How will a BCV work in practice?

By Hugh Fraser, managing partner

Welcome to my weekly article outlining HFI’s new approach to helping businesses establish a presence in Abu Dhabi through our innovative Bridgehead Cluster Ventures (BCV). This week, I am discussing how BCVs will operate in practice.

In basic terms, a BCV will operate as follows:

The participating companies, local partner and HFI will execute the BCV JV Agreement (preceded by Non-Disclosure Agreements and Commercial Heads of Terms). The term of the BCV JV arrangement will be (1) a Phase 1 period of up to 24 months during which full efforts will be made to secure a minimum of US$1.5 million to US$2.0 million of “bridgehead” gross revenues and, at the option of the participants and (2) a Phase 2 transition period of 12 months during which the BCV will be evolved into a shared registered and licensed in-country entity (or at the option of each participant it will withdraw or pursue an alternative individual option and the BCV will be pursued by the continuing cohort or be wound up).

Each participant company will appoint the relevant local partner as its authorised representative in the territory and will acquire a registered 2% equity shareholding in the local partner entity on a “borrowed” basis for nominal value. On departing from the BCV each participant will re-transfer the 2% shareholding back to the local partner’s proprietors or onwards to a nominated replacement company again for nominal value. The local partner will establish a ringfenced bank account for each participant’s trading operations with agreed authorised signatories.

During the early part of Phase 1, a new DMCC free zone company, 100% owned in common by the participants will be formed as an in-country management services vehicle for the consortium. The DMCC company will provide banking, accounting and associated administration services to support the general manager and the participating companies.

Subject to Phase 1 being completed with the achievement of the targeted initial sales revenues for the participants, the objective would be to move to a Phase 2 process whereby a jointly owned registered and licensed in-country legal entity would be formed to provide a solid platform for the participants to complete the development of their business to a US$5 million plus annual sustainable level. This JV entity would then be used to hold all new contracts going forwards. However, prior to the end of the initial 24 months each participant will be given the option to proceed with Phase 2 or to (1) withdraw from the BCV or (2) launch its own individual venture (including an equity joint venture with the local partner by mutual agreement) or (3) collectively continue in the BCV for the third and final year of the term (subject to sufficient numbers of participants wishing to continue).

Using the local partner’s registration, licence, authorized vendor status, in-country value certificate, visa sponsorship capabilities and facilities the participating companies’ products and services will be marketed to the ADNOC Group and any other relevant target clients and all supplementary approvals and testing trials will be undertaken and completed.

The BCV general manager will have the full-time responsibility to collaborate with the local partner and the business development/management team of the participating companies to secure minimum initial gross revenues of US$1.5m to US$2.0m revenues within 12 to 24 months of the operational commencement date. The general manager will hold a UAE visa and Abu Dhabi gate passes via the relevant local partner.

All awards of client contracts will be held by the local partner’s entity as primary contractor and will be subcontracted to the relevant participant company’s operating entity for performance of the scope of work. The local partner will provide suitable office and administration support facilities and employment/visas capabilities to facilitate the performance of the scope of work in territory. The relevant participating company will be obligated to ensure that all bonds, guarantees, indemnities and insurances are in place to protect the interests of the local partner as primary contract holder. In the event of option (2) all reasonable endeavours will be made to obtain all necessary approvals for the novation of all relevant current client contracts to the relevant new entity.

In the event of the decision being taken to proceed with Phase 2, the third period of 12 months will be utilized to complete the registration and licensing process of the new joint venture entity and for vendor approvals to be put into place and for contracts to be novated. It would be anticipated that the local partner would remain involved as the local shareholder of the minimum national shareholding requirement, either on a nominee basis or by mutual agreement as an equity investment partner in the venture.

In the event of Phase 2 not proceeding the BCV will be wound up during the third 12 months period and individual arrangements will be determined for each participant wishing to continue its business development in the territory.

In the event of Phase 2 proceeding the expectation is that the “shelf life” of the JV entity would be 3 years, allowing sufficient time for participants to build up revenues, profits and cashflows sufficient to allow them to break out into their own individual business structure for the territory.