The evolution continues

Fund managers are typically keen to emphasise that returns are not necessarily reliant on favourable market conditions – and indeed that great opportunities can be found in times of distress and market disruption.

But that’s a harder sell to investors when the fund manager is focused on deals in the Middle East and North Africa (MENA) region, where a number of countries have undergone regime change following the 2011 Arab Spring and fighting and civil unrest continue in places like Syria, Gaza, Yemen and Iraq. How these conflicts will impact economic growth remains to be seen, but at present the World Bank is still forecasting an uptick in GDP: for example, the MENA region this year averaged around 3 percent growth, while it’s predicted to grow by 4.2 percent in 2015 and move back in to the 5 percent-plus range in the medium-term.

Still, that wasn’t enough to keep The Carlyle Group in the market: the global firm decided to stop marketing its second MENA-dedicated fund, presumably given a lacklustre investor response. Carlyle has told reporters it “will still seek out targeted opportunities in the region using both existing and new funds with a mandate to invest in those markets”, but there have been reports that some of the firm’s Istanbul-based partners will instead raise their own Turkey-dedicated fund.

Which points to an issue a number of sources raised: the region and its risks/rewards are not homogenous and thus regional funds, as opposed to country-specific products, may find themselves out of favour.

LPs are said to be increasingly sceptical about treating MENA as a single region, arguing that the market dynamics in Turkey or Libya, for example, are very different from the market dynamics in the GCC countries. That’s perhaps one reason why MENA funds haven’t attracted as much interest lately: in the first 11 months of this year, eight funds were raised totalling $1.67 billion, according to Private Equity International’s research and analytics division. That’s down some 11 percent from last year, and nearly 60 percent less than the $4.03 billion raised in 2012.

That’s not to say that managers with pleasing track records are failing to attract interest, however. For example, 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, while Gulf Capital closed GC Equity Partners III on its $750 million hard-cap, smashing its target of $550 million.


Differing dynamics across the region was an issue pointed to repeatedly by market practitioners.

“When you think about MENA, it is not really a distinct market,” says Paul Harter, partner and co-chair of the private equity practise group at Gibson Dunn. “There’s Turkey, there’s the GCC and Egypt. And then occasionally there will be a deal in Jordan or elsewhere.”

Dushy Sivanithy, a principal at Pantheon, takes a similar view. “I would split the Middle East and North Africa into two markets. North Africa has been off everyone’s radar because of the Arab Spring. The Middle East itself is very interesting,” he says, adding that Pantheon recently committed capital to a Middle Eastern-focused fund.

“We think there are some interesting macro dynamics there; relatively good growth rates, good demographics. There’s probably reduced emerging market risk when it comes to currency volatility and other issues. The oil surplus is quite significant and that is being channelled into the domestic economies, so there’s very significant infrastructure spending and there’s a significant uptake in consumer demand from the young population.”

So how are some regional funds approaching deals and countries’ various market dynamics these days?

GCC-focused Gulf Capital says it tends to keeps investments in Syria, Iraq and other conflict-ridden countries largely at bay.

“Our fund can invest a portion outside the GCC region, but we are very cautious as to how and where,” says Muhannad Qubbaj, a managing director at the firm. Gulf Capital has invested in a number of companies in Egypt for instance, despite turmoil. “We like Egypt, for example, and we think that many businesses there may have commonalities and links with our core focus markets. Hence we opportunistically look at companies in Egypt that are also defensive in nature and will still grow regardless of the political situation.”

Nevertheless, LPs are increasingly concerned about the geopolitical issues in the area, he admits. “LPs have been vigilant when allocating to the MENA region and this remains the case.”


As well as splitting the Middle East and North Africa, many investors describe Turkey as a separate market unto itself.

Turkey has been tipped to become a hotbed of private equity activity for some time, given its geographic position between Europe and Asia and its strong supply of founder- and family-owned companies ripe for expansion. But as valuations have risen and competition intensified, some groups have retreated (Advent International notably closed its Istanbul office in 2013) while some of the larger deals that got observers excited in recent years – such as BC Partners’ $3.5 billion take-private of supermarket chain Migros – have become few and far between.

Still, many practitioners say that despite challenges, prospects remains substantial.

“Investments by, for example, [domestic private equity funds] Turkven and Mediterra show that even in very depressed times, there are [good companies to invest in], and [that] these times are also creating opportunities,” Jean-Philippe Burcklen, deputy director of equity fund investments at the European Investment Fund, said at PEI’s recent Turkey Forum in Istanbul. “We always look at the country in which we invest, but we are not buying the country in its entirety. And whatever the cycle, [Turkey] has companies that are in a very good shape and which are very attractive.”

In October, ÜNLÜ & Co, a Turkey-based investment banking services and asset management group, secured an evergreen multi-asset investment partnership with one of the largest foundations worldwide to invest in Turkey. And many other groups are raising dedicated funds.
“Private equity in Turkey is still heavily underpenetrated so the opportunity is immense,” says Omar Syed, a managing director at The Abraaj Group, which is currently targeting $500 million for a Turkey-focused fund.

While he declined to comment on fundraising, Syed said the firm believes Turkey is picking up allocations that were originally meant for Russia. “With the Russian markets now shutting down, many investors have to continue to deploy capital in Central Eastern and South-Eastern Europe. As a result, Turkey has become a massive beneficiary of that capital.”

This echoed the view of Baris Gen, senior investment officer at the International Finance Corporation, who made a similar remark at PEI’s Turkey Forum in October: “Because of what is happening right now, [Russian appetite] will probably be subdued for the next two years – and Turkish GPs can benefit from that.”


Regardless of geopolitical issues, MENA and Turkey are still relatively young private equity markets with a lot to prove, which will naturally affect investor appetite.

“One of the real issues of the region is that deal flow has been limited and exit opportunities have not necessarily been proven yet,” says Pantheon’s Sivanithy. “It’s a very hard market to operate in. Vendors don’t like to be seen to be selling assets, but succession is an issue like it is around the globe, so we are starting to see some of those businesses starting to come to market.”

The good news is that these markets are becoming slightly more developed. “Carlyle recently sold a business to Turkven, so we are now seeing [secondary buyouts] starting to emerge,” adds Syed. In March, Gulf Capital listed offshore contractor Gulf Marine Services on the London Stock Exchange, netting the firm a 10x return. It also sold a stake in Metito to Mitsubishi this year. “Gulf Capital has proven that it is possible to do successful exits in the region,” according to Harter.

What’s more, local trade buyers and international buyers are increasingly active in the region, market participants say. US buyout firms are also looking at the region selectively, which is a positive sign, says Harter. CVC and KKR are currently reported to be in discussions with Americana, a Kuwaiti food company and if the deal succeeds, other large firms might follow their example.

“There are the obvious hurdles for GPs; including the political situation, difficulty to source deals and the relative immaturity of the legal framework,” says Harter. “MENA is a great place to do buyouts… but it’s all about whether GPs and LPs can be confident that the potential upside will take into account the risk they are taking.”