Investment Banking Essay, Research Paper
Introduction to the topic:
The topic we are approaching is Fund Management Companies; the job of those companies is to manage the funds or in simpler terms the money of the individuals or the corporations. They take the money and invest it through one of many different methods like buying shares in a promising company, for example. This is very simply what fund management companies do.
What we did is that we chose a practical example for a fund management company operating in Egypt to see what they are really doing. We chose EFG-HERMES to be our example.
Throughout the paper we will discuss the company and its different investments concentrating on fund management job.
Executive Summary
In this paper we are discussing fund management companies using EFG-Hermes as an example. The paper can be summarized in the following points :
? Introduction about EFG-Hermes in Egypt.
? The mission and the objective of EFG-Hermes Asset Management aims to be the leading investment manager for private and institutional portfolios in Egypt, the Middle East, and North Africa.
? The five divisions of EFG-Hermes are Investment banking which prepares companies for being listed; Securities brokerage which is for trading stocks; Private equity which is a service in which it invests its own money in emerging and not listed companies; fund management which is managing money of a group of people (like for a bank); and finally portfolio management which is managing funds for individuals or organizations.
? The investment strategy of the company is to provide investment management excellence to its clients which entails the identification of each client’s return/risk and the desire of a suitable portfolio to match this profile, and the policies for investments serves this strategy also.
Introduction
EFG
The Egyptian Financial Group (EFG) was established in 1980 as the first investment banking firm in Egypt. For more than 15 years it offered its clients a variety of services and was involved in a large number of privatization studies for the Egyptian government. EFG moved into brokerage in 1993 and Asset management in 1994. EFG established the first equity index in Egypt.
Hermes
In 1994, Hermes was established as another leading financial services company based on the international experience gained by its founders in the U.S.A . and on a young energetic team. Hermes showed great success in securities brokerage and fund management.
The Merger
When the local market had reached a point where large financial institutions were needed with real financial muscles and a wide network of local and international clients, the two firms decided to merge.
In 1996, EFG-Hermes was born out of the highly publicized merger between the Egyptian Financial Group (EFG) and Hermes Financial.
EFG – Hermes Now
The company’s present structure reflects the consolidation of several ventures. Created with the merger in June 1996 of the Egyptian Financial Group (EFG) and the Hermes Financial Group, EFG-Hermes conducts business through 10 operating subsidiaries, located in Egypt and offshore.
The process of centralizing and institutionalizing the combined company’s procedures continued through 1998, with emphasis on streamlining the operations of subsidiaries and minimizing risk. Changes aimed at eliminating bottlenecks included new account-opening forms and a different formula for commissions.
EFG-Hermes’ activities are regulated by the Egyptian Capital Market Authority, and the firm also has a secondary regulatory reporting line with the London Stock Exchange, following its listing on 28 July 1998.
EFG-Hermes is organized into five principal divisions (which will be discussed in detail further in the paper) :
1) Investment Banking
2) Securities Brokerage
3) Private Equity
4) Fund Management
5) Portfolio Management
Mission & Objective
EFG-Hermes Asset Management aims to be the leading investment manager for private and institutional portfolios in Egypt, The Middle East and North Africa.
The company can aspire to this goal through achieving premium investment performance in the innovative products and solutions that it bring to an increasingly competitive market. EFG-Hermes believes a thorough, research-driven approach to its investment decision-making is necessary to the successful growth of its business.
The Group’s internal systems are always tailored to manage the growing diversity of products and resources, ensuring that it maintains the highest professional standards in all its activities.
EFG-Hermes Asset Management has the skills and flexibility to cater for a wide range of clients with different needs. It guarantees that the interests of their clients are protected and monitored through rigorous compliance procedures.
Managing Growth
EFG-Hermes Asset Management’s strategy is to manage growth while maintaining the highest quality service to existing clients. It will grow assets under management in a disciplined and controlled fashion, without prejudicing the interests of existing clients.
Mandates that EFG-Hermes is seeking to develop include private pension funds, specialist sector-based funds and regional funds. As the domestic Egyptian and regional markets develop, EFG-Hermes believes there is considerable potential for increasing the number of institutional portfolios as well as broadening its range of Individual client mandates in Portfolio Management.
In its capacity as leading participants in capital market development across the region, EFG-Hermes will continue to pursue its role of developing public awareness in the benefits of capital markets, their products and their role in capital formation and economic development.
The Five Divisions of EFG-Hermes :
1) Investment Banking :
An investment banker is one which acts as an underwriter or agent for corporations and municipalities issuing securities, but does not accept deposits or make loans. Most also maintain broker/dealer operations, maintain markets for previously issued securities, and offer advisory services to investors. As EFG-Hermes increased its commitment to domestic and regional private sector development, Investment Banking focused on traditional industries and on the rapidly emerging telecom and information technology sectors.
The firm, closely involved with established Egyptian companies looking for a place on the regional map, served as global coordinator on a LE97.6 million IPO for Al Ezz Porcelain, Egypt’s leading porcelain-tile producer. In the food industry sector, we acted as global coordinator for the LE142 million public offering of Savola Sime Egypt. This transaction set new precedents: the first Egyptian IPO for an Arab Gulf subsidiary and the first Egyptian stock sold directly in the USA under Regulation 144A.
EFG-Hermes also played a major role in advisories, advising Amoun Pharmaceutical Industries in its sale for LE400 million to pharmaceutical giant Glaxo Wellcome-the largest transnational M&A transaction involving an Egyptian private sector company to date. Another client, Oriental Weavers, a global player in rug manufacturing, became a case study in successful restructuring.
Despite a downturn in tourism and hospitality following the November 1997 Luxor incident, EFG-Hermes entered this sector, looking forward to the inevitable recovery. In March, the group became sole placement manager for the LE61.2 million sale of shares in Orascom Projects and Touristic Development, and in July, managed to raise LE137.5 million for Orascom Hotels Holding.
By August, 1996, the firm was involved in sell side as well as buy side advisory mandates on behalf of a number of local and international clients. The firm’s backlog deals (August, 1996) stands at its highest point and continues to grow in terms of public offerings, it exceeds LE 250 million, all of which represents private sector clients. Moreover, in terms of strategic sales it was involved in several sell side advisory mandates with an aggregate value of over LE 1.1 billion. The firm’s backlog of fixed income products of LE 500 million represents three forthcoming debt issues.
Telecommunications and information technology (IT) represent areas of rapid growth in developing markets. As sole financial advisor to Vodafone and AirTouch in the creation of Misrfone, Egypt’s second GSM network, EFG-Hermes handled the LE1.8 billion licensing agreement and oversaw the country’s largest-ever loan syndication transaction, worth LE2.4 billion. In addition, having identified a need for IT specifically suited to the Arab market, we initiated the pooling of three of Egypt’s
largest IT firms under a new entity, Tritech (later Raya), a major force in software development, systems integration and hardware distribution.
EFG-Hermes concluded its first Jordanian deal in July 1998, as sole placement agent for the sale of shares worth US$26 million in Pella, owner of Jordanian GSM network Fastlink. Soon after, against stiff international competition, the firm was chosen as sole financial advisor in the Jordan Cement privatization issue. According to London’s “Financial Times”, the resulting US$100 million purchase by Lafarge
was “a triumph for Egypt’s efforts to export its privatization expertise.”
Looking also at Africa, we advised a leading Yemeni group on its US$35.7 million acquisition of a controlling stake in National Tobacco Enterprises, Ethiopia’s monopoly producer. That agreement was signed in January 1999. As economies continue to expand, EFG-Hermes should be well positioned to capitalize on regional development
2) Securities Brokerage
EFG-Hermes’ two distribution arms–Financial Brokerage Group (FBG) and Hermes Securities Brokerage (HSB)–are clear leaders in the Egyptian capital market. Facing competition from over 110 local and international firms, the combined firms have consistently maintained the highest market share. Indeed, in 1998, EFG-Hermes Securities executed over 14% of all transactions on the Cairo Stock Exchange (CSE), outgrowing its nearest competitor by over 70%.
The firm keeps a dedicated trading desk for fixed income products. Given the currently lop-sided nature of the Egyptian securities market–with few bond issues outside the government–fixed income securities represent an area of huge potential growth.
HSB caters to high net-worth individuals and private clients, locally and regionally, through an expanding network of sales outlets in Cairo and other major Egyptian cities.
FBG focuses on providing sales services exclusively to financial institutions, both international and local. In terms of both operations and capital, FBG is able to meet the requirements of all major international institutions, and its sales team and back office are among the most efficient and reliable in Egypt. Consequently, Reuters News Service’s annual “Global Emerging Markets Report” named EFG-Hermes the best firm covering Egypt for 1998.
The Securities Brokerage division includes a research department that is internationally recognized as the best in Egypt. A team of 15 analysts produces a varied array of products, such as country reports covering Egypt and (starting in 1998) Jordan, industry sectoral reports, and regularly updated coverage of over 50 actively traded companies on the CSE. Aiming to address regional
needs, the research department greatly increased its output of Arabic-language publications in 1998.
During 1998, both brokerage arms were strengthened by large investments in state-of-the-art information technology. Along with efficiency in decision making, reliable communication with clients, precise reporting and secure execution and settlement, the ongoing upgrading of capabilities has allowed EFG-Hermes Securities to consistently provide its clients with the best brokerage service in Egypt.
The brokerage division’s extensive distribution network has also proven to be a great asset in other areas of the company’s business. In textbook fashion, brokerage distribution links has enhanced the placement capabilities of the investment banking division, while the brokerage division’s placement prowess has infused investment banking clients with confidence in the firm’s ability to close deals. As EFG-Hermes continues to expand its range of fixed income products, the brokerage distribution base can be expected to grow further.
3)Private Equity
Private Equity is a service provided by EFG-Hermes in which it invests its own money in companies that are still emerging and not listed. In recent years, the Egyptian economy has developed sufficiently to provide increasing opportunities for long-term investment in the growing private sector. EFG-Hermes has promoted the directing of resources towards medium- to long-term investments in successful, well-managed privately held Egyptian companies.
The company has played an instrumental role in the establishment–based on money from institutional and private investors in Egypt and the Middle East–of two private equity investment vehicles:
? Arab Investment Company (ABIC)
? Horus Private Equity Fund (HORUS)
ABIC is an Egyptian shareholding company founded by the Arab Bank and EFG-Hermes. ABIC’s share capital is LE250 million, fully paid, and it has 120 shareholders representing most Arab countries.
In 1998, ABIC pursued a very active investment program, conducting 13 investments with a total value of LE239 million. Estimated returns, based on conservative valuations, gave investors an IRR of over 30%. ABIC’s holdings represent substantial minority stakes, ensuring board representation and an active role in the development of its investments.
HORUS is an offshore limited partnership with committed capital of US$54 million (US$35 million paid). EFG-Hermes is one of the general partners of HORUS, and also serves as the fund’s advisor, providing information on investment opportunities and advice on Egypt’s economic and financial climate. The company also gives general support to HORUS’s local office.
Most of HORUS’s investments were made in pre-IPO situations, but where an IPO was imminent. Accordingly, viable exit scenarios for the investments have been visualized. By the end of 1998, HORUS had made 11 investments with a total value of US$25 million. IRR on these investments is estimated at over 30%.
Private investment funds are sure to be a critical factor in the region’s economic development in the next century, and through involvement in ABIC and HORUS, EFG-Hermes Private Equity has already established a firm foothold in the field at a critical initial stage.
4) Fund Management
Fund management is an essential service provided by EFG-Hermes. Being a fund manager means that EFG-Hermes manages the money of other organizations. In funds, the money that EFG-Hermes manages does not belong to one individual, but instead to a group of people. An example would be managing the money of a bank (the bank does not own the money, but it just collected money from people). So EFG-Hermes takes this fund and invests it mainly by purchasing stocks of listed companies.
Procedure :
First promoter (the bank for example) sits with the fund manager (EFG-Hermes) to write a prospectus. This prospectus is like an agreement on some broad regulations EFG-Hermes must follow in investing the fund. The prospectus follows the guidelines of law. It is then submitted to the CMA (Capital Market Authority) for approval. Then it is published in two major newspapers. After that, the subscription period begins.
Approaches :
There are two approaches for making investment plans; top down and bottom up. By using the top down the firm would first look at well performing countries. Then after choosing the country look at the different fields in this country, then look at a certain company. The bottom up approach works the other way around; the firm would first choose the company that it will invest in, then look at the entire field, then entire country.
Types of Funds:
EFG-Hermes invests in different types of funds. The major types of funds are :
1) Open ended vs Closed Ended : All the funds are open ended except the Delta Mutual Fund which is closed ended. The closed ended one has no redemptions nor subscriptions.
2) Islamic Fund : These are funds in which no investments are made in any alcoholic products, cigarettes, hotels, or any ‘borrowing’ transactions. The two Islamic funds are Al Rajhy and Faisal.
3) Local vs Offshore : The local funds are those invested in companies listed in Egypt, while the offshore is for countries listed outside Egypt.
4) Growth vs Income : The growth funds are the investments in companies which don’t distribute dividends and keep the money as Retained Earnings, while the income funds are those in companies that distribute dividends. Most funds are income funds, while the Cairo fund is growth.
5) High risk vs low risk : These are investments in companies with either high or low risk. High risk companies generally offer high return, while low risk offer low return.
The mutual funds division in EFG-Hermes operates through four subsidiaries: Egyptian Fund Management Group (EFMG); Hermes Fund Management (HFM); Hermes Financial Management (Egypt); and EFG-Hermes (UK) Limited. The four entities combined manage a family of eleven mutual funds. These include six local mutual funds as well as five offshore funds, three of which are listed on the Irish Stock Exchange. Five of the local funds are open-ended and the sixth is a closed-ended vehicle listed on the Cairo Stock Exchange.