MENA briefing Braving the Gulf

Mention the MENA region to investors and the first phrase that comes to mind, for many, is ‘political risk’. The repercussions of the Arab Spring uprisings, which swept across North Africa in 2011, continue to reverberate across the region – even in countries like the Gulf states that appear to have escaped relatively unscathed.

Some observers still argue that the GCC’s monarchies are inherently unstable and must one day fall, under pressure from young populations demanding a greater say in the way their countries are run. That may or may not be true. But for some LPs, the underlying question about private equity in the MENA region remains: is it just too volatile as an investment destination?

DEAL VALUE TICKS UP

Deals are actually being done in MENA. According to data compiled for Private Equity International by Dealogic, 13 investments had been announced so far this year (at time of writing) with a total value of $2.53 billion. On the face of it, that suggests 2014 will see more capital invested than in recent years: in 2013 there were 36 deals with a total value of $1,745 million, while in 2012 there were 40 deals with a total value of $3,763.

However, the 2014 figures are slightly misleading because just one deal – Apax Partners’ agreement to sell 56 percent of Israel’s Tnuva Food Industries business to China’s Bright Foods for $1.38 billion – accounts for more than half the total value of deals done so far this year. Strip that out, and the figures look more like those for 2009-11, when the number of deals done was in the 20s and totalled around $3 billion in value.

The deals that are being done are very much concentrated in a few sectors. Three technology deals with a total value of $263 million have been completed this year; that compares to eight last year, with a total value of $392 million. At least four have been done every year since 2010, largely reflecting Israel’s strength in that area. Last year there were also five food and beverage deals, and six in the healthcare sector.

A number of other $100 million-plus deals have also gone through in the past 12 months, including the sale of Palm Utilities by Dubai government investment firm Isthitmar World to Empower, another Dubai firm, for $500 million, and the $350 million sale of PrimeSense, an Israeli firm that makes 3D sensor technology, to Apple.

American private equity firm Rhone Capital announced the $320 million acquisition of the European/ Israeli food and drink firm Mayanot Eden, which is best known for its mineral water, while 6.5 percent of Egypt’s Commercial Industrial Bank was sold to Fairfax Financial from Canada for $313 million. Dutch electronics giant Philips spent $235 million buying 51 percent of Saudi Arabia’s General Lighting Company; and 30 percent of Egypt’s Edita Food, a baked products firm, was sold to emerging markets-focused private equity firm Actis for $102 million.

THE RISKS OF MENA

So it would be wrong to say that private equity is not active in MENA. But the region still worries many LPs.

According to a survey by the Emerging Markets Private Equity Association (EMPEA), just 2 percent of the money private equity firms invested in emerging markets in the past year was sunk into MENA, compared to 46 percent into emerging Asia. Three times as much was invested in Russia. When asked about the returns they expected from the region, 38 percent of LPs said they expected returns of 16 percent or higher for MENA – whereas the equivalent figure for Turkey was 25 percent, and for China, 60 percent.

Political uncertainty is clearly a factor here. The vicious civil war in Syria shows no sign of easing; nobody knows how it will end or what that will mean in the longer-term for neighbours Lebanon, Iraq, Turkey, Israel or the Palestinian Territories (and the recent news that an Al-Qaeda offshoot has taken control of cities in Iraq will not exactly help to calm any of those investor nerves).

And although many in the region see the election of Abdel Fattah al-Sisi as prime minister of Egypt as a sign that order will be restored, following the chaos of the brief period of Muslim Brotherhood leadership, others are less enamoured with the former army chief (who won 97 percent of the popular vote in an election). The stock market has rallied since he took over, with investors convinced that a young population of 90 million people cannot be ignored. But issues remain: tourists are still staying away from the country’s beaches, and religious strife is still bubbling under the surface.