Dear Shareholders,
After a promising start, the fiscal year ending 31 March 2011 has proven to be the third consecutive difficult year for our industry driven by an uncertain economic and political environment in the broader MENA region. Although the UAE and rest of the GCC economies, with the exception of Bahrain, have been the stronghold of economic and political stability in a region characterised by tremendous political uncertainty, our financial performance was nonetheless affected due to our regional footprint and exposure to some of those markets that witnessed significant upheaval.
This regional unrest and economic volatility coupled with corporate and sovereign debt crises in the US and Europe respectively, which derailed global economic recovery in 2010, made FY 2010-11 the most difficult year since the onset of the global financial crisis. Although the repercussions of these political upheavals on economic growth may be less severe than the fall-out from the implosion of the global financial system in 2008-09, these cannot be underestimated.
Against this backdrop, our consolidated revenues for FY 2010-11 declined to AED 161.9 million representing a year-on-year decrease of 13%. Our net profit declined to AED 2.2 million. Our profitability, despite a decrease in revenues, was partly driven by stringent cost controls that management implemented during the course of the year. While the headline results this year may be disappointing, I firmly believe we have demonstrated our resilience throughout the worst economic and financial crisis in recent history by protecting and preserving the interests of our clients and shareholders, and delivering stable performance. Our prudent management of the balance sheet of the firm, effective risk management and strong corporate governance ensured that the risk to the equity of our shareholders and capital of our clients was restricted.
Our financial strength is further bolstered by a strong cash position and our unlevered balance sheet. Our balance sheet and liquidity have never been stronger and we have started to lay the groundwork for positioning ourselves in the front ranks of the investment management industry. We have preserved our reputation as one of the leading regional middle-market investment management and advisory firms, and have capitalized on this to capture international institutional capital inflows that have been directed into the region. We pride ourselves on our meritocratic culture, which has ensured retention of our top-performers during a difficult year. We believe that people are our most important asset and it is their integrity, talent and commitment that contribute to our success. The significance of these achievements cannot be underestimated in an environment where many of our peers have experienced liquidity and solvency issues.
In asset management, our most significant achievement during FY 2010-11 was the launch of the MENA UCITS III Fund. This fund, which was launched with AED 100 million of seed capital and was A-rated by Standard & Poor’s, is primarily targeted at sophisticated international and regional institutional investors. This is a particularly strong point of differentiation between TNI and its regional peers. UCITS III (Undertakings for Collective Investment in Transferable Securities Directives) is a set of European Union (EU) directives that aim to allow collective investment schemes to operate freely throughout the EU on the basis of a single authorisation from one member state. Many international institutional fund managers cannot invest in a fund unless it is UCITS-compliant. TNI is positioned as one of the few regional fund managers that can offer these institutional investors exposure to the region through its MENA UCITS III Fund.
We have an impressive track record in the MENA long-only business and over the years have delivered consistent performance, which has helped attract institutional clients. During FY 2010-11, our assets under management increased by 9%. Our UAE Blue Chip Fund received a subscription of AED 50 million from an institutional investment manager in the UK that manages money on behalf of public and private pension funds, and endowments and foundations. This is a significant achievement and our first big ticket from an institutional investor since we implemented the “Focus and Deliver” strategy. This subscription underscores the growing importance of the UAE to institutional investors and validates the best-in-breed status of our UAE Blue Chip Fund. We expect international institutional investors to increase their allocations to emerging market countries since these markets have shown resurgence in economic activity when compared to the US and Europe.
Furthermore, it is anticipated that MSCI, a leading provider of investment decision support tools including indices to institutional clients worldwide, may upgrade the UAE from the MSCI Frontier Markets index to the MSCI Emerging Markets index in 2011. Although the outcome of the MSCI review in 2011 is unclear, the benefits could be significant if the UAE is reclassified for inclusion in the MSCI Emerging Markets index since it is tracked by an estimated USD 380 billion of emerging markets funds. There are varying estimates of the amount of capital inflows that will be directed into the UAE as a result of the reclassification but these could be as much as USD 1.5 billion. This is partly driven by the fact that many emerging markets today have become increasingly crowded and expensive, and investors are searching for markets that are undervalued.
We are confident we can capitalize on this trend in favour of the UAE since we possess the corporate governance, risk management and research capabilities that international institutional clients demand. This increased liquidity could present an opportunity to achieve scale by growing our assets under management and positioning TNI as the preeminent fund manager in the UAE. Furthermore, we will continue to focus on delivering superior performance and client service, and to broaden our product offering and distribution as the competitive landscape in the investment management industry evolves.
In private equity we have completed the groundwork for the launch of the etQaan Shariah Fund, which we are jointly launching with KIPCO Asset Management Company (KAMCO) with seed capital of AED 86 million. This fund will focus primarily on opportunities in turnarounds, recapitalisations, growth capital, and primary and secondary buy-outs. In parallel, we continue to identify direct investment opportunities in sectors that offer significant growth potential including health-care, and food manufacturing and distribution. We invest our own money alongside capital from outside investors in these direct investment opportunities – this model has been exceptionally well-received by our investors and we will continue to develop it into a full-fledged offering as part of our private equity franchise. We believe that in the existing corporate environment there are compelling opportunities for private equity and we are well-positioned to identify these through our extensive network of relationships. We are evaluating a number of such strategic investment opportunities in our focus sectors and expect to close some of these during FY 2011-12.
During FY 2010-11, we realised a successful exit from one of the portfolio companies in our Growth Capital Fund, DEPA United Group, delivering a return of 2.5 times the capital invested. This emphasizes our commitment to creating value for our investors even in a distressed economic environment where opportunities for exits are restricted. Furthermore, TNI was voted the Best Private Equity Firm in the Middle East in 2010 by Banker Middle East in recognition of the strength of our private equity franchise in the region. During FY 2010-11, we continued to strengthen our institutional sales and coverage model, which is integral to building and growing our investment management business. We have adopted best practices in client relationship management in order to ensure effective coverage of our key clients. In FY 2010-11, we organised a number of road shows in Europe to create market visibility and awareness of our product offerings among institutional investors, and we will continue to build on this momentum during FY 2011-12.
In our investment banking business activity has been sluggish as the M&A and IPO markets continued to show signs of weakness with no indication of recovery in the appetite for IPOs in the short-term. During FY 2010-11, revenues in our investment banking division declined due to the low volume of corporate M&A activity. Furthermore, one of the challenges we face is our lack of balance sheet capability in a market where the ability to lend to clients is key in winning investment banking business. However, we continued to build strong agency capabilities and a growing pipeline of middle-market M&A transactions. Furthermore, we continue to grow our investment banking business by cultivating senior-level relationships with existing and new clients as their advisor of choice. Our goal is to build a prominent local M&A advisory business with cross-border capabilities so we can advise and assist clients in the UAE who are considering expansion into Saudi Arabia and other GCC countries. We are likely to see increased opportunities in M&A advisory particularly in the mid-market segment as companies in the UAE look for growth and expansion outside their domestic market.
Although competition for our investment banking business in the UAE has been increasing, the mid-market opportunity is a compelling proposition for us since there is likely to be limited competition from larger foreign banks given the smaller size of the deals and lower fees in this segment. We are confident we can build a leading competitive position in this niche given the depth of our relationships in the midmarket segment and understanding of the local business context. We seek to develop and sustain long-term relationships with our clients. Our goal is to create value for our clients on a continuing basis. Furthermore, our strong equity capital markets franchise positions us among the leading investment banks in the UAE and we can capitalize on this to win new business, as and when there is a revival of IPO activity.
Our principal investments division continued to perform well during FY 2010- 11. We divested our equity interest in a brokerage business yielding an internal rate of return of 25% on our investment. We are also in the process of divesting our equity interest in one of our proprietary portfolio companies, and expect to complete the sale during FY 2011-12 and realise significant capital gains. Our priority is to channel this excess liquidity into growing our client-driven businesses. Furthermore, we have repositioned our portfolio and now a significant portion of the firm’s assets are held in either cash or high quality liquid assets. The financial strength of TNI underpins our confidence that we are well-positioned to benefit from the progressive recovery that is anticipated in financial markets over the coming years. Our flagship real estate project, Mafraq Hotel, is undergoing a massive refurbishment, which is expected to be completed in July 2011. Mafraq Hotel is expected to be fully operational in September 2011 subject to obtaining regulatory approvals.
One of the challenges that we faced during FY 2010-11 was to reorganize our operations in Saudi Arabia due to the decision of our joint-venture partner to exit the business. This, coupled with regulatory constraints imposed by the Capital Market Authority (CMA) in Saudi Arabia, made it mandatory to liquidate the business. We have made a strategic decision to close down the office in Riyadh in the interests of cost-control and conserving cash during the liquidation process, which is expected to be completed during FY 2011-12 under a best-case scenario. We will re-evaluate our options upon the successful completion of the liquidation process and may consider reapplying for a license from the CMA to conduct securities business in Saudi Arabia. As we start our new fiscal year, we remain committed to building a dominant local investment management and advisory firm in the UAE. We have an incredibly strong franchise and we intend to capitalize on that strength to position TNI as the preeminent financial services firm in the UAE. We are pleased with the continuing evolution of our firm and believe the best is yet ahead. However, our first and foremost priority in the short-term is to generate the requisite return on equity that our shareholders expect. We have a strong management team and highly accomplished and committed professionals, and we can build on that to deliver sustainable financial performance and value creation for our shareholders. Although the new competitive landscape that will evolve as the impact of the global financial crisis diminishes is likely to present challenges including a tougher commercial and regulatory environment, we remain confident we will emerge stronger and maintain our position among the top-tier investment management and advisory firms in the market.
I would like to take this opportunity to express my gratitude to our board members, shareholders and clients for the confidence and trust they have shown in us. It would not have been possible without your support and encouragement to navigate the business through this period of economic volatility.
Orhan Osmansoy
Chief Executive Officer