On the radar

The private equity industry in the Middle East and North Africa (MENA) has had a turbulent past three years, despite its strong macroeconomic and demographic indicators and trends. While at first it seemed the region might escape the pain more mature markets and their financial sectors experienced in the wake of the global financial crisis, it became clear – particularly as Dubai’s own debt woes took centre stage in 2009 – those assumptions had been off-base.

“It’s been affected by the financial crisis in a similar way but on a much smaller scale,” says Anis Bibi, executive director at Shuaa Partners, the captive private equity arm of regional investment bank Shuaa Capital. “Fundraising’s tougher. Transaction values and volumes are down. I’m sure there are issues with portfolio companies out there, either because people paid too high of prices or are unable to exit. So a lot of what you’ve seen elsewhere in the world, people have experienced here as well.”


One of those issues has been changes to the makeup of regional private equity players. Some notable restructurings took place last year within high profile groups including Dubai International Capital. The state-backed private equity group, which at the peak of the market had more than $13 billion under management, shifted its focus from dealmaking to portfolio monitoring as a result of the economic crisis. Media reports in mid-November 2010 indicated that DIC was responsible for accruing nearly one-third of the some $12 billion in debt that parent company Dubai Holding owes creditors.

Another of the region’s larger private equity groups, Kuwait-backed Global Investment House (GIH), also reshuffled its management and structure as it worked towards reducing its debt burden. It had reportedly defaulted on nearly $3 billion in loans in December 2008.

You’ve got lots of smaller shops that have fallen by the wayside or captives that had announced big funds that will never see the light of day.

Omar Lodhi

“There have also been some less publicised cases,” says Omar Lodhi, executive director with MENASA-focused private equity group Abraaj Capital. Lodhi declines to name names, but says, “You’ve got lots of smaller shops that have fallen by the wayside or captives that had announced big funds that will never see the light of day.”

Similar sentiment was voiced by Ammar Al-Khudairy, co-founder and managing partner of Riyadh-headquartered private equity firm Amwal Al-Khaleej. “We’ve only begun to see the long term effects of the crisis on the private equity industry,” he explains. “People talk about there being 100-some funds in the region; I think what we will see is that more than half of them will not come back to market.”

Sabah Al-Binali, chief investment officer at Dubai-headquartered Saffar Capital, expects two types of shake-out to occur among GPs. “One of which that is already well underway regards the managers who really didn’t have much value to add – they were confusing a bull market with investment talent.”

The other, Al-Binali says, will start to take root next year and materialise over the next few years as MENA fund managers begin to deploy capital again and actively manage investments amid a changed market cycle. It will be vital to see “how managers have been able to adapt to this newer world where holding periods have expanded significantly from two years to maybe seven years; where cash flow has reversed from strong positive cash flow to negative cash flow; where exits are going to be much more difficult to engineer; and so on.”

In particular, firms that have not staffed themselves with true operating talent capable of effecting real change at portfolio companies are expected to suffer, he says.


The region’s private equity groups have traditionally relied on domestic LPs, particularly family offices, to fund their investments. But just like Western GPs, post-financial crisis, MENA’s private equity practitioners were forced to make concessions to limited partners struggling with liquidity issues – putting paid to the notion that the region’s investors had a limitless supply of cash.  And, perhaps more so than any other LP type, family offices’ allocations to the asset class have proved fungible, adding an extra layer of difficulty to the fundraising environment.

“There was a period immediately post-financial crisis where there was a lot of money that went out of the private equity space generally from these investors, including partial release from obligations to existing funds,” says Hussein Khalifa, partner with global placement agent MVision Private Equity Advisers.

Al-Khudairy says these LPs remain mostly on the sidelines today and may reduce participation in future. “I know a lot of family offices are co-investing with four or five regional private equity players at once; I don’t think that’s going to continue. They are going to look at track records, they’re going to look at downside protection and weigh their options more carefully.”

Many domestic LPs will also opt to finance individual transactions. “The general sentiment you hear from investors in the region is they are more comfortable investing money going forward on a deal-by-deal basis,” says Bibi. “It’s unclear if the industry will go wholesale in that direction. But for argument’s sake, three years ago 95 percent of deals were done through private equity funds; going forward for the next few years maybe it will be 80/20.”

Al-Binali, too, is reserving judgement on what funding structures will prevail in MENA. Saffar Capital has syndicated out all of its deals, but at one point had planned to start raising a traditional private equity fund. The timing, Al-Binali recalls, couldn’t have been worse – its planned launch date was for October 2008 – and thus the firm scrapped the idea and has not returned to it since.

“I think there’s not going to be any one right way of doing it,” Al-Binali explains. “After a few years things might settle down and we’ll have a consensus, but the next few years I think you have to stay in close touch with LPs and learn to be flexible.”

That is going to be difficult, however, for some domestic GPs wishing to attract capital from international LPs, most of whom prefer to commit to traditional fund structures. Securing a more diversified LP base would not just make MENA’s GPs less vulnerable to shifting appetites and attitudes among domestic LPs, market participants say, but it would also force them to adhere to international best practices.


Attracting institutional capital from international LPs, however, is no easy feat.  “That’s where the biggest challenge has been – attracting that type of capital,” says Khalifa. “And it’s not because the [market] fundamentals aren’t there. It’s that China and Brazil – and India, too, to a slightly lesser extent – seem to be on fire.” As demonstrated in the figure on p. 46, Asian fund managers far and away attract the bulk of LPs’ emerging market commitments, a trend expected to continue.

“There’s a bit of a herd towards Brazil, India and China,” agrees Lodhi. “But in the last 12 months you’ve started to see institutional investors starting to get concerned – perhaps not about Brazil but certainly India and China – about overheating and valuations. So I think in the next 12-18 months we as a region will come more into the focus for a lot of international institutions.”

A recent global LP survey undertaken by PEI, whose full findings were recently published in a white paper entitled “The Final Frontier: An Investor Perception Analysis of MENA Private Equity”, has highlighted that many of the most enterprising (and arguably least risk-averse) types of private equity investors – including the fund of funds groups, investment advisors and commercial asset managers with long-standing exposure to the asset class – have been making inroads in recent years.

Of the LPs interviewed, 32 percent currently had a formal allocation to MENA private equity. The figure reflects the strong bias towards funds of funds and investment advisors in the overall sample – excluding them leaves just 13 percent of respondents (pension funds, development agencies and sovereign investors, among others) with an existing MENA allocation. When asked about plans to develop their portfolios geographically going forward, however, no less than 43 percent said they were expecting to have a MENA allocation in place by 2012. That means no less than 11 percent predicted that in the next two years they would enter MENA private equity for the first time.

While optimistic news for MENA’s GPs, respondents also made it abundantly clear that to attract a greater share of global capital going forward, MENA private equity will continue to find itself competing with other regions and must deliver returns in excess of 20 percent. As one LP put it, MENA private equity will be judged “in the round” with its emerging market competitors, particularly Asia and Central and Eastern Europe.

It will not be an easy and straightforward road ahead for MENA managers. But equally they mustn’t lose sight of progress made to date.  “You have to look at the positive side,” says Al-Khudairy. “Three years ago, international institutional investors did not even want to meet with MENA managers. Now they want to meet and talk. Now we are on the radar.”