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Friday Letter Come on in …

Middle Eastern private equity is booming, but LPs from outside the region have been reluctant to make inroads.  

The promising outlook for MENA private equity funds, unsurprisingly, was among the main talking points at our sister publication Private Equity International’s Middle East Private Equity Forum in Dubai earlier this week.

Arif Naqvi, vice chairman and chief executive of Middle Eastern alternative investment pioneer Abraaj Capital, said in his keynote address that the outlook for private equity firms in the region was “bright”, as more mature markets stagnate in the wake of the credit crunch. The Middle East’s private equity industry is still surging on the back of the soaring oil price, and of economies in the region addressing the need to diversify.

Naqvi for one is backing his words with action. His firm has just opened offices in Egypt and in Turkey with senior executives to head each office. Its expansion into wider markets underlines the scale of the opportunity in the region.

Abraaj’s local rivals at Dubai International Capital is also stretching its wings as it continues to seek opportunities in Asia, and especially in China and India. Sameer Al Ansari, DIC’s chief executive, said his firm had committed around $1 billion in India. It is also launching a $500 million fund to invest in Saudi Arabia.

But the Forum was far more than just the story of two firms’ regional expansion. A myriad of local mid-market firms are also benefitting from MENA’s economic and financial boom.

What is curious however about the surge is the indifference of international investors to the region’s charms. Abraaj, one of the most outward-looking of firms, has a number of investors from outside the region in its client base, as has Global Investment House, a merchant banking group in Kuwait. But these are among the exceptions to the rule.

Limited partners at the PEI conference from Asia, the US and Europe admitted to having difficulties with a classic chicken and egg conundrum: which teams to back when those with a long-term track record are still quite thin on the ground.

David Pierce, chief executive of Asian fund of funds Squadron Capital, said he was still forming a view on the region, but feared the opportunity was eclipsed by the weight of capital already in the market. What’s more, strip out the oil and the GDP is less impressive, suggesting a smaller opportunity for private equity compared with Asia, he said.

Needless to say that local managers are keen to see more engagement from international investors. Not only will this be the sign of a mature market, but it will also give the local industry permanence well beyond the (still distant) day when the last barrel of oil is dispatched from the well.

In the meantime, international investors could be missing out on some spectacular returns while they wait for track records to develop. As in all private equity investments, manager selection is critical. Not every commitment will make money, and picking the winners is never easy. But if you are a private equity investor and hesitant about MENA, it is high time to book that trip and find out more.