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business culture october 2008


By Dr. M S S El Namaki Private equity is in fashion,
despite recent global capital
market volatilities. The
principle of opportunistic
leveraged buyout of
businesses and rapid and
enhanced sell-out of
restructured and presumably

Opportunity healthy companies has caught
fire. The reach and depth are
global in scale and intensity. A
near $136 billion of private
equity and venture capital

or Threat?
funds, or the equivalent of 0.31
percent of the world’s gross
domestic product (GDP), was
invested globally in 2005. A
record $272 billion was raised,
also globally, in the same year.
Total global private equity
investments over an 8-year
period (1993 to 2005) amounted
to $935.06 billion and funds
raised reached $1,312.38 billion
over the same period,
according to the

Global Private Equity Report 2006.

Private Equity While greed, if
managed, could
Private equity performance in the Middle East is
leading to a number of questions. Prime among
those is the claim that private equity potential is not

in the Middle East be conducive to a
dynamic and
private equity
fully utilized and that opportunities exceed, by far,
the demonstrated reach of the players. Firm portfo-
lio composition and rationale are also raising ques-
industry, it could tions.
also turn into an
ugly whirlwind The Players
that destroys the Players in the Middle East are few and far between.
very foundations
Abraaj, the UAE operator, seem to be the undisput-
of the structure.
ed leader. The Abraaj portfolio includes investments
in retail, financial services and aircraft maintenance
businesses. Exit decisions related to past acquisi-
tions in insurance, financial services, logistics and
waste water management.

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or “Mubadala. an icon of the Manhattan skyline. Put differently. financial services. Past Mubadala deals included a 5 in terms of history and novel in terms of entry. Mubadala was cre. US-based Carlyle Group’s Middle East and North Africa base. growing companies in the energy. as well. especially the are not really performing. Constraining clusters pose barriers to the healthy devel- opments of the sector. and is planning to become Middle East Drivers and Prospects one of the 10 biggest institutional investors in The private equity industry in the Middle East is short General Electric. today’s volatile capital markets. There is the concern that this could the globe.” is the largest and Qatar United States who are wondering whether govern- Investment Authority is possibly the smallest and ment ownership. that was wound up last year. We will build on our expertise and long [private equity] is track record to create value for our clients and fulfilling one of the basic shareholders through innovation. Fund raising jumped from a few hundred million in These moves highlight the growing self-confidence 2004 to $3 billion in 2006. created in 2005. especially if it is a Middle Eastern youngest (established in 2005). a risky endeavor in Sovereign wealth funds. Rasmala. Its jeopardize interests and undermine traditional capi- investments are broad and scattered. expan- sion and productivity. Abu Dhabi’s Investment purpose. business culture october 2008 www. The percent stake in Ferrari. and technology and transportation industries. 7. played a leading role in helping to recapitalize the fal- ture. with a near $875 billion in assets. Group and a 4.5 times in wealth funds have very 6 years. of specific American assets is ated in 1976 and is the largest sovereign fund on a good thing. aims at invest- ing in healthy. These investments are strong in Middle East countries.5 percent equity in Carlyle industry is also modest in terms of global scale. according to Altassets. Casualties included a single develop a balanced and diversified fund. 2007. The economic growth model. they are lead- Gulf states. recently The industry is driven by two clusters of forces: a conducive cluster and a constraining cluster. quasi-private equity entities. industrial. industry claims an average internal rate of return of Middle East sovereign 22 percent and a return to investor of 3. with the first billion-dol- and ambitions of Abu Dhabi’s sovereign investment lar fund raised in 2006 and a $2 billion Islamic fund vehicle and the efforts of the emirate to currently being raised. there are those in the Shuaa Asset Management is another player that was By aligning established in 2001 and claims near $1 billion owner and management assets under management. healthcare. Sept 5. infrastruc. a controlling stake in the Chrysler Building. The company’s mission interests and states that it aims to be “the leading Asset Manager seeking higher by specializing in Arab and Regional Emerging productivity. Conducive forces stimulate industry growth. foreign government. 16 . It has bought tal-market fundamentals of the country. They command massive resources and ing to the question of who owns what and for what have strong capital clout. tering US banking industry. dedicated premises of research and strategic development. Markets. Worse still.9 percent capital input in" capitalist Global players are enticed by the area’s capital clout thinking.

growth of 6. espe.e. Competition. described as complete and purposeful. Capital market. and one can only specu. Oil price climbs. EMPA Private Equity 2006 Fundraising Review. leveraged buyout. Minimization Seeking performance. Closed cultures are gener. Middle East had. largely. Business cultures in most Arab acquired business.e. “optimum. There are four types of “lucra. by far. the scope and scale of restruc- operators are scarce. Exit market. Comprehensive grow The Role of Risk (Strategic. March 2007 However. a func- between 2000 and 2006. in 2007. over the entire arena. larger volumes and greater access Nations. There is a high measure of and internationally backed private equity firms will Restructuring needs of acquired business as China. June 2006. Some “beyond the optimum. and period (at constant prices. And they represent substantial potential. especially in GCC countries. (finance-biased) Risk Risk conform to common standards of management or tionally slow growers such as Egypt have shown a ist thinking. Track of the players. Leverage could be “benchmark- Middle East is leading to a number of Increasing levels of available capital will undoubtedly countries diverge from the typically open culture of compatible” or “optimum” or “above benchmark” or questions. and 7. This track record is crucial to an be comprehensive. likely to be identified in Egypt.8 percent and 7. finan- assessment of industry participation and industry cial and organizational dimension. with or “modest” restructuring. Tolerance Maximization 2. Questions remain with regards to the scale and It is estimated that the private equity industry in the • To-be-privatized companies feature across the scope of the exit market. To the are on the horizon. be at the forefront of the Middle Figure 2: Strategic positions within the private equity industry There is also the issue of growth in neighboring mar. Both markets provide ample opportunities fragmentation among industries in the Middle East pose a threat. and together have lead to an average GDP growth of 9. Eastern market. turing alone. i. A shortage of skilled invest. as was practiced in the early days of 3. could provide a target. Conducive Forces Constraining Clusters restructuring process of the acquired or to-be- 1. if not non-existent.1 percnet (at constant prices.” The High Power Distance coefficient (PDI) accepted standards within the industry. and even turing has something to do with the coverage. it has to have a strategic. sity and depth of restructuring. restructuring and a change in the organizational lution of the private equity industry in the Middle parameters of the acquired business could be East. The fol. inten- the oldest practitioner. for the coming years reflect the same positive out. organizational. Even tradi. Risk Risk 3. Projections Let us start with the risk attitude issue.4 percent in the same cially in the small and medium industry sector. HSBC. for Middle Eastern private equity capital to enter and and opportunities for consolidation are numerous. “Optimum” Level Benchmark business sector. The following diagram provides an illustration.4 percent derived risk attitude of the private equity player. trade sales will remain the preferred exit organization. can only trace its his. claim that private equity potential is not North America or some European countries. Financial restruc- expansion. Exit volumes are expected to tinction here is between what we may call “limited” increase as fund portfolios reach maturity. and “comprehensive” or “all-inclu- likely exit routes. the level is equity. costs of debt incurred in the process of acquisition ally not conducive to the risk-taking spirit of private and allow a “windfall” return to investors. although sizable ones are more 5. very likely. sive” restructuring. i. or restructuring that extends taken to expand and enhance the exit market. would very likely not suffice. Prime among those is the stimulate industry growth and progression. ment professionals and legislation governing for.” 2. Non-national sovereign wealth funds kets such as India and even faraway markets such • Fragmented industries. magnify the less than positive dimensions of capital. finance. So the dis- 4. Management talent. A few initiatives are being under. cover the Figure 1: Private equity fund-raising in MENA 2000-2006 closed business culture. Business culture.” An “optimum” or “bench- lowing chart shows private equity fund raising fully utilized and that opportunities evidence is provided in Geert Hofstede’s book mark-compatible” level of leverage is. bined with stimulatory economic growth policies. Their The three categories taken together could provide tention that this risk attitude is closely associated attraction lies in conservative management culture fertile ground for the private equity industry in the with two variables: the level of leverage involved in Leverage needs of the transaction and entrenched management approach. respectively. Middle East in the medium and longer terms. It is my con. The first is the measure of risk involved and the financial) tive” acquisitions in the Middle East. a near $15. Syria. One can view this question in terms of two variables. Track records of private equity On the other hand. Behaviors. business culture october 2008 www. Target acquisitions. Institutions and Organizations Across assets and the cost of leverage as well as the nessed pace. (80) and equally high Uncertainty Avoidance (UAI) extent that future earnings are high enough to pro- (68) coefficient are predominant and induce a vide an industry-accepted rate of return. restructuring that is counter acquisitions and IPOs perceived as the most finance-biased. however. tion of the future earnings. IFM data) in the the second is the extent to which the concept could Limited • Ill-managed businesses or businesses that do not UAE in 2006 and 2007. attitude of the player is a key force. IFM data). Private equity performance in the 1. Private equity is a risk-laden process and the risk Benchmark or Beyond • Family businesses provide the backbone of the look. Saudi Arabia and will. fund generation and fund flow. For restructuring to tory back to 2001. the rate of return on total late that with oil prices rising at the recently wit. Home-grown private equity firms management.3 billion under entire Middle East. These are commonly observed. exceed. Financial restructuring backed by a strategic eign ownership are regarded as critical in the evo. strategy and Source: Zawaya PE Monitor.. com. the demonstrated reach “Culture's Consequences: Comparing Values. Macro economic climate. the transaction and the scope and span of the 18 19 ..

and the result was a stagger- tions: ing debt burden. including the those in the textile sector of Egypt or the telecom. er productivity. Greed has led to Namaki’s book has become a prime driving force in the search of grim consequences in the present-day US. has swayed between risk minimiza. underline a robust growth and dominant position. out of restructured and presumably better -perform- It is my contention that Middle East private equity ing companies. where leverage is placed at bench. vate equity in the Middle East could follow the same Entrepreneurship in Arab Countries” was Enron in the United States and Ahold in the path if foreign new entrants and foreign industry cul- published in March. Private equity is the process of leveraged buyout of ers are positioned today and where are they likely to opportunity businesses and rapid and enhanced sell- be in the foreseeable future.” which has talist greed. El Namaki has practices. for example. business than years ago. And pri- “Strategy and excessive gains and exceptional opportunities. of course. • Risk tolerance. The core is the extent to which capi- (Eindhoven). (MSM). The same would ment talent. more likely and the very scale of the economies of the area dean of the Maastricht School of Management than not. international business. more likely than not. It equity industry in the Middle East. bring about more risk seeking and risk max. and ward analysis. let us start by could also turn into an ugly whirlwind that destroys stating that capitalism today – at least the very foundations of the structure. so far. may tip the balance in favor of the conducive Egypt. business culture october 2008 www. Those players are known for their On the other hand. Poland. Netherlands. entrepreneurship and applicable to the industry in the region as a whole. it is fulfilling one of the basic premis- required average levels of restructuring and were es of capitalist thinking. M S S El Namaki culture. (Amsterdam). A combination of abundant funds. Where will that take the industry is a programs into no apply to the privatization of state enterprises such as question mark. El has assumed a more pronounced role than ever. Brazil. could be conducive to a Turning to private equity and the dynamic and progressive private equity industry. developed and introduced belongs. where leverage is beyond bench. ing the very fundamentals of capitalism. The Freescale takeover was based on massive leverage at a time when the firm’s mar- The above diagram illustrates four strategic posi. try’s foreign culture. more or less identical. a family-dominant business sector. Private equity in the Middle East could sway in either mark levels and restructuring is comprehensive. a few cases that Are Middle East private equity operations an oppor- teaches and consults do not represent or provide a board conclusion tunity or a threat? There is evidence supporting on strategic thinking. government support He is past founder and sive global players such as Carlyle will. numerous acquisition targets. munication sector of Syria. risk minimizing. Neiman Marcus’ story is mark level and restructuring needs are limited. The imizing behavior. He has held executive ism. Canada and Indonesia. Netherlands provide ample evidence. management walkout. let us start by stating that capitalism today – at However. new entrants and the accommodation of the indus- ing needs are combined with excessive leverage. where comprehensive restructur. business than years ago. pendulum has swayed to the danger zone. Acquisition and turnaround of family firms ness culture. if managed. Prime among those is a closed busi- 2002). both notions. The industry is led by key acquired within reasonable levels of leverage. hesitant government policies and scarce manage- management degree tion category than any of the others. “Greed. an inherent element in capitalism. for example. It is a growth industry that is chang- practice. A Question of Greed The question now is where the Middle Eastern play. the as Wall Street sees it – is a very different. it practice of capitalism. to the risk maximiza. ket was contracting. McKinsey worse. China. The sheer power of capital. Acquired businesses such as owner and management interests and seeking high- Aramex or Jordan Aircraft Maintenance. com- fewer than 25 countries. ture takes hold. Turning to private equity and the practice of capital. the issue goes far beyond this straightfor- positions within Philips least as Wall Street sees it – is a very different. prove to be a boon or a hindrance within the private Salaam) and Time Inc. Dr. the industry faces structural Netherlands (1984. In the US. This is players in the US that combine the powerful and the commendable. several recent acquisitions such as Freescale and Neiman Marcus. could (London and Dar es always been a core value of modern-day capitalism. Future competition and entry into the fray of aggres. collapsing revenues and a serious • Risk direction and it will all depend on the impact of the • Risk maximizing. given the realities of the area and the endowed. 20 . Maastricht. Witness and While greed. bined with volatilities in the international market. forces. By aligning tion and risk tolerance. And these are. aggressive leverage and fundamental restructuring constraints. • And finally. where leverage is lim- ited and restructuring is modest.