Fancy investing in Iraqi tourism? It doesn't sound like an immediate growth area.

But this week two new investment funds which pinpoint hotels in Baghdad as a golden opportunity are being launched in London

On the plus side for international investors, Iraq is a country under reconstruction, with huge oil reserves and an educated middle class.

But as far as the rest of the world is concerned Iraq has a mountain to climb, as far as its business reputation is concerned.

Fow example, while the UK has a top AAA credit rating, the internationally-recognised projection of a country's credit risk, Iraq has no credit rating at all.

This makes it difficult to attract investment as many see the risks as simply too high.

But to a small section of the financial community, elevated risk signals opportunity.

MerchantBridge, a boutique investment house, has written to City institutions in the hope of raising millions of pounds for a fund that will be listed on the Iraq Stock Exchange.

Eric Le Blan, of MerchantBridge, calls these "sophisticated" investors - hedge funds and asset management houses which are willing to invest a minimum of $250,000 (£174,000) in Iraq's fledgling stock market.

The stock market opened with much heralding in 2004, the year after the US-led invasion. But trading volumes have remained low, something Mr Le Blan acknowledges.

But he says it is "really gathering momentum".

"We are saying to people, 'be cautious' - but there is huge potential in this emerging market.

"Things are improving at a very fast speed. The situation is still complex: there is a lack of transparency, a lack of liquidity. But you don't want to miss the boat."

The company points to regular flights now being made into Iraq, oil firms competing for contracts and improved security.

It is aiming to raise $50 million (£35 million) to deal in shares in Baghdad's banks and hospitality industry. It also has a contract to build a cement factory it is trying to raise investment for.

So will investors bite?

John Bowler, director of country risk at Economist Intelligence Unit (EIU) - a branch of The Economist - thinks they will.

"The last 10 years have been a golden period for emerging markets, like India and China.

"But these countries are no longer cheap. So that means people will look for riskier investments - frontier markets. As far as frontiers go, Iraq is the Wild West.

"If you can get in early, that's where the real money is to be made."

The Economist Intelligence Unit does its own credit ratings and does include Iraq. It gives it CC - the second worst rating, but better than Sudan and Zimbabwe.

For potential investors the rewards are potentially huge - Iraq sits on two thirds of the biggest oil reserves in the world.

And unlike other war-torn states, there is huge international political will for the country to achieve peace.

Some British firms have already recognised the potential for doing business in Iraq.

Last April, then Business Secretary Lord Mandelson led the first British business delegation to Iraq in over 20 years, shortly after armed forces officially started withdrawing from the country.

Representatives from BP, Shell, HSBC, Glaxosmithkline, Rolls Royce and oil services firm the Wood Group joined the one-day trip to Baghdad and Basra.

The UK's coalition government has yet to make any statement on conducting business in Iraq, with ministers awaiting the make-up of the next government in Baghdad.

However, a UK Trade and Industry spokesman said: "The government is committed to developing its broad bilateral relationship with Iraq."

Those who live and do business in Iraq are well aware of the huge profits on offer for those who invest in the formerly war-torn country.

But they are also realistic about the extent of the reforms - both legal and political - which are needed to make the country a viable business proposition.

Luay Al-Khatteeb, Executive Director of the Iraq Energy Institute, estimates up to $450bn-worth of contracts could be on offer - much of it to foreign-owned firms.

The projects include roads, pipelines, hospitals and other infrastructure which could help boost Iraq oil production to a targeted 10-12 billion barrels a day.

Mr Al-Khatteeb plays down Iraq's security problems, indicating the decline in the number of bombings and other violent incidents over recent years.

But he is adamant that the country needs to face up to the "critical issues" of bureaucracy and corruption that deter potential investors.

He points to surveys, like the one carried out by the campaigning group Transparency International, which ranks Iraq just above Sudan, Burma, Afghanistan and Somalia in a world-wide comparison of the perceived level of public-sector corruption

"At the moment if I had a company in Iraq and I wanted to enter into a partnership with an international oil firm, I would have to get the approval of someone in the Ministry of Oil," he says.

"Otherwise some bureaucrat might signal to the authorities that I was not trustworthy and not to be dealt with.

'Bet the ranch'

"When it comes to investment you need an attractive environment if you want investors to sign up from the short to mid-term.

"That means bringing in market-orientated laws compatible with Iraq's new constitution, delegating more power to regional councils to engage with the private sector, and giving local firms more freedom to work with foreign investors."

Back in London, MerchantBridge is hoping those who do get in at the ground floor will be able to take advantage of privatisations of national companies when, and if, they happen.

But for all the promise of "substantial returns", the risk remains high.

John Bowler warns against "betting the ranch" in these unrated countries.

"If you'd asked anyone 10 years ago if Mugabe would still be in power in Zimbabwe, who would have bet on that?"

Pushing the investment frontier in Iraq -  Source