Investing insights from a prince

By Larissa Fernand |  01-03-17 | 
 
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Larissa Fernand is Website Editor for Morningstar.in. She would like to hear from you and welcomes your feedback.

Prince Alwaleed Bin Talal of Saudi Arabia claims to be a self-made billionaire. While that is true, there are conflicting stories as to how he started the journey to arrive on the world’s billionaire lists of Forbes (#41/net worth $17.3 billion) and Bloomberg (#38/$19.6 billion).

According to BBC, he was gifted $330,000 on obtaining a business degree in California. A further $600,000 helped him invest in Saudi Arabia's construction industry in the 1980s.

This is Money commences the journey with a slightly different variation; a loan of $30,000 from his father kick-started his business. He also mortgaged his house (a gift from his father) to raise about $400,000 and each month, being a member of the royal family, received an allowance of $15,000.

Foreign Policy believes that he embarked on this journey in a more unobtrusive way: Started off with $15,000 given to him by his father.

Whichever version is true (and there are others too), the underlying message is clear – this is certainly NO rags-to-riches story. But what is of interest is the acute business acumen coupled with foresight and a risk-taking ability.

His first contract was a $8 million project to build a ‘bachelor’s club’ at a Riyadh military academy. On striking gold in the real estate industry, he began to cast his nets wider.

In 1988, he acquired a controlling stake in United Saudi Commercial Bank. The ailing bank turned around (cut in staff, increase in assets) and the value of the bank’s stock subsequently multiplied 20-fold. In an interview, he pointed to the fact that under his helm the bank became the first in Saudi Arabia in terms of return on assets (ROA) and the second in terms of return on equity (ROE). Within a decade, it merged with the struggling Saudi Cairo Bank, thus creating the United Saudi Bank, which again merged with Saudi American Bank, as it is now known.

What put him on the international map was his investment with Citicorp.

Prince Alwaleed’s attraction to the stock in 1990 was probably the brand. It was a global bank and possibly the only American bank with the potential to become a dominant global force; being the largest bank in the U.S. and the ninth largest in the world.

However, the bank had a precarious balance sheet, with a few billion of loan-loss reserves mainly on Third World debt. They were being criticised for their real estate assets and on the capital front. The bank desperately needed capital as the Federal Reserve urged it to strengthen its capital base after it lost significant sums on property loans. Citi’s hunt for investors (it needed $1 – $1.5 billion) was failing and its stock price kept sliding downwards. Moody's had downgraded Citi preferred stock to a speculative "junk" rating and many began to wonder if the bank would fold up.

At the end of 1990, Prince Alwaleed quietly bought 4.9% of Citicorp's existing common shares for $207 million ($12.46 per share) on the open market. Once the management noticed him and approached him for further investments, he played his cards shrewdly.

In February 1991, he bought new preferred shares, amounting to $590 million, amounting to a further 10% of Citicorp and taking his stake to 14.9%. These preferred shares were convertible into common shares at $16 each. In addition to an 11% dividend on the new issue of convertible preferred stock, he would earn a profit if the common stock rose above $16 a share.

Early March, Citicorp's capital crisis passed when a group of investors bought a further $600 million of new preferred shares. By 1994, Tier I capital had increased to 6.1%, above the 6% threshold for a well-capitalized bank set by the government. The stock price began to climb. Dividend payments resumed. Citi came back from the precipice and had recovered from its crisis. In 1998, Citicorp merged with Travelers Group to create Citigroup. Prince Alwaleed made insane amounts of money on his contrarian bet.

Prince Alwaleed’s debut on the international investing scene was timed to perfection.

He believed that the company was undervalued given its strong brand and significant potential for growth. He successfully negotiated at a time of financial uncertainty. His daring to go against the tide earned him a stellar reputation as an investor and amassed a fortune in the bargain. It was only a matter of time when the millions turned into billions.

His Midas touch was once again evident when he began quietly picking up stock of another American company – Apple. In April 1997 he announced that he purchased more than 5% of the shares of Apple Computer Inc. for $115 million. (Steve Jobs returned that year). The purchase came at a time when Larry Ellison, CEO of Oracle Corporation, was considering a takeover bid for Apple, which had been struggling to turn itself around and was operating at a loss. At that time the prince stated that there is “serious potential” for Apple to provide large returns to its stockholders once again, as it did in the past.

He then invested into Netscape and Motorola at a time when both companies were out of favour on Wall Street and their stocks far cheaper than they were a few months prior. He told Bloomberg News that he took advantage of the turmoil in the world markets to buy shares in companies that he had been monitoring for months. “I was investing while others thought the market would crash.”

In 1999, the New York Times reported on the dizzying returns on his investments. The investment in Apple in March 1997 ($115 million) was worth $211 million. In 1997, he also bought 5% of Netscape ($145 million). With AOL’s acquisition of Netscape, that holding was worth more than $500 million.

His foresight was also evident when he set his sights on microblogging site Twitter in 2011.

He invested $300 million at a time when it was an upcoming brand name which he thought would be a “promising, high-growth business with a global impact.” He believed it to be a cornerstone of the consumer social network experience and not a “bubbly” or “crashable” company. “People these days are getting hooked on tweeting. If you have half a billion active users, it means that you are going to have around 2 billion tweets a day since the average number of tweets per person per day is four. If this is monetised well with advertising, you can see the growth of that company in revenues and profits,” he said to Gulf Business.

According to the Financial Times, he acquired the stake on buying shares from existing shareholders in a secondary offer. This was after DST, the Russian internet investment firm, invested $400 million in Twitter that very year.

The investing process….

Prince Alwaleed invests on his own as well as through Kingdom Holdings his vehicle for investments. Kingdom Holdings is a publicly traded company on the Saudi stock exchange of which Prince Alwaleed owns 95% while 5% is traded.

  • He looks for promising, high-growth businesses with a global impact. What grabs his attention is the company’s global presence – an international brand or the potential to become one. In his own words, he looks for “irreplaceable brands in their own field”. His holdings stand testimony to that - eBay, Apple, Citigroup, News Corp, Twitter, Motorola, Euro Disney, Saks Fifth Avenue, Four Seasons Hotels, Movenpick, Saatchi & Saatchi, Daewoo, Donna Karan International, to name a few.
  • He has a knack for identifying undervalued companies. Once he does that, he looks for an entry point which can achieve 20% growth within a 5- to 10-year horizon. He buys low and is gutsy enough to bet with vast sums of money. He then hangs on should the ride get bumpy. In an interview with New York Times, he stated that he “invests in firms that are doing badly” but believes that “the industries should not be too cyclical and not facing a meltdown”.
  • When told that he is criticised on not knowing when to sell, he responded by saying he does not believe in an exit strategy when you exit the company completely. “I believe in a ‘Monetisation Strategy’ in which you IPO a certain percentage of the company, may be 10% or 20%, you keep the balance and then you go mark-to-market. However, some companies that we are involved in - for example News Corporation, Citigroup, Hotel George V, Plaza in New York - are irreplaceable assets. You can never have another George V, you can never have another Savoy in London, you can never have another Plaza in New York, you can never have another News Corp. These are all unique blue chip assets and once-in-a-lifetime opportunities. So yes, we’ll buy them, stick with them and not expose them at all. It’s very important to separate between exit and monetisation.”
“When there’s euphoria in the market and everyone’s buying, that’s when I think of selling at least part of my trading portfolio, never part of my strategic portfolio.”
  • He is a great believer in diversification – geography and industry. The investment portfolio of Kingdom Holdings is eclectic: hotels, aviation, real estate, entertainment, media, healthcare, education, agriculture, financial services, petrochemicals and technology – all spread over different countries.
  • When asked to give tips to investors, he suggested that investors have a 3+3+1 objective:
    • Macro: Vision/Strategy to implement the vision/Plan to implement the vision
    • Micro: Take initiative/Take risks/Be ambitious
    • All the above fall under ONE umbrella – high ethics.
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