Ascending Asia: Gulf Capital on moving between markets

Bringing Gulf-based companies into high-growth markets such as Asia is a proven recipe for outsized returns, say Gulf Capital’s co-founder and CEO Dr Karim El Solh and managing director of investor relations Kaiser Jasrai.

This article is sponsored by Gulf Capital

Why is the Ascending Asia growth story such an important part of Gulf Capital’s strategy?

Dr Karim El Solh
Dr Karim El Solh

Dr Karim El Solh: Asia already accounts for over 50 percent of global GDP, according to the World Bank. But while the European economy is set to grow by just 1.5x over the next 30 years, and the US economy is set to grow by 1.8x, China will grow by 2.7x, the Gulf region and Egypt by 3.2x, and Southeast Asia by 3.7x.

Meanwhile, India will quintuple. Growth in Europe is anaemic long term, while growth in what we call ‘ascending Asia’ is phenomenal. So, of course, that is where we expect to see the most interesting returns going forward.

How have you expanded across the East-West Economic Corridor in order to maximise returns?

Kaiser Jasrai
Kaiser Jasrai

Kaiser Jasrai: We have always seen tremendous opportunities to push our companies into Asia, starting in West Asia and then expanding them into East Asia through strategic acquisitions. This strategy to focus on ascending Asia has reaped huge rewards because there is a clear multiple arbitrage opportunity when we invest at relatively low entry multiples in West Asia and then expand those companies into East Asia, before exiting them at much higher Asian multiples. As Dr Karim said, growth is clearly going to be focused in Asia in the coming decades.

Gulf Capital is perfectly positioned to play this East-West Economic Corridor, also often referred to as the ‘New Silk Road’, through our offices in the UAE and Egypt and our soon-to-be-opened office in Singapore. This strategy is something we fully plan to continue with in the future.

Karim El Solh: This is nothing new for us. Most of our portfolio companies have acquired their way into Asia. We have been serial acquirers of Asian companies through our proactive buy and build strategy. Why that unique focus? Our average entry multiple is around 7x EBITDA in the Gulf, while average exit multiples in Asia are around 13x, according to Preqin. When we expand into Asia, we can sell our enlarged portfolio companies at a much higher price to Asian strategic and financial buyers.

Which sectors do you see as particularly well suited to this approach?

Karim El Solh: We have evolved into a thematic investor over time. We strongly believe that picking the right sector is the most important factor to generate outsized returns. As far back as 2015, when we raised our $750 million third fund, we hired Boston Consulting Group to look into the future and identify where the growth lies.

The previous year, there was the big oil crash of 2014, which shook everyone, and we realised then that we needed to look ahead to see where future growth lay and what legacy sectors to avoid. We explored the key mega-trends and mapped a large number of sectors and subsectors, ranking them by both growth potential and investability.

It was at that point that we decided to exit the oil and gas, construction, retail, food and beverages, and heavy industry sectors, which were facing tremendous headwinds. Instead, we decided to invest in a big way in technology, fintech, healthcare, business services, consumer services and sustainability, and have been doing so since 2015.

We have since been extremely disciplined about avoiding legacy sectors and investing only in the high-growth sectors of the future, and that decision – made more than five years ago – served us extremely well through the pandemic. We have just received our latest financial results, which showed the profitability of our technology companies was up 64 percent year-on-year. Fintech is up 44 percent, healthcare is up 124 percent, business services are up 20 percent, and sustainability is up 24 percent. Across our entire Fund III portfolio, EBITDA is up on average a remarkable 74 percent year-on-year.

Long-term secular trends – such as digitised payments replacing cash, the rise of telemedicine, the explosion of ecommerce in our region, increasing spend on specialised healthcare and an increased focus on sustainability – have all highlighted that we placed the right bets on the sectors of the future. Our portfolio companies are now starting to yield real results, and we are seeing a surge in profitability.

What is your approach to ESG within Gulf Capital and in the broader portfolio?

Kaiser Jasrai: ESG is a major focus for us, both at Gulf Capital and at the portfolio companies’ level. We are signatories to the United Nations Principles of Responsible Investing and to Terra Carta, the Prince of Wales’s sustainability initiative. These organisations help us think about our sustainability goals and create a framework around how we implement them.

We are very keen to push our ESG initiatives down to our portfolio companies as well, and have recently created an ESG working group at Gulf Capital to ensure this happens. Going forward, we are also looking to integrate our ESG standards into our term sheets, so companies know what they have to adhere to before we invest in them. If a company is not prepared to follow our ESG guidelines and show that commitment to sustainability, then we simply won’t invest. That is how core this is to our philosophy.

We are also placing an increased focus on diversity and inclusion and have created an internal D&I working group, which I chair, alongside our HR head. We are looking to implement more structure around our desire to foster a more diverse and inclusive environment, in terms of both gender and ethnicity.

Karim El Solh: I would add that we have recently been ranked the number one firm for ESG transparency in the Middle East by Preqin, and we are certainly stepping up our efforts and becoming more affirmative in our desire to see ESG embraced by our portfolio companies. As Kaiser said, all deals now have ESG commitments embedded in the term sheets. Our pitch to prospective portfolio companies is this: “If you want our investment, then these are the ESG initiatives and reporting standards you have to adhere to. It’s a package deal.”

And, of course, it isn’t only about protecting the environment: it also makes good business sense. Take the example of our portfolio company, Middle East Glass, one of the largest packaging companies in the Middle East. The business used to produce glass and PET plastic bottles for the likes of Coca-Cola, Pepsi Cola and Juhayna in Egypt, which is the largest Arab market.

Between the board and our Egyptian shareholders, we made the decision that remaining in PET plastic packaging was not only bad for the environment, but that it would create issues when it came time to sell or list the business. The decision was therefore made to divest the division and to exit PET completely, and the proceeds were reinvested back into the business to increase our capacity to recycle glass.

This is an example of how we have helped transform a packaging business involved in PET and glass into a business that is green and focused on recycling. I am sure that we will eventually be rewarded with a higher valuation on exit – in the long run, you don’t have to sacrifice returns in order to make a positive impact.

How would you describe LP appetite for the Ascending Asia story, and what are investors looking for?

Karim El Solh: Ascending Asia ranks very highly as a destination for LPs, who recognise the long-term growth that the region offers. But they also want to back managers focused on particular sectors in Asia, because growth within technology and fintech, for example, is clearly going to be far higher than growth in retail or oil and gas. Overlaying the ascending Asia story with a thematic investment focus is highly appealing.

What are the biggest challenges and opportunities you would associate with your globalisation strategy?

Karim El Solh: We primarily sell to strategic buyers, and we realised very early on that they prefer to buy international companies rather than single-country operations. Those global businesses command a premium, but to get there, you need good management teams that travel well. And that can be challenging.

A lot of the themes we are investing behind, such as digital payments or healthtech, are still relatively new, and so a lack of experienced human capital can be a bottleneck. We often have to import that talent from Europe and Asia to ensure our companies can scale and execute our growth strategy quickly. A great example is our Saudi merchant payment solution provider Geidea, which provides 600,000 payment machines to more than 120,000 merchants in Saudi Arabia. But we don’t only want to help those merchants transact with those machines: we want to facilitate online payment gateways and e-stores, moving the service up the value chain, and take it to Egypt and the UAE.

To do this well, you need the experience of someone who knows the payments space and who has managed a global business. We were fortunate, then, to secure Renier Lemmens, former CEO of PayPal EMEA, as chief executive. We have also brought Nick Ogden, founder of Worldpay – a business that was sold for $43 billion in 2019 – onto the board of Geidea. We like to surround ourselves with global experts who partner with us on our investments: these are the people who can help take our portfolio companies on their international growth journeys.

Kaiser Jasrai: With the help of these sector specialists – our internal team, board and strategic advisers, and management teams – we are perfectly positioned to capitalise on the major themes of our time, and in particular, on digitisation and sustainability. The big opportunity for us is to continue to grow our position as a tech and sustainability leader across the Gulf and Asia.

What are some of the positives you have been able to take out of the pandemic?

Karim El Solh: We were blessed to have some amazing CEOs in our portfolio companies during the pandemic, who we encouraged to innovate and, if anything, to accelerate their growth plans. One example would be our digital healthcare business, Vezeeta, an online doctor-booking platform. Going into the pandemic, the company had over two million registered patients and 25,000 doctors.

During lockdowns, however, patients clearly could not attend physically the doctors’ clinics. So, we decided to bring the doctor into the patient’s home using telemedicine and then, once the diagnosis has been made, to fulfil the prescription via a newly launched e-pharmacy business. This new model is now arguably even more valuable than the original business.

This is a great example of how we innovated throughout the pandemic and pivoted to where the growth lay. As a result, we now have a business that is not only an online doctor-booking platform, but that also offers telemedicine.