Regional

XXX report: MENA March 2010 Issue 38

“Wherever you look in the region and

whatever sector you look at, there is a
need for private capital.”

Back to work

With 2009 almost a standstill for private equity in the MENA

region, the only way is up for 2010. But will LPs recover their
appetite for the asset class in time for GPs to make the most
of increased deal flow?
Last year was a quiet year for private equity in the Middle East and North Africa (MENA)
– an almost silent one in fact.
“There was zero activity last year – we went straight from 2008 to 2010,” says Chris
Ward, chief executive officer – Financial Advisory Services for Deloitte Middle East.
However, Ward, like every other person in the region spoken to for this report, notes
a pick-up in activity recently; at least in the sense that Deloitte’s due diligence teams are
working with a number of firms on potential transactions.
Although a full recovery in confidence and activity levels has yet to take place, there are
several reasons for private equity firms in the region to be optimistic.
The first, according to local practitioners, is that existing portfolios in the MENA region
are in relatively better shape than many of their Western counterparts, which are suffering
from issues with debt structures. There is, as Omar Lodhi, head of investor coverage at
Abraaj Capital, puts it, less “indigestion” for MENA private equity firms to work through.

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Regional report: MENA
In terms of new deals, as with other emerging
markets, the region’s continued growth and
the need for private capital to feed that
growth continue to provide the primary
investment thesis.
As Lodhi notes: “Wherever you look in
the region and whatever sector you look at,
there is a need for private capital. It’s all about
growth – whether through organic means, M&A,
or domestic and regional expansion.”
Following on from this, with banks in the
region still hesitant to lend as they struggle with
the aftermath of the economic downturn and
what Ward terms the “Dubai World effect”, Ward: private equity skipped 2009
private equity has an opportunity to position
itself as the obvious capital provider. When you
factor in that the IPO pipeline is still deferred in many of the region’s
stock markets, the case for private equity becomes even more
compelling. “There’s nowhere else to go quite frankly,” says .
Because of these market conditions, Lodhi predicts private
equity firms will see targets that were not targets two years ago
become “very attractive” prospects for private equity.
“The pipeline has increased substantially across all sectors and
activities. I do not see any shortage of investment activity over
the next two or three years and I think 2009/10/11 vintage year
opportunities are going to be very attractive in terms of the quality
of the investments and the pricing levels at which they can be
executed,” he predicts.
Supporting all of this, says Lodhi, is the fact that, rather than
back away from reform agendas during the downturn, governments
Dubai: Downfall of government-backed giants
While private investment firms in the Middle East have largely
managed to keep their troubles to themselves, this has not been
the case for many of the Dubai government investment entities.
The most public fallout has been from Dubai World, the giant
holding entity, which asked creditors for a standstill on $26 billion
of debt at the end of November 2009. At the time of going to press,
Dubai World-owned private equity entity Istithmar World was selling
off assets such as budget airline SpiceJet at a rate of knots in order
to improve its parent’s balance sheet.
While Dubai Holding, owned by Dubai’s ruler Sheikh Mohammed
bin Rashid Al Maktoum, has not caused the same ripples in world
markets as Dubai World, it has also embarked on a selling spree to
ease its $100 million debt burden, with Singapore-based distributor
and retailer RSH and a stake in Malaysia’s Bank Islam among the assets
reported by the Financial Times to be up for sale.
At Dubai Holding’s private equity entity Dubai International
Capital (DIC), signs that things were not as they should be emerged
in February 2009, when the firm replaced the dealmakers at the top
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March 2010 Issue 38
in the region instead stepped them up. They
also tightened fiscal policies and pledged fresh
investment to maintain the pace of infrastructure
development even after the project finance
market tailed off.
This, Lodhi argues, is because the
governments in Saudi and other countries
“have realised that it’s through true private
sector-led investment that job creation over
the next 20 years will be achieved”.
Lodhi estimates there is a need to create
between 40 and 50 million jobs throughout the
region going forward in order to sustain the
young demographics of the region. “That is what
has led to reform and that is what we believe
makes it sustainable,” he states.
LPs and fundraising
While the overall might look increasingly attractive on the
investment front, fundraising remains a stumbling block for firms,
which for the most part raise their capital exclusively from within
the region.
Abraaj, the region’s private equity powerhouse, is still in the
market with its fourth fund, focused on buyouts, which was launched
with a $4 billion target. The firm, which held a first close in October
2008 on $3 billion raised entirely from existing LPs, was reported
by the media to last year to be considering reducing that target.
“Fundraising is certainly very tight. The first close that we did
on Fund IV in October 2008 was very timely so, from a firepower
of its international private equity division, Sylvain Denis and Alan
Hyslop, with portfolio managers David Smoot and Eric Kump.
Later that same month, DIC and Dubai Group, a diversified
financial services company, were aligned under Dubai Holding
Investment Group, a wholly-owned subsidiary of Dubai Holdings,
in order to cut down back-office costs.
Then in August 2009, DIC founder Sameer Al Ansari resigned
from his position of chief executive officer in order to take
the same role at SHUAA Capital, becoming executive chairman
instead. In January this year, he stepped back once more, becoming
non-executive chairman.
The remaining DIC team has been tasked with managing the
group’s existing portfolio, which includes UK-based hotel chain
Travelodge and German industrial packaging manufacturer Mauser.
Local observers consider it unlikely that the group will return as
an investor in fresh deals any time soon.
Commented one Dubai-based private equity professional:
“I think it’s fair to say that none of these [government-controlled]
investment funds are going to be in new investment mode for the
foreseeable future.”
Regional
XXX report: MENA
perspective, we are alright,” says Lodhi, adding that the firm would
“right-size” Fund IV through the course of 2010.
Ward states that “the word fund is the new f-word”. “Many
of the investors, if they invest at all, want to invest in real estate
or businesses they can see or touch, rather than with a fund
manager, at least at the moment,” he says.
This is backed up by Shailesh Dash, founder and CEO at
Al Masah Capital, who reports that many of the region’s family
offices and other non-institutional private equity investors are
limiting their private equity investments to direct acquisitions at
the moment.
“Many family offices feel this is a great time for them to
do acquisitions, so if they can they will buy directly,” he says.
“In a boom time they find it difficult to find those deals,
but today deals are present everywhere and at prices that still
The lay of the land: How has the downturn impacted
committed capital?
The amount of capital committed to private equity in the MENA
region and the number of GPs in operation has always been hard
to pin down, but it has become almost impossible since the
economic downturn.
A statement released in February by the Ministry of Economy
of the United Arab Emirates said that 131 private equity firms were
active in the UAE at the end of 2009, with committed capital of
AED126 billion ($34 billion; €25 billion), of which AED116 billion was
paid-up capital.
But last year several in the industry put the estimate of the capital
available at $10 billion – a figure that even at
less than half the size of the UAE government’s
current figure was described as a ‘capital
overhang’. Since then, although deals have been
scant, fundraising has been even scarcer. So what’s
the real story on dry powder?
According to Benjamin Newland, corporate
partner in the Dubai office of King & Spalding,
there is “in theory” a “tremendous overhang of
uninvested capital in the Gulf countries” based on
announced commitments to private equity funds
in the last few years.
But, he adds: “A lot of new funds won these
commitments, but then had trouble finding ways
to deploy the capital. I wouldn’t be surprised if
Newland: any capital overhang is theoretical
many of the funds, and their capital commitments,
just disappeared and we were left with a much
smaller private equity industry here.”
He is not the only one to think so. Another MENA industry
insider predicted confidently that if one were to trace fundraising
announcements, a likely outcome would be the discovery that a large
number of the firms had been “stillborn”.
The issue of how many GPs remain active in the region is
March 2010 Issue 38
remain attractive to them.”
Dash says that even if these families might not have the skill set
to manage the assets they are buying long-term, they prefer to go
the direct route because of the buying delay implied in investing
into a fund and because to them direct ownership is preferable.
Dash, who has just launched his maiden private equity fund
at Al Masah Capital with a $500 million target and a focus on
social infrastructure, is more optimistic about the prospects for
fundraising from the region’s institutions.
“If you are a team with a track record, it is not very difficult
to raise money from institutions,” he says. “The institutions are
full of liquidity and they are looking for good managers to invest
their money with.”
Likewise, he says institutions like the region’s wealthy sovereign
wealth funds and pension funds are more likely to stick to the
complicated by the fact that much of the private equity investment
in the Middle East has traditionally been done through club-style
funding on a per deal basis.This, says Dawood Ahmedji, Bahrain-based
European Finance Leader at global consultancy firm Deloitte, has left
many private equity houses having to rethink their business model in
order to move forward.
“The sell-down model in times like these becomes very difficult,”
he points out. “Investors are feeling relatively poor and more cautious,
making it difficult for firms to syndicate investments. Plus there are no
commitments for LPs to trade out of.”
Despite all this, there have been few obvious casualties of the crisis
in the private sector as yet and neither is there likely to be in a region
where, as Ahmedji puts it, “there is not always a purely economic
rationale driving business decisions”.
Culturally, Ahmedji says, it is difficult to see
US or European ‘survival of the fittest’ type M&A
happening in the Middle East. More likely, he says,
is “a quiet closing of doors” or firms continuing
to exist “notionally”, because the founder has
reasons other than profit for keeping the business
open, albeit in name only.
Even if any fallout has happened below
the radar, there has still been enough of a shift
in the make-up of GPs for Omar Lodhi, head of
investor coverage at Abraaj Capital, to comment
on the change.
“Before the downturn, private equity in
our region was somewhat synonymous with
pre-IPO minority strategy players,” he said.
“Some of those players have been weeded out
leaving only the firms with more wholesome private equity strategies
intact and around.”
Returning to the theme of committed capital, Lodhi dismisses
the notion of a capital overhang, saying that even if there is $25 billion
of dry powder in the region, “private equity is still under-penetrated,
even as a portion of GDP.”
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Regional report: MENA March 2010 Issue 38

commitments they have already made.
“If your LPs are institutions, such as pension funds or
sovereign funds, your money has not departed. If you go after them
with a transaction and you want to draw down, they are full of cash
and they’ll be able to fund you. But if your LPs are family offices
anywhere in the Gulf countries, I am sure if you go to them today
they will come back to you saying ‘Don’t ask for the money’.’
There must be many in the region who hope the region’s
institutions recover their appetite for private equity funds in time
for managers to maximise deal potential. l

Not a great year for data…
As the charts below show, private equity activity in the MENA
in 2009 was either extremely thin on the ground, or GPs were
less than candid about what they were doing. Here’s what Ali Arab,
private equity analyst at Dubai-based research house Zawya,
the source for the data here, has to say about it:
“In general the private equity industry in 2009 was less
transparent than previous years; the industry witnessed low
investment activity in the past year for two major reasons. First,
the valuation gap existing between vendors and buyers, where
vendors still valuate their companies at high premium while buyers
see it as overvalued. Second, the inability of LPs to meet their
commitments in some cases. The bright side of 2009 for MENA was
the reemergence of venture capital. The industry witnessed four
deals closing. This type of investment started gaining more appeal,
since investments in smaller companies required smaller funds, and
this made more sense with the crisis conditions faced by investors.”

2009 private equity transactions by country 2009 transactions by sector

Country Buy Sell Grand Sector Buy Sell Grand
Total Total
Bahrain 1 1 Agriculture 1 1
Egypt 1 1 Construction 1 1
France 1 1 Consumer Goods 2 2
India 1 1 Education 2 2
Kuwait 2 2 Health Care 2 2
Lebanon 1 1 Industrial Manufacturing 2 2
Oman 1 1 Information Technology 2 2
Saudi Arabia 3 3 Media 1 1
Turkey 3 1 4 Oil and Gas 2 1 3
UAE 6 1 7 Power and Utilities 2 2
United States 1 1 Real Estate 1 1 2
Grand Total 19 4 23 Telecommunications 2 2
Transport 1 1
Total transactions in 2009 Grand Total 19 4 23
Buy Sell Grand
Total
Total 19 4 23

Funds in market by geography and focus/ type

Geographical Focus Buyout Infrastructure Grand Funds in market by type and status
Total
Status Buyout Infrastructure Grand
GCC 1 1 Total
MENA 1 1 2 Announced 2 2
North Africa 2 2 Fund Raising 2 1 3
World wide 1 1 Rumored 1 1
Grand Total 4 2 6 Grand Total 4 2 6
Source: Zawya

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Country
XXX report: Saudi Arabia
Private equity money
vs. petro dollars
MENA private equity needs Saudi,
but does Saudi need private equity?
Like Japan in Asia,
Saudi stands out in the
Middle East as a highly
alluring market for private
equity – on paper. With
GDP in 2009 at roughly
$361 billion and around
27 million inhabitants,
it has both the GCC
Dash: Families need private equity expertise rather than capital region’s biggest economy
and largest population.
It also has a government supportive of private
investment and enterprise and prepared to invest
some of its enormous quantities of oil money
into those parts of the economy that need it
the most.
However, like Japan, although for entirely
different reasons, Saudi has earned itself the
moniker of being “a tough nut to crack” in the
private equity world.
One problem is the sheer wealth of
the country – private equity money is often
times superfluous.
“The families in Saudi are themselves so rich
that they really don’t need the capital – effectively
what they need is the expertise of the private
equity players,” says Shailesh Dash, founder and
CEO at Al Masah Capital.
He adds that even then there is “a question
mark” over whether families really want the
advice of a private equity firm on a business
they themselves have run successfully for that last
couple of decades. “It depends where they want
to go,” he says. “Whether they’re happy with what
they have or want to go into the global market.”
According to Dawood Ahmedji, Bahrain-
based European Finance Leader at global
consultancy firm Deloitte, private equity in
Saudi is simply “a different ball game”.
March 2010 Issue 38
“It’s more about joint ventures with existing
conglomerates as opposed to funding
divestments or existing operations,” he says.
“Family conglomerates would like to see
private equity bring something new to the table,
rather than ask them to participate in current
business activities.”
Besides this, and despite the government’s
encouraging stance on private investment, there
many who say that Saudi is a simply a very
difficult place to do business.
“They always say Saudi is very business
friendly, but having operated there for some time
I would say that it is quite cumbersome in terms
of bureaucracy,” said one MENA-focused GP.
Issues include the length of time taken to get
things done or approved, lack of on-the-ground
talent for both private equity firms and portfolio
companies and restrictive employment laws
which mandate the inclusion of a certain number
of Saudi nationals on the staff.
“Private equity in Saudi
is a different ball game.”
Improvements are needed in the legal
framework too, points out the GP.
“There is very little legal protection for
minority shareholders in private companies,
which is the case in many other emerging
markets as well,” he said. “But if the family owners
are not going to sell you the majority and you
cannot get protection as a minority investor then
it obviously becomes very difficult for a private
equity player to invest there.”
It looks like Saudi may remain an uncracked
nut for some time yet. l
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