It was long said the attractiveness of the Middle East and North Africa hinged on two elements: oil prices and geopolitics. Over the past year, this formula has become more complicated.

The collapse of Abraaj Group, MENA’s largest private equity firm, has raised questions among investors about the transparency, governance and ethics of other firms in the region, whether deserved or not. Even for investors undeterred by the Abraaj developments, the ongoing liquidation process is tying up investor capital that could be going to other managers.

“When you’ve got investors who have money stuck in a fund and are unsure whether they are going to lose it or not, it obviously impacts on us,” Karim Moussa, head of private equity at Cairo-headquartered EFG Hermes, told Private Equity International.

Annual private equity fundraising in MENA has failed to near to the recent peak of $4.65 billion raised in 2012. Last year, funds targeting investments in the MENA region raised just $690 million across five private equity vehicles, according to PEI data.

The only MENA-focused private capital fund to close in the first half of this year was SEAF’s Morocco Growth Fund, which held an $18 million first close. It would appear that MENA is a tough sell at the moment.

“One reason is purely organisational – MENA is in none of the usual buckets, not Europe, not Africa, not Asia,” said Helmut Schuehsler, chief executive of Dubai-based TVM Capital Healthcare. “The news from MENA is sufficiently troublesome that selected countries and investment committees are getting increasingly wary of the region, often a result of a lack of knowledge about the differences between countries and regions within MENA.”

Does this weak fundraising picture call for action on the part of general partners? Is a change in approach necessary?

EFG Hermes’ Moussa believes so. His firm stopped raising blindpool funds to invest in its home region several years ago, arguing that North Africa was too volatile and Middle Eastern companies did not need the money. In May last year it returned with a more focused strategy, announcing it was to raise a $300 million fund to invest solely in Egyptian schools.

Half the total comes from private schools operator GEMS Education. EFG will commit $15 million and raise $135 million from investors. EFG has already used its balance sheet to acquire four schools with which to seed the new fund at a cost of 1 billion Egyptian pounds ($55.8 million; €48.9 million). This is a five-year vehicle, which, combined with EFG’s sector expertise, may sit more comfortably with investors.

“Investors in the region don’t like these 7-10-year blindpool funds anymore,” Moussa said. “Our exit is quite clear – build a platform of 40-50 schools over the next three years, IPO that vehicle over the next three to five years… In this region you have to think a little bit out of the box.”

This belief in a more specialised approach is shared by Neil Brown, head of the investor development group at Actis. For him this applies to all emerging markets, not just those in the MENA region.

“I firmly believe the days of the generalist are going if not already gone,” Brown said. “More focus leads to more experience with deals and better pricing ability, better value creation and greater knowledge of which levers to pull at exit. The only way to achieve this is to become an expert in a focused sector.”

This is reflected in the data to some extent. According to industry body EMPEA’s senior director of research Jeff Schlapinski, there has been a shift in the composition of fundraising in the region. Generalist buyout strategies peaked in 2007 and 2008, with $4 billion and $2.3 billion raised, respectively, Schlapinski said.

“There has been a consolidation around a smaller group of active growth and buyout players, with many of the new entrants focusing on early-stage VC strategies and tech-enabled business models,” he said.

Not so fast…

While the trend towards specialisation is clear, not everyone is on board. According to EMPEA, the most active private equity GP in the region between the start of 2017 and the end of the first half of 2018 is Barcelona-headquartered Mediterrania Capital Partners, which closed four deals. Focused on African growth investments, mainly North African, the firm is in market with its third fund, seeking €250 million, according to PEI data.

According to founder and managing partner Albert Alsina, the lull in MENA private equity fundraising is largely down to the fundraising cycle; the big names will return and the numbers will grow. Equally, he believes that while sector specialisation can work, geography-specific funds are not the way forward.

“You need diversification across countries and sectors,” Alsina said. “The currency risk, the risk of devaluation [in a particular country], is too high for investors.”

There are indeed some marquee names set to come back to market. In March last year Abu Dhabi-based Gulf Capital, one of the gulf region’s largest private equity firms by assets, said it would return to market within 18 months, offering a welcome fundraising boost in 2019.

For others, focusing on specialised strategies may be the best way to make returns and offer comfort to investors.