Corporates may look to PE for capital: experts

Subdued equity markets and a conservative lending approach on the part of the banks bodes well for the region's private equity (PE) players, which are sitting atop more than $11 billion (Dh40.39bn) in dry powder, or investable money. With growth returning to the region albeit in baby steps, a good proportion of local and regional corporates in need of expansion will seriously evaluate private equity as a source of capital, experts say. "PE will be one of the few sources of capital in 2010. Other sources of capital have shrunk considerably in value and interest," Imad Ghandour, Chairman of Gulf Venture Capital Association (GVCA), told Emirates Business . "Many companies will see solid prospects for growth in 2010 and will need capital to take advantage of such prospects," he said. According to Ghandour, in the absence of conventional capital-raising avenues, such companies will look at the PE option. "Banks will be as (or even more) conservative. Public markets are not as open as [they were] in 2008," he said. According to Global Investment House (Global), the PE industry in the Mena region is flush with huge amounts of dry powder. "The growth in fundraising activities that the region has witnessed from 2005 until 2008 resulted in $20bn raised to date, out of which approximately $11bn is still not invested, representing about 52 per cent of dry powder in the region," a recent Global report said. The GVCA expert agreed with the amount of investable money but highlights that some funds may be facing issues with receiving committed capital. "Dry powder was estimated by GVCA to be $11bn, but in reality, some funds are facing problems in executing capital calls. Despite the difficulty some funds are facing, there remains enough PE capital to fund existing deal flow," he said. Following a difficult 2009, however, this year isn't expected to be very smooth for the industry either. "The number of players is starting to shrink as previously predicted and there are already rumours of some players facing difficulty. [However], PE houses with established track record will probably survive the downturn and will be able to raise money," said Ghandour. This year, it will be the defensive sector that will see a flow of investments. According to Global, the sharp reversal of economic fortunes has driven most PE houses to redesign their investment strategy. The bulk of PE houses are focusing on a selected number of non-cyclical sectors to invest in, with the consensus being to invest in defensive sectors such as education, healthcare, fast moving consumer goods, and related industries that will survive the downturn, it said. Sectors that will exhibit sustainable growth in these difficult times will attract PE investment, said Ghandour. "In addition to healthcare and education, logistics, transportation, retail and consumer related, oil and gas, utilities may be some of the sectors that will witness investments in 2010. These sectors have a positive outlook either because governments will be spending on these projects or because consumption will continue at an escalating pace," he said. Talking of sector focus, Global is particularly upbeat about investments in infrastructure. "In 2009, infrastructure funds are regaining its popularity due to the anticipated demand for infrastructure ﬁnancing in the Mena region. Many governments in the region have set aside surpluses from oil revenue for infrastructure development but they are also increasingly turning to high net worth individuals for the capital to help meet the demand driven by fast growing and young population," the company said in its recent report. According to EMPEA, approximately $400bn of infrastructure development is planned for the Mena region over the next decade. ADIC-UBS Infrastructure Investment Fund I is targeting to invest in infrastructure projects, transport networks, power, water, health, and education facilities in the Mena region and Turkey over the next three years. On geographical focus, experts opine that Egypt and Saudi seem the two destinations for private equity this year. "I expect that Egypt and Saudi will be the most attractive countries to invest in 2010. The UAE, which has been a primary destination for the past several years, may be less attractive in 2010 because of the lower economic prospects than the above mentioned countries," said Ghandour. Researchers at Global believe that regional funds are still mainly concentrating on the GCC markets especially Saudi as there are a lot of untapped opportunities. "These funds are also trying to diversify their investments broadening their mandates to include other regions like Egypt, Turkey and South Asia," it added. Keep up with the latest business news from the region with the Emirates Business 24|7 daily newsletter. To subscribe to the newsletter, please click here .