MTI Consulting, as part of an initiative to scale up their corporate finance and investment advisory practice, recently announced the appointment of Naushervan “Naush” Beg, a Canadian-Pakistani with formidable international experience in financial services, capital markets, private equity and investment facilitation. Having worked in North America, the Middle East and South Asia, Naush brings a wealth of international experience to the South Asian (Sri Lanka in particular) and Gulf financial industry.At the Royal Bank of Canada, Naush served in the capital markets division, handling currency derivatives and precious metals and later joined the Bank of Montreal Financial Group’s wealth management affiliate, BMO Nesbitt Burns, as part of their advisory team and full service broker, where he was also responsible for initializing and spearheading initiatives towards the South Asian market. Naush was later appointed as a Director and Chief Executive Officer by the Arif Habib Group’s financial services division – one of the largest financial services groups and businesses houses in Pakistan – to spearhead their management restructuring process for the group’s Sri Lankan operations and to look after their interests. As part of a regional road show In Sri Lanka, Beg shared his views on the Sri Lankan capital market, the challenges and emerging financial services opportunities. Excerpts:
Globally (and of course in Sri Lanka), how do you see the role of banks in the development of capital markets? Should they be the preferred go-to-model?
Currently banks are playing the traditional role that otherwise the capital markets should play. Banks normally are not in the business of providing long-term funding. Requirement of long-term capital should ideally be sourced through the capital market. This has also become more relevant with the increasing stringent regulatory requirements where banks are now further compelled to strengthen their capital requirements by increasing liquidity and decreasing their leverage. This in turn reduces the available and permissible flow of cash to fund corporates - as the easy liquidity once the banks could create has become very difficult.
How do you see the role of banks in raising long-term debt?
Banks will also find it difficult to raise long-term debt which banks normally do by issuing long-term paper and the likes of pension funds and insurance funds normally invest in these long-term papers.
In our (MTI Corporate Finance) professional opinion, this trend will eventually change and the long-term savers will no longer be confortable in locking their savings at fixed interest rate for ten years, but rather wanting a choice and desire to change their savings as when they feel the need arises.
Hence a global trend towards many corporates moving towards ‘pension contribution’ and the increase talks of pension reforms. With this there will be a further reduction in demand of long term paper as normally such paper is at the cost of pensioners or life insurance takers.
How well are Sri Lankan corporates served by the banks and how can a vibrant capital markets eco-system help corporate Sri Lanka?
Currently Sri Lankan corporates are very well served by banks may it be for their short-term, long-term and or for the expansion of capital, but with the above eventualities, in our (MTI Corporate Finance) professional opinion, a serious though needs to be given towards the capital market and for the same to be a vibrant source of funding. Further, reliance on the capital markets by corporates would also allow them to raise more quality capital and would structurally make their balance sheet stronger and less susceptible during liquidity crunches and economic/business volatility.
There tends to be a notion that investing in capital market is risky. Your perspective?
It is a fallacy to think that investing in equity is risky. If equity was risky, then where is the risk? And if so, which company on the S&P index has shut down? The risk does not lie in the equity or stock but the price volatility. Further, investors feel comfortable when investing in a corporate debenture on a long-term basis but at the same time they feel insecure and uncomfortable in investing in the equity or shares of the same company. In theory, if the risk is there, it should apply to the whole capital structure of the company. After all, debenture holders of the company can only be paid if the company makes enough money.
Another basic knowledge people need to have is that just because one owns shares of a company they cannot get better results for the investment over what the management of the company can do. At the end of the day, it’s the management of the company that runs the company, not the shareholder, who works towards growing and making profits for the company. Anything beyond that is more heading towards speculation and mathematically a zero sum gam e.
Hence, it is imperative to have an understanding of what the business is, its future expectations and the capacity of its management to deliver on that (financial analysis). For many investors they may not have the time and or the technical expertise to do so. Hence they should rely on a professional financial services provider or advisor or otherwise it is a akin to driving a car without knowing how to drive and at the same time not knowing the roads or the rules.
What is the role of real estate as part of an investment portfolio?
Real estate can channel savings into the economy and can be an important investment class that naturally appeals to investors, especially within the regional and Sri Lankan context, because of its inflation hedge and touch-and-feel perception. Real estate has investment characteristics that are distinct from traditional asset classes, as its returns are not directly correlated to other conventional investment classes such as debt, equity and or commodity and therefore offer better diversification and risk adjusted returns, when held within a portfolio.
Many global pension funds have long valued real estate investments for its steady income, potential for capital gains and risk diversification.
How do you see the development of the REIT market regionally and in Sri Lanka?
The REIT market in the Asia-Pacific region is valued at more than $250 billion, according to Bloomberg; Australia, Japan and Singapore are the region’s three-largest REIT markets. There are 34 REITs and business trusts listed in Singapore. From a South Asian perspective, both India and Pakistan have leaped forward in developing supportive REIT regulations in order to support the potential multi-billion dollar REIT market.
Pakistan has been able to launch South Asia’s first public listed REIT. In Pakistan, the local government, that imposes transfer tax on real estate, came out with a significantly reduced rate of tax for transfers to and from REITs, so as to promote recording of the real transaction value (which) the REIT has to do so as to be publically traded.
Given the growth dynamics and expected real estate and infrastructure developments in Sri Lanka, the time is opportune for Sri Lanka to establish a supportive and positive REIT legislative framework. This will have a domino effect on the investment landscape, real estate sector, capital markets and the real economy.
One of the major objectives of the policy makers has been to encourage the small time savers to participate more actively in the local capital market. The introduction of REITs would add a new dimension in enhancing the investment opportunities available to small scale savers.
Traditional interest bearing deposits and instruments are no longer conducive to meeting long-term saving objectives, especially in the context of Sri Lanka’s aging demographics and recent single-digit interest rates regime. The fact that REITs would provide a mechanism for such investors to diversify their risks and meet their required investment objective makes the introduction and formalization of this investment class into the capital market a vital requirement.