SEDCO manages a wide and diversified spectrum of Shari'ah compliant equities and real estate investments, and other businesses in Saudi Arabia and around the world. The Jeddah-based company, founded in 1976, is a family run business with more than 1,500 employees. The Bin Mahfouz family has maintained 100 percent ownership in the company since its establishment by the family's head, the late Sheikh Salem Bin Mahfouz. Sheikh Salem was also founder and manager of the National Commercial Bank. The shareholders of SEDCO divested all their interest in NCB in 1994.

Before joining SEDCO in 1996, Yousuf, an MBA graduate of the University of California, started his career in private banking in 1982 with Citibank's Saudi affiliate, Saudi American Bank. He has worked in corporate banking and later joined a private investment company based in Saudi Arabia, where he was in charge of sourcing, negotiating and monitoring investments in private equity, industrial ventures and real estate development. Yousuf is a member of the board of directors of Gulf Finance House. He served as a member of an advisory council to the governor of the Mecca Region from 2001 to 2004.

How has SEDCO developed its private equity arm?

Last year we built up a network of contacts in the region, as well as working on a number of transactions in terms of negotiating and evaluation, spending the better part of the year working on a number of deals. Some of them fell through because of reasons of valuations or because of Shari'ah compliance issues. There were two significant deals we had to let go of because of Shari'ah considerations. But we have now come to the end of the road in respect of a number of transactions we have been working on from the middle of last year. Just last week we closed our first transaction with a very promising IT company based in Saudi Arabia, and we have three other transactions in various advanced stages of completion, which we hope to complete by the end of August this year. At this point our activities are strictly to invest proprietary funds. At a later stage we hope that we will provide our service to third party investors. Maybe in two or three years we will go to the market with a new fund.

Which other sectors will you invest in?

We are pretty open to most sectors. What really matters to us is the quality of the management in the business. Everything really starts and ends with the quality of management, this is the number one priority. Of course, there are sectors that are more attractive than the others. Although mature sectors may be safer, they also have limited return potential, so we look for growth sectors. IT is one example.

There could be opportunities within a mature sector, if the business itself is on a growth path. We are looking at a healthcare company in Egypt. Some people think this sector is mature but some would say not, because of the diminishing role of governments in the sector in the region. If you have an able management team with the proper financial backing, lots of very interesting things can be done. Even if you look at developed markets like US, Europe or Japan, there are always pockets of opportunities where if you had the right management, you can still achieve significant returns.

What characterises SEDCO's investment strategy?

"Some of them fell through because of reasons of valuations or because of Shari'ah compliance issues. There were two significant deals we had to let go of because of Shari'ah considerations."

We don't need to have a controlling interest in the company that we invest in. We take a significant minority interest and we are a long-term investor, unlike a pure financial investor in private equity who has to exit. Limited partners have to exit investments within the lifespan of the fund. For us, because we are only managing company money we don't really have that necessity or obligation to exit. Theoretically, if we invest in a business and the business is doing well and the marriage is going well with the partners, we can stay for a much longer time than a typical fund would stay. In that respect we have an advantage over a typical fund because we don't really rush management because we want to exit at a profit. That is not to say that we are going to be slack or taking it easy, it just means we are taking a longer term, more strategic view in the business, and we take time to build the fundamentals of the business.

What stage are the businesses at which you are investing in?

Right now we can, under our present structure, do start ups, but we prefer to confine these greenfield investments to the GCC region. We generally don't do greenfield projects in Thailand or Indonesia, as it's too hard to do. Greenfield is already hard enough and risky enough as it is.

Being a family business, how has SEDCO continued to modernise its business practices?

SEDCO, in addition to capital, also brings know-how in terms of institutionalising the business. SEDCO has been undergoing a process of institutionalisation of its management practices. We might be a family-owned business but we have moved in the direction of behaving like an institutional business. We have an investment committee which has family members and non-family members as the decision makers. We have a board that has members from outside the family and the country. We have a board member from Indonesia who was the governor of the Central Bank of Indonesia, and a gentleman based in the US who was the chief investment officer of the World Bank. We also have an accomplished Saudi businessman.

How much of an impact does being Shari'ah compliant have on deal considerations? You mentioned you had to let some deals go because of Shari'ah issues?

We had to discontinue pursuing one business because there were certain inherent practices in the way the business was conducted. Although the owner was genuinely interested to pursue solutions to these issues, and came to Jeddah and sat for hours with our Shari'ah advisor to try and find ways, and also had umpteen discussions with a Gulf-based bank about how best to deal with the issues, in the end, because of the way the business was done, he found it too hard to resolve. Shari'ah, in essence, will not usually impede a business, as there are many solutions, and Islamic finance and Shari'ah are flexible enough to allow for many situations, but there are obvious areas where Shari'ah cannot be flexible.

What factors affect an investor's choice of investment avenues in the GCC?

"We might be a family-owned business but we have moved in the direction of behaving like an institutional business."

There are quite interesting dynamics in the region. You have the dynamics of the governments privatising, which in itself offers opportunities. You have growing needs for maintenance and expansion of existing infrastructure, and new infrastructure projects. Then you have the dimension of family businesses, which dominate the economies. The majority of these family businesses are going through transition periods, so they are feeling the need to professionalise the business and to grow the business in a more sustained, institutional manner. The days of easy money and easy business have gone. Competition is increasing, and only people with businesses that are better organised and managed can survive and prosper and do well.

It's good that many family groups are finding that this is the way they want to go. To admit new partners who can help them protect and grow the business. Then you have the factors of population growth and oil prices. Another major factor is liberalisation of regulations in the region. There is greater easing of restrictions on inter-country movement of capital and of labour and listing. It is now easier to list a business than before. For the private equity investor this is important because going public provides a very important exit mechanism, which in the past was much more limited.

Growing globalisation of overseas investor firms could also give rise to further consolidation and movement towards forming higher and more efficient entries.

Also, in the aftermath of September 11, investors looked to invest closer to home. First it was through the stock markets and real estate, but then people looked for other avenues. They are looking for real business, whether it's starting a new business or buying into an existing business. All these dynamics are giving rise to a significant increase in the amount of capital available to be invested in private equity. However, the pace of the capital growth for private equity certainly has outpaced the amount and the quality of available opportunities. You have a lot of capital coming back in a short period of time. Peoples' attitudes change much slower, and the private owner, although they on the one hand can sometimes see the benefit of admitting partners, sometimes worries about how they are going to share power, and if they can exert the same kind of control as before.

Unfortunately, the rise in the stock markets gave people the wrong ideas about the value of their own businesses, so they started to believe that their businesses should be valued in the same way as their counterpart companies which are listed, which is not realistic. We all knew that these were speculative levels and almost all the bourses in the region have corrected significantly, but there is a time gap between that happening and people believing that their business may not be worth what they thought.

In the meantime, there is competition for deals. But in general I think the outlook is good for private equity, it's an emerging asset class in the region. So far most of the funds are regional, but I think in a number of years you will see funds coming from Europe, US or Asia, coming to invest in companies here. I think many people still worry about the political landscape here, and the regulations. Although they are liberalising and improving, compared to what these folks are used to, they are still not up to the level where they feel comfortable.

Do you see any factors affecting the growth?

In a sense, private equity is a more stable area. Firstly, because contractually the LPs, once they commit, cannot just change their mind because of an event. They are committed. But also because private equity is not prone to quick in and outs, it is inherently more stable, and the returns for the patient investor are certainly superior to what one can get from real estate or the stock markets. On average, private equity as an asset class across the world, has produced returns superior to other asset classes. So for the sophisticated investor who can accept the long term nature of the asset class, it will do well.