MENA: After the storm

There is no getting away from the fact that private equity in the MENA region has had a challenging few years. The financial crisis led to a number of well known names running into trouble – notably Bahrain-based Arcapita, which filed for bankruptcy protection last year. This was closely followed by the political unrest started to spread across the region after uprisings in Tunisia. For an industry that was still very much in its infancy, these have been tough times. 

Nowhere has this been more evident than on the fundraising front. In 2008, 31 firms in the region raised an aggregate $8.9 billion, according to PEI’s Research & Analytics division. The following year, the total plunged to $0.89 billion across 10 funds. Last year saw something of a pick-up, with $2.7 billion raised by seven funds targeting the region, but fundraising remains well below pre-crisis levels. 

Deal activity has been hit particularly hard in the North African region, where political instability has caused the most problems for private equity. The value of private equity deals stood at just $755 million in 2012, well down on the $1 billion recorded in 2011 and the $1.4 billion in 2010, according to Dealogic figures.

“Clearly, the effects of the Arab Spring are being felt most in countries such as Egypt, where unrest continues and where there has been a major currency devaluation,” says Michel Abouchalache, chief executive of Quilvest. “Activity there is narrowing down. Yet the real impact on private equity in the region overall has been the financial crisis. Since the collapse of Lehman Brothers, there has been a tremendous drop in the capital raised by private equity and in deal activity.”

A PAINFUL CORRECTION

The crisis came at a particularly inopportune moment for MENA private equity. As a nascent industry, many managers had yet to build a track record – and the difficulty of exiting businesses at a time of economic turmoil has had an inevitable drag on returns. This has left many LPs far from impressed by performance. 

“A lot of GPs in the region have not delivered on their promises,” says Jassim Alseddiqi, chief executive of Abu Dhabi Capital Management, the region’s first secondaries player. “It’s such a young region in private equity terms that there are very few funds that have been fully liquidated, and that is not helping the market.”

In addition, the years immediately before the crisis had created an unsustainable market. “Few players had either the authority or the skills to improve the businesses they were backing,” says Osman Mian, director, private equity at Tadhamon Capital. “Private equity was very much a multiple arbitrage play and when valuation increases stopped, this had an inevitable effect on returns.”

“Private equity in MENA has been slow to develop and mature,” agrees Abouchalache. “One of the issues is that before the crisis, the market had been driven by euphoria and a buoyant IPO market in the region. Many thought the industry was reaching maturity. But that wasn’t the case. These factors were sugar-coating reality and led to too much money being raised too quickly.”

Indeed, Quilvest’s figures suggest that $33 billion has been raised by MENA funds in the last ten years; of this, $22 billion has flowed into larger funds of $500 million or more. “These are large funds for the region,” adds Abouchalache. “We believe the opportunity will be far greater for funds in the $100 million to $250 million space.” Although bullish on the economic prospects for the region, Quilvest has yet to commit to a MENA fund.