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The regional private equity (PE) industry has long been seen as potentially one of the key drivers in transforming corporations in the Middle East.
It's a promise that critics say has taken some time to fulfill and is still far from being realised. But the regional PE industry is slowly making its mark on the regional fin-ancial market landscape, and has already helped no less than 14 companies go public to date, according to Zawya research. These exclude PE investments just before a company is about to launch an IPO.
There are plenty of other candidates around in the region ripe for the PE treatment, with low-hanging fruits especially in regional infrastructure sector and family-owned businesses.
According to Abraaj Capital, the region's largest private equity player, investments needed in the Middle East's infrastructure projects are valued at $676 billion over the next 10 years. These include investments in power ($200 billion), transportation ($188 billion), water ($134 billion) and petrochemicals ($87 billion).
Meanwhile, Ithmaar Capital, another regional PE player, estimates that more than 90 per cent of all commercial activity and non-oil-related GDP in the region is controlled by family firms. These firms number over 5,000, hold assets of more than $500 billion, and employ 70 per cent of the workforce.
With these two areas alone throwing up opportunities worth $1.1 trillion, the 70 or so regional PE players are spoilt for choice. As their numbers grow and as international players such as Carlyle Group enter the fray, the industry is set to go into acceleration mode.
Report
It may have already begun. A recent Gulf Venture Capital Association (GVCA) report notes that PE firms raised $6 billion in 2007, compared to nearly $2.6 billion in 2006. Of the 22 funds raising capital in 2007, 14 were announced in 2006 and six in 2007 (two in 2005).
Infrastructure funds accounted for 38 per cent of total funds raised in 2007 primarily as a result of the $2 billion Abraaj Infrastructure and Growth Capital Fund. "With the rising need for infrastructure funding, particularly for power and water sectors, local governments will be looking for external capital, providing opportunities for PE funds," says the GVCA report.
These may appear to be robust figures, but there is still a long way to go. According to Abraaj, regional PE funds under management as a percentage of GDP stood at 1.45 per cent ($15. billion), compared to the US's figure of six per cent.
This might seem like an unfair comparison given that the US boasts of the most advanced financial markets. But the heady cocktail of petrodollars waiting to be deployed and a wave of privatisation in the MENA region suggest that the industry can step on the accelerator and quickly reach new levels of sophistication and development.
Also notable are exits - the PE players' prime way to reward their shareholders - which are also on the rise. Nineteen exits were recorded in 2007, compared to 17 in 2006, and a huge leap from the six in 2005.
Going forward, the GVCA recommends that the PE industry must seek multiple exit options and not rely on IPO-only strategy. "The strong IPO market, weak private sector, and constraints on foreign direct investment have increased the importance of IPOs as an exit opportunity. However, it is expected that IPOs will have a smaller share of exits in the future. Alleviating foreign investment restrictions in several GCC countries will also increase the number of sales to international trade buyers. Finally, sale to financial buyers will be more common in the future as is the case in more developed economies."
Family affair
Till very recently, regional family firms were not converts to the idea of public or private sale of their assets. Their ability to find simpler ways of raising funds, paradoxically due to high liquidity and profitability, did not oblige them to seek a public or private offering. But the tide is slowly turning. The imminent arrival of Mohammad Al Mojil Group, Depa and Future Pipes on to the region's trading boards shows that there is an avalanche of family businesses looking for external funding.
So what's holding PE firms to take advantage of these developments - and energise companies and markets in the process?
There are a few issues holding PE back in the region. First, is the reluctance of target companies to be taken over by PE firms, as there is still an embarrassing lack of awareness about the nature and scope of PE investments.
Another key issue is developing more complex and innovative financial deals. "Debt providers in the region are increasing in sophistication and awareness, and hence, will allow PE players to structure more sophisticated and better leveraged deals," says GVCA, adding that two PE players raised mezzanine funds for the region last year. "This will furnish PE players with the tools to structure more sophisticated deals."
Skills shortage in this very complex field is not helping the industry either. Indeed, "the legal, operational, and financial nuances of the region make importing talent from developing economies less effective than anticipated," says GVCA.
Lastly, regional PE players have to bring in more corporate transparency in their own operations to allay the secrecy fears that have plagued the global PE industry.
- The writer is managing editor of Zawya .com.
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