Kingdom of opportunity

When Abraaj Capital, the largest private equity firm in Asia, opened an office in Riyadh at the end of May, it came on the back of a tide of sentiment that has seen Saudi Arabia become one of the hottest picks for investors focused on the Middle East and North Africa (MENA).

Abraaj has stressed the economic prospects for the kingdom's $465 billion economy, which has been growing at an average rate of 4 percent per year for the last five years.

“The opportunities to invest in Saudi Arabia are immense given the kingdom's position in the MENA region and its relative insulation from the global economic downturn,” said Arif Naqvi, founder and chief executive of the Dubai-headquartered firm, in a statement.

Abraaj may also have diplomatic reasons for opening up in Riyadh, since many of its investors come from Saudi Arabia, along with its chairman, Sheikh Abdulrahman Ali al-Turki.

But while other GPs in the region have not yet seen reason to set up base in Riyadh, they certainly seem to agree with Abraaj that the country makes a compelling investment case. In the MENA Private Equity Confidence Survey published earlier this year, Saudi Arabia ranked second after Egypt as the country in which GPs expected to see most deal activity over the following 12 months. It has, however, struggled to shed its reputation, built on an embedded economic and cultural conservatism, as a tough nut for investors to crack.

“It isn't the easiest place to do business – it's definitely harder to do deals there,” Benjamin Newland, a corporate partner at Dubai-based law firm King & Spalding, told PEI's sister publication PEI Asia. “But the economy is too big, the population is too big and too young, and there are too many resources there for it not to happen.”

The innate appeal of the world's largest oil exporter has been heightened in recent years by attempts by the Saudi monarchy to liberalise its economy and open the door to foreign investment. Initiatives like the Saudi Arabian General Investment Authority, which aims to match-make funding with investment opportunities, reflect the kingdom's desire to enter the world business arena.

It seems the monarchy's endeavours to foment an investment-friendly platform are beginning to pay off. However, there will likely be some way to go before the country can fully shake off its ultra-conservative image.

“We see the country as a very important market in the region,” says Hafeez Shaikh, a general partner at Dubai-based New Silk Route Partners. “The exact role it will play will largely depend on the government's continued success in liberalising the economy and the desire of domestic businesses to grow domestically and internationally while adhering to international governance standards.”

As yet, there seem to be few deals being done within the country, one notable exception being the buyout of luxury jewellery maker L'Azurde in March by a consortium led by Bahrain-based GP Investcorp. The firm, along with Eastgate Capital Group and The National Investor, took a 70 percent stake in the company, hoping to profit from the rapidly growing jewellery market in the MENA region.

Shaikh says New Silk Route is currently evaluating “several potential transactions” in sectors such as infrastructure, oil and gas, education, healthcare, telecoms and consumer. In addition, he says, two existing portfolio companies are looking at investment and partnership opportunities.

It could be time for Saudi Arabia to take centre-stage in MENA private equity.

Abu Dhabi-based Gulf Capital has held a first close on its buyout fund, GC Equity Partners II, on AED1.75 billion ($476 million; €336 million). The fund is targeting AED2 billion, which it expects to reach at some point in July. Though individual limited partners were not named, the firm said it has attracted commitments from “some of the most prominent sovereign wealth funds, pension funds, insurance companies and financial institutions in Asia, Europe, the US and the GCC”.

Invest AD (the former Abu Dhabi Investment Company) , Korea Development Bank and Korea Trade Promotion Agency (KOTRA) have signed an agreement to increase the flow of investment between South Korea and the Middle East and North Africa. The agreement encompasses private equity, cross-border M&A and infrastructure. “The Middle East should not just be regarded as a source of capital, but also as an investment destination,” said Nazem Fawwaz Al Kudsi, Invest AD chief executive. The rebranding of ADIC, meanwhile, is “a call to action,” said Al Kudsi in a statement. The firm aims to attract international investors to invest the region. It also wants to encourage local investors to do the same, he added. There is a “phenomenal investment opportunity” in the MENA region, said Khalifa Al Kindi, chairman of Invest AD, citing the region's diversifying economy, young growing population and reformminded governments.

Cairo-based Citadel Capital's portfolio company TAQA Arabia has won a lucrative gas infrastructure contract. Libya awarded the company a $165 million contract to build the infrastructure for a gas distribution network linking 370,000 households across the country's three major cities of Tripoli, Benghazi and Misurata. It marks a first in the country for TAQA, which already holds gas distribution contracts across Egypt, Qatar, the United Arab Emirates, Syria and Jordan. Citadel invested $84.3 million of equity into TAQA in June 2006 as part of a regional industry roll-up investment strategy, according to a summary of Citadel's portfolio.

Bahrain-based Unicorn Investment Bank has acquired a 70 percent stake in Bahrain Maintenance and Diving Services (BMDS) for an undisclosed sum. BMDS is a Bahrain oil and gas services company specialising in commercial diving, rigging, marine construction and fabrication. This is the sixth investment from Unicorn Global Private Equity Fund I, which is now fully invested. The fund's previous investments in the GCC region include Bahraini ready-mix concrete producer Orimix Concrete Products and Al Safat Industries Holding in Kuwait.

The State Bank of India (SBI) is planning to launch private equity vehicles in conjunction with both Oman and Qatar. The bank is “at an advanced stage in setting up a general purpose private equity fund jointly with sovereign entities in Oman”, according to its latest annual report. The Indian government has also selected SBI as the “operationalising agency for a similar sovereign fund with Qatar”.

Israel will exempt profits derived from private equity fund investments from tax for foreign investors, its finance ministry said in a statement in May. Presently, the profits of foreign investors in private equity funds are taxed at a rate of 15 percent for individuals and 25 percent for corporations. The change is one of many tax breaks Israel has recently instituted to attract investment, which include tax exemptions on profits from the sale of shares in Israeli companies and investments in corporate bonds.

Dubai-based advisory and investment firm Delta Partners has named Kai-Uwe Ricke, a veteran of the German telecoms industry, as chairman of its international advisory council, which was recently created to help fine tune Delta's structure and corporate governance. Based in Zurich, Ricke will also be a member of the firm's private equity advisory board. He is no stranger to private equity, having worked with – among others – both EQT and Warburg Pincus on German investments.

Kohlberg Kravis Roberts has appointed Ford Fraker, the former US Ambassador to Saudi Arabia, as a senior adviser to the firm in the Middle East. Fraker will augment the firm's network and relationships in the Middle East, where it began operations last year. Aside from time spent as ambassador to Saudi Arabia, Fraker has spent the majority of his working life in financial services and co-founded London-based investment bank and placement agent Trinity Group in 1996. KKR opened its first office in the Middle East earlier this year in Dubai.