MENA: After the storm

First came the financial crisis, then the Arab Spring. The MENA region has had to deal with crises on several fronts over the last few years. So how well is the region’s private equity industry picking itself up after the turmoil?

There is no getting away from the fact that private equity in the MENA region has had a challenging few years. The financial crisis led to a number of well known names running into trouble – notably Bahrain-based Arcapita, which filed for bankruptcy protection last year. This was closely followed by the political unrest started to spread across the region after uprisings in Tunisia. For an industry that was still very much in its infancy, these have been tough times.

Nowhere has this been more evident than on the fundraising front. In 2008, 31 firms in the region raised an aggregate $8.9 billion, according to PEI’s Research & Analytics division. The following year, the total plunged to $0.89 billion across 10 funds. Last year saw something of a pick-up, with $2.7 billion raised by seven funds targeting the region, but fundraising remains well below pre-crisis levels. 

Deal activity has been hit particularly hard in the North African region, where political instability has caused the most problems for private equity. The value of private equity deals stood at just $755 million in 2012, well down on the $1 billion recorded in 2011 and the $1.4 billion in 2010, according to Dealogic figures.

“Clearly, the effects of the Arab Spring are being felt most in countries such as Egypt, where unrest continues and where there has been a major currency devaluation,” says Michel Abouchalache, chief executive of Quilvest. “Activity there is narrowing down. Yet the real impact on private equity in the region overall has been the financial crisis. Since the collapse of Lehman Brothers, there has been a tremendous drop in the capital raised by private equity and in deal activity.”


The crisis came at a particularly inopportune moment for MENA private equity. As a nascent industry, many managers had yet to build a track record – and the difficulty of exiting businesses at a time of economic turmoil has had an inevitable drag on returns. This has left many LPs far from impressed by performance. 

“A lot of GPs in the region have not delivered on their promises,” says Jassim Alseddiqi, chief executive of Abu Dhabi Capital Management, the region’s first secondaries player. “It’s such a young region in private equity terms that there are very few funds that have been fully liquidated, and that is not helping the market.”

In addition, the years immediately before the crisis had created an unsustainable market. “Few players had either the authority or the skills to improve the businesses they were backing,” says Osman Mian, director, private equity at Tadhamon Capital. “Private equity was very much a multiple arbitrage play and when valuation increases stopped, this had an inevitable effect on returns.”

“Private equity in MENA has been slow to develop and mature,” agrees Abouchalache. “One of the issues is that before the crisis, the market had been driven by euphoria and a buoyant IPO market in the region. Many thought the industry was reaching maturity. But that wasn’t the case. These factors were sugar-coating reality and led to too much money being raised too quickly.”

Indeed, Quilvest’s figures suggest that $33 billion has been raised by MENA funds in the last ten years; of this, $22 billion has flowed into larger funds of $500 million or more. “These are large funds for the region,” adds Abouchalache. “We believe the opportunity will be far greater for funds in the $100 million to $250 million space.” Although bullish on the economic prospects for the region, Quilvest has yet to commit to a MENA fund.


One of the industry’s responses has been to look more to raising capital on a deal by deal basis. This was already a feature of the market before the crisis – Citadel Capital, for example, has always raised capital for specific platform deals, in addition to more recently starting to raise LP-style funds. But this method of fundraising has increased in prominence since, as managers find they have to prove their credentials to investors. 

“In the past, many funds got initial backing from a few key LPs that was contingent on them raising the full amount,” says Mian. “But investors have been very conservative over recent years and so haven’t been committing to blind pools. Instead, many firms have shifted to deal by deal fundraising.”

“It is very hard for managers to raise blind pools – there are not many willing to write a blank cheque these days,” agrees Alseddiqi. “But there is a lot of appetite among investors for deal by deal and co-investment arrangements.” In 2012, for example, Swicorp, which had previously only raised traditional LP funds, launched a new co-investment platform, allowing it to offer investors opportunities on a deal by deal basis.

In addition, the variety of deals that firms have been targeting has broadened, says Mian. “We are seeing more structured products, real estate development plays and turnaround opportunities being marketed to LPs, many of whom are looking for yield and ways of boosting returns. The definition of private equity is being expanded to ensure that firms can get funding from LPs.” 

In 2009, Sphinx Private Equity Management and Citadel Capital launched a $100m distressed SME fund, Samena Special Situations II, which is currently looking to raise $700 million. And Gulf Capital this year reached a $215 million third close on its $300 million credit and mezzanine fund, managed by Gulf Credit Partners.


One of the other key problems facing the market is that private equity houses are often prevented from taking control positions in the businesses they back, either because of a reluctance on the part of family owners to relinquish their positions or because of tight restrictions on foreign ownership. Deloitte’s latest MENA Private Equity Confidence Survey found that over a quarter of respondents would like to see changes in foreign ownership restrictions in the region (only reform of capital markets regulations was considered to be a higher priority).

There are some firms, however, that are managing to circumvent the cultural issue of owners not wanting to sell control positions. Gulf Capital, which raised a $553 million fund in 2010, has majority positions in many of the companies it backs – 80 percent in contract staffing business Reach Group and 82 percent in power generation services business Smart Energy Solutions, for example. It is also about to announce a food sector deal, in which it will acquire 100 percent of the business, according to the firm’s head of private equity, Karim El Solh. 

“This takes a lot of perseverance,” he says. “We have to chase deals over two or three years and the discussions always start on the basis of minority stakes, but we keep going back. We manage to persuade owners that we can provide liquidity and/or an interim step to the IPO market.”

This perseverance enables the firm to make improvements to the businesses it backs – a much harder task with minority positions. “We have large operational teams,” says El Solh. “They are very involved and can help companies grow. The businesses in our portfolio are seeing an annual EBITDA growth rate of over 45 percent – that reflects the economic growth in the Gulf, but it’s also the result of our operational focus.”


Yet despite many of the challenges the region faces, the longer-term outlook is positive. Demographic changes, in particular, are highly attractive, with expected annual population growth of between 1.5 percent and 2 percent on average between 2010 and 2030 across the region, according to United Nations figures. Egypt and Saudi Arabia have very young populations, with over 60 percent of their inhabitants under the age of 30. In addition, disposable incomes are rising in countries such as Egypt – and incomes are already high in many of the GCC countries, boosted by oil revenues. 

The International Monetary Fund estimates GDP growth for the region in 2013 to be 3.1 percent in 2013, rising to 3.7 percent in 2014 – far higher than that projected for the developed economies, and similar to that for Brazil (although lower than some other emerging markets, including China).

“The Middle East is one of the better macro stories around today,” says Abouchalache. “If some of the natural hurdles of management talent, the legal environment, capital markets and the political instability could be worked through, it’s a highly promising market. And, with the exception of the latter, these are improving.”

And some groups remain bullish despite that instability. “We are on the ground,” says Hossam Abou Moussa, director of financial services at Actis’s Cairo office. “We can smell the tear gas and we sometimes struggle to get into the office. But life goes on. Consumers continue to consume; strategics continue to acquire businesses here. Good businesses can continue to gain market share even in crisis times.” 

He points to continued M&A activity as proof. In 2010, Electrolux announced it was to buy an Egyptian white goods manufacturer in a deal valued at $409 million. The transaction was delayed by political unrest, but still completed the following year. And in 2012, Qatar National Bank acquired the Egyptian unit of Société Générale, followed by Emirates NBD buying BNP Paribas’ Egypt retail business a few weeks later.

Some firms are also looking to take advantage of the largesse offered by governments in a bid to quell potential unrest.

“There are a lot of opportunities in the Gulf in defensive sectors such as oil and gas, healthcare and education as these areas are growing on the back of government spend,” says El Solh. “Government investment is increasing to please populations. This, combined with the rise of consumer spending, makes the Gulf an area with emerging market dynamics, but with first world economics.”

Overall, the opportunities in the region look good. But the industry and investors will need to be patient. Now unrest has spread to the previously booming Turkish market, it remains to be seen what the impact on deals there will be: many Gulf-based players had been completing transactions in Turkey in recent years, such as NBK Capital and Abraaj. 

Yet with the new involvement of the European Bank for Reconstruction and Development in North Africa – it recently committed to Tuninvest’s Maghreb Private Equity Fund III – and the continued political stability in the GCC (so far at least), the private equity industry’s development in the region looks set to continue. It just might happen a bit more slowly than seemed likely a few years ago.