Mergermarket breakfast seminar – Iran: Understanding the path to market access through M&A and local intermediaries

As increasing numbers of international investors seek to take advantage of the largely untapped Iranian market, obtaining insight and guidance from companies that have detailed and in-depth local knowledge is essential in identifying and analysing the potential risks of doing business there.

Clyde & Co sponsored a breakfast seminar on 16 May 2016, moderated by Najmeh Bozorgmehr (Tehran Correspondent for the Financial Times), and led by Jonathan Silver (Clyde & Co's MENA Managing Partner), considering the intricacies of doing business in Iran, and the obstacles to successful M&A activity in the Iranian market. Please see the key discussion points from the session below.

Current Investment climate of Iran 

Although the sanctions relief presents new business opportunities in Iran and has made most non-US transactions lawful from a local and international perspective, there still remains a great hurdle - none of the big non-US banks will currently do business with Iran or allow their customers to do business with Iran. The Iranian banks are eager to resume their ties with international banks, however, there are only a few smaller financial institutions which have, so far, returned to the Iranian market and are willing to do business with Iran on a case by case basis. Many international businesses have evaluated their market entry strategies and establishment options in relation to Iran, but they are now, rightly, concerned about how they will process payments for their goods and services. The main reasons for the international banks' reluctance seems to be the risk of causing the transit of 'Iran-related transactions' into the 'US financial system', which remains prohibited under the primary US sanctions. 

Another risk for the international banks is that the financial system in Iran has some catching-up to do in terms of international compliance procedures.  We are told that the Central Bank of Iran and other public and private banks in Iran, have started to introduce and implement international compliance procedures into their systems. 

Local Partners and Due Diligence

Although 100% foreign ownership is, by law, permitted in many sectors in Iran and selecting an Iranian partner is not mandatory in order to conduct business in Iran (apart from in the upstream oil and gas sector), many companies seek to engage an Iranian partner when establishing a business in Iran, either through an acquisition, or a joint venture.  If successful, this strategy will be advantageous for both parties with the Iranians benefitting from the import of technology, capital and knowhow and the international investor benefitting from Iranians' corporate structure, contacts, know-how and experience "on the ground". 

Selecting a partner or a counterparty with which to do business in Iran has its own challenges and risks.  A number of individuals and entities still remain on the US and EU Specially Designated Nationals sanctions lists so it is important to carry out sufficient due diligence to ensure that one is not entering into business with a sanctioned party or an entity that is controlled by a sanctioned party.  However, in a market in which reliable information is not readily available, this can be a challenge.  During its isolation from the international business community, Iran has not developed a culture of transparency and disclosure so conducting the required due diligence searches, prior to entering the market, is essential but can be a time consuming and, in some cases, costly process. 

Private Equity Investment in Iran

Private equity in Iran is a new concept, but the appetite for a privatized economy in Iran is vast. Iran has a population of around 80 million, with 65% below the age of 35. The level of literacy amongst Iran's population is over 85% and 72% of the population is urbanised. Iran has huge energy and mineral reserves, and a strategic geographic location. Iran has also recently witnessed a change in its consumption patterns, with significant increases in annual family net expenditure. There are plenty of opportunities in Private Equity, particularly in the healthcare, hospitality and consumer sectors. Since the lifting of sanctions, Iran has received interest in private equity investments, mainly from high networth individuals and Family Offices.  However, it is expected that Institutional Investors will also, ultimately, enter the market, once the banking and compliance issues have been resolved and greater certainty returns to the political backdrop.  It may be some time, however, before the Iranian market adjusts to and embraces the practices, concepts and demands of those investors.

Investing in Iranian Public Companies

The Tehran Stock Exchange (TSE) offers a lot of opportunity to investors seeking to benefit from the lifting of sanctions. The TSE is large, it covers a broad range of sectors and is a liquid exchange.  Companies listed on the TSE have low PE ratios and high dividend yields. Privatization has been, and currently is, a government priority as part of Iran's re-emergence into the market and the TSE has a big part to play in Iran's privatization plans.

Specialist funds have been developed through which international investors can participate in that market.

The Auditing climate in Iran

There are currently around 230 audit firms in Iran which specialise in providing financial and tax advice. The tax system in Iran is complicated and the accounting systems currently in place are relatively complex.  It is expected that the major international accountancy firms will re-enter the Iranian market via new or historical alliances with a number of audit and accountancy firms in Iran. 

Jonathan Silver Partner, Clyde & Co
Ida Mokhtassi Associate, Clyde & Co