Bold investors putting money into war torn Iraq

It may not be the most obvious place to put your money but a few bold fund managers are betting on the reconstruction of war-ravaged Iraq to tap into an investment market potentially worth billion of dollars.

They are seeking out hedge funds, family offices, ultra high net worth investors and pension funds as potential investors willing to overlook the volatility for the prospect of double-digit returns from the Middle Eastern country.

‘We strongly believe that the Iraqi stock exchange is a one way bet,’ said Eric le Blan, chief operating officer at boutique investment firm MerchantBridge.

The firm launched its Iraq-focused Mesopotamia Fund last month, aiming to initially raise $5 million (£3.4 million), and $50 million in the long term. So far, it has attracted only Middle Eastern investors, but it hopes Western clients will follow.

Iraq's stock market is valued at about $2.5 billion with nearly 90 listed stocks, almost untouched by foreign portfolio investors. Some of its blue chips are North Bank, Credit Bank of Iraq and hospitality group Mansour Hotel.

An inconclusive election has left political tensions in Iraq high, with no new government in sight nearly three months after the vote and the country remains largely isolated from world financial markets. Indeed, only a short while ago local banks were so cut off the only way to transfer money across borders was in cash stuffed bags.

But substantial investments from groups such as Exxon Mobil and Royal Dutch Shell to develop untapped oil fields are expected to boost capacity,bringing a return of prosperity and lifting consumption.

The government is also set to finance the construction of a $3 billion metro rail through Baghdad to shore up depleted infrastructure after years of war and underinvestment.

Despite the potential, risks still abound and money managers warn that in this gamble of high risk and reward, losing a major chunk of money is a real possibility.
 
‘We are telling everybody, put in 1 to 3% of your assets, write it off immediately as a total loss and then look at it in three to five years,’said Johan Kahm, a principal at multi-manager fund firm FMG that manages about $200 million across 10 funds.

Kahm said his $5 million special opportunities fund is now investing only in Iraq and raising money to boost assets to $10 to 15 million. ‘Iraq is a long term play, the minimum investment horizon is at least one year,’ he said.

Bjorn Englund, founder of alternative fund manager Godvig, believes that the risk involved is lower than perceived. His Babylon Fund returned a total of 25% since its inception and the fund’s assets have grown four-fold to $21 million since inception.

Sitting on about 115 billion barrels of oil reserves, Iraq could look completely different five years down the line, as oil production and investment flows improve and the country’s economy gets a lift, re-rating its stock market which is valued lower than that of Barbados.
 
‘Nobody knows what’s going to happen. Everybody is guessing. But if it works out, we are going to make five, 10, 20 times our money,’ Kahm said.