Griffon Capital launches Iran equity fund

Tehran based asset management and private equity group Griffon Capital has announced the launch of its Griffon Iran Flagship Fund, offering investors access to the Iranian stock markets.

The fund, which is a Cayman domiciled open ended vehicle, invests predominantly in in the Tehran Stock Exchange (TSE) and Iran Fara Bourse (IFB). It targets UK, European and GCC HNWIs, family offices and institutional investors and aims to attract an estimated €100m by year end.

The fund will be managed by portfolio manager Mehdi Farivar alongside Hossein Salimi, who according to Griffon Capital have a history of managing in excess of US$15bn accounting for over 10% of the market’s total capitalization.

Griffon’s Asset Management team is led by Payam Malayeri, whose previous experience includes heading up and developing emerging market equity platforms and managing over a US$1bn of long/short proprietary capital among others at Goldman Sachs and Citi.

Homan Harandian, CEO of Griffon Capital said: “We’re pleased to launch the Griffon Iran Flagship Fund. The lifting of sanctions on Iran has created an unprecedented opportunity for investors. The Iranian economy has strong fundamentals and is expected to grow at an average rate of 4-6% per annum over the next five years.”

Speaking in more detail about the opportunities seen in the local market, the manager highlighted the need for “boots on the ground” in order to spot market inefficiencies and maximise returns for stockpickers.

And for those concerned about the frontier market status of Iran, it is arguably a step change in size versus many of the frontier markets investors may have been used to.

Griffon points to factors such as:

  • 130% mobile penetration
  • 93% adults have bank accounts and an ATM card
  • 52 airports
  • Two stock exchanges
  • Bond exchange
  • 80 million population, many under the age of 30, and highly educated

Iran is also a more diversified economy than some may believe, Griffon says, pointing to oil accounting for about 10% of GDP, with services at some 60%.

In terms of the local equity market there are some 600 listed companies representing a market capitalisation value of some $100bn. However, the TSE goes back to 1967, and with rules in place sinece 2007 for related intermediary investment services, the manager sees considerable scoope for growth. Sectors such as banking, oil, autos and cement are well established; Iran is claimed to be the biggest exporter of cement globally, with the fourth largest oil reserves and biggest gas reserves.

In terms of the sanctions being lifted, this could see some $30bn flow back to the country from some $100bn that has been unfrozen. This will add to an economy that currently has negligible levels of debt to GDP, Griffon suggests.

The key macro challenge of inflation is being tackled. From a high of some 40% annually in recent years, this has been brought down to around 12% currently, and “is on track” to hit single digits. This continued fall in inflation suggests that domestic investors who are currently in fixed income will start to turn towards equity as real interest rates also start to diminish.

Regarding the political risk associated with investing in Iran, Griffon’s position is that this is no different to investing in any frontier market. There are elections pending in February, but the investor expectations are that the government remains committed to pursuing privatisation opportunities.

Technicals are also working to Iran’s favour, Griffon says: not only is the market seen as better value as measured by typical multiples – eg, P/E – but the very low levels of foreign ownership proportional to other frontier or emerging markets suggest that it has been underowned – and that could change – and meanwhile offers a significant diversification opportunity.

Currency may well remain the key challenge for foreign investors. It is very hard to predict any particular direction of the exchange rate, particularly against the dollar. It will depend on a number of factors, such as currency inflows following the lifting of sanctions, foreign direct investment by sector, additional oil sales, and so on. The central bank is predicted to maintain a healthy balance of dollars and continue to improve its balance sheet. However, on the basis of being a country where inflation may be around 10% and experiencing productivity gains as the result of sanctions lifting, then currency depreciation ought to be less than that rate. Countering that benign view is the reality that there could be volatility and ‘knee jerk’ reactions in currency markets in the short term.

For foreign investors there will also be some local business customs to overcome. Companies tend to report in local language only and use accounting that is described as a modified version of IFRS. Also, there is a tendency for companies not to divulge information, even during annual general meetings.

There is also an absence of international market research firms and other services providers, which would otherwise enable a better understanding of market trends and dynamics. Griffon points to this as a key reason for its “boots on the ground” approach; to be able to access those managing companies in order to better understand what is actually occurring.

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