Letter from … Dubai: Keeping it in context

Last month, more than 300 investors and fund managers from across the Middle East, North Africa and South Asia (MENASA) had a chance to share notes about the road they have travelled – and the journey ahead – at our annual Middle East Forum in Dubai. The mood was notably sanguine in terms of investment opportunities, but for fundraising much less so.

The MENASA region has not been as badly affected by the financial crisis as more mature private equity markets whose business models relied much more heavily on leverage. That said, it is regions like MENASA that are finding it hard to counter the assumption that they are more fragile – and hence riskier – than those mature markets. 

“We have to think very rationally and calmly about where the world finds itself, because don’t forget, when we looked at risk many years ago – even two years ago – everybody had a very clear model in their heads: risk, when it came to being priced for emerging markets, was generally priced at a premium,” said Arif Naqvi, founder and chief executive of Abraaj Capital. “But ladies and gentlemen, when risk came, it came from the West.”

As with other less mature markets, the provision of growth capital defines most private equity investment activity in MENASA. The acquisition of minority positions in sector-leading companies that are ready for the next stage in their development (for example, becoming regional players) is the hallmark of many groups’ investment strategies. And for those who have weathered the storms of 2008 and 2009, this year looks set to offer some compelling opportunities. 

Despite this, managers in the region are having a tough time on the fundraising trail. Via a series of anonymous audience polls, it became clear that many GP groups attending were in fundraising mode or planned to be in the next 12 months. They also revealed a wish to expand their LP base to become less regionally-dependent. Most also confirmed that the fundraising process was slow-going and that their pitches were not being terribly well received.

One of the biggest hurdles MENASA managers face is the need to explain Dubai’s debt problems and their implications – or lack thereof – on the regional private equity industry. It simply must be the starting point for all conversations with existing and new investors, market insiders say. It’s not as if such issues are unique to the region, however.

Europe-focused GPs looking for commitments will encounter the same conversations, Stewart Hay, partner with SL Capital Partners, told conference delegates. “In Europe, the first question people say to me is, ‘What about Greece?’ And they’ll say, ‘Alright what about the PIGS [Portugal, Ireland, Greece and Spain]?’ … Let’s keep it in context: Greece is the size of Alabama and Ireland’s got the same population as Kentucky. The biggest GDP deficit anyone’s got right now is California, and nobody seems to worry too much about that.”

The head of one regionally-focused private equity firm agreed. “People do ask, but they must keep in mind that [while] Dubai has been a focal point, it’s a very tiny piece of the regional economy.”

Communicating that story is a challenge most emerging market managers are ready and able to meet. Dealing with investors’ (and trustees’) post-crisis inclination to buy brand name private equity is a tougher ask. Perhaps some would recognise the irony in that old adage that “you don’t get fired for buying IBM”. Just ask Lenovo.