Ups and downs: The investment segment has faced market volatility in recent years

The rise of investment companies (ICs) in Kuwait began in the late 1990s, when easy access to bank credit and low regulatory barriers to entry resulted in a jump in the number of firms participating in the country’s capital markets. According to data from the Central Bank of Kuwait (CBK), by the end of 2001 the nation was home to 26 conventional ICs and 11 sharia-compliant ICs, which together had total assets of around KD4bn ($14.3bn). By the end of 2007 there were 40 conventional ICs and 39 Islamic ICs in the market, with total assets of around KD16bn ($57bn). Finally, in mid-2008 the market peaked at 100 ICs in total and more than KD18bn ($64bn) in assets, which made Kuwait one of the largest investment sectors in the GCC at the time. While ICs implemented different investment strategies during this period, most firms borrowed from local or international banks on a short-term basis to invest in what turned out to be primarily long-term assets, such as property and private equity holdings, for example.

A TOUGH SITUATION: The rapid expansion of the market in the years leading up to the 2007-08 international financial downturn resulted in many local ICs and banks holding substantial investments in equities and real estate, both of which were hit hard during the ensuing decline. When the financial downturn swept across the region, many of these assets lost a substantial amount of value in a short period of time, and numerous ICs were left holding the bill. By the end of 2009 total IC-held assets in Kuwait had fallen to around KD14.5bn ($51.8bn), and this number dropped further to KD13.8bn ($49.3bn) at the end of 2010; KD12.2bn ($43.6bn) at the end of 2011; and KD11.9bn ($42.5bn) by the end of 2012, according to data from the CBK.

These losses were felt throughout the investment segment and led to defaults in Kuwait and the wider GCC. In late 2008 Global Investment House (GIH), a major regional investment group and Kuwait’s largest IC, became the first firm in the Gulf to default on its debts since 2002, when it announced it would restructure $2.7bn in short-term debt. Since then, several firms have announced defaults, including The Investment Dar (TID), the Kuwait Finance and Investment Company, Gulfinvest International and the International Investment Group, among others. While a number of firms have faced serious financial challenges since the downturn, it is important to note that the majority of Kuwait’s ICs have managed to stay afloat. By focusing on sustainable, long-term investments and implementing careful risk management practices, some ICs have turned a profit even in the current challenging economic environment. “The safest and wisest investments were ones made in inflation-resistant asset classes,”

Fahed Faisal Boodai, the chairman and managing director of Gatehouse Bank, a UK-based Islamic bank that focuses on real estate, told OBG. “Even during the crisis, companies were able to make a profit investing wisely. We can see now that funds are changing their investment strategy to focus on real assets.”

TIME TO REGROUP: Since the downturn a handful of ICs have had to go into restructuring in an effort to manage their debt obligations. The government has played a key role here. The Financial Stability Law (FSL), which was passed in March 2009, was developed to offer financial and legal assistance to ICs with debt issues.

So long as an IC meets the CBK’s solvency requirements, they are eligible to receive government support of a variety of sorts, from state-backed loans to assistance with debt restructuring. Additionally, the FSL includes provisions for a company to receive a capital injection from the Kuwait Investment Authority (KIA), the government’s sovereign wealth fund, and for the government to purchase part or all of a company, depending on a firm’s financial situation.

The first firm to make use of the FSL was TID, Kuwait’s largest sharia-compliant IC, which entered debt restructuring under the law late in 2009. The only other firm to have applied the law at the time of publication was the Aayan Leasing and Investment Company, a local IC that announced plans for restructuring with the FSL in 2010, and as of 2013 was in the process of doing so.