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Dubai: Leaders of the Middle East's private equity industry gathered in Dubai at an industry forum said yesterday that they were worried about rising regional inflation and relatively uncertain exit options.
"Of the estimated $13 billion private equity deals in the region in the past decade, only between 5 per cent and 10 per cent had been exited - with the main options being trade sales," said G. Bala Subramanyan, chief investment officer of M'Sharie, the corporate venture capital arm of Dubai Investments, at a forum in Dubai.
Responding to an instant poll during the event, 74 per cent of the industry professionals said inflation is emerging as a big worry for the private equity industry as the real rate of growth in their investments will be adversely affected if inflation surged unabatedly.
While most Middle East countries have near double-digit inflation, some of the Gulf countries such as Qatar and the UAE have inflation over 10 per cent. The UAE recently confirmed that its average inflation rate last year was 11.1 per cent.
Although rising inflation is a worry, some said the negative interest rate environment in the GCC countries is good for the industry.
"Negative interest rates make cost of borrowing attractive for the private equity players, but rising inflation would mean a threat to long term real growth and appreciation of investments," said Abrar Mir, chief executive officer of NBD Sana Capital.
Private equity encompasses investing in companies whose shares are not traded on stock exchanges and runs from small venture capital investments in start-up companies to multi-billion dollar buyouts of well-known public companies. Private equity had been responsible for 45 per cent of all investment in the UAE in the past decade and 35 per cent in Saudi Arabia. In addition, the average private equity fund size had increased to around $300 to $500 million with average deal sizes increasing to an average of $25 million.
"Private equity has seen phenomenal growth in the region, particularly in the past two years. However, there are uncertainties about exit options as regional stock valuations have come down substantially during the past few years," said Subramanyan.
Role: Helping to diversify
Private equity is playing an increasingly important role in reshaping and diversifying the economies of the Middle East but several potential global storms such as record oil and food prices, inflation, financial systems in peril and a global slowdown are likely to impact the industry, according to Ali Erfan, senior adviser to Ithmar Capital.
"Unequivocally, there is a global slowdown which will affect regions to lesser and greater degrees. Inflation and rising cost of living is another factor. It is no longer true to say that the GCC is a low-cost economy - it is quite an expensive economy," he said.
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