Venturing Back to Iran

The nation’s large market and 36 years of pent-up demand offer significant first-mover advantages.

The list of countries off-limits to private equity investment recently grew shorter by one: Iran. Forward-thinking investors are emboldened by the recent nuclear deal and the lifting of sanctions. However, regulatory concerns, an unfriendly political environment, and lingering uncertainties over the deal mean actual investments are not happening yet.

But when investments do start to happen, one of the first firms into Iran will likely be Canton Hermidas Private Equity, which has been eyeing opportunities in the nation for years.

“We started in 2009 as one of the first private equity funds in Iran,” says Canton Hermidas managing partner Ali Milani. “But then the sanctions kicked in, which made things difficult. So we pulled out. But we got active again about a year ago.”

Canton Hermidas is based in London and focuses on companies that operate in or do business with Iran. It has not yet closed a formal fund.

Milani says his firm has yet to make an investment in Iran—it’s complying with sanctions still in place—but it is laying the groundwork. Although PE does not now exist in the Iranian market, Milani says there are many privately held companies in Iran that present opportunities.

With a population of nearly 80M and a growing, $400B economy, Iran is poised to be the biggest addition to the global financial community since the breakup of the Soviet Union.

Iran has 9.3 percent of the world’s proven oil reserves—the fourth–largest after Venezuela, Saudi Arabia, and Canada—and 18.2 percent of the world’s natural gas reserves—an amount larger than Russia’s 17.4 percent. But Milani says Canton Hermidas is not interested in oil or gas investments, because there is always the possibility that sanctions will be reimposed—and the sector that sanctions hit hardest is oil and gas.

“But there are tremendous opportunities outside oil and gas,” says Milani. “There are fast-moving consumer goods. There are technology companies with a pool of very talented engineers who have been trained globally. Retail could be interesting; the population wants a more Western shopping experience. Food could be interesting, as could healthcare plays.”

Though the firm is hedging its bets, it doesn’t believe the sanctions will be reversed. “It took a very long time to negotiate this deal, and there is so much at stake for all sides,” says Milani. “Years of mistrust are coming to an end, and over the next decade, a level of trust will grow between the international community and Iran.”

Since the recent nuclear accord, Canton Hermidas has fielded interest from potential investors in China, the United Arab Emirates, and Europe. The curiosity is there, as is the knowledge that there will be first-mover advantage. To investors who are interested, Milani points out that Iran has a Western-style work environment similar to Turkey’s. It has traditional values but is also a nation of traders. There is opacity and bureaucracy in the system, but the government is addressing that concern by setting up offices to accommodate the needs of overseas investors.

“A lot of the large private equity players will certainly hold back for several more years,” Milani says. “First movers will be the smaller private equity vehicles and family offices aiming to grab a piece of the action.”

That said, Milani thinks it will be very challenging to set up an Iran-based PE fund. But there are glimmers of opportunity.

“We expect, at minimum, 10 to 20 percent annual growth in many sectors,” Milani says. “Within three or four years, this could be a trillion-dollar market. This is a diverse economy with a much stronger talent pool than any other Arab state. Iran has cheap, educated talent, and as an investor, that can serve you well.”