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The usually quiet and resilient private equity players in the Middle East and North Africa (Mena) region appear to be a bit disturbed about the overall market conditions that is affecting their exit plans and expected returns.
On the sidelines of a recent industry gathering in Dubai many were heard cribbing about the high volatility and relatively poor performance of the regional stock markets which have compelled many regional firms to put off their plans to float their shares, effectively blocking private equity's exit plans.
Private equity players who took exposure in some of the regional firms hoping to exit at several multiples of their original valuations are also finding it difficult to realise their dream valuations due to the adverse market conditions.
Worse, the exit itself is being delayed either because the valuations are not attractive or market conditions are not conducive to bring these (privately held stocks) into public domain through IPOs. Some of the major players privately admit that exit is indeed a cause of big concern. Industry statistics show that, of the estimated $13 billion private equity deals in the region in the past decade, only between five per cent and 10 per cent had been exited - with the main options being trade sales (negotiated deals).
With relatively low merger and acquisitions in the region trade sales are also few and far between. While exit remains a concern, the rising inflation in the region and some of the key emerging markets where the regional private equity firms have deployed their money is emerging a bigger worry. While most Middle East countries have near double-digit inflation, some of the Gulf countries such as Qatar and the UAE have inflation over 11 per cent. India, where many of the regional private equity firms have exposure, the inflation is raging above 11 per cent. While inflation itself could wipe out a significant portion of real portfolio gains, active inflation targeting by central banks could dampen the markets, making exit difficult.
Despite some of these glitches, the availability and cost funds are two major comforting factors for the regional private equity industry.
In the Mena region the private equity business has relatively low dependence on leverage. The active deployment of funds by institutions, high networth individuals and sovereign wealth funds combined with prolonged low interest rate environment makes both cost and availability of funds attractive. The latest industry figures show that the average private equity fund size had increased to around $300 to $500 million from $20 to $30 million a few years ago.
Although liquidity is indeed a big cushion and the worries are temporary, some may be pressured to unload some of their holdings at prices that are much lower than what they anticipated. Firms that are raising new funds, for example, may need to prove to potential investors that they're able to generate returns in the current market. But obviously the market conditions haven't deteriorated to that level that could result in private equity sellouts at fire-sale prices.
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