Gulf Capital: Young man, go East

The Gulf and Southeast Asia are two of the fastest-growing regions in the world today, making the corridor connecting the two a rich seam of investment opportunities, say Gulf Capital’s Karim El Solh and Shantanu Mukerji

This article is sponsored by Gulf Capital

Karim El Solh, Gulf Capital
Karim El Solh

Why is an investment strategy predicated on bringing East and West together so compelling right now?

Karim El Solh: We focus on creating regional and global champions out of businesses with roots in the Gulf region. We often take those companies eastwards, buying our way across South and Southeast Asia. Now, with our new presence and local private equity team in Singapore, we are also looking to reverse that flow, bringing deals from Southeast Asia back to the Gulf. These are two of the fastest-growing regions in the world yet they are geopolitically neutral, which is why this East-West Corridor is one of the most exciting places to be investing in right now.

Shantanu Mukerji, Gulf Capital
Shantanu Mukerji

Shantanu Mukerji: The question is, how do you invest in Asia in this new paradigm? Southeast Asia is not only the fastest-growing region, it’s also a region that is fiscally stable with a young population, and is striving to make its mark in the private markets. Founders and entrepreneurs in Southeast Asia have reached the next level of sophistication and are looking to drive internationalisation and growth.

Earlier growth markets such as China have become a little harder to navigate in this new environment, but the regions we target are well connected with substantial interoperability. From a category, market, demographics, fiscal, growth and risk perspective, and considering the aspirations of management teams and founders, this is a fantastic corridor to invest in.

What sectors and themes do you deem to be particularly interesting?

Karim El Solh: This is something we think about very carefully and, when we launched our third fund – GC Equity Partners III, which raised $750 million in 2016 right after the oil crash – we realised we needed to revisit how and where we invest and ensure we were looking to the future, not the past. We therefore exited the oil and gas sector and other legacy industries facing headwinds or contraction. We hired five global consulting firms, analysed 80 mega-trends and mapped 45 sectors to determine our strategy going forward. We dismissed any sector that was not growing at double digit growth rates and ended up focusing on five priority sectors: technology, including fintech; healthcare; business services; consumer; and sustainability, including water, the environment, food security and the energy transition.

What do you look for in a platform investment and how do you source your deals?

Karim El Solh: We are evolving into becoming a thematic investor and we follow a top-down investment approach. For instance, we wanted to be in healthcare, so we mapped the entire healthcare value chain and discovered that, in the Gulf region, one of the fastest-growing sub-sectors was IVF fertility treatment. We found an attractive target, which was the subsidiary of a global leader in the space, IVI-RMA, and convinced them to carve out their Gulf business, which we acquired with the management team and rebranded as ART Fertility. We then took that business from Abu Dhabi to Al Ain, Dubai and Oman.

We are also launching an ambitious organic expansion strategy across India and have already built and opened 6 state-of-the-art IVF fertility clinics across the country. We are actively looking at other bolt-ons from the GCC to Southeast Asia and Australia because we want to create a pan-Asian IVF fertility champion. This is a good example of how we buy into a local platform with a strong management team and internationalise the business through both organic and inorganic growth.

M&A is obviously a major part of your value creation strategy. How do you approach operational improvements?

Karim El Solh: We focus on buying controlling stakes or strategic influential stakes with very strong rights. Indeed, 81 percent of our private equity deals have involved majority controlling stakes. By taking this approach, we can step in with operating partners and industry advisers to drive change and really institutionalise and optimise our portfolio companies. We are fortunate to have a suite of 23 operating partners and industry advisers who are world-class proven entrepreneurs and CEOs. They co-invest alongside us, sit on the boards of our investee businesses and come with us on the growth and transformation journey. This active approach has worked very well for us – on average, we have increased EBITDA by 241 percent in the companies we have exited to date.

Are there any particular challenges associated with your strategy?

Karim El Solh: Acquiring controlling stakes in emerging markets isn’t always easy because it is not in the culture of business owners in the region. It requires a lot of persuasion, tea drinking and visiting the homes of entrepreneurs and family business owners. We have numerous successful case studies where we can demonstrate how the existing shareholders benefited greatly by welcoming us into their capital.

It has become easier today to convince entrepreneurs and family business owners to let go of controlling stakes than it was when I first started out in this business in the Gulf 21 years ago. Private equity has become more acceptable, and entrepreneurs and business owners are more educated about the benefits it brings. One of our secret weapons is our deep bench of operating partners and industry advisers who speak the entrepreneurs’ language because they are from the same industry.

Shantanu Mukerji: Another challenge we face is maintaining investment and selection discipline, particularly as capital becomes constrained. We are inundated with companies looking for funding, but the success of our strategy relies on careful asset and management team selection. We build businesses globally and it takes a special kind of management team to align on that strategy and execute well.

What is your preferred exit route, and do you have a specific example of that strategy paying off?

Karim El Solh: Historically, our preferred exit route has been selling to strategic buyers. We own controlling stakes in market-leading companies operating across multiple geographies, which are very appealing to global strategic buyers. For example, we recently exited Chef Middle East, the number one food service distribution company in the GCC. That business was growing exceptionally fast, helped by strong GCC macroeconomic growth and the recent Dubai Expo and the World Cup in Qatar. Chef Middle East hit a record EBITDA in mid-2022, and we decided it was the perfect time to launch a sale process.

The stars were aligned for a great exit. We hired a regional investment bank, deNovo, and approached 20 regional and global strategic buyers, getting four solid bids at the end of the process. It was a very heated and competitive auction with bids being raised up until the very last moment. Eventually, we sold Chef Middle East to a Nasdaq-listed company, The Chefs’ Warehouse, for $100 million, making 2.5 times our money. During Gulf Capital’s ownership, Chef ME grew its revenues by more than 150 percent and operating income by 91 percent.

Strategic sales are definitely our favourite route and account for 42 percent of all of our exits to date, followed by financial buyers and then initial public offerings. We do take companies public occasionally, but it takes a long time to exit these investments through the public markets.

How are investor attitudes towards emerging market risk evolving?

Shantanu Mukerji: Historically, there are three primary reasons why private equity didn’t perform well in Asia. First, you don’t have control over your destiny because you have invested at an earlier stage or with a passive minority interest, which is very difficult to exit. Second, you get seriously impacted by currency fluctuations. Finally, there is a deterioration in the credit markets.

We avoid all three of these potential problems. The Gulf Cooperation Council is pegged to the dollar and we take multiple country bets, avoiding single country risks. We don’t do early-stage venture and we focus on taking controlling stakes, meaning we can influence the direction the company takes and are able to sell to strategic buyers. We also take very little leverage at entry, which allows us to disassociate ourselves from the cost of high-yield finance and the risks of excessive leverage. Our strategy of securing controlling stakes, avoiding excessive leverage, focusing on deep operational improvements and EBITDA growth, and specialising in selling to strategic buyers resonates with our global investors.

Karim El Solh: The growth in the GCC region where we operate is remarkable. Saudi Arabia’s GDP grew at 8.7 percent in 2022, according to flash estimates by Saudi Arabia’s General Authority for Statistics in January 2023, overtaking India as the fastest-growing major economy in the world.

When it comes to investing, we have perfected a new “control growth buyout” methodology whereby we borrowed a page from the West on the proven control buyout playbook and a page from the East on high growth. Very few firms in our part of the world have built the expertise of control buyouts and deep operational improvements as we have.

Finally, our global investors aren’t only getting growth with our private equity funds, they are also getting diversification. Our economies are negatively correlated to the rest of the world and add major diversification in any global portfolio.

“The success of our strategy relies on careful asset and management team selection”

Shantanu Mukerji

Bearing in mind the macroeconomic situation globally, what does the future hold for your strategy?

Karim El Solh: In 2021, we carried out a study with a research institute that predicted European GDP would grow by 1.5 times by 2050; US GDP would grow by 1.8 times and China by 2.7 times, while the GCC economies would triple, Southeast Asia would quadruple and India would quintuple in size. Clearly, the future is Asian. When I started out in my career in 1991, the advice I received was ‘young man, go West’. Today, I tell my adult children ‘go East’ because the growth long term is clearly in Asia. Connecting the Near and Far East is what we do.

Shantanu Mukerji: We have presided over the longest period of zero percent interest rates and zero or negative inflation in history. That period is not coming back. We are in a world where the generation of alpha through cash flow and earnings matters, which means our strategy and focus on growth and operational improvements will only resonate more and more in this high interest rate environment.

Karim El Solh is Gulf Capital’s co-founder and CEO, and Shantanu Mukerji is managing director and head of the Singapore office and Asia investments.