MENASA private equity ‘is not McDonald’s’

The mega-LBO model developed in Western private equity markets doesn't necessarily fit emerging markets, according to speakers at PEI's Middle East Forum.

An introspective panel that broadly examined the global private equity industry's evolution kicked off Private Equity International's Middle East Forum this week in Dubai.

The panelists agreed that the right private equity strategy would vary depending on the market.

This is not McDonald's. You can't take a formula that works somewhere else and suddenly raise these big global funds and come operate in markets that you don't understand properly.

Arif Naqvi

“There's a sense that private equity is KKR, Blackstone, Carlyle and that [the mega-fund segment's characteristics and strategies] speaks to the entirety of the industry,” said Josh Lerner, a professor at Harvard Business School who has for two decades studied the private equity industry. “It's not really clear that a model that is great for doing large US buyouts can really be applied to lots of little deals in all sorts of corners of the world.”

Lerner's comment set off a chorus of head nodding among the hundreds of delegates in the audience, as well as among fellow panelists Arif Naqvi, founder and chief executive officer of MENASA-focused Abraaj Capital, and Rajiv Lall, managing director and chief executive of India-focused private equity infrastructure group IDFC.

“In this region, [we are now] proving the fact that private equity is not a commoditisable business,” said Naqvi. “This is not McDonald's. You can't take a formula that works somewhere else and suddenly raise these big global funds and come operate in markets that you don't understand properly.”

Lall gave several examples of how managers in MENA and Asia, as well as their limited partners, may approach the asset class differently than large, name-brand Western firms.

“[In South Asia there] is a tendency toward relationships to become even more bespoke, so you can access large pools of capital but perhaps from investors that have relationships that are tailored much more closely to them,” he said.

Lall also said IDFC has found LPs more willing to accept firm structures that may not fit the traditional mould. “At IDFC, we are actually [part of] an institution that does asset management. The orthodox view has been that private equity businesses overseen by an institutional umbrella are fraught with conflicts of interest, but as it happens with the infrastructure asset class, where deal origination depends a lot not on a bunch of individuals but wider relationships.

“We found that our story has been very credible [with LPs] and not only on account of our ability to originate a deal pipeline but also from the point of view of demonstrating commitment and longevity over a period of time,” continued Lall. Given that teams may come and go, a committed institution may be a better choice for an LP, and provide a greater alignment of interests, than seeking out a small, independent team of individuals that has a track record of working together, he said.

“Different models are beginning to appear,” Lall said.