Is the sun shining again on the Middle East and North Africa’s private equity firms? There seems to be mounting evidence to suggest that, after a number of difficult years, the region’s remaining firms are feeling optimistic again.
“Overall, the mood in the region is better than it has been since the 2009 crisis,” says Michel Abouchalache, CEO of the Quilvest Group. “Many of the financial institutions were hit hard – some of them well-known local names. But there is a sense that this is now behind us. There are some new funds emerging, and many family-owned companies are now looking at concentrating on core businesses and so are looking at selling off non-core divisions. None of this will happen overnight, but my sense is that there will be a slow pick-up.”
Indeed, a number of established firms that have not only survived the financial crisis but also established a track record are starting to go out on the fundraising trail again. NBK Capital recently launched its second fund, with a target of $300 million; Gulf Capital is set to launch its third fund, seeking commitments of around $550million. More activity is expected in the coming months.
“Over the last six months or so, we’ve seen more new enquiries to establish new funds,” says Chezard Ameer
, partner in the Dubai office at Gibson, Dunn & Crutcher. “These are mainly coming from players who are already established in the region and who are therefore in a good position to raise new capital. The strongest players have survived and look set to continue to do so. But we may start seeing some new funds set up by new management groups or spin-out teams in specific areas – we’ve seen a few looking at clean energy, for example.”
Meanwhile, deals are starting to pick up again too. “There are now more deals in the pipeline than we’ve seen over recent times and one new development is the increase in deal size,” says Paul Hart
, another partner at Gibson, Dunn & Crutcher. “There are now deals on the market that are between $500 million and $1 billion ticket sizes; we’ve not seen this before.” One such deal is the Saudi-based fast food chain Kudu, which is attracting a lot of private equity attention for a rumoured $533 million price tag. Kohlberg Kravis Roberts is competing against Abraaj Capital together with TPG for the business – the first time KKR and TPG have ventured into the Middle East.
The latest Deloitte MENA Private Equity confidence survey, published in October, backs up this anecdotal evidence. Entitled ‘On the verge of a new investment cycle’, the report points to market confidence among the region’s private equity houses, with 65 percent saying they expect deal activity to increase over the next 12 months and none predicting a slump.
Yet at the same time, the report also identifies a narrowing investment focus among private equity players in the region. As many as 71 percent of respondents said their investment activity would be focused on Saudi Arabia and the UAE. That’s partly to do with political unrest in other parts of the region – Egypt’s share of focus has fallen from 22 percent in 2008 to just 3 percent in 2013, for example.
But in addition to the political risk, is there also a sense that a regional strategy doesn’t actually make sense in a region so vast and varied?
Gulf Capital has always focused mainly on the GCC countries, explains Karim El Solh, the firm’s co-founder. “We are backed by local money as well as international capital,” he says. “Many local CEOs and business people are our investors; they are part of our regional network. But we recognise our limitations: we don’t like to invest in a business that is further than a three-hour flight away, because we take a hands-on approach to the businesses we back. We need to be close to our portfolio companies and know the management and the local customs – and we can’t do that if we can’t visit them regularly. Morocco, for example, has some great investment opportunities, but it takes eight hours to get there.”
He describes the GCC as providing “first-world economies with third-world demographic trends – we have young, fast-growing populations and high government spend, together with political stability. We don’t need to travel”.
Gulf Capital does, however, look at opportunities in Egypt on a case-by-case basis. “There is turbulence and malaise in North Africa that you don’t see in the Gulf,” adds El Solh. “Yet Egypt’s population growth is hard to ignore. So while we’d avoid deals that rely on government spend, we will look at consumer plays, such as food, and healthcare.”