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02 October 2023

Private equities eye Mideast in LBO lull

By Agencies

MIDEAST INVESTMENT Private equity firms such as Citigroup have had their eyes set on the Middle East for investors. (GETTY)

In recent years, leveraged buyout (LBO) executives scoured the Middle East mainly in search of investors. The hope was to find an oil-rich institution willing to commit capital to a buyout firm's next fund.

Now, private equity executives are headed to the region seeking a lot more: deal partners, shareholders, exit opportunities, lenders. The promise of a lucrative deal, plus red sand camel rides, Lebanese belly dancing and cigar sessions awaits a few LBO chiefs this week in Dubai.

The booming growth of sovereign wealth funds and their search for investments abroad has had a huge impact not just on private equity firms but on the investment banks and the entire mergers and acquisitions industry.

With the funds flush with cash, Western private equity chiefs are courting their business, as a credit crunch across the United States and Europe has dramatically cut off lending and deal-making within their borders.

Private equity executives have been particularly focused on sealing relationships in the Middle East, where the soaring price of oil has left countries loaded with cash to spend.

"The Middle Eastern funds have huge, available free cash flow right now," said Brad Setser, a fellow at the council on Foreign Relations, who focuses on the global flow of funds and sovereign wealth funds.

The global explosion in central bank reserves has led to the growth of state-owned investment vehicles with assets estimated at more than $2 trillion.

The vehicles, so-called sovereign wealth funds, are seeking higher investment returns by taking stakes in companies and investment firms abroad.

The budding, cross-border relationship will be on full display next week in Dubai, where the Super Return Middle East conference will feature some of the biggest names in US private equity. It is the first time the conference, which has been held annually in Frankfurt and Hong Kong, is taking place in Dubai.

Super Return is sponsored by The International Centre For Business Information, a London-based conference group and subsidiary of Informa Plc.

David Rubenstein of The Carlyle Group, David Bonderman of TPG Capital, Jonathan Nelson of Providence Equity Partners and Tim Collins of Ripplewood Holdings and other members of large Western buyout firms will be among the featured speakers.

The speakers will retire to the Bab Al Shams resort in the desert and be treated to camel rides on the red sand dunes, local food and Lebanese belly dancing, according to BusinessWeek, which adds that roof-top cigar smoking is popular among the Dubai's deal-making crowd.


Acquisitions by sovereign funds total $33.3 billion through 43 deals so far this year, up 32 per cent from the year-ago period, according to Dealogic, which records zero deals done by the funds in 2002 and only a few the following year.

Among the big deals this year were Abu Dhabi's $7.5 billion purchase of a stake in US bank Citigroup and its $1.35 billion stake in Carlyle Group; China's $3 billion stake in buyout giant Blackstone Group LP and Temasek Holding's $2 billion piece of UK bank Barclays. Dubai bought a $1.26 billion stake in US hedge fund Och Ziff before it went public last month.

For a US or European private equity firm, the attraction of a sovereign wealth fund is not just as a wealthy investor in the firm. A sovereign fund could become a strategic partner on a deal, provide loans for leveraged buyouts or buy majority or minor stakes in portfolio companies private equity firms are trying to sell -- all major advantages given the tightening grip of the credit crunch on companies at home.

Chiefs of investment banks such as Morgan Stanley and Goldman Sachs are also courting business in the region.

And while sovereign funds and their massive check books offer greater opportunities for buyout firms and Wall Street, the funds also pose a competitive risk.

For the banks, the risk is if sovereign funds become lenders and cut Wall Street out of the lending business. For the buyout firms, the risk is in the funds becoming buyout shops themselves.

"To me, the more interesting question is to what extent are some Middle Eastern funds not just going to invest in private equity firms, but are they going to become private equity firms? Do their own leverage, do their own deals," asked Setser, of the Council on Foreign Relations. (REUTERS)