Saudi investor Maan Al Sanea’s story will be told for many years to come. It is the story of a man who worked diligently all his life and recently made a series of mistakes that caused him to have his assets frozen and his company’s reputation shaken.
Al Sanea was previously known as a conservative businessman who won lucrative government tenders working in infrastructure projects in Jeddah in the 1980s.
Lately, Al Sanea’s empire has grown so fast that he now has an “office locator” on his website. His offices exist in the Cayman Islands, London, Manama, Riyadh, Jeddah, Geneva, Dubai and multiple locations in Al Khobar for what is essentially an investment holding company. Compare Al Sanea with Warren Buffett, who has one single office in Omaha, Nebraska. Although having over half a dozen office locations in global cities may seem prestigious to some, it is ultimately counterproductive, as the owner can lose focus.
The Kuwait-born businessman is known to be a major philanthropist and is possibly among the most publicly generous individuals in the region. He founded the Center for Communication Disorders in AI Khobar, which helps 500 children who have speech, auditory, mental and motor challenges. The Saad Benevolent Fund, an educational and medical endowment, offers healthcare, graduate grants and postgraduate grants to aspiring youth.
AI Sanea was generally thought of as a conservative investor throughout the 1980s and 1990s, as he preferred “a small profit every day to volatility”. Recently, however, there was a strategic shift in his investment strategy. The amounts invested grew bigger and more concentrated. In the early 1990s, AI Sanea employed Christopher C. Hart. The former us army captain and veteran banker from London eventually became general manager of Saad Investments. Hart is a firm believer in the capitalist system. He backed a proposal by the London-based Berkeley Group (in which Saad Group owned a 12.6 per cent stake) to offer management hundreds of millions of British pounds if they were able to deliver hefty returns “to make it tasty’. Hart, in an interview with The Times in 2004, called critics of the proposal ‘anti-capitalist and against entrepreneurship,’ stating that such an idea “would never be an issue in America.’ In fact, Hart was right, and this was precisely what brought the American investment and banking sectors to their knees.
In the past few weeks, due to such a risky strategy, the Saudi central bank has ordered banks to freeze Saad Group assets. Moody’s has downgraded the group to junk and the Kuwait and UAE central banks have ordered a halt to loans to the firm.
The other issue that Al Sanea could have avoided was over-leveraging. Investors in the Gulf would do well to remember the wise words of US comedian W.C. Fields, who said when asked about borrowing money: “I’ll see what my lawyer says and it he says yes, I’ll get another lawyer.”
Keep in mind that banks are all too happy to offer you money, especially when you can show collateral. The worst thing one can do is to borrow money to invest in the stock market.
AI Sanea’s biggest mistake was investing so heavily in HSBC stocks in 2007, just before the global financial crisis and possibly at the height of the banking sector bubble. To finance the GBP 3.3 billion purchase of HSBC, he literally borrowed left, right and center. Kuwaiti banks’ total exposure to his portfolio is in the hundreds of trillions of dollars! He also owes Omani banks half a billion Saudi riyals along with his Saudi in-laws, the Ahmad Algosaibi Group, which is also facing serious financial difficulties and defaulted on a US$ 1 billion debt just a few days before AI Sanea’s troubles.
We may never know what prompted a man who employed over 10,000 staff members and whose fortune was estimated to be around US$ 15 billion in 2007 (although I do not believe any of these wealth estimates in the Gulf and resort to a simple formula of halving the declared wealth and doubling the declared loan exposures of all Gulf based “PR billionaires”) to borrow to finance most of his US$ 6.6 billion HSBC purchase. This investment came about despite the fact that HSBC announced just weeks before that it had taken a US$ 10 billion hit because of what it called subprime loan problems.” In this case, the writing was literally on the wall.
Indeed, there are lessons to be learnt from Al Sanea’s story. Consolidate your offices. Don’t borrow and invest. Don’t encourage managers of firms you invest in to take more risks. And finally, read the papers. You never know it a bank you like just declared a USS 10 billion loss.
This article first appeared in the July 2009 issue of MONEYworks.