Inside Bahrain’s Sovereign Wealth Fund Mumtalakat

The $11 billion sovereign wealth fund has an outsize role to play in promoting stability and economic development in this fragile island nation.

At the headquarters of Bahrain Mumtalakat Holding Co., most of the offices and meeting rooms are walled in plate glass. Visitors escorted to the conference room outside Mahmood Al Kooheji’s fourth-floor office can observe the sovereign wealth fund’s chief executive at work and enjoy the view of the Manama skyline and Gulf waters. For Al Kooheji, the openness of the office is more than a matter of aesthetics. It’s a symbol of transparency — a quality he deems vital for managing the kingdom’s sovereign wealth fund.

“The thing about transparency is people fear it,” Al Kooheji, who has spent more than two decades in the Bahraini government, tells Institutional Investor. “But once you get used to it, you don’t want it to go away.”

Tasked with managing the kingdom’s non–oil and gas investments, Mumtalakat — Arabic for “assets” — seeks to turn around state-owned enterprises by promoting private sector–style transparency and sound corporate governance. The $11.2 billion fund holds stakes in 38 enterprises, including many of the country’s largest employers, with a total value of about $8 billion. It has undertaken major restructurings at several of these companies, including two of the most critical: Aluminum Bahrain and Gulf Air. “Our mission is very simple: just run our portfolio commercially,” Al Kooheji says in a calm, fatherly tone befitting the protector of the nation’s most strategic assets.

Mumtalakat is also beginning to flex its muscles as a portfolio investor, taking significant minority stakes in three foreign companies over the past two years in a bid to diversify its holdings and provide knock-on benefits to the Bahraini economy. The three deals, made in partnership with seasoned private equity investors, had a total value of about $1 billion; Mumtalakat hasn’t disclosed its stake in the deals. Nevertheless, Al Kooheji says he hopes to be involved in roughly $1 billion worth of deals a year going forward. The fund plans to expand its international portfolio as part of a broad government program to develop the economy over the next 15 years. “To a certain degree, we need to have a bigger impact in what we do relative to other sovereign wealth funds that are gigantic,” says Zulfe Ali, the fund’s chief investment officer.

As one of the newest and smallest of the Gulf’s many sovereign wealth funds, Mumtalakat has little of the swagger and market clout of such established giants as the Abu Dhabi Investment Authority (estimated size: $620 billion) or the Qatar Investment Authority ($334 billion). Global asset managers aren’t scrambling for its mandates, and bankers don’t stream to its waterfront headquarters looking to arrange deals for New York office towers, U.K. football teams or other trophy properties. Bahrain was the first country in the six-nation Gulf Cooperation Council (GCC) to strike oil but it doesn’t possess the massive reserves of its neighbors. Similarly, the fund does not receive inflows from surplus government revenue — not that there is any.

“Unlike our neighbors, we never depended on someone to give us cash to deploy,” Al Kooheji says. “We know that we have to earn our living.” The fund posted net income of 91.6 billion dinars ($245 million) in 2014, the most recent period for which results are available, on revenue of BD1.2 billion.

At home, though, Mumtalakat is a giant in this island nation of 1.35 million people with a gross domestic product of barely $24 billion, according to World Bank data.

The fund occupies the commanding heights of the economy. Established in 2006 to supervise the government’s main commercial interests, Mumtalakat holds controlling stakes in such entities as Batelco Group, operator of the national phone company, Bahrain Telecommunications Co. (37 percent); National Bank of Bahrain, the country’s largest lender (45 percent); Aluminum Bahrain, commonly known as Alba (69 percent); and Gulf Air (100 percent).

Mumtalakat’s mission has only grown in importance over the years. The Arab Spring shook Bahrain to its core in 2011. Tens of thousands of people, predominantly from the country’s Shia majority, took to the streets in a pro-democracy movement against the Sunni monarchy of King Hamad bin Isa Al Khalifa, demanding constitutional and political reforms and an investigation of alleged human rights violations. After a month of demonstrations, the government called in military support from Saudi Arabia and the United Arab Emirates and unleashed a brutal crackdown, storming the protesters’ camp in Manama’s Pearl Roundabout. An independent inquiry set up by King Hamad said security forces killed at least 18 people without justification; thousands more were injured and jailed. Although the government has subsequently kept a lid on major protests, tensions remain high between the regime and the Shia majority.

Socioeconomic factors played a major role in the unrest of 2011 and are a major source of discontent, says Jasim Husain, a Bahraini economist and former member of Parliament for Al Wefaq National Islamic Society, the largest Shia political party. “The big issue for many people is jobs, absence of discrimination and equal opportunity,” says Husain, who left public office in 2012, when his party boycotted Parliament in response to the crackdown. “These are very important things for the average Shia.”

The government is eager to maintain social harmony but is strapped for cash at a time of sub-$30-a-barrel oil prices. Last year Sunni and Shia parliamentarians crossed the aisle to stall controversial cuts to meat subsidies; the cuts eventually went through in October, doubling the prices of chicken and beef. The government slashed fuel subsidies in January, boosting gasoline prices by more than half. Bahraini citizens, who make up only about half of the population — the rest is immigrant labor, mainly from Asian countries — still receive some government assistance through cash payouts.

In this tight budgetary climate, the government, just like the neighboring Saudis, must now turn to the private sector to generate sustainable growth in the long term. Mumtalakat’s ability to attract private investors to Bahrain through partnerships has thus become ever more crucial to the stability of the monarchy. “People are hungry for ways to express themselves and raise their standard of living,” says Khalid Al Rumaihi, CEO of the Economic Development Board, an agency that oversees and works with the sovereign fund. “And I think that you can do it through traditional employment opportunities, but you’ve got to allow people to have a dream and find a way of executing on that dream.”

Lacking the prodigious oil resources of many of its GCC partners, Bahrain for decades has relied on industrial policy to develop its economy. It established Alba in 1968 to capitalize on the region’s abundant and cheap oil supplies, as aluminum production is a highly energy-intensive process. After declaring independence from the U.K. in 1971, Bahrain began building a financial services sector; it overtook Beirut as the region’s money hub in the 1980s after opening its arms to bankers fleeing Lebanon’s civil war. Over the years Bahrain attracted numerous multinational companies that set up regional headquarters in the country because of its infrastructure, permissive financial regulations, relatively progressive culture and proximity to Saudi Arabia, by far the region’s largest economy.

Events have conspired to blunt Bahrain’s competitive edge, though. The brash emirate of Dubai moved aggressively in the 2000s to develop an international financial sector and quickly overtook Bahrain as the region’s financial center. Abu Dhabi and Qatar followed Dubai’s lead and spent heavily to develop their economies. Other Gulf countries, including Oman, Qatar, Saudi Arabia and the UAE, have built their own aluminum smelters, some of them larger than Alba.

In a bid to take its economy to the next level, Bahrain in 2000 created the Economic Development Board to oversee planning and promote reform, and six years later established Mumtalakat as a holding company for state-owned businesses. “The question is how we move our thinking beyond this beauty-contest paradigm to some based on integration and complementarity,” says Jarmo Kotilaine, the EDB’s chief economist. “We need to make sure we understand the regional value chains and capture those elements that best play to Bahrain’s strengths.”

The agency has identified five priority sectors for development: manufacturing, tourism, information technology, logistics and financial services. Mumtalakat controls many of the largest players in those sectors, having inherited its corporate holdings from the Ministry of Finance’s Government Shareholdings Directorate. “In the government we decided these companies needed to be run commercially,” says Al Kooheji, who formerly headed the directorate. “So we decided to spin Mumtalakat out.”

The sovereign fund has more in common with development funds such as Singapore’s Temasek Holdings and Abu Dhabi’s Mubadala Development Co. than with giant sovereign portfolio investors like the Abu Dhabi Investment Authority.

“Like a young Temasek in its first decade of existence, Mumtalakat’s mandate is to play the role of a state entrepreneur, to make investments in related companies and infrastructure to help build the domestic economy — a role that Bahrain’s nascent private sector is unable to undertake,” says Ravi Shankar Chaturvedi, a research fellow at Tufts University and author of an academic case study of the fund. Both entities tap global bond markets for financing and were created to turn around state-run businesses and attract investment to diversify their domestic economies, he adds.

The sovereign fund took on a greater role in 2008, when the government adopted Economic Vision 2030, a plan that calls for the state to reduce its role in the economy and allow the private sector to take over. The plan envisages Mumtalakat making strategic investments on behalf of the state while nurturing government-owned enterprises until they can be privatized through initial public offerings or private equity sales. “The idea came well before the drop in oil prices, but there’s urgency now because the government wants to manage its expenses and shrink,” says the EDB’s Al Rumaihi. “And we want employment to be provided by a vibrant private sector.”

Although the oil and gas industry accounts for only 20 percent of the country’s GDP, it has traditionally generated about 70 percent of government revenue. The plunge in crude prices has forced the government to scale back expensive social programs and subsidies. The International Monetary Fund estimates that Bahrain’s break-even oil price (the price of crude needed to balance the budget) stands at about $125 a barrel. With the country having run substantial deficits since 2009 — Fitch Ratings projects a gap of 10.7 percent of GDP this year — its public debt was estimated to be 54 percent of GDP at the end of 2015.

Can the Bahrain fund emulate the success of Temasek? Chaturvedi has his doubts. “Unfortunately for Mumtalakat, the government of Bahrain is far from being like its Singaporean counterpart,” he says. “The fund’s transparency is of little good when its parent, the sovereign, is shrouded in a veil of corruption.” On Transparency International’s 2014 Corruption Perceptions Index, Singapore ranked seventh while Bahrain came in at No. 55, notably lagging its regional rival the UAE, in 25th place. “Temasek benefits from its sovereign’s discipline, whereas Mumtalakat is inhibited by its sovereign’s indiscipline,” Chaturvedi adds.

Mumtalakat has notched some significant accomplishments in its first decade. The fund had a steep learning curve, says Talal Al-Zain, a former executive at Bahrain-based private equity firm Investcorp who was appointed as Mumtalakat’s first CEO in 2008. At the time, Alba, Batelco and National Bank of Bahrain were the only companies contributing to Mumtalakat’s cash flow, and the fund was run by a team of about 20 employees, most of them from the Finance Ministry.

“Even though Mumtalakat is owned by the government, the objective was to create an institution with corporate governance like the private sector,” Al-Zain tells II in a telephone interview. To that end, the CEO began filling senior positions with global talent sourced through an executive search firm.

From the outset Al-Zain made transparency a priority. In addition to publishing audited annual financial statements on Mumtalakat’s website, he pushed most of the opaque companies in the fund’s portfolio to do likewise. He also embarked on restructurings of Mumtalakat’s two biggest holdings. Al-Zain stepped in as chairman of Gulf Air, and Al Kooheji, then his deputy CEO, took the same position at aluminum company Alba.

Strapped for cash, Al-Zain identified a partial sale of Alba as a way to boost liquidity at the sovereign fund. In 2008, Al Kooheji brought in consultants from McKinsey & Co. and forensic accountants to put Alba’s operations under a microscope. The accountants uncovered signs of government mismanagement and corruption. Alba filed a lawsuit against Alcoa alleging that the Pittsburgh-based company had funneled tens of millions in bribes to Alba executives in exchange for overpriced contracts to supply alumina, the raw material used to make aluminum. Alba claimed the contracts had resulted in losses of $400 million since 1989.

In 2012, Alcoa agreed to pay $85 million to settle the suit and struck a long-term alumina contract more favorable to Alba. That same year Bruce Hall, who was CEO of Alba from 2001 to 2005, pleaded guilty in the U.K. to charges of conspiracy to corrupt. He was sentenced to 16 months in prison and ordered to repay $5.1 million in bribes. By contrast, Sheikh Isa bin Ali Al Khalifa, a member of the Bahraini royal family and chairman of Alba at the time, was named as a co-conspirator but did not face charges.

In 2009, Al Kooheji spearheaded a restructuring plan involving job cuts and a switch to direct marketing from using sales agents; the moves reduced operating costs by 16 percent, saving the company BD38 million in 2010. “We realized competition was coming,” he explains. He also moved to diversify the company’s supplier base to ensure it gets competitive prices on all of its raw materials. “We historically used to rely on single sources for almost everything, and that was probably because of the corruption issues,” says Tim Murray, the American who helped drive the company’s restructuring as CFO and has served as CEO since 2012. “Now for our big raw materials we typically have three to four suppliers.” In addition to Alcoa, the company buys alumina from companies such as Rio Tinto Alcan and Glencore. Chinese companies provide most of its other inputs, like green coke, liquid pitch and fluoride.

Al Kooheji reviewed Alba’s sales contracts to eliminate undercharging. For example, Gulf Aluminium Rolling Mill Co., which is 37 percent owned by Mumtalakat, had been receiving discounts on the aluminum slabs it compresses into sheets and foils. “All that disappeared,” Al Kooheji says. “They work with each other commercially now, and I think that’s the right way through.”

In November 2010, Mumtalakat floated 10 percent of Alba on the Bahrain Bourse and the London Stock Exchange’s AIM market. Priced at the bottom of the indicated range, at $11.97 per global depositary receipt, the offering raised $338 million. The shares fell sharply in the first year of trading and have drifted lower since, to $4.80 in late January. But Alba’s earnings before interest, taxes, depreciation and amortization climbed to BD177.9 million in 2014 from BD15.7 million in 2009.

“Doing the IPO required a lot of discipline,” says Murray, who credits Al Kooheji as the brains behind the company’s changes. “We’re listed on the London exchange, so the corporate governance requirements are relatively high.”

At Gulf Air, Mumtalakat found itself on the hook for financing the company’s perennial losses after becoming the carrier’s sole shareholder in 2007. The sovereign fund provided equity injections and loans of BD169 million in 2008 and BD197 million in 2009 to offset losses, expand the fleet and refinance existing aircraft. “This speaks to the Bahraini government’s inability to uphold the separation of the regulatory and policymaking functions of the government from its role as a shareholder in commercial entities,” says Tufts’s Chaturvedi.

In addition to being one of the largest employers in Bahrain, Gulf Air has strategic importance because of its role in facilitating tourism and business travel. This is a region, after all, where Dubai and Abu Dhabi have used their airlines — Emirates and Etihad Airways, respectively — as pivotal growth drivers. “For companies to set up here, they need to have the connectivity, and I refuse to accept the argument that other airlines would service Bahrain,” says former CEO Al-Zain. “You need a local carrier to service the economy and provide connectivity.”

After Al-Zain left Mumtalakat in 2012 to become CEO of PineBridge Investments’ business in the Middle East and North Africa, Al Kooheji took over as CEO of the fund and joined the board of Gulf Air. He overcame political headwinds and secured government support to push an agenda that closed unprofitable routes, shrank the existing fleet and cut staff. “We went to the government and said, ‘Look, these routes are losing because you need them as a government, and you need to help us restructure the company,’” says Al Kooheji. In 2014 the carrier announced its best results in a decade, reporting an operating loss of BD62.7 million, compared with a loss of BD183.8 million two years earlier.

In addition to managing Mumtalakat’s industrial holdings, Al Kooheji and his team are looking for new deals, with a two-pronged focus: attracting investments to Bahrain that capitalize on the fund’s existing holdings and looking for international investments that can diversify its portfolio.

Much of the former deal making revolves around Alba, the fund’s biggest cash cow. The company is spending $3.5 billion to develop a sixth production line, which will expand its capacity by more than a third, to 1.45 million metric tons a year. The project, which is due to come on line in 2019, will make Alba the world’s largest single smelter.

After winning government approval for the expansion in 2014, Mumtalakat, working with the EDB, has been busy seeking to entice manufacturing companies to set up in Bahrain and absorb Alba’s increased output. “The objective is to maximize downstream — you know, keep the value in the country, which I agree with,” says CEO Murray. Manufacturers in Bahrain currently take about half of Alba’s production. The company exports 16 percent of its output to countries in the Middle East, mainly Saudi Arabia. About 5 percent goes to the U.S., with the remainder split between Europe and Asia. Al Kooheji expects that the company will sell roughly half of its increased output to domestic manufacturers. With the new investment, he explains, “the downstream cost is much lower, and it creates more jobs and it’s commercial.”

In November, Mumtalakat signed a $150 million joint venture with Synergies Castings, an Indian alloy wheel producer, to build an aluminum casting and wheel manufacturing plant with annual production of 25,000 metric tons. The facility will be located in a new industrial park adjacent to Alba’s smelter that is being developed by Mumtalakat and the EDB. The sovereign fund will hold a 49 percent stake in the venture, which will create about 600 new jobs. “Where they’re really pushing is to get more into component manufacturing or fabrication, because this is where you get the real ripple in employment,” Murray says.

“We like the fact that Mumtalakat can help drive development in the country on commercial terms,” says EDB chief Al Rumaihi. Explains fund CIO Ali:“When our guys are looking for proprietary opportunities, this is exactly what we’re looking for: What industries make sense here? The obvious example is downstream aluminum.”

Meanwhile, most of Alba’s existing customers in Bahrain plan to expand with Alba. “Every time they have growth, they will come and coordinate with us,” says Hamid Rashid Al Zayani, managing director at Midal Cables, which makes electrical transmission cables at a plant next to Alba. The company currently takes some 300,000 tons of liquid metal a year, or about 30 percent of Alba’s output.

On the international front Mumtalakat looks for minority stakes in mature companies where it can secure board representation, says CIO Ali. The fund has turned to experienced international partners to help it get its feet wet and has struck three deals in the past 16 months.

In October 2014 the fund joined with Investcorp to acquire PRO Unlimited, a Boca Raton, Florida–based provider of software to help companies manage their contingent workforces, including consultants, freelancers and independent contractors. That same month Mumtalakat teamed up with Dubai-based Fajr Capital and U.S. alternative-investments firm Blackstone Group to take a significant minority stake in Dubai-based GEMS Education, which operates more than 50 private K-12 schools around the world. Last year the fund joined with Investcorp again to acquire Nobel Learning Communities from New York–based Leeds Equity Partners. Nobel, based in West Chester, Pennsylvania, runs 176 schools in the U.S., from preschool to secondary level, and offers online college preparatory programs to students in more than 55 countries. Terms of the three deals weren’t disclosed.

“Working together was smooth in terms of we’re both very transparent, we share where we’re coming from and work together on diligence calls,” says Maud Brown, managing director of corporate investment in North America for Investcorp. Her team sourced the PRO and Nobel deals, and she chairs the boards of both companies.

Although Mumtalakat has a commercial remit, the board of directors, which consists predominantly of government officials, likes to invest in companies that could forge ties in Bahrain in the longer term, according to the EDB’s Al Rumaihi. Referring to GEMS Education, he notes that the sovereign fund “has a financial investment there, but it makes it more interesting that GEMS also could potentially invest in Bahrain. So we like the linkage back to the country.” As part of the investment, the company will divide its operations into two discrete geographic entities. The capital from Blackstone, Fajr Capital and Mumtalakat will be devoted to expanding the company’s business in the Middle East, North Africa and Asia.

The fund plans to continue its push into international markets, but CIO Ali notes that the lack of inflows from the government or oil revenue means there’s no pressure to deploy capital. “If all we do is buckle down and work on the existing portfolio — and there’s a lot of work to be done there — that’s actually fine,” he says. •

Follow Jess Delaney on Twitter at @jdelaney_NYC.

Get more on sovereign wealth funds.