Letter from … Dubai

Following hard on the heels of the global economic crisis, the wave of political unrest sweeping through the Middle East and North Africa has buffeted the region’s private equity industry.

The unseasonal storms which swept through the Emirates during the seventh Private Equity International Middle East Forum, held at the Jumeirah Emirates Towers, were perhaps a manifestation of the turbulent political and social environment.

Jeremy Coller, chief investment officer of Coller Capital, summed up the turmoil in his own inimitable way: “Trying to work out what’s happening here over the past few months has been like chasing a moving target – pardon the pun. But it’s an incredibly exciting time for the region – almost too exciting.”

A tentative post-crisis recovery appeared to be on hold, and opinion was divided as to how long a true resurgence would take: an optimistic 54 percent thought recovery would take less than a year, whilst 46 percent thought it could take anything from 18 months to five years.

One thing is beyond doubt though: the number of managers active in the region has shrunk significantly.

An experienced MENA-based buyout executive confided that there was perhaps only a handful of MENA-based GPs still active and in any sort of health. Compared to more than a hundred managers to have raised capital pre-crisis, that represents a significant contraction.

Yet many at the conference welcomed that contraction. Most agreed both GPs and LPs had been guilty of excessive exuberance during the boom years. Indeed, the number of unfinished construction projects littering Dubai suggests that hubris was not limited to the buyout industry. Too much capital had been raised for a relatively immature private equity market, where the pool of potential deals was too shallow to satisfy the dry powder stockpiled by GPs.

Contraction could however be the saviour of MENA private equity. Zulfi Hadari, managing director of MENA-based investment group HBG Private Equity, said equilibrium had been reached between the number of active managers, the capital at their disposal, and available deal opportunities.

Another poll found 79 percent of delegates thought the so-called ‘Arab Spring’ would have a negative effect on the region in the short term, but would benefit MENA’s private equity in the longer term.

The political strife has undoubtedly dampened investors’ ardour in the short-term. But Mustafa Abdel-Wadood, managing director of private equity group Abraaj Capital, made a compelling case for sticking by the region. “Longer-term, the region’s demographics and story still hold. It’s one of the fastest growing emerging markets and is very much under-invested.

“Over the last few months, we’ve learnt that extraordinary is the new ordinary. As with many emerging markets, a changing environment can create opportunities. Private equity isn’t about the moment, it’s about stepping back and looking at longer-term market fundamentals,” he added.

The prescription for those GPs who remained active read: improve transparency; demonstrate your ability to generate 2x returns over the long term, not just in a bull market; look at and adopt the more attractive fund terms on offer in mature western markets; and don’t cast your net too wide.

MENA is certainly subdued in terms of deal activity, and the emirate’s wealthy elite is feeling the pinch, despite plenty of supercars still in evidence on Dubai’s highways. As one local buyout executive pointed out, you still see plenty of Ferraris, Lamborghinis and Porsches roaring down Sheikh Zayed Road, but look closely, and most are 2007 models.

The region though is unlikely to slip into obscurity and stand by while other emerging markets steal its thunder. One look at real estate developer Nakheel’s plans for further offshore archipelagos to complement its four existing off-shore projects in Dubai tells you all you need to know about the emirate’s ambition, for example. The Arab Spring may yet prove to be the best thing that could have happened.