Betting on the Middle East

In October, it emerged that private equity behemoth The Carlyle Group had decided to stop marketing its second fund dedicated to the Middle East and North Africa. At the time, this looked ominous; if arguably the industry’s most potent fundraising machine couldn’t generate enough interest in the region, did that suggest its various political and economic challenges were just too much for international investors to stomach?

Apparently not. Within a week, two Middle East specialists announced oversubscribed fund closes totalling $1.06 billion. NBK Capital, a subsidiary of the National Bank of Kuwait, closed NBK Capital Equity Partners Fund II on $310 million, above its initial target of $300 million. And Abu Dhabi-based Gulf Capital closed GC Equity Partners III on its $750 million hard-cap, smashing its target of $550 million.

Although Carlyle hasn’t commented officially on the MENA fund, sources suggest that some LPs are increasingly sceptical about treating MENA as a single region, arguing that the market dynamics in (for example) Turkey or Libya are very different from the market dynamics in the Gulf Cooperation Council countries.
That certainly chimes with the position of Gulf Capital: the firm focuses solely on the GCC, and argues that these countries are not seeing the sort of political turbulence in evidence elsewhere in the MENA region.

“Our vision is: ‘We’re from the Gulf, investing only in the Gulf,’” Gulf Capital managing partner and CEO Dr. Karim El Solh tells Private Equity International. “We believe in the region and [its] growth.”

It’s putting its money where its mouth is, too: Gulf has itself committed $150 million of its own capital to the fund. “We raised $330 million at inception from our founding shareholders, and what we do with that capital is [that for] every fund we launch, we like to be the biggest anchor investor – then we raise money around our commitment,” El Solh says.

The re-up rate for the fund, according to El Solh, was “well over 80 percent,” with many investors doubling or tripling their commitment. And excluding the GP commitment, 60 percent of the fund’s capital came from outside the Gulf. “We managed to attract a number of global [LPs from] Asia, Europe and the US to invest in the Gulf, really showing that [it] is becoming an attractive investment destination,” he says. “Global LPs are taking note of the growth and starting to put money to work in the region.”

The sale of Gulf Marine Services earlier this year (through a listing on the London Stock Exchange) was clearly a big factor. The deal generated an exit multiple of 10x, returning the firm’s entire $533 million second fund in the process. The vehicle’s net IRR is currently above 25 percent.

El Solh is the first to admit that closing deals in the region is a long and drawn-out process; even though Gulf Capital’s fund held a first close just below target in January, it has yet to complete any deals. But that doesn’t mean the opportunities aren’t there – GPs just have to work harder for them, he says.

“It takes a lot of patience to close deals in the Gulf. You have to drink a lot of tea and coffee and socialise and build a relationship and a rapport and a bond before you actually transact. So one has to be patient and take the long-term view. That’s why local private equity firms are able to crack and penetrate the sector faster than global firms.” ?