target “the whole spectrum,” Griffon’s managing partner for private equity Xanyar Kamangar said, making equity investments of $10-15 million and offering opportunities for co-investment. “We are seeing well-run companies that have been suffocated by lack of access to capital, and companies looking for working capital.”

The firm has conducted a soft due diligence on a “few” companies with which it is now in discussions. Kamangar met with one of the largest dairy companies in the Kurdish region of Iran this week. “They see the market [will] open up and international firms [will] come in and be competitive, and they don’t have access to capital. Companies are coming to us. It’s a special market, it’s been starved of capital for so long.” 

Iran has production capability and national brands that have grown, in part due to Iran’s economic isolation, he noted. The most attractive consumer sub-sectors to the firm are where one player has about 6-7 percent of market share, while the rest each hold about 1 percent. 

“For instance biscuits. The biscuits in the shops are the same as when I was a child,” Kamangar said. “The packaging and the product are exactly the same. They sell for a quarter of their price in Turkey. If you go into a sector and do proper packaging and improve the product just a little bit you can increase the price. There are many other sectors waiting to be disrupted.”

Griffon is hoping to make its first investment by the end of the year, making the most of the current opportunity before multinational companies previously excluded from the market are expected to ramp up competition for deals. The LPs that it has spoken to recognise that “the further we go over the next few years, it’s going to be a seller’s market rather than a buyer’s market,” Harandian said.

Appetite

Although Griffon has attracted interest from a financial institution, it is HNWIs and family offices that are mostly likely to invest in Iranian funds first, led, it is expected, by investors that have already participated in one of several recent trade delegations to the country.

But local market watchers and a London-based placement agent anticipate that it will take at least six months before European institutions with an interest in frontier markets start to look at Iran seriously. 

In addition to confirmation that the sanctions decision will not be reversed, investors will be waiting for some sort of event or diplomatic initiative to cement Iran’s return to the international economic stage before they venture forward, the placement agent said.

And there are other systemic challenges. Legal advantages like no tax on dividends and capital gains and 100 percent foreign ownership permitted in most sectors, are countered by obstacles such as a two-track currency, a banking system that lags international standards in compliance and anti-money laundering processes, stagflation and a low oil price. 

Private equity is virtually non-existent in Iran. Firms have no local track record and no guaranteed exit routes, although Griffon anticipates that multi-national companies will enter as strategic buyers, and the Tehran Stock Exchange, where trading is active, is an obvious route to exit.

The key task, Kamangar maintains, will be to sift out the right investment. “Wherever you look there are opportunities. The main challenge is to find the most attractive deal.”