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21 May 2024

Private equity heading for slump



Evolvence Capital, with $1.5 billion (Dh5.5bn) under management, predicts a bit of a shakedown in the private equity industry in about four to five years time. Fortunately, until then, the going is good, according to the company’s CEO Khaled Al Muhairy.


In an exclusive interview with Emirates Business, Al Muhairy outlines plans to launch a $1bn real estate product, and other innovative offerings in the private equity and hedge funds sectors.


What does Evolvence do and what are its plans for the future?


We operate in two markets – India and the Gulf Co-operation Council. We cover the three alternative assets – private equity, hedge funds and real estate. In India we have a tremendous position in terms of where we are in private equity and also hedge funds and we are very happy with our India exposure. We have developed a brand name in private equity and going forward we will just continue doing that.


In the GCC we have launched a hedge fund and will soon launch a real estate product and later a private equity product.


Is the real estate venture an investment vehicle or a development project?


It is an investment vehicle and we will announce its details in three to four weeks. It takes advantage of the differential between yield and the cost of borrowing that has fallen dramatically.


Was it a quick response to the rate cut?


It was done long time ago, before the rate was 3.75 per cent. It looked very attractive then, but it [interest rate] has come down to three per cent. If the yield is at 10 per cent and you borrow at three per cent, your differential is seven per cent.


Any idea about the size?


I think $1bn. It will be Emirates-focused. We were the first to launch a private equity fund in India. We were the first to launch a hedge fund of funds in India, and the first to launch a hedge fund in the region. We were the first to bring a brand school [Repton] in the education platform. In this institution, we always expect to be a pioneer in the development of products. I think there is enough innovation in this organisation to come up with products that are unique in this region and that fit in well in the global context.


Is listing of the real estate product on the DIFX a possibility?


It could be.


What are the prospects of the DIFX?


I am very positive on it. I think expectations are much higher than reality. Exchanges take many years to develop, but people expect it to be a success overnight. This cannot happen.


How large is the hedge fund industry in the Gulf?


We are the only one. Our fund is doing good. We’re planning to raise $250-300m more and take this product, developed by ourselves, international – maybe in the summer.


What is the size of private equity in the region?


There are two numbers – one that managers wake up in the morning and dream to target on the funds side and the other is what reality brings to the table. I would say $4-5bn.

That is small compared to what the industry projects.


That is because people announce $1bn and then raise $100m. Some media take it as $1bn and when they add up the numbers it is $14-15bn, when actually it is $4-5bn.


What is the average size of a private equity deal here in the GCC or the UAE?


The average equity cheque is about $20m. The average transaction size is about $50-60m. If the enterprise value is $100m and the promoter would like to sell 30 per cent, that’s $30m. Then your equity cheque is $30m and the enterprise value is $100m.


Has the average size of the deals gone up, down or remained the same?


It has gone up around 50 per cent over the past five years. It is an indicator of activity.


How is the industry faring?


It’s a fashion here to have private equity funds. I remember in New York in 2000-2001 everybody wanted to become a hedge fund manager.


I have been in this industry for 14 years and there is only myself and one other colleague in Abu Dhabi who have the long-term experience in this asset class. With respect to others, I don’t think they have seen the ugly down cycle we have seen in different markets around the world.


Is the down cycle expected here?


No, not here. I think probably in five to six years you will see a little bit of saturation and a downside. But not right now. 


There are many others in this industry and there is a lot of capital floating around… how does it affect business, the industry?


I will give you an example. When I go to India, I have one rule – that I invest with Indians who have lived and stayed in India. That means I’m not going to go and look for Non-Resident Indians (NRIs) living in New York for 15 years who suddenly feel India is hot and come back.


I want to invest with real Indians who live on the ground and who know exactly what is happening and don’t read it on websites, but are part of it.


It’s the same thing here. I think if you look at private equity managers and if you send them a letter asking who has been in this region for more than five years, you will eliminate probably 70 per cent. Then when you ask who speaks Arabic, you will eliminate another 15-20 per cent of them.


But the private equity managers seem to be doing well, why?


There is an old saying in New York that when the wind blows even turkeys fly.

Sovereign funds and private equity – they are having mixed reactions. How does this industry get regulated?


What is the difference between a sovereign fund and a pension fund? Both do not disclose. There are only 10 in the United States that disclose. One of the largest pension funds in the US – for teachers – does not disclose. Either everybody has to disclose or nobody can disclose. There has to be the same rule for everyone. I find it very strange that people would speak about some and not about others. Nobody speaks about Norway, which has one of the largest sovereign funds.


There is no reliable data in this region. How do you deal with marketing and know what your competitors are doing?


In a market such as India, we are the number one globally with a number of funds invested in India. There we have 10 funds.


Here it is a different ball game. There is no actual market research. You have a lot of mediocre players coming here and, honestly, they are not serious. I think you have to have a little bit of a shake-up in the market. But unfortunately, these are good times, so all is well. The only difficulty is fundraising, because clients are over-marketed.


Why did you go to India?


We were there three years ago. I think we timed India perfectly in terms of what we wanted to do. India is the platform for us. We believe in the story. I think there is not that much of a change in culture. In two-and-half-hours, I’m in my office.


How do you satisfy the criteria for your investors, especially Islamic, if information is restricted?


It’s in the structure. The company has to be Islamic-compliant. It is easy in growth capital as long as you don’t touch banks and insurance companies. For retail, education, construction and hospitality, it’s in the structure.


What’s the pattern of your shareholding?


Government institutions, sheikhs, royal families and very prominent businessmen from the region. We are one of the first institutions to raise money from the US and that has been our achievement. If there is discipline in the documentation and the way things are done, we have demonstrated we can attract investors, achieve targets and meet international standards.


How much is the American equity?


They are just investors in our products.


Are you planning to diversify to other markets?




Which sectors do you think are important to focus on at this point in time?


Of course, education, financial services, building materials. Healthcare is taken care of by the government. With the surplus they have, they will invest very heavily in healthcare, education and infrastructure. It’s very hard to compete where the government is pushing really very hard.


Your target is $5bn of assets under management. When will that be achieved?


We take into consideration that there will be hiccups along the way. I think patience delivers returns. Consistency and focus have delivered in the past and will deliver in the future. Commitment, ethical behaviour and a code of ethics are serious for the investors. Private equity is like Jurassic Park.


Sub-prime. Has it affected you?


Everybody gets affected indirectly. This is a global credit crunch. You cannot just choose by yourself to be immune from it. The US has always had a herd mentality – either extreme to the left or extreme to the right. Now it is extreme to the right again in terms of closing down all credit.


The problem is when you have gross domestic product in the UAE growing at 14 to 15 per cent, and you lower the interest rate, you’re just going to see the market shoot up and that would offset any impact from the US. Sub-prime is a flight from London to Dubai with 10-minutes of turbulence.



Khaled Al Muhairy

Founder and CEO of Evolvence Capital


Evolvence Capital is a Dubai headquartered alternative investment company with assets of more than $1.5bn under management.


Khaled Al Muhairy is the chairman of the $250m Evolvence India Fund, Evolvence India Holdings, Repton Dubai, Evolvence India Life Sciences Fund, a $150m fund focusing on pharmaceutical and biotechnology firms in India; and Evolvence Education Holding, the $150m fund formed to promote education in the GCC.


Al Muhairy also serves on the board of Ithmar Capital, Arady Real Estate, Amzaan, and Madison Harbour Capital.


Prior to founding Evolvence Capital in 2000, Al Muhairy headed the North America department of the Abu Dhabi Investment Authority (Adia) where he specialised in technology and telecommunication equity investments.


Al Muhairy holds a BSc in Finance from Saint Louis University, Missouri, US.