Gulf Trip: Day Three

Dubai/Abu Dhabi

It seems so easy. Leave Canada on Friday evening. Land in Dubai early Saturday evening. Toddle off to bed at the normal time on Saturday night, and awake on Sunday morning as though nothing really happened.

Our first business day involved three meetings and a two hour drive from Dubai to Abu Dhabi.

The first meeting was with what can only be described as an international accountant, businessman, connected, venture capitalist, merchant banker, airline boss, and homeowner in at least four different countries. Where do you live? “On airplanes”, he says. It doesn’t bother him as he can sleep on planes, but his wife can’t.

He, Sunil and I have a great discussion about the challenges of creating a culture of venture capital in the Gulf Region. The annual Gulf VC conference is really what we’d call a private equity conference, where the focus is more on “private investing” than venture capital as we know it in North America. He says between 300 and 400 people attend, and the sponsors include international banks, Sovereign Wealth Funds, international and regional accounting firms and so forth. Mental note: worth attending next April.

Gulf investors are regularly linking up with their counterparts in Asia, which is the first of a series of hints that Canada’s private investment community is behind the rest of the world. For a Gulf Investor, it sounds as though there are four key investment regions right now: the Gulf itself, MENA (Middle East North Africa), Europe, and Asia…although some will meld MENA and Asia together and speak of a market that includes North Africa, the Middle East, India and Pakistan.

North America? Well, the sense is that we (the U.S., anyway) are melting down. Some know that the Canadian banking system is the healthiest in the world, while others ask if the government has had to bail them out in the same way as Britain and the U.S. This provides the perfect opportunity to talk about all of the good things that are going on in Canada. Something that Sunil does very well.

Our second meeting is with a V.C. based just outside Dubai. They’ve got their own incubator set up, and have made a few seed investments. Technology, lifesciences, healthcare, clean tech are all of interest, but particularly the concept of “tech transfer”. They even knew about a company based out of Toronto’s MARS facility, although in that classic VC way “they were going to follow their progress”. The fact that a very early stage Toronto-based startup was even on their radar screen was telling: there isn’t a start-up ecosystem in Dubai for a local V.C. to support. This group has two folks Stateside to ensure they hear about deal flow from this side of the Atlantic.

There are Universities, and hospitals, of course. And Microsoft, Cisco, etc. all have a decent presence in the City State of Dubai. But despite having built large multi-building campuses with the names “Internet City” and “DuBiotech”, they are more like real estate “plays” than petri dishes of innovation as the grand titles suggest. Although there are a myriad of companies and players, at the end of the day, most of the property and businesses are owned by His Highness Sheikh Mohammed bin Rashid Al Maktoum. He is the bank, government, benefactor and visionary all rolled into one. And with his vision and passion, his team is trying to prove that nine women can indeed make a baby in a month. And they just might have done it. I’m told that if you haven’t been to Dubai in the past four years, you would not think you were in the same city.

With this dynamism comes opportunity, of course. Initially it has been for the Canadian construction firms and retailers; two obvious elements of any growing City. Second Cup and La Senza are operating in Abu Dhabi, for example.

The opportunity for Canadian tech, mobile, biotech, clean tech, healthcare and life science companies is clear, if your wares are as saleable in the Gulf as they are in Continental Europe. Rather than set up your international presence in France or Germany, it could make sense to consider the Gulf. Enough local players exist with the desire to stimulate a “tech transfer” activity, whatever that might mean, and there is definitely the need for many of the products that venture-backed firms are already producing.

Real estate can be expensive, however, depending upon where you set up shop. Office tower rents in Dubai are US$156.53 and US$132.44 in Abu Dhabi (source: CB Richard Ellis research via Reuters). Rents in Abu Dhabi rose 94.6% during 2008, the fastest in the world; and Dubai couldn’t have been far behind. Which means we need to price the real estate near Cisco’s presence in Dubai’s Internet City in Building #10, since there’s no way you can afford to be “downtown”. The rents are still cheaper than downtown London. And the tax system here is different, of course, as there is neither corporate nor personal tax to worry about.

The Shiekh generates revenue for the city in different ways, including road tolls, fines for changing lanes without signaling (tracked by cameras), infrastructure (such as internet and electricity), licence fees to start a business, etc. With no oil to speak of in the Dubai Emirate, all of the revenue comes from the business of business, as it were.

What they don’t do is charge for the real estate that a development firm wants to put a highrise on. The impact of this is clear to all and sunder, and there is little doubt that the main business of Dubai this decade has been its real estate. By one account, 40% of “GDP” comes from real estate (rents?), with another 20% being attributed to the construction industry, aggregates, HVAC, infrastructure and the various inputs that are used to build dozens of condo projects, office towers, shopping centres and so forth.

A studio apartment will rent for 85,000 dirhams each year; with the entire 1 year’s rent being due on signing. 185,000 will get you a two bedroom with a nanny’s room. 250,000 should be sufficient to rent a 3 bedroom villa in one of the Dubai Marina developments. (~3 Dirhams equals one CDN$)

To buy, well that’s a different story. The goal at some sites was to build “affordable” housing for the foreign nationals who come in droves: lately, 6,000 new workers migrate to Dubai each day according to two different sources. Most are not in the financial services industry, of course. To deal with delays for the new Abu Dhabi F1 racetrack, for example, the 4,000 workers were increased to 5,500 to ensure that the site would be ready for the inaugural race, which is about 335 days away.

A year ago, a raft of “affordable” condos were released in the 150,000 dirham category. They are bought and sold many times over in the weeks that followed, finally topping out at 1.3 million a few weeks later. The person at the bottom of the pyramid was now the lucky owner. Those who had the “desire” to buy for the purposes of living in these units could no longer afford them, and the goal of the state was undercut.

To keep supply and demand in balance, many suspect that the amount of true real estate supply is managed to ensure that prices stay robust. Certainly, you can drive by what appear to be completely finished office towers on Shiekh Zayed Road. The only thing is that they haven’t been hooked up to the electricity grid, keeping them off the market. For the real estate brokers, their 5% commission on all rental properties serves as a compelling attraction to keep rents up and turning each year, although prices are off about 10 or 15% over the past few weeks as the market succumbs to the global recession.

Our third meeting was with a large institution in Abu Dhabi. The fellow we were to see had been called away to South America that day, so he kindly sent two colleagues in his place. Our goal here was merely to understand their investment strategy, and we didn’t need to take the time of a group head for that purpose. Besides, Brazil must be more fun than meeting with us. One of the two fellows who met with us was a delightful young Canadian. His counterpart was born in Abu Dhabi, and the teams seem to be well balanced between local talent (often Western educated) and foreign-born recruits. In terms of experience set, the financial player we met with had probably spent 6 years in an analytical role before joining this fund. Certainly enough experience to be part of a team with the mandate at hand.

Canadians, it turns out, are the third largest representation of foreigners within this particular firm; something that came up elsewhere as well. Why is that, we asked? No one is really sure, but it may well be the first sign that Canadians are doing better in this new economic frontier than we might have initially thought.

The only “problem”, of course, is that when you join a large Gulf Fund you have to check your nationality at the door. If you were seen to be doing your fellow countrymen favours – beyond professional courtesy – you likely wouldn’t last very long.

In terms of mandate, this group is looking for large direct investments. If you’re Electronic Arts or Orange Telecom and you want a minority investor, these might be your guys. No funds (at least not advertised), although one wonders about sources of proprietary deal flow. Certainly intermediaries are important to this group. As with our earlier meetings, the players were gracious, polite, and as helpful as they could be.

That night we heard that 100 new hotels are built in Abu Dhabi each year, and each year people wonder who will sleep in them – but they’ve stayed in business to date. There is regeneration of the office and commercial stock underway, although many of the streetscapes look more like Brooklyn than Manhattan. There are certainly some stellar office and hotel edifices, but there is definite difference in the scene and feel of Abu Dhabi vs. Dubai. They are pumping about 2.8 million barrels a day from this Emirate, and have fantastic oil reserves, so perhaps they are in less of a rush than Dubai.

There is a bit of rivalry, we are told, between the two key cities of the UAE. Not quite like the Ottawa Senators and Toronto Maple Leafs, but you get the idea. Some try to tag Dubai with a “Las Vegas on Steroids” moniker, but that’s not accurate. The business of Las Vegas is Las Vegas. In Dubai, they are all about business. They have fun, it appears, but I saw just two Ferraris during my entire week; despite the fact that Abu Dhabi-based Sovereign Wealth Fund Mubadala (sole shareholder is the Government of the Emirate of Abu Dhabi) owns 5% of the company. With US$10B under management, wouldn’t you invest in Ferrari, AMD, Carlyle and do a JV with General Electric?

Over dinner we felt the gentle impact of a society that shuns liquor. For my very basic palate, Indian food is easier to survive if you have a beer handy. We could only get water, soft drinks, tea or coffee, which is the case in every restaurant outside of the foreign-managed hotels.

I also came to realize that we had yet to see any police presence in either city. The hotels have the expected stiffs, and each office building has the same requisite security team that you’d see in New York to take your name and record it in the annuals of corporate history.

In France, you forever come across a van or bus full of tactical troops, ready to leap out onto Place de La Concorde should the need arise. Here, road signs threaten speeding tickets after 100 km/h, but we were passed by more than one sedan on the eight lane Dubai-Abu Dhabi highway that was certainly going faster than 200 km/h.

The tourist / business hotels don’t have any visible police presence, either. Something you see everywhere in Mexico, for example. Odd, based on a Western pre-concieved notion of the threats you might face when you travel in this part of the world.

The truth is, they don’t seem to need the brute force. Which is utterly fascinating.

Tomorrow is a big day, so the lack of beer was just as well in any event.

MRM