Parts of the Middle East most closely resemble a vast building site in the desert. Foundations are put down during the day and almost overnight vast skyscrapers spring up. In some cities the mantra from Kevin Costner's film Field of Dreams seems to be a strategic imperative: “If you build it, they will come.”
The tourists, business executives and financiers have come – and are coming in ever greater numbers. The region's burgeoning private equity scene is taking steps to embrace the growth on offer. For years local capital was sufficient for the task, but now firms are beginning to structure their funds to attract international investors.
Muhannad Qubbaj, managing director of business development at Abu Dhabi-based Gulf Capital, says it depends on the specific general partner: “If it just wants to raise money locally, it is easier. If you want strategic alliances to effect introductions, conduct due diligence, especially if you have a long-term outlook, you have to diversify your resources.”
WHAT ARE INVESTORS LOOKING FOR IN THEIR FIELD OF DREAMS?
Robert Wages, head of private equity at Abu Dhabi Investment Company (ADIC), says: “In the US, general partners adopted a strategy and style and stuck with it. We are looking to invest in funds locally, where they have a clearly stated strategy and team and experience. Some have only part of the pieces of the puzzle.”
Everyone wants to diversify. If they invest in the Gulf, in an emerging manager, it is important they have a risk premium
David Pierce, chief executive officer of Hong Kong-based fund of funds Squadron Capital, is exploring opportunities to access the MENA region's boom. “You want the best talent to deliver on its track record. You need to make sure the financials are properly structured and the economics shared among the team. You need a clear idea of what you want to do, which is hard in a bubble market.”
The piece of the puzzle most often missing is track record. It is a young market, practically virgin compared with the developed markets most institutional investors are used to backing. As such, support from international investors comes at a cost.
Qubbaj highlights this expectation. “Everyone wants to diversify. If they invest in the Gulf, in an emerging manager, it is important they have a risk premium.”
But he says there has to be a balance. International investors could put their money with international managers coming to the region but Qubbaj says they would miss out on the huge advantage offered by local players: “When investors look at Gulf Capital and others with a strong network, there is a definite value addtion from investing in companies on the ground for many years.”
It is possible for a global firm to synthesise this. Pierce says: “For global firms to be effective, they need local expertise. KKR and Bain have done well in Europe. Below a certain size local teams have an edge. You want to work with someone you know, who will be around and support the team.”
The truth is, investors want the best of both worlds: Local expertise married with the technology of doing deals and achieving exits. ADIC's Wages says: “There is no fundamental reason any of the deal techniques won't work here. It is, however, very challenging to come into this region without staff who know the local nuances.”
The reverse also holds true: For a firm leaving its local market it is helpful to a potential investor if the firm understands international nuances of reporting.
Qubbaj, whose firm recently revealed an international alliance with the bank Credit Suisse, says: “In order to become more global – raising funds with international investors to complement local investors – you have to have tangible due diligence partners to raise the bar on how a fund is set up and institutionalised.”
He says they can help the general partner ensure documentation is as far as possible set up to a standard template. High-quality local investors can be both a help and a hindrance in this regard. Squadron's Pierce notes: “If there was an absence of local limited partners, it would be surprising. It would be an alarm signal. But we do our own due diligence.”
Wages agrees: “Sovereign wealth funds are viewed by other investors as a positive. Many of the general partners in the region have developed unique terms that LPs have been happy with. But it makes it hard to compare performance. It will be a hindrance if they have non-standard terms.”
ALIGNMENT THE KEY
For Pierce it underlines the importance for local firms of putting the limited partner at the heart of their thinking. “The reality is it is an international market. The alignment of interest is key and the limited partner is the most important member of the partnership. The general partner cannot be seen to be advantaged. It has to be fair. We are not averse to unusual terms as long as alignment of interest is there.”
That, of course, presupposes an interest in the region. Some international investors are sceptical.
Pierce, whose firm has invested extensively in Asia, says: “Liquidity is the enemy of outsize returns. There is a lot of money in Asia, but relative to the size of the economy it is still small. Asia is a much bigger region and the economies are broader based.”
Is there too much money for the opportunity in the Gulf? Limited partners are waiting to see. Pierce again: “It is long term and you have to take time. People are right to be careful. There will be separation between superior managers and the rest. There may not be a shake-out but some have suffered by getting too much too soon.”
Wages thinks limited partners are easily bewildered when they try and meet teams with a clear investment strategy, clear structure, team and terms. Qubbaj's experience echoes this. He says when marketing to international limited partners, half of the process is about the region and its exploding demographics and half is about the track record. “It is an educational process and it has to be really focussed on the region with visuals, facts and validated and verified figures. It is important to help them feel comfortable”, he says.
Wages agrees: “Growth in the region is absolutely enormous. There is a perception issue in US and Europe, a lack of awareness to overcome and education is a big part of that.”
However, Qubbaj warns there is no excuse for hesitating, particularly if investors are hoping for the wheat to separate from the chaff, because the region's growth prospects will assist even the weaker teams. He says: “With exponential growth, if investors wake for a shake-out they will wait for a long time. They have to do due diligence on as many companies as soon as possible.”
His message to international investors is clear. Don't wait for your field of dreams to be built. Roll up your sleeves and lend a hand.