No place like home for MENA limited partners

LPs in the region represent a huge amount of capital, and they are increasingly looking to deploy it on their doorstep.

MENA’s attractiveness to foreign investors largely hinges on two factors: oil prices and geopolitics. The Emerging Markets Private Equity Association’s 2017 Global Limited Partners Survey ranked MENA the seventh most-attractive emerging market investment destination out of 10, down one place from last year. The main obstacles were the political situation, then currency risk.

Muhannad Qubbaj is senior managing director at Gulf Capital, which focuses on deals in the six Gulf Co-operation Council countries – Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain and Oman – plus Jordan, Lebanon and Egypt. He argues these risk factors, off-putting to many foreign investors, are having a positive effect on the local LP base. Growing numbers of investors, particularly family firms, are starting to see MENA private equity as an option offering the same potential upside as emerging markets, but with less risk.

“They are understanding that this region provides very exciting demographics that are similar to other emerging markets in their nature and potential,” Qubbaj says. “However, it is with an overlay that it is a bit more comfortable for them because they understand the region, they understand how it works and they don’t have the foreign currency exposure, business risks or geographic and political risks.”

According to Robert van Zweiten, chief executive of EMPEA, it’s not just that the Middle East is looking more attractive to local LPs than other emerging markets, but that the North American and European markets are looking much less favourable.

“Traditionally, [MENA-based institutional investors’] focus has been mostly on developed economies, but as of last year an acute awareness of political risk in certain developed markets – the US and Trump election, the UK and Brexit [referendum] – and associated currency risk led many investors to take a much better look at emerging markets,” he says. “If political risk and currency risk are ubiquitous, then you might get better risk-adjusted returns in emerging markets private capital, as long as you invest with the top-quartile GPs out there.”

The capital is clearly there, as is the growing willingness of LPs to invest in their own backyard. But the nature of doing business in the Middle East makes it a difficult market for any new GPs looking to get a foothold. Relationship building is paramount, particularly with family houses, and this is an area where the established players have a huge advantage.

Bahrain-based Investcorp raises an average of $2 billion a year and over the last 10 years it has deployed $1.5 billion in 12 deals in MENA. Hazem Ben-Gacem, head of corporate investment in Europe who also sits on the MENA investment committee, describes building and maintaining relationships as its “secret sauce”.

“We have a team of about 30 relationship managers who are physically present in each of the GCC countries,” he says. “They engage with their investors not once a month or once a quarter but weekly. And it’s not always to talk about investments or a new deal. This week it could be investments, next week to watch the Manchester United game, the following week to help their children finish their MBA applications.”

Undoubtedly, North America and Europe will continue to be popular destinations for MENA-based LPs with an eye on diversification. But if the current macro environment persists, and the efforts of regional governments to diversify their economies away from oil prove successful, MENA could become an increasingly attractive destination for local as well as overseas capital.