In search of 3x in Beirut

“We’re doing something interesting in the Middle East,” a limited partner told me at a recent lunch in London. Not the sort of thing you hear from private equity investors every day. 

The man I was talking to invests in private equity globally through a fund of funds. He likes his underlying funds small, nimble and progressive, for he believes that is what gets you compelling results: 3x money or better, if you please. It’s an approach that takes one’s capital away from the private equity mainstream and into territories that not everyone dares enter. One such territory is undoubtedly the Middle East.

Needless to say my host wasn’t giving much away. He spoke with the confidence of a man who thinks he is on to something. “It’s a pan-regional opportunity, and we’re negotiating exclusively,” he beamed. As part of their due diligence, he and the team had just spent a week in Beirut, a city rarely included on most people’s map of private equity safe havens.

To the contrary: the Middle East remains one of the least popular destinations for limited partner capital in the world. According to a recent white paper* published by PEI in partnership with Al Masah Capital, a Dubai-based alternative investment firm, the average investor’s allocation to the Middle East and North Africa (MENA) is a mere 1 percent of their private equity capital. Excluding funds of funds, which tend to be the most enterprising and risk-loving of private equity fund investors, we found only 13 percent of the world’s limited partners have an allocation to MENA.

In other words, nearly 9 out of 10 international LPs have no appetite for the region at all. For the vast majority, trips to Beirut or any other MENA business hub are not on the agenda. This is despite the fact that MENA boasts above-average economic growth and favourable demographics – attributes that usually attract foreign capital in spades.

It also contradicts the notion that following the growth spurt of recent years, private equity is now a truly global asset class. To many LPs, it is in the emerging private equity regions of Asia and Latin America that a big chunk of benchmark-beating investment performance is expected to come from. As far as MENA is concerned even the largest, most buoyant of its markets, such as Egypt and Saudi Arabia, still tend not to be on the list. 

Perhaps the LPs’ enthusiasm for Asia and LatAm is only as overstated as their reticence towards the Middle East.  Consider the warning that TPG co-founder David Bonderman recently issued at an industry gathering in Hong Kong: “Emerging markets are volatile. At some point there will be despair just as there is euphoria now.” Or, as a Singapore-based veteran of Asian private equity put it to me recently: “With all the money that has flown into Asian funds recently, I can’t see how there won’t be disappointment.”

Of course, not everyone is concerned that the BRICs and other emerging markets destinations really will struggle to absorb the growing amounts of private equity capital earmarked for it (for a more optimistic outlook, see p. 31).

Most LPs see managers with questionable track records, a blinding lack of transparency, poor governance practices and scary politics

In MENA, meanwhile, oversupply of capital is hardly the problem. There are many reasons why so many investors shun it. According to the PEI white paper, most LPs see managers with questionable track records, a blinding lack of transparency, poor governance practices and scary politics.

Ignorance also plays a part, if you believe those who know the region well. Take Saudi Arabia, for example. With a young and growing population of 27 million, the country has a large, diversified economy and a government that has worked hard to attract foreign investment. “Saudi Arabia has huge appeal to private equity – sadly too few people know that,” says Arif Naqvi, founder of regional private equity pioneer Abraaj Capital.

With funds to deploy and a team based in Riyadh, Abraaj has a vastly better chance of spotting and utilising Saudi opportunities than most. For overseas investors weighing the merits of a MENA push, on the other hand, the task is more difficult. For them, the question is whether any MENA market can ever deliver returns commensurate to the increased risk. If 2x capital is all that’s on offer, a US pension fund is bound to conclude he can get that elsewhere with much less hassle. For MENA private equity to appeal to foreign capital, it has to deliver something extra. 3x money would be a good place to start. When that is on offer, a trip to Beirut becomes more palatable. 

*The Final Frontier: An Investor Perception Analysis of MENA Private Equity is available to download at