Private equity appetite to increase in Mena

The private equity fundraising environment in the Mena region remains tough, but sentiment appears to be moving in a positive direction, according to the findings of the fourth Mena Private Equity Confidence Survey 2010 by Deloitte.

There is a widely held view that global limited partners (LPs) appetite for the Mena will increase over the period, fuelled by market recovery and, in particular, interest in new and specialist sectors, the survey based upon 34 private equity respondents in the Mena region said.

The percentage of respondents who believe fundraising is going to be more difficult has sharply declined from last year. While in 2009 it was 71 per cent, this year only 25 per cent of respondents believe fundraising is going to be more difficult, according to the survey.

The generalist private equity fund that cannot offer much differentiation will find the fundraising market very difficult, but specialist funds with an identified pipeline and local presence will face less challenging conditions, it said.

While there is now perceived to be less uncertainty in the global economy and more encouraging signs within Mena itself, private equity executives in the region view the next 12 months with an element of caution, it added.

The results of the survey demonstrate some signs of a positive shift in sentiment amongst general partners (GPs) compared with the 2009 study, but at the same time reflect an air of hesitancy in the market.

Buyers are seen to be in a better position now and most GPs expect investment activity to rise, with valuations beginning to stabilise, albeit at stubbornly high levels in the eyes of many, the survey said.

However, many GPs cite a shortage of quality opportunities as a concern, the survey finds. These factors are contributing to an increase in competition levels but whereas reputation and brand remain key defining attributes when it comes to winning deals, as does a demonstrable ability to add value to portfolio firms the importance of trust and ‘personal chemistry’ also appears to be rising, the survey said.

The more defensive sectors, such as healthcare and education, will continue to be popular in Mena over the coming year, whilst oil and gas, unsurprisingly, is also expected to remain vibrant, along with the consumer sector and infrastructure, according to the findings of the survey.

And 17 per cent of respondent expect pharma/ biotech/ healthcare sector to see most deal activity over the next 12 months, followed by power/oil and gas/mining sector (13 per cent); infrastructure and education (12 per cent); consumer/retail (10 per cent); and real estate/construction (10 per cent), among others.

Additionally, the survey said, in terms of geography, the lion’s share of deal activity will remain in the three key hubs: Saudi Arabia, Egypt and the UAE, but there is greater recognition now of the role more ‘frontier’ markets could well play in future, with Iraq, for example, noted for its untapped potential, despite the evident risks.

As private equity’s recovery starts to build, most Mena GPs view the role of government in this process as supportive. However, there is still some way to go in easing legislation, such as that relating to foreign ownership laws, and overall market regulation, the survey said.

Another clear barrier to growth is the cultural mindset of family owners, and the low level of acceptance of private equity as an asset class. However, there is recognition that this is improving as the industry develops and matures.

Overall, the region’s GPs remain optimistic about the prospects for Mena private equity, with strong domestic economies and favourable demographics cited as just two of the many strengths Mena has to offer.

And 76 per cent of respondents expect trade sales to be the most common exit route for private equity deals over the next 12 months, while 41 per cent expect IPOs, and 18 per cent expect secondary buyouts to be the most common exit routes.

Lack of acceptance of private equity (16 per cent), market regulation (15 per cent) and oversupply of capital/competition (11 per cent) are some of the biggest challenges and barriers to growth for the Mena private equity industry to overcome, the survey finds.

And lastly, favourable demographics (20 per cent), domestic economy (16 per cent), market growth (eight per cent) and lots of liquidity due to oil wealth (seven per cent), are the top four strengths of Mena relevant to the long-term growth of the private equity market, the survey finds.

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