Cobra in the Bath: Adventures in Less Travelled Lands

by Miles Morland

  ‘Sure, Jack. Great idea. Do you want me to talk to them?’

  ‘No worries, mate. I’ll handle it. I’ll talk to Billy.’ Billy was a Solly partner already famous for his exploits in the Russian markets. ‘This’ll be child’s play for him.’

  I could not believe it, but little by little this trade was coming together. We had a buyer, Jack’s five different Stone accounts; we had a seller, the government of Ghana; we had a broker to execute the trade, Ken Ofori-Atta; and now we had someone to take care of moving the money and taking custody of the securities on behalf of Stone, the mighty Salomon Brothers. The deputy finance minister was calling Ken daily and asking when the trade was going to happen. We scheduled it for a Thursday two weeks out to allow Solly time to set up the transfer and custody arrangements. That was two weeks before the scheduled visit of Jim Wolfensohn, the head of the World Bank. Our trade would allow the government of Ghana to show him that they were serious about privatisation.

  I was a happy man. Or I was until the phone rang on Wednesday, eight days before the trade was due to happen. It was Jack, calling from New York.

  ‘Hey, Miles, mate.’

  ‘Hi, Jack, what’s up?’

  ‘Micky’s spooked about the way some of these emerging markets are acting.’

  ‘Sorry to hear that. Still, Ghana should be OK. It’s insulated from the big markets. It shouldn’t affect our trade.’

  ‘Miles, sorry, mate, but there isn’t going to be a Ghana trade. Well, not for us. But don’t worry. Billy owes us a few favours and this is chicken feed for Solly. So I told him to find some buyers for the trade himself. Hope that’s OK with you. Bye.’

  The bastard. Now, not only didn’t I have a buyer but my carefully nurtured trade was about to go walkabout in the wilderness. Billy had never been anywhere near Ghana and knew nothing about the package of shares. If he attempted to place them it would be chaos. The Ghanaians would hunt me down and have me fed to the snails. I needed to get the trade back under my control and to place the shares with my other clients, all of whom at least were now familiar with Ghana thanks to my report and could be counted on not to try and resell them into a non-functioning stock market as soon as they had bought them. God knows if it could be done, but that was the only hope.

  I called Billy in New York only to find he was in Ecuador chasing down an Ecuadorean bond trade. There were no mobile phones in those days. I finally reached him on Friday afternoon in his hotel in Quito. I explained that the shares needed to be placed in firm hands.

  ‘Hey, Miles. Whatever. Y’ know, I like this trade. These shares are great value but it’s your trade, my friend. Tell you what. Lemme keep $10 million worth for Solly’s account and for a few of our friends and you do the rest.’

  ‘Thanks, Billy. That’s great.’

  All I needed to do now was, in the next five days, find buyers for $40 million of Ghanaian shares among people who had never owned an African share before. It was lucky that I had been to see my other clients as an insurance policy when Stone had committed to the trade. There was of course no email. Everything had to be done by phone and fax. The phone lines to Ghana seldom worked. Pips had raw fingers from continually dialling Ken. I went to see my London clients. I phoned my American and European clients, and then I phoned them again. Somehow the trade began coming together.

  On Thursday morning Ken, as scheduled, in his first ever trade on the Ghana stock exchange, walked on to the floor and traded one quarter of the value of the entire exchange. No one had ever done that before, anywhere. The seller was the government of Ghana. The buyers were identified as clients of Blakeney Management. Their names were not made public, but they were a high-quality group of institutions, some of the biggest and most respected names in the world of emerging-market investing – far more respected than Stone. I could not believe it, but the Great Ghana Trade had become a reality.

  I was exhausted but exhilarated.

  The next day the Financial Times ran a quarter-page story on the trade. Blakeney Management, of whom no one had ever heard, was mentioned as if it was a well known firm. The aftermath of the trade also worked well. The Ghanaian government got its money on time, and Mr Wolfensohn was pleased. Those of my clients who participated in the trade decided to take a closer look at Ghana and began buying more shares there, which in turn encouraged the locals to follow them into their own market. As a result the market more or less tripled in the next year, giving Blackney Management a lot of happy clients who made a lot of money.

  And next time I went to call on people in Accra or Lagos they knew who we were. Blackney had street cred in Africa.

  22

  Man Has Accident in Muscat

  Most careers are a series of random accidents to which we later try to lend logic. I had one such accident at the end of 1993. The consulting business was going well; the Great Ghana Trade had caused a stir, and I was now turning away consulting clients. One afternoon two tall men called Nigel shimmied into my office on the quay. One was Nigel Pilkington, a friend since First Boston days. He brought with him the equally tall and elegant figure of Nigel Cayzer.

  ‘Know anything about Oman?’ said Nigel Cayzer.

  ‘Funnily enough, yes. I do know a bit. All the Gulf stock markets are closed to foreign investors, but one of these days they’ll have to open up so I thought I’d find out about them in advance. Then when they do open I’ll be ready. So yes, I’ve done some work on the Muscat Securities Market and it looks interesting.’

  ‘Good boy,’ said Nigel P, giving an I-told-you-so look to Nigel C.

  ‘Well, that is a good thing,’ said Nigel C. ‘You appear to be the only man outside the Gulf who has ever heard of the Muscat Securities Market. You see, I know the Omanis pretty well, and the chap in charge of the stock market is a very go-ahead person called Muhammad Musa, who’s also the minister for development. He wants to open their market to foreigners but he doesn’t want to let the whole world invest there because it’s a small market and he worries they might get swamped.’

  ‘That makes sense. A number of countries, like Brazil and Korea, have done it by stages,’ I said.

  ‘Exactly,’ said Nigel C. ‘Muhammad has been studying what they did and would like to do the same thing. He’d like someone to raise $50 million for a fund for foreigners to invest in Oman. That fund would be given an exclusive licence. They would be the only foreigners permitted to invest in the market and would also be allowed to invest in the other Gulf markets. What do you think?’

  ‘It’s a great idea. The Gulf markets are cheap, and there’s a lot of oil money out there in the hands of the locals, which one of these days will find its way into their own markets. When that happens they’ll blow the roof off. Running the Oman fund will be a nice piece of business for whoever you get to manage it. Anything I can do to help?’

  ‘Well, yes,’ said Nigel C. ‘How would you like to raise the money and manage the fund?’

  ‘Me??’

  ‘Yes. How about it? We could work together. The Omanis would help.’

  ‘Look, it’s a great opportunity for someone, maybe Foreign & Colonial or Genesis, but I’m not a money manager; I’m just a consultant. You have to be registered with IMRO to manage money. I’m not.’

  Consultants advise investors as to what to do, and the investors may or may not take the consultants’ advice. A money manager, on the other hand, is entrusted with a chunk of investors’ money, either retail money from individuals, or institutional money from entities like pension funds and insurance companies, to look after. The manager makes the decisions as to what to buy or sell and gets paid a management fee relative to the size of the assets.

  I refrained from saying that my money-management skills dated back to the era of bowler hats. The last time I had been a money manager had been on Schroders’ investment desk some twenty years earlier. ‘Sorry. I’d love to help but I can’t.’

  The Nigels shimmied off into the Chelsea night.

  Lat
er that evening Nigel Pilkington rang. He had a knack of making everything sound simple. ‘Miles,’ he said, ‘you should do this. It’s a great opportunity. And I’d help. It would be great to be working together again.’

  ‘But I can’t. I’m not registered with IMRO, and I’d need more people at Blakeney. I’m just one man and a Pips at present.’

  ‘Yes, but you’ve got to start somewhere.’

  He was right. Two months later, in late 1993, Blakeney Management was registered as a money manager with IMRO, the predecessor regulator to the FSA. I had hired Khaled Abdel-Majeed, an experienced Palestinian investment professional, as my partner, and we had mandated Barings, then the greatest power in emerging-market investment banking, to help us raise $50 million for the Oryx Fund, an Oman fund to be listed on the London Stock Exchange. The two Nigels were going to be on the board of directors along with a number of well known Omanis. I criss-crossed the US and Europe pitching to investors while Khaled spent time in Oman visiting local companies and getting to know them well.

  Somehow this too came together despite my scepticism as to whether it was doable, and by June 1994 the Oryx Fund was a reality. Not only were we in business as a money manager but anyone who wanted to invest in the Gulf had to buy shares in the Oryx Fund; we were the only non-Gulf residents licensed to invest there.

  Then I had another idea. A number of my consulting clients had from time to time asked me if I would manage some money for them and invest it all over Africa and the Middle East on their behalf. I had thanked them but turned them down as I was not licensed. Now I was, so I got back to them not just about the Oman market but also Africa and the rest of the Middle East. By the end of 1994 Blakeney Investors, a Luxembourg-registered trust, had been set up, and we had $17 million from ten different investors, an infinitesimal sum by money-management standards, but a beginning. I hired three more people to help as we had such a huge geographical area to cover and we were now a fully fledged emerging-market manager specialising in Africa and the Middle East. In fact we were the only emerging-market manager doing anything at all in these areas.

  A year later we had another stroke of luck. One of our investors, John Walton, managed money for the Yale University Endowment Office. Yale’s chief investment officer, David Swensen, is the best-respected investor in the US after Warren Buffett, and under him the Yale Endowment had grown mightily to over $20 billion and outperformed every other large endowment fund in the US. John introduced us to Swensen, and in 1995 we began managing money for Yale. This was the ultimate seal of approval. David Swensen later wrote the bible on managing institutional money, Pioneering Portfolio Management, in which he makes unflattering comments about most of the big money managers, whom he dismisses as ‘asset-gatherers’. About Blakeney and me, on the other hand, he says nice things and refers to us as a new type of animal, a ‘guerrilla investment manager’. We were flattered. Soon other money came in too, and in addition to Oryx and a similar fund we set up in 1997 in Lebanon – the only fund for foreign investors in the Beirut market – we were managing $300 million by 1998.

  Our performance was terrific. Others were starting to discover the markets we had pioneered, and this was pushing up the prices of the stocks we owned. I had closed down the consulting business in 1994 as we could no longer give hedge funds disinterested advice on markets in which we had become the biggest foreign investor. I then made the classic mistake made by entrepreneurs who enjoy some early success. I got overconfident and made a near-fatal misjudgement.

  Like so many entrepreneurs who have a success in one area I thought I could extend this to a related area. Drunk with my own brilliance after four years of stellar success, I decided that African companies were short of management and technical expertise, and if we could get control of some of them, as opposed to just being the passive investor we had been to date, I could bring in management and technical expertise from outside and enhance our investors’ returns. On paper it was a brilliant idea.

  With my clients’ money and with some help from some old consulting clients who were happy to come along for the ride, Blakeney got control of four companies and I or my nominee went on the board. We did not run the companies on a day-to-day basis but controlled their strategies and had a decisive say in appointing their senior management. The four companies were: the Social Security Bank of Ghana, of which we bought 51 per cent from the government in a deal teed up by Ken; African Lakes, a Glasgow-based trading company so old that Dr Livingstone had gone to some of its early board meetings; African Plantations, in which we co-invested with Soros and the giant Moore Capital, a private company run by Dekel Golan, an entrepreneurial Israeli who was going to bring modern Israeli management and agricultural techniques to the tradition-bound business of growing tea and coffee in Africa; and lastly Lonrho Africa, an unrelated bundle of assets collected by the buccaneering Tiny Rowland, which, now that Tiny Rowland was dead, was without a strategy.

  These were referred to collectively as Blakeney’s strategic investments. We managed to exit one of them, the Ghanaian bank, with a modest profit after five years of very hard work and many sweaty days spent planning strategy in Accra. So brilliant were my strategic investment skills that the other three investments went all but bankrupt.

  We sold African Lakes’ existing businesses and used the proceeds to buy, at the top of the market, Africa On-Line, the continent’s leading Internet service provider. Africa On-Line proved to have an insatiable hunger for money and very modest revenues. We eventually sold the company for virtually nothing. Meanwhile, Dekel Golan’s modern agricultural techniques had locked African Plantations into a cycle of expansion by building dams, generators and irrigation systems at a time when the traditional tea and coffee growers were spending nothing and waiting for prices to recover to normal levels. We lost 100 per cent of our clients’ money there.

  Our strategy at Lonrho Africa was to sell off its unconnected subsidiaries – hotels, plantations, car dealerships and the rest of Tiny Rowland’s ragbag of assets – to people who specialised in these businesses and return the cash to shareholders. The price we had paid to get control was a fraction of the value of the sum of the parts, but by the time we began looking for buyers, the crash of 1998 had taken place and no one wanted to buy anything in Africa. Meanwhile the interest incurred by the huge debt burden run up by the company to buy these assets was destroying its value. By the time we managed to execute our plan the stock was down 80 per cent.

  Taken collectively, Miles’s brilliant strategic investments were an investment catastrophe. Although the performance of the companies where I was not on the board and interfering in management was good, the performance of the strategic investments meant that the value of the portfolio as a whole declined sharply.

  David Swensen, whom I had come to look upon as an investment godfather, called me from Yale in 2000.

  ‘Miles?’

  ‘Yes.’

  ‘You should do some thinking about what you’re good at and what you’re not.’

  ‘That’s good advice. Thank you, David.’

  ‘And you should do some attribution work.’

  ‘Er, what’s that?’

  ‘You better find that out pretty fast too.’

  I did. Attribution involved doing a calculation in which you split your portfolio into its constituent parts and worked out how each bit had performed so you could see to what you should attribute your performance. We divided the portfolio into Miles’s brilliant strategic investments and the rest. The conclusion was inescapable. The closer Miles personally got to the management of a company, the worse it subsequently performed, a humbling thing to learn about yourself. But meanwhile our basic model of buying shares in underpriced companies on inefficient exchanges was working better than ever.

  We called our clients and promised to make no more strategic investments and that Blakeney would never go on the board of an investee company ever again. We would revert to being a one-joke comedian, identifying b
argains in inefficient markets. The trouble was, we had hardly any clients left to call. Most had taken their money away. Yale and a big UK pension fund had remained loyal, but apart from Oryx and the Lebanon fund we had set up, the fees from which were just about paying the bills, our general money under management had shrunk from $300 million to about $70 million.

  I called everyone together – we were now twelve people – and told them that we were operating at break-even. ‘Let’s give it a year. If we can bring in two good new clients we’ll stay open. If we can’t we’ll close the firm and see if anyone has any jobs left.’

  At the end of the year we had brought in no new clients but were close to landing one, a New York foundation managed by a brilliant woman who knew us from the time she had worked at the Yale Endowment. She did not follow herd thinking and liked giving money to people who had learned from their mistakes. We decided to keep going for another quarter, and to our great relief a month later she gave us some money. It was only $18 million, but it gave us the confidence to stay in business.

  Our performance was improving now that we had got back to doing what we were good at and nothing else. Over the next six years our back-to-basics strategy turned that $18 million into $112 million. Soon other money began coming in. Our performance was extraordinary. By 2003 we had reached $500 million under management and stopped accepting new money, and by 2007 we had turned that into $2 billion. None of this was achieved by magic, mirrors or taking stupid risks. By this time my partners at Blakeney were doing most of the work while I swanned around talking to clients, but we had all recognised how narrow our talents were. We had found out the hard way how bad we were when we strayed outside our area of expertise. Blakeney resolved to remain a one-joke comedian.

  And so it has remained.

  23

  Beirut