Friday Letter Why you shouldn’t write off MENA

If you thought private equity in MENA was headed for extinction, think again.  

The Middle East and North Africa (MENA) region has been on a political and economic roller-coaster ride the past several years.

Consider Dubai, where industry thought leaders gathered earlier this week for PEI’s MENA private equity forum. The Emirate borrowed heavily pre-GFC to finance mind-bogglingly ambitious infrastructure and construction projects and ran into well-publicised trouble servicing its debts when the economic cycle turned. Thus the flocks of cranes and unfinished skyscrapers that have marked Dubai’s skyline in recent years have represented, at various periods, both the Emirate’s ambition as well as its hubris.

So what’s changed, and more importantly, how does this relate to the region’s private equity industry? There are fewer new construction projects, fewer unfinished buildings. The monorail is finished, and the roads less congested. Dubai seems happier in its own skin. Its ambition to become a global financial centre is still there of course, although it’s more measured, more considered. And all this is mirrored in the MENA region’s private equity industry, which pre-financial crisis was over-inflated, just as Dubai’s property market was. A number of MENA firms ran into portfolio and fundraising problems post-GFC and have reduced or ceased making investments, meaning the level of capital available, and the number of firms in a position to deploy it, has become better matched to the number of opportunities available.

Investors are also pleased about the contraction because it means surviving fund managers arguably possess the requisite skill sets to thrive despite volatility. As one influential LP attending the conference put it: “I want to back teams that have come through a crisis. I want to see the scars on their back. I want to back managers who show to me they can deliver returns despite a difficult environment.”

That there is a solid core of more mature, experienced fund managers was just one of a number of points raised at the conference about the still-unlocked potential for private equity deals in the region. Add to that the opportunity for local managers like Amwal AlKhaleej to open up the region's most economically vibrant and viable economy, Saudi Arabia, and initiatives like Gulf Capital's new credit offering, which alongside rival NBK Capital will provide a fresh route to finance for ambitious entrepreneurs frustrated by cautious banks.

Bain Capital partner Stephen Pagliuca noted the region’s relatively low sovereign debt, and almost non-existent consumer debt, were among the factors that left it well-positioned for future growth.

Hisham El-Khazindar, co-founder of Cairo-headquartered Citadel Capital, agreed the investment case for MENA was still a strong one, despite recent economic and political turmoil. “It is a challenging environment but challenge creates opportunity. We have a number of years ahead where there will be high growth. The region’s fundamentals haven’t changed. Together with the energy unleashed by the Arab Spring, it represents a very compelling case for investment.”