Private equity buys not leveraged in Middle East

(SAEED DAHLAH)   

The private equity (PE) sector in the Middle East will remain largely unaffected by the sub-prime crisis, as, unlike Western economies, PE acquisitions in the region are not leveraged, industry experts have said.

This statement comes in the wake of increasing attacks on the PE industry and a recent Standard & Poor’s report. The report states most firms near default have private equity ties and there are concerns on a global level that a lot of it is over-leveraged into asset classes, which may default owing to the sub-prime crisis.

Experts in the Middle East, however, believe this may not be applicable to the region. Imad Ghandour, Chairman of the Information & Statistics Committee in GVCA (Gulf Venture Capital Association) and Executive Director in Gulf Capital, told Emirates Business: “This is not an issue in the Middle East. In this region, most acquisitions are not leveraged. These may be the concerns on a global level, but they are not applicable here.

“A lot of money is being committed to private equity funds in the Middle East and this has increased by 122 per cent in 2007. Several funds are selling investments successfully and the private equity industry is bolstering its reputation of being one of the best asset classes.” 

Analysts, however, agree that there may be some effect of the sub-prime mess, but hope the impact of the storm is minimal. Ghandour said though economic fundamentals remain strong in the Middle East, all financial players will feel the heat of the global meltdown. “Hopefully, our region will be the least affected,” he said.

Ghandour also called for a secondary market for PE to be developed. “The secondary market is very small. The whole asset class is only three years old, and hence is not deep enough for secondaries as yet,” he said.

Ashish Dave, Head of Private Equity, Middle East and South Asia in KPMG, believes the private equity industry is going strong in the region backed by robust fundamentals. “We can demonstrate to a global audience that there is real substance, structure and professionalism behind the stories of liquidity and petrodollars looking for a home and this can only benefit the region’s private equity houses and their investors,” he said.

According to a recent report, new amounts committed to private equity funds in the Middle East have more than doubled in 2007, from $2.7 billion (Dh9.9bn) in 2006 to $6bn in 2007, which is a 122 per cent increase.

This brings the total money under the management of private equity houses to around $13.3bn in more than 76 funds. In 2006, the total investments were $1.8bn in more than 50 investments, and in 2007 this number increased to $3.5bn in more than 62 investments. 

The first billion-dollar investment was completed in 2007, when Abraaj Capital took over Egypt Fertilizers Company for $1.4bn. Abraaj Infrastructure & Growth Capital Fund was the first fund exceeding one billion, which paved the way for the entrance of mega funds into the region. 

There were a number of exits recorded in 2007 as well, according to the Standard and Poor’s report. Private equity houses sold 19 of their investments for a total amount of $1.6bn, compared to 17 sales worth only $0.2bn in 2006. In terms of geographic distribution, Egypt was the leading recipient of private equity investments over the past decade with a market share of 37 per cent, mainly as a result of a few large investments in 2006 and 2007.

The UAE has consistently been a favourite destination for a number of investments, and came second with 19 per cent of total investments. The region’s economic heavyweight, Saudi Arabia’s market share has risen quickly to 15 per cent.

Jordan, as a result of its open economy, stood fourth with six per cent market share, ahead of several larger Arab economies.

The report also surveyed companies backed by private equity funds that witnessed outstanding growth. These companies increased their sales by more than 92 per cent, their exports by more than 95 per cent and their profits, too, by more than 92 per cent. Moreover, private equity companies have increased investment by 86 per cent, headcount by 43 per cent and R&D spending by 32 per cent, highlighting the role of private equity in sustainable development.

S&P RATINGS ARE STILL RELIABLE

A triple A credit rating from Standard & Poor’s means the rated security or debt issuer has an extremely strong capacity to meet its financial commitments. It is S&P’s highest rating and therefore should have the lowest probability of default.

This remains the case even in today’s volatile credit markets. Although the market valuation of many triple A structured securities has fallen heavily – reflecting in large part their very limited market liquidity – very few have defaulted. According to the most recent structured finance rating transition study of the 26,000 triple A ratings issued by S&P on structured securities between 1978 and end 2007, less than 0.1 per cent have defaulted. That is broadly comparable with the historic default rate for triple A corporate bonds.

Triple A ratings can and do change, both in the corporate and structured bond markets, and they can and do default.

However, it remains the case that they default more rarely than securities that were originally rated lower.

According to Vickie Tillman, Executive Vice-President, Ratings Services, Standard & Poor’s, New York: “Standard & Poor’s is committed to continuing to enhance its analytics and the information we provide the market, and we continue to take steps to build greater confidence in our ratings and support the efficient operation of the global credit markets.”

(Source: Standard & Poor’s)