Economy, Domestic Economy

Investors Vie for Toeholds in Iran’s Exploding Market

Investors Vie for Toeholds in Iran’s Exploding MarketInvestors Vie for Toeholds in Iran’s Exploding Market

Foreign investors are rushing to cash in on a bonanza in Iran since UN economic sanctions were lifted in January.

That's because the country's $400 billion economy is poised to surge in the months ahead, as President Hassan Rouhani works to diversify the oil-based economy, Elizabeth MacBride wrote in an article recently published on American business news television channel CNBC's website.

MacBride is an independent journalist who specializes in finance and international business. Excerpts of the article follow:

Iran's GDP is expected to grow 6% this year and almost 7% next year, according to the World Bank.

The country has three great strengths: natural resources, including oil, gas and minerals; a huge population of nearly 80 million; and manufacturing capacity unrivaled in the Middle East.

Oil and gas account for only 10% of the GDP.

Investors worldwide have a myriad and growing number of options to invest in Iran, probably the world's hottest geographic investment opportunity in the last 20 years—all except for Americans.

Though they have been eying the Iranian market, US institutional and individual investors are hitting some brick walls because of the still-in-place US sanctions that make it nearly impossible for US companies to set up a physical presence in Iran, partner with an Iranian company or even sell most goods there.

There are a few exceptions, though, including food, medical equipment, transportation, aircraft and some IT products. And some US companies may be able to get licenses through the US Treasury's Office of Foreign Asset Control to work in sectors defined as aligning with US policy interests, including oil, gas and aviation.

Companies, such as Honeywell International and General Electric, are expected to get licenses to trade with Iran, said Cyrus Razzaghi, CEO of Ara Enterprise, a consultancy in Tehran working to help foreign companies and investors navigate Iranian laws and find business partners.

This is while Boeing has been permitted to strike deals.

"We get a lot of calls from American investors," said Dominic Bokor-Ingram, portfolio advisor to the Turquoise Variable Capital Investment Fund, established in December with €50 million to invest in public companies in Iran. His London-based firm tells them: No, sorry, you can't invest.

However, European and Asian companies are moving in to get early footholds. Airbus has a multibillion deal to provide 118 jetliners to Iran's state airline company; Peugeot returned with a €400 million deal to update its factory and begin manufacturing cars; the Renault-Nissan alliance is in aggressive talks with local partners SAIPA and Iran Khodro to expand car manufacturing; and Italian and French mining companies, including Persiana Metalica and Fiault, are in talks to invest more than €5 billion in aluminum and steel projects, according to Iranian news sources, which also reported that Chinese firms are negotiating to finance coal production.

> Getting a Piece of Action

For now, individual US investors and institutions are exploring ways to invest in Iran through offshore entities, foreign subsidiaries or funds based in Europe, said sources.

But "it's like speeding down the Dulles toll road at 90 mph," said Farhad Alavi, managing partner of the Akrivis law firm, naming a highway near Washington, D.C. "You can do it 50 times and be fine, but the 51st, you might not be."

In other words, no one knows how the US Department of Justice will interpret the US sanctions in the new environment, especially against individual and institutional investors. In the past, it has prosecuted many companies, large and small, for breaking the embargo, including a 2014 $8.9 billion fine against Paris-based financial services giant BNP Paribas.

The risks for investors are undeniable. The country has infrastructure problems, an unfamiliar legal and regulatory regime that lacks transparency, complex regulations and the usual challenges of finding good business partners.

Another wild card is how soon global banks will reengage in Iranian business. Many are sitting on the sidelines to see how events unfold.

Investment Options

For those looking for a frontier investment play, here are four options open to investors worldwide:

1. Private equity funds are opening, often headquartered in London or Geneva, many with sector-specific approaches. They offer assurances of compliance with the still-evolving legal picture. For instance, Griffon Capital is a private equity firm focused on Iran, aiming to capture institutional funds, according to its website. It also has an asset management arm to invest in Iranian securities, headquartered in the Cayman Islands.

Another fund is Iratel Ventures. Mohsen Khalkhali, managing partner at the fund, which is the investing arm of Iranian telecom company Pars Iratel, is raising $10 million to invest $50,000 to $100,000 in startups in or related to Iran, especially in the mobile arena, he said.

2. The Turquoise Variable Capital Investment Fund, a joint venture between London-based Charlemagne Capital and Tehran-based Turquoise Capital Partners, opened in December with a minimum of €125,000 to invest. It's investing in 20 to 25 companies trading on Tehran Stock Exchange which, according to Charlemagne, has a market capitalization of $100 billion and daily trading volume of about $2 billion, making it the second-largest exchange in the emerging markets.

Turquoise Capital also announced separately that it was launching an ETF mirroring an index tracking Iran's biggest public companies.

3. Investors with enough knowledge can also invest directly in companies in Iran.

"The country's laws allow foreign direct investment," said Razzaghi. "Foreigners are allowed to own 100% of a venture, and there are laws to protect them."

And its tax rates are attractive. Iran has a 25% corporate tax rate and there is a 9% value-added tax.

4. Angel investors are beginning to explore the tech market in Iran, which many expect to grow exponentially. Iran is home to Sharif University of Technology, known as the MIT of Iran, which has a student body of 12,000 studying engineering, economics and science. More of the country's tech talent, which had been emigrating to the United States and Europe, may now remain at home.

"In the last three years, more than 200 startups have formed in Iran. A movement has begun. It's accelerating," said Nasser Qanemzadeh, who founded Opatan, an Iranian cloud startup. He was in San Francisco for the past several weeks, attending a workshop organized in part by the venture capital firm 500 Startups, so that he could learn to be a venture capitalist himself.

Angel Labs, a Silicon Valley-based, 40-employee investor accelerator that starts and helps run angel networks around the world, said it has formed a network of about 35 Iranian angels, including C-level bank executives who are investing in financial technology startups as a route to modernize their own infrastructure.

It's expecting an influx of interest from angels worldwide to get into the country, though executive director Tugce Ergul said it's still unclear what mechanism US investors might be able to use, if any.

Meanwhile, in Iran, with or without American investment, the boom continues.

"Thousands of visitors stream into Tehran, where business-class hotels are frequently sold out these days," said Razzaghi.

Many think it's a matter of time before the United States lifts its sanctions, too. As individual investors increasingly discover that they are stymied, and big businesses like GE, which in February sent the head of its oil and gas division to Iran to seek ways to work within the sanctions, the pressure may grow, said Alavi.

"After so many years of isolation, there are opportunities in Iran in every sector," said Razzaghi.