Firms flock to the Middle East oasis

03 Apr 2008

As western Europe and North America suffer from large deal drought, the Middle East offers an oasis of liquidity.

But unlike previous oil-driven booms, which proved to be blips, this year could see a turning point in the Middle Eastern investment industry.Private equity in the Middle East has grown significantly in recent years, fueled by oil wealth and led by cash-rich sovereign funds.Financial News’ sister publication, Private Equity News, polled 69 industry professionals to gauge sentiment regarding the industry’s prospects in the region. The attractiveness of the Middle Eastern market was evident from the survey.

Almost 60% of respondents who had not done deals in the region in the last year said they planned to make investments there this year.

Faisal bin Juma Belhoul, founder and managing partner at Middle Eastern private equity firm Ithmar Capital, said: “Private equity in the region has witnessed exponential growth in the past five years.

From modest beginnings it has become a developed industry with about $25bn (€16bn) of funds under management dedicated to regional opportunities alone. I believe there is significant room for growth.”

The fundraising pipeline has increased in the past 12 months. Private equity firms from Gulf Co-operation Council countries are raising 49 funds worth a combined $21.7bn, according to data provider Private Equity Intelligence. This represents a 429% increase on the $4.1bn raised by 19 funds last year and a 456% increase on the $3.9bn raised by 22 funds in 2006. In 2005, 14 funds raised $3bn.

However, there is room for further growth according to some in the industry. Hamid Yunis, a partner at law firm Taylor Wessing, said: “The Middle Eastern market – and by that I mean both private equity deals done in the Middle East and those done elsewhere by Middle Eastern firms – is not yet saturated or at full capacity. It will continue to grow into a credible market and the global economic situation is helping that development process.”

Ranjeev Bhatia, a Bahrain-based corporate investment principal at investment group Arcapita, said a distinction type of deal was being done in the Middle East. He said: “The activity we have seen has been mostly greenfield and project finance-oriented. With the region getting more coverage from investment banks, families facing generational issues and seeking better corporate governance, dealflow is likely to increase, though most deals will be minority equity transactions rather than the typical leveraged buyouts.

In terms of foreign investments, many of the eye-catching deals have been those done by sovereign wealth funds.

Middle Eastern-based funds accounted for 32% of the $60.5bn invested by sovereign wealth funds globally in 60 deals last year, a 140% rise from the $25bn across 54 deals in 2006, according to data provider Dealogic. Dealmaking by Middle Eastern SWFs has expanded in the past three years, rising from eight deals worth $2.7bn in 2005 to 25 worth $19.4bn last year.

Almost 90% of industry professionals who took part in the survey felt the Middle East would play an important, very important or essential role in bolstering the private equity industry globally.

Bin Juma Belhoul said: “The region has continued to enjoy vibrant conditions despite the credit crisis and has not been too exposed to it. Firms in the region are well positioned to take advantage of opportunities. This should shore up dealflow and Middle Eastern LPs could partner with western groups struggling to raise capital from their traditional LP base.

Yunis said: “Conventional buyout houses abroad will be looking to unlock commitments from Middle Eastern investors and we may see those commitments being structured differently on sharia-compliant lines or to take advantage of co-investment opportunities.”

Investment by foreign and home-grown firms in the Middle East has been hampered by a lack of sophistication in the financial community there and by red tape. Although some countries, such as Saudi Arabia, are seeking to address this and streamline bureaucracy, it remains an issue.

Other barriers to entry cited by survey respondents included insufficient knowledge of Islamic finance, a shortage of investment opportunities and “lack of transparency and availability of valid data”.

Mounzer Nasr, head of corporate investment at Arcapita, said although the credit crisis presented Middle Eastern firms with an opportunity to enhance their profile abroad, their ability to take advantage of it was in question.

He said: “Reforms are needed. In Saudi Arabia, there is a lot of red tape involved in investing, particularly if you are an international investor. The authorities there are trying to fast-track projects and solve these problems. A transparent tax and regulatory framework and legal system would clearly help.”

Bin Juma Belhoul said: “The impact of the credit crisis is emotional rather than fundamental at the moment. Our focus remains companies in the GCC states but it has had the welcome effect of bringing valuations down to more reasonable levels and has made it more difficult for global firms to compete with local players in the region.”

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