(As appeared on Middle East News Online on July 16, 2001)

"The Middle East Lacks Social Capital" - An Interview With Ziad Abdelnour

Middle East News Online

By Middle East News Online Reporter

Posted Monday July 16, 2001 - 06:29:07 PM EDT

NEW YORK CITY, New York - "Ziad K. Abdelnour is an entrepreneurial venture capitalist and financier with over 15 years of combined transaction and principal investing experience targeting both emerging growth and middle market brick and click companies. He is a co-founder of TechCapital Access LLC, a New York City based merchant and investment banking. Middle East News Online interviewed Mr. Abdelnour on Monday.

MENO: TechCapital Access LLC is one of your recently formed companies. However, its ambitious agenda, unique principles and the long expertise of its founders provides it with the potential to become a leading company in the field of business and finance. Do you find the company's promising potential sufficient enough to survive the US slowing economy?

Abdelnour: If you delve deeply into the history of capitalism in this great country of ours, you will realize that the biggest fortunes and greatest successes in US history were made at radical inflection points such as the one we are experiencing today. The company's main area of focus is "technology finance" which frankly is what makes the world go round.

It is a fact that the Internet is still the most powerful two-way global communication medium that we have witnessed, and probably will witness, in our lifetime. Plus, the appetite for bandwidth is insatiable. So financing communications, networking, software & technology infrastructure-basically rewiring the world's central nervous system for communications- is a major Herculean effort with very high returns and the revolution in genomics is also going strong.

The fact that there may be an overall economic slowdown will not have much impact on the emergence of new technology and concepts which continue to emerge and are revolutionizing the way we live and work. Ten years ago very few people used the internet or email; today they are part of the fabric of our lives.

MENO: What are the areas that TechCapital Access LLC is more interested in? North America? Europe? The Middle East?

Abdelnour: TechCapital Access LLC does not view the world according to where the company is located. One cannot afford to be provincial anymore; especially in a world that is becoming increasingly global. Having said that, the "secret sauce" in our view consists of striking the right balance between backing the right teams with the right business model at the right time and with the right amount of money.

Frankly, in the world of today, there's plenty of technology, plenty of entrepreneurs, plenty of money, plenty of venture capital. What's in short supply is great teams. A company's biggest challenge will be building a great team. There's enormous change underway in every facet of the world. Some is technology driven, some is market driven.

All that change creates unprecedented opportunity. But to take full advantage of those opportunities, focus on the team. Teams win.

MENO: What's your strategy for investing/working with companies' doing business in the Middle East?

Abdelnour: Our strategy for investing/working with companies doing business in the Middle East is no different than any company doing business in any other emerging market.

I would rather address your question differently. What are the challenges facing any company doing business in any emerging market including the Middle East? I believe a good part of the answer lies in the dynamics of "social capital".

Social capital includes universal education and health care, police and fire protection, religious freedom, a sense of neighborhood bonds and widely available cultural resources. But it also includes the incentives for risk taking inherent in established property rights, protection of creditors, regulatory continuity, transparent markets and rigorous financial reporting standards. These incentives are strong in the U.S., improving rapidly in Europe, and highly variable throughout the Middle East and other parts of the world.

Social capital is important both for investors and policy makers trying to address the problems of poverty and unemployment. But as Japan has shown us in this decade, social capital alone doesn't create dynamic growth. The future prosperity of any country depends on the sum of "financial technology" - the kinds of financial instruments and methods developed in the U.S. over the past generation - multiplied by the combined social capital, human capital and "real" assets of the nation.

A look at the U.S. experience in changing its capital markets, and the capital structures of its job-producing companies, illustrates the multiplier effect of financial technology. Back in the 1960s, a small number of money-center banks and large insurance companies pretty much determined who got access to U.S. financial capital. Tens of thousands of smaller enterprises - companies with prospects - scrambled for crumbs at the tables of the capital club. Those companies with an "investment grade" rating got access to capital and the hundreds of thousands who were "not rated" got nothing.

Today, it seems that Middle East companies and entrepreneurs are unfortunately experiencing the same "lack of capital availability" that the majority of US companies were facing 40 years ago.

Having said that, I believe that as long as the political power, industrial control and financial capital are concentrated in the hands of only a few, the region will unfortunately not see "real" prosperity and will hardly be able to attract its brightest minds who have left the country seeking better opportunities abroad.

By the same token, as long as Middle East brokerages are weak, mutual funds are small, and there isn't a public corporate bond market as we know it, the Middle East will have a very hard and arduous way in developing the kinds of secondary markets that financed growing U.S. companies.

The answer? Though mergers will undoubtedly create better capitalized and stronger institutions, power at these institutions should trickle down and not up.

It won't be easy to overcome tradition and reform the Middle East economies.

While much of the Middle East, starting with Lebanon, is beginning to address these issues, the kind of revolution in capital markets that set the stage for the U.S. boom can take root only in the soil of comprehensive social capital. Throughout the developing world today, inadequate social capital - especially the incentive to put investment capital at risk - is the weak link that limits the multiplier effect of financial technology in creating broad-based and lasting prosperity.

MENO: Can you specify which and how many companies have you currently engaged in?

Abdelnour: I would say we review around 30 companies a week, meet with a dozen and embrace one out of 30 . By embracing I mean positioning companies to receive funding to fuel their development, providing value-added expertise to the management team in identifying and pursuing a clear path for increasing value through expansion, market redirection, operating efficiency gains or other factors, working with clients to help round out the team through key senior management additions and/or advising on follow-on financing, potential mergers & acquisitions, re-capitalization and restructuring.

MENO: Has the market response to your company been satisfactory?

Abdelnour: With the period between startup and liquidity stretching from 18 months to three-four years (technology and non-technology companies alike) there is today no doubt an acute need for more creative and substantial funding of emerging companies' growth. As the majority of boutique investment and merchant banking firms have consolidated into larger investment banks, there are very few financial resources supporting this process with the discipline required to do the job right in tight capital markets such as the ones we are experiencing today and on a global basis.

Entrepreneurs and venture capitalists are spending a disproportionate amount of their time helping existing portfolio companies with capital raising and the major investment banks, in substantial part, have made executive decisions not to devote resources to these so-called smaller $5-$50 million deals.

Comes TechCapital Access LLC. I believe that if I had to dream our advent, I wouldn't have timed it better. It is a fact that we are arriving at such a precise time in the venture capital marketplace and at such an inflection point in the private finance industry that it will be very challenging, to say the least, for the larger investment banks to compete with us. As you may well know, larger banks need to do larger deals in order to earn a larger fee, and most venture-backed companies simply cannot afford to pay such fees; hence, they are embracing our existence. In addition, if a company wants a strategic combination rather than a financial one, then a larger investment bank may not be the best choice of advisors. It simply may be that the deal is not one that such banker is as optimized to do.

MENO: Given the current market conditions do you believe it would be safer to work with smaller emerging companies?

Abdelnour: There is still a big fallacy in today's world, after all what we have been through during both the "high yield" finance era of the eighties and the "Internet revolution" of the nineties that "big is safe" and "small is risky". How untrue this is.

Which brings us to same issue addressed earlier, what makes a company safe and sound is the character, talent and insight of its management team and not the size of its balance sheet. Besides, with all the institutional pools of capital floating around today, a large company is much more subject to the vagaries of the public market and the whims of aggressive predators than a smaller private company smartly surfing below the radar of such "vultures" which are quite ready, willing and able to break apart any company; whatever its size is.

MENO: Could you share with us a success story of a company that have managed through your help to achieve substantial financial gain?

Abdelnour: Having worked on more than 100 transactions representing approximately $30 billion in value and ranging in size from $5 million - $5 billion, and having raised in excess of $2.5 billion in privately placed debt and equity financing for more than 60 companies involved in leveraged buyout, acquisition financing, growth financing and corporate restructuring worldwide over the course of my career, I can tell you that everything is relative.

It is like comparing apples to oranges. Raising for example $5 million in private equity for an entrepreneurial start-up to basically put it on the map compared to raising a few billion dollars in "high yield" bonds for a corporate raider to help him acquire an industrial conglomerate are two very different situations. You are giving both the tools to make a real "mark" in the world and I recall a number of situations where both have made substantial financial gain. But here again, everything is relative. Making a 40X return on a $5 million capital injection is something; making a 2X return on a $2 billion capital infusion is a different story.

MENO: What are your plans and TechCapital Access LLC's for the future, in regards to expansion? Or shift in business strategy?

Abdelnour: TechCapital Access's main mission is to provide first class business consulting and merchant and investment banking services to emerging growth companies, concentrating on middle tier transactions that are not being served by the major investment banks.

TechCapital Access's approach is to partner with companies where the Principals:

1. Work with a limited number of enterprises where our knowledge and contacts can substantially improve a company's chance of success.

2. Bring a "do what it takes attitude", helping the CEO and senior management attack difficult strategic and operational issues that will be critical to attracting investors interest.

3. Do not shy away from demanding situations where the opportunity to create significant value may be great; and last but not least

4. Take compensation based solely upon the demonstrated success of our clients in attracting the right investors and partners.

As to our plans for the future, we fully understand what it takes to truly succeed and build the foundations of everlasting businesses.

Unlike a number of technology investment and merchant banks formed in the last few years which could manage neither their revenues nor their costs line items, TechCapital Access is very well positioned to be a role model for our client and partner companies in terms of both managing and building our businesses.

Conclusion:

Abdelnour: Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts.

Persistence and determination are omnipotent. The slogan 'press on' has solved and always will solve the problems of the human race. Add to that Intelligence gathering, the ultimate weapon to make the best decisions, and you have a real big success story.

© 2001 Middle East News Online. This news item is distributed via Middle East News Online (MiddleEastWire.com). For information about the content or for permission to redistribute, publish or use for broadcast, contact our syndication department.

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