A place for patient capital?

Has growth capital been marginalised in the Middle East in recent years, and is it now set to make a comeback? Answering the first part of that question is close to impossible. There's nothing to stop firms from claiming the growth capital tag, even if, in doing so, some may be taking the kind of liberty that could reasonably constitute a breach of trade description legislation. Furthermore, because a definition of growth capital is problematic, producing statistics-based evidence is equally so. The degree of prevalence of the strategy is, therefore, necessarily anecdotal.

However, when one apparently genuine Dubai-based growth investor recently expressed the view to PEI that “there are so few of us that you can count us on one hand”, there are reasons for believing that the claim has substance. Not least, Middle Eastern private equity in the up-cycle was dominated by the emergence of two main strategies, neither of which easily fitted the ‘growth’ description: buyouts and pre-IPOs. At the height of the bull market, both provided quick, and often highly lucrative, exits. Neither could easily be recognised as patient long-term capital. Pre-IPO investments (generally held for a year or two) definitely not; buyouts maybe, but, given the nature of prevailing market conditions, frequently not.

Post-crisis, the landscape for investment in the Middle East is completely transformed. As elsewhere, the buyout model that involved the use of significant amounts of leverage lies dormant. The pre-IPO market, meanwhile, was reliant on investor fervour that has long since dimmed. One example: ports giant DP World listed its shares at $1.30 a piece on Nasdaq Dubai in November 2007. The (non-)viability of the strategy today is hinted at by a closing DP World share price of $0.48 on 10th November 2009.

Into this temporary vacuum of strategic credibility, growth capital players are tentatively staking their claims to investor capital. One such is Saffar Capital, a Dubai-based financial services specialist. By its actions, Saffar will provide a test case of whether this type of strategy can win over the investment community in the changed environment of today. The firm, which since inception in 2001 has invested from its own balance sheet, is currently in the market for its debut third-party fund. It is hoping to raise $150 million by the middle of next year.

Saffar applies two main strategic rationales in a new deal context. One is to adopt concepts that have worked successfully on the global stage and apply them to the Middle East. One example is Zawya, the Dubai-headquartered business information provider, which Saffar has sought to model on Bloomberg while making adaptations to take account of local business and cultural idiosyncrasies. The second is to take a local, UAEbased business and expand it regionally. Saffar chief executive Mishaal Al-Usaimi recently told PEI that these local businesses often find it hard to grow out of their home markets into the likes of Saudi Arabia and Kuwait. Saffar helps them to do this, often by creating joint ventures with local partners.

Al-Usaimi believes that sentiment towards his firm has taken a turn for the better since the crisis. In particular, he believes that sophisticated family offices in Europe and Asia will not be put off by the long time horizon involved in building companies from the ground up. “We say to some of the family offices ‘do you realise our strategy takes between five and seven years?’ and they say ‘we're surprised it's that short’.”

At the same time, he acknowledges that explaining to some investors how patient they need to be is a “difficult ball game”. Of the seven investments Saffar has made to date, none have yet fully exited (though six of these were completed no earlier than 2005). He says: “A lot of investors, particularly in our region, want to exit as soon as possible. We want to see the model mature in its own time. The silver lining from the crisis is that investors are now willing to give us a fair hearing on this.”

Al-Usaimi argues that, with the likes of pre-IPOs and PIPE deals prevalent in the recent past, investors in Middle Eastern private equity funds have often been paying 2 & 20 for no good reason. Funds that provide intensive support to businesses over the long term can at least claim to provide value for money on fees. Whether or not they can live up to return expectations will be key, however – and waiting for the evidence on that front may demand too much patience for many investors' liking.