The Middle East is being viewed globally as a centre where doing business guarantees good results (AFP)
The private equity market is growing in popularity in the Middle East as increased liquidity attracts some of the largest private equity firms in the world. At the same time, local companies are spreading their wings to become global players.
However, the exponential growth is leading to a situation where too much money is chasing too few assets, analysts believe.
The increase in the size of funds raised in the Middle East and North Africa (Mena) over the past five years has outpaced that in the United States and the European Union by more than twice. In 2005, $4 billion (Dh14.6bn) was mobilised in the region compared to an estimated $20bn (Dh73.4) this year.
High oil prices and the resulting higher levels of liquidity are being reinvested in the region. The Mena region is increasingly perceived as a centre where business can be done, where good returns can be achieved. This leads to crowding in the segment. But the local players are unfazed and bullish.
“It is true that in some parts of the world, private equity has too much money pursuing too few opportunities. But here in the Gulf, it is the other way around with too little smart private equity money available to cope with all the opportunities available,” said Faisal bin Juma Belhoul, Co-Founder and Managing Partner of Ithmar Capital.
Not everyone subscribes to this view. The Middle East is witnessing huge growth in the asset management business, with the region’s total portfolio projected to increase from the current $70bn (Dh256bn) to $200bn (Dh734) by 2012.
There are 128 private equity funds in the Mena region. There are about 25 firms managing between $200 million (Dh734m) and $600m (Dh2.2bn), and 29 firms with less than $250m (Dh917m). Carlyle has its $1bn (Dh3.67bn) fund focused on the Middle East, Global Investment House manages about $2.7bn (Dh9.9bn) and Abraaj Capital is the big daddy at $4.3bn (Dh15.7bn).
According to the Gulf Venture Capital Association, around $21bn (Dh77bn) was raised by closed and estimated-to-close funds in the Mena region between 1997 and 2006, of which approximately 89 per cent, worth $18.6bn (Dh68.2bn), was raised in the past two years.
Abraaj Capital Executive Director Frederic Sicre said: “We believe that there will remain strong opportunities in the mid-sized company segment for buyout funds. In addition, large privatisation announcements and infrastructure projects will offer private equity players very interesting investment opportunities.”
Amongst the 10 largest transactions in the region, Abraaj accounts for half. “Industry insiders ask whether there is too much liquidity chasing too few deals. Ultimately, the ability to source deals will be a strong differentiator between those firms that will win and those that will lose.”
Transactions worth $2.3bn (Dh8.4bn) have been announced in the Mena region this year. This is already 80 per cent more than in 2006.
Deal sizes have also been on the increase with the largest transaction in the history of the Middle East announced two months ago by Abraaj Capital when it acquired 100 per cent of Egyptian Fertilizer Company.
Even as local players are charting a global route, world majors have set their eyes on the Gulf markets.
The Washington-based Carlyle Group has established offices in Cairo, Dubai and Istanbul. The firm’s increasing expansion in the region is a testament not only to the general need for foreign investors to establish a local presence in the region to capitalise on opportunities, but also to its forecast for growth.
“International players are looking to private equity to provide a sophisticated institutional partner, to orchestrate exit options and provide strong regional connectivity to expand in high growth markets, acquire regional assets or simply relocate to the GCC. All of which augurs well for the region,” Belhoul said.
David Rubenstein, the co-founder and Managing Director of Carlyle, has predicted that the Middle East will be the fourth-largest private equity centre of the world in the next 10 years. The Carlyle Group is marketing a fund that is targeting to raise $700m (Dh2.5bn).
It makes sense for some of the firms who manage sovereign cash to diversify their asset base outside the region. It is part of their mandate in terms of diversifying the economies of oil-producing countries. Abraaj’s Sicre said: “Our mandate on the other hand is to provide our investors with best risk-adjusted returns at IRRs [internal rates of return] that currently place us in the top quartile of private equity companies internationally.
“We are well on the way to our final close [raising $300m (Dh1.1bn)] which will also see large institutional investors from Europe, USA and Asia. So in this respect Abraaj and our funds are becoming global.
“We have attracted global investors into our funds who see us as their preferred vehicle in gaining exposure to the exciting opportunities we see today and those we see for tomorrow.”
Private equity has the potential to support strong growth in the Middle East region, as can be seen by the fact that family businesses in Europe that partnered with private equity firms increased exposure to new markets by 60 per cent and recorded a 50 per cent increase in employment.
Companies or family groups wishing to raise capital through an IPO will often achieve greater results if they partner first with a private equity company.
FAQ: Private equity
What is private equity?
Private equity is medium- to long-term finance provided to private or unlisted firms in return for an equity stake. It is a well-established source of funding that complements bank loans, government-backed loans and investment by individual “business angels”, and provides an alternative to a listing on the stock market.
How can a company get private equity funding?
Most of it is provided through independent firms, which raise funds from investors, select investments, structure deals, and provide support to the businesses in which they invest.
What is in it for the firm?
Companies funded by private equity typically outperform their peers in terms of both growth rate and profitability. Businesses backed by private equity grew sales by an average of 23 per cent per annum in the past five years. That is more than twice the rate for FTSE 100 companies. Entrepreneurs use private equity to fund expansion and grow the value of their businesses.
Founders and owner-managers use private equity to release personal wealth tied up in their business through a partial sale, to exit the business entirely, or to buy out other partners.
How do private equity firms find such companies?
Firms such as Abraaj Capital that have influential partners will be privy to investment opportunities and, more importantly, will be in a stronger position to be granted periods of exclusivity during due diligence phases.
Other firms will find themselves looking at deals that are being shopped around or auctioned off, which usually end up carrying higher valuations.
Thunder of explosive growth