Friday Letter: Middle Eastern promise

Private equity’s push into the Middle East and North Africa (MENA) continues unabated. Although funds raised in the region still outweigh funds invested, local and international interest in MENA private equity is intensifying.  

Earlier this week, more than 600 practitioners – including many visitors from outside the region – gathered at sister publication Private Equity International’s third annual Middle East Forum in Dubai. Many came to network but everyone came to get a better understanding of the nature of the Middle East’s private equity opportunity.

By the time they packed their bags on Tuesday afternoon, most were conscious that to ignore developments around the Persian Gulf could prove costly in the years to come. A heavyweight line-up of private equity luminaries addressing the conference had explained emphatically why they were taking no chances in terms of positioning their firms in the region.

Carlyle co-founder David Rubenstein declared MENA “ripe for investment” and cited a raft of reasons why Carlyle is raising its first fund for the region: a mind-boggling $1 trillion increase in local wealth resulting from mushrooming hydrocarbon exports in the past five years; rapid population growth; maturing capital markets; liberalising government agendas creating investment opportunities; a large base of family companies in need of restructuring; and limited competition from other financial sponsors.

Rubenstein predicted that the convergence of these factors would soon turn MENA into the world’s fourth-largest private equity region in the world – behind North America, Western Europe and Asia/Australasia, but ahead of Eastern Europe, Russia, Africa and Latin America.

Arif Naqvi, founder of local private equity pioneer Abraaj Capital, painted an equally eye-catching picture. Naqvi, whose firm’s geographic focus reaches across North Africa, the Levant, the GCC and South Asia, sees a $600 billion investment requirement in regional infrastructure alone. He also gave a compelling reason why the Middle East needed private equity investors: unemployment is the single largest challenge facing the region, with up to 100 million new jobs needed to keep up with the explosive growth of the local labour force. This problem, Naqvi said, is dominating the region’s political agenda – and presenting private equity with an outstanding opportunity set.

In addition to doing transformational work inside the region, MENA private equity is also becoming increasingly influential outside it. Sameer Al Ansari, executive chairman and CEO of Dubai International Capital, used his keynote speech to highlight the growing importance of locally based principal investors such as acquisitive DIC itself on the international M&A scene. The presence of these well-funded outward-looking players clearly is another reason why international investors should get to know the Middle East and build relationships within its growing private equity community.

Make no mistake: it is still early days for the industry in the region, and the road ahead is not at all without potential pitfalls. Joe Rice, co-founder and chairman of New York-based LBO specialist Clayton Dubilier & Rice, told the conference that private equity professionals everywhere needed to engage more with those currently criticising and attempting to weaken the industry.

John Micklethwait, editor-in-chief of The Economist and one of the most engaging speakers at the Forum, warned the world’s business leaders, including those present, against failing to bear in mind that globalisation as a force for economic good was “a process, not a fact”. This process, he said, was currently in real danger of stalling as a result of weak political leadership in the face of mounting global crises. 

But despite Micklethwait’s sobering words, the Forum’s fundamental message to private equity practitioners was positive. There is still an immense amount of work to do if private equity is to fulfil its potential in the region. But at this point in time, despite the fact that investment in regional business has remained limited so far, the industry is laying the foundations for an exciting and prosperous future. Delegates were already promising each other to swap notes on the funds raised, the deals done and returns delivered at next year’s gathering. Readers should make a note in the diary for next March: visit Dubai.

PS: Following news of Blackstone’s imminent IPO at the conference, public private equity was  obviously a major talking point at the event. Asked during a Q&A whether Carlyle was currently preparing for an IPO, Rubenstein said ’no’. There are many things currently on the great man’s mind, but taking the firm he built public is apparently not one of them.