Friday Letter: Looking past the gloom

Private equity in the Middle East and North Africa is seeing ways to a lucrative future.  

There wasn't much traffic, compared to what the city is notorious for. Getting a taxi was easy, too. And although the five-star hotels seemed busy enough, guests would happily comment on the discounted room rates they'd been offered.

No question: Dubai is feeling the pressure. Visitors to the city, including delegates to PEI's Middle East Forum earlier this week, are not having to look hard for signs of the city's sudden slowdown at the moment. The global crisis is taking its toll on the erstwhile poster child of MENA's great leap forward, and the consequences are widely visible.

The Forum reflected the downturn, too: not quite as many delegates as last year, and some of the region's best-known private equity professionals unable to attend because of pressing engagements elsewhere.

Despite this, many of the 375 attendees (headcount in 2008: 450) spoke with measured optimism about the industry's future in MENA. Some were even downright bullish: “Private equity in the region ia going to enter into a phase where I believe historical returns will be dwarfed,” predicted Arif Naqvi, founder of Abraaj Capital, MENA's largest provider of private equity capital.

Naqvi spoke of a “serious” investment opportunity arising from the fact that family businesses and entrepreneurs looking to finance growth are left with limited alternatives when it comes to sourcing capital. The region's stock markets have been decimated; banks are retreating. Private equity firms on the other hand still have capital to invest and are open for business. Just this week, for example, the Carlyle Group raised $500 million for its first MENA fund.  

Consider also that the region is forecast to deliver significant annual GDP growth of approximately 5 percent in the coming years, and that MENA's governments are now looking to deploy a greater share of their still vast financial resources in the region rather than overseas. “It all bodes well for private equity,” Naqvi said.

However, no one at the Forum was suggesting the industry's immediate future would be straightforward. For the time being, the priorities are survival and capital preservation. Everyone agreed that a shakeout of managers was inevitable and in fact already ongoing. “The sector in this part of the world must consolidate: too many funds have been created without differentiation and without a good enough reason,” said Charbel Abou Jaoude, CEO for Investments at Agility, a pan-regional logistics group based in Kuwait.

Those who survive the contraction should be in a position to help build out MENA's still nascent private equity business. Compared to other parts of the world, its penetration of the MENA economy has only just begun.

To move forward, the enduring funds must proceed with patience, cultural awareness and a socially responsible approach to partnering with private enterprise. If they do, the region's large base of family-owned businesses will provide attractive opportunities. And once the global economic situation stabilises, even Dubai's traffic jams may stage a comeback.